Speech by SEC Staff:
The Advantages of a Dual System:
Parallel Streams of Civil and Criminal Enforcement of the U.S. Securities Laws
Thomas C. Newkirk
Associate Director, Division of Enforcement
Ira L. Brandriss
Staff Attorney, Division of Enforcement
U.S. Securities & Exchange Commission
16th International Symposium on Economic Crime
Jesus College, Cambridge, England
September 19, 1998
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the authors' views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
In a high-profile case that first drew big media headlines last February, a New York brokerage firm and a ring of eight brokers on the floor of the New York Stock Exchange were charged with perpetrating a scheme in which they made over $11.1 million in illegal profits and at the same time covered their tracks with an elaborate fraud.1
Floor brokers generally are not allowed to trade for their own accounts because their first-line knowledge of what is happening on the market gives them an unfair advantage over the public. Enforcement authorities allege that these brokers colluded with the brokerage firm to buy and sell for the firm's account, with the owners of the firm falsifying the records after the fact to make it seem as if it was the firm that placed the orders. The brokers received 70% of the profits; the brokerage, 30. According to press reports, it was the first time federal prosecutors ever brought charges against anyone executing trades on the actual floor of the exchange.2
Later, in May, the owners of the firm and five of the floor brokers were also charged with "front-running" buying and selling for their own accounts before executing orders they had from customers for the same securities. Front-running is illegal because when a floor broker trades for his own account first, he may not obtain as favorable a price for his customer. But more seriously, when he receives a large customer order to buy or sell, he knows that the size of the transaction itself may well affect the price of the stock. If he trades for his own account with the benefit of that inside knowledge, he is breaking both the rules of the stock exchange and the federal securities laws.3
These and other violations were uncovered as the result of a concerted investigation involving the New York Regional Office of the United States Securities and Exchange Commission (SEC), the United States Attorney's Office for the Southern District of New York, the Internal Revenue Service Criminal Investigation Division, the Federal Bureau of Investigation (FBI), and the investigatory branch of the New York Stock Exchange. The SEC brought a civil action against the offenders in federal court.4 The U.S. Attorney's Office which is a branch of the U.S. Justice Department brought criminal charges in federal court.
For a person unfamiliar with our American system of law enforcement and indeed for many an average U.S. citizen in the street this array of authorities, investigations, and court actions may seem perplexing. What is this all about? Isn't there just one set of federal securities laws? How can a person find himself in both civil and criminal cases for the same offense? And what is the role of the FBI and the Department of Justice here? Isn't the SEC the agency that's charged with enforcing the federal securities laws?5
II. The Civil-Criminal Distinction: On Background
A key to understanding our way of enforcing securities law is to go back to the fundamental distinction between criminal and civil law. Some say this distinction, a "hallmark of English and American jurisprudence,"6 was still "cloudy (and perhaps nonexistent)" as late as the era of the Magna Carta.7 But others see it as a tenet common to nearly every legal system in the world. The distinction in fact seems to be so rooted in the human conception of justice that it is found in legal systems as diverse as the dissimilarities of worldwide human society. In the words of one scholar:
- The communist Chinese have distinct criminal and civil systems, as do the democratic Swiss and the monarchist Saudis. The criminal-civil distinction is also a basic organizing device for legal systems of Islamic Pakistan, Catholic Ireland, Hindu India, the atheistic former Soviet Union, industrialized Germany, rural Papau New Guinea, the tribal Bedouins, wealthy Singapore, impoverished Somalia, developing Thailand, newly organized Ukraine, and ancient Rome. Apparently every society sufficiently developed to have a formal legal system uses the criminal-civil distinction as an organizing principle. . . .8
Back in the United States at the risk of sounding pedestrian people are fond of illustrating the two regimes with the example of the celebrated O.J. Simpson case.9 First, O.J. was tried for the criminal offense of murder and acquitted. Subsequently, he was brought to court in a civil action for wrongful death by those who claimed damages from his purported acts and he was found liable. In this conception, it is the state that prosecutes the actor to punish him for his crime; it is the private individual who is harmed who brings the actor to court civilly to be made whole from his injuries. Here, we have no trouble understanding the rationale of two proceedings civil and criminal for the same misbehavior.
