FIGHTING FINANCIAL FRAUD
Securities and Exchange Commission
Enforcing the Securities Laws
The SEC's Enforcement Division investigates possible violations of the federal securities laws. This includes such violations as insider trading, market manipulation, fraud regarding a securities offering, and failure to report or disclose certain material information or fraud by a broker or investment adviser.
Where wrongdoing is alleged, the SEC can bring a civil suit seeking monetary penalties, disgorgement of illegal profits, orders prohibiting future violations or orders barring individuals from holding certain corporate positions.
Since January, the Enforcement Division has been undergoing one of the most significant reorganizations in its history. The new leadership has, among other things, removed a layer of management resulting in the redeployment of dozens of qualified attorneys back to the front lines; created specialized units where attorneys will be able to concentrate their expertise in a particular area; and streamlined procedures so that investigations can be opened quicker.
Stepping Up Enforcement
In addition, in FY 2009 — as compared to FY 2008 — the SEC:
- Increased disgorgement orders by 170%;
- FY08: $774 million
- FY09: $2.09 billion
- Increased penalty orders by 35%;
- FY08: $256 million
- FY09: $345 million
- Increased emergency restraining orders by 82%;
- Increased asset freezes by 78%.
Enforcement Milestones — FY 2009
- SEC's enforcement actions in FY 2009 resulted in:
- Civil Penalties of approx. $345 million
- Temporary Restraining Orders: 71
- Asset Freezes sought: 82
- Trading Suspensions: 192
- Officer & Director Bars sought: 90
- In SEC-related criminal cases, prosecutors filed indictments, informations, or contempts in 154 cases
The SEC has already returned approximately $6.6 billion in disgorgement and Fair Fund distributions to injured investors since the 2002 passage of SOX.
NOTABLE SEC SUBPRIME AND FINANCIAL CRISIS CASES
COUNTRYWIDE FINANCIAL—Misrepresentation of Credit Risks
SEC v. Mozilo et al., June 2009. The SEC charged former Countrywide CEO Angelo Mozilo and several other Countrywide officers with securities fraud for allegedly misleading investors about the significant credit risks being taken in efforts to build and maintain the company's market share. Mozillo was also charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.
AMERICAN HOME MORTGAGE—Accounting Fraud, Concealment of Financial Condition
SEC v. Strauss et al., April 2009. The SEC filed a complaint against American Home Mortgage's former chairman and CEO Michael Strauss and former controller Robert Bernstein. It alleged that the defendants engaged in accounting fraud and also made false and misleading disclosures to conceal from investors the company's worsening financial condition in early 2007 as the subprime crisis emerged.
BEAZER HOMES USA—Multi-Year Earnings Management Scheme
SEC v. Michael T. Rand, July 2009. The SEC charged Beazer Homes' former Chief Accounting Officer Michael T. Rand with allegedly conducting a multi-year fraudulent earnings management scheme and misleading Beazer's outside and internal auditors to conceal his fraud.
BROKER MISREPRESENTATIONS RE SECURITIES PURPORTEDLY BACKED BY GUARANTEED STUDENT LOANS—Misrepresentations to Customers
SEC v. Julian T. Tsolov and Eric S. Butler, Sept. 2008. The SEC charged two Wall Street brokers with misleading customers into believing that auction rate securities being purchased in their accounts were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds. Instead, the securities that Tzolov and Butler purchased for their customers were backed by subprime mortgages, collateralized debt obligations (CDOs), and other non-student loan collateral, ultimately resulting in losses.
BROOKSTREET SECURITIES—Unsuitable Marketing and Sales of Collateralized Mortgage Obligations (CMOs)
SEC v. Betta, Jr. et al., May 2009. The SEC charged 10 brokers at a now-defunct broker-dealer, Brookstreet Securities Corp., with fraud for falsely marketing investments in derivatives of mortgage-backed securities as safe and suitable for retirees and others with conservative investment goals. The SEC alleges that the brokers enriched themselves with millions of dollars in commissions and salaries while the investors suffered millions of dollars in losses.
AUCTION RATE SECURITIES SETTLEMENTS RESTORING $60 BILLION IN LIQUIDITY TO THE ARS MARKET
SEC Settled Actions Against Citigroup Global Markets, UBS Financial Services, Wachovia Securities, Merrill, Lynch & Co., Bank of American Securities and RBC Capital Markets Corp.
The SEC settled actions against 6 large broker-dealer firms for allegedly misrepresenting to their customers that ARS were safe, highly liquid investments that were equivalent to cash or money market funds. Firms failed to disclose the increasing risks associated with ARS, including their reduced ability to support the auctions. When the ARS market froze, customers were unable to liquidate their securities. In 2008, the SEC negotiated a series of landmark settlements in coordination with state regulators. Through these settlements the SEC enabled ARS investors to receive 100 cents on the dollar for their investments and restored approximately $60 billion in liquidity to the ARS market.
OTHER NOTABLE SEC FINANCIAL FRAUD CASES
AMERICAN INTERNATIONAL GROUP—Improper Accounting to Inflate Financial Results
SEC v. Maurice Greenberg and Howard I. Smith, Aug. 2009. The SEC charged former American International Group Chairman and CEO Maurice "Hank" Greenberg and former Vice Chairman and CFO Howard Smith for their involvement in numerous improper accounting transactions that inflated AIG's reported financial results between 2000 and 2005. The SEC alleged that Greenberg and Smith are liable as control persons for AIG's violations of the antifraud and other provisions of the securities laws. Smith also is charged with direct violations of the antifraud and other provisions of the securities laws. Greenberg and Smith agreed to settle the SEC's charges and pay disgorgement and penalties totaling $15 million and $1.5 million, respectively. The SEC previously charged AIG in 2006 with securities fraud and improper accounting, and the company settled the charges by paying disgorgement of $700 million and a penalty of $100 million, among other remedies.
GENERAL ELECTRIC—Reporting Materially False and Misleading Financial Results
SEC v. General Electric Company, Aug. 2009. The SEC charged that GE misled investors by reporting materially false and misleading results in its financial statements. The SEC alleges that GE used improper accounting methods to increase its reported earnings or revenues and avoid reporting negative financial results. GE has agreed to pay a $50 million penalty to settle the SEC's charges.
UNITEDHEALTH GROUP INC.—Stock Options Backdating; SOX Section 304 Clawback
SEC v. UnitedHealth Group, Inc., SEC v. David J. Lubben, Dec. 2008; SEC v. William W. McGuire, Dec. 2007. The SEC charged United Health, its former chairman and CEO William McGuire and its former General Counsel David Lubben with stock options backdating. The company was not charged with fraud based on its extraordinary cooperation with the investigation and instead agreed to settle reporting, books and records and internal controls charges. Former General Counsel Lubben settled the charges by consenting to, among other things, an antifraud injunction, a $575,000 civil penalty, and a five-year officer and director bar. In a record $468 million settlement, former CEO William McGuire consented to anti-fraud and other injunctions; disgorgement plus prejudgment interest of approximately $12.7 million; a $7 million civil penalty (the largest penalty against an individual in a stock option backdating case); and reimbursement to UnitedHealth under Section 304 of the Sarbanes-Oxley Act of approximately $448 million in cash bonuses, profits from the exercise and sale of UnitedHealth stock and unexercised UnitedHealth options. McGuire also agreed to be barred from serving as an officer or director of a public company for ten years.
ZURICH FINANCIAL SERVICES/CONVERIUM A.G.—Finite Reinsurance
SEC v. Zurich Financial Services, Dec. 2008. The SEC filed a settled action against Zurich Financial Services Group for aiding and abetting a fraud by Converium Holding AG involving the use of finite reinsurance transactions to inflate improperly Converium's financial performance. Under the settlement, Zurich consented to the entry of a final judgment directing it to pay a $25 million penalty plus $1 in disgorgement and, in a related administrative proceeding, consented to the entry of a cease-and-desist order against it.