A wrinkle is added when the state is the plaintiff in the civil case, too. The government is not necessarily seeking compensation for a loss or somehow to be made whole. And yet the notion of it bringing civil action to enforce the law is not foreign to us. Being fined for parking in a no-parking zone does not automatically make a person a criminal. We all see the difference between a civil misdeed like this and offenses like arson, theft, murder which we look to the state to prosecute as blatant, punishable crime. It may take the state to bring action against you, in the interests of society as a whole, but we do not necessarily want it wagging a moral finger at you.
There are many forms of antisocial behavior, however conduct it takes the state to halt that require a more complex response. Driving while drunk, cheating on taxes, purveying pornography, violating health and safety rules: how do we regard them as civil wrongs, or moral crimes? Dumping toxic chemicals, peddling drugs, defrauding consumers: if we are forced to make a choice between the two regimes, civil or criminal, in which courts should we try them? In combatting many forms of conduct, it is obvious that we want society to do both: take corrective action civilly, and mete out justice through punishment of the crime. How then should we proceed?
Other questions arise, as well. When it comes to a subject area like protecting the investor, for example, some laws and rules particularly those that are compliance oriented, like reporting requirements for issuers of securities and registration of broker-dealers seem more naturally to fall into the civil category. Others like laws against fraud and market manipulation, or, to take a position on a more controversial topic, insider trading deal with behavior that seems more criminal. Still, there is no crisp distinction. Including a blatant falsehood in a routine filing can rise to the criminal, and taking advantage of inside information certainly includes a harm we would consider civil.
To address these questions, we can look at the civil-criminal dichotomy as, indeed, courts, lawmakers, scholars, and law enforcement authorities in the United States have done from two different perspectives. The one is theoretical and conceptual; the other, real-worldly and practical.
III. Conceptual Frames
Conceptually, the thrust of criminal law is to get at the evil. As legal scholars have amply demonstrated,10 criminal law looks at the subjective, the mens rea, scienter, the guilty mind. Civil law, on the other hand, is interested in objective liability, at protecting legal rights, at getting plaintiffs restitution for their losses, even when those losses result from a wrongdoer's mere negligence. Civil law is compensatory and businesslike; criminal law is retributive and, say some, non-utilitarian.11 Civil law is concerned with the damages incurred by individuals; criminal law is concerned with the menace to society.
The question of how we relate to securities laws violations in the context of these distinctions is an important one, of course, and we will touch upon it further when we look at how the U.S. securities statutes were drafted. Quite aside from how we view violators conceptually, however, is the question of how to deal with their wrongdoing pragmatically. And that brings us to the more practical differences traditionally associated with the criminal-civil divide.
IV. Practical Differences
Different countries have different rules, but generally we might look at three broad areas in which the distinction between criminal and civil law enforcement plays out on the practical side: (a) the investigation of the alleged misbehavior, to determine whether in fact a suit should be filed; (b) the rules of procedure we follow once a case is filed including how we gather evidence and what degree of proof it takes to determine guilt or liability; and (c) the kinds of remedies available with which to sanction or deter the wrongdoing, if in fact wrongdoing is found.12
In terms of investigating unlawful behavior, at least in the United States, the criminal authorities the police, the FBI have far more power in their respective domains than do civil authorities.13 And that has to do with the seriousness with which we look at criminal misbehavior.
There are, to be sure, constitutional restrictions on police powers, but by and large criminal authorities have a considerable number of tools at their disposal in their mission of detecting and rooting out crime. These include the right to search for and seize evidence, conduct undercover operations, intercept electronic communications, pay informants, and interrogate and subpoena witnesses before a grand jury.14 Moreover, although in the U.S., as elsewhere, a witness cannot be forced to testify against himself if it will implicate him in a crime we call it "the Fifth Amendment"15 our criminal authorities nevertheless have the means to circumvent this barrier to obtaining evidence. They can compel a person's testimony by conferring upon him immunity from criminal prosecution even against his will.16
A civil law enforcement authority, on the other hand, has nowhere near the powers of the police or the FBI. For instance, under our country's Privacy Act of 1974, an investigator for a civil agency like the SEC cannot even solicit information from an individual without first identifying himself and explaining the purpose of his inquiry.17 A civil authority may issue investigative subpoenas to compel people to testify and produce documents, but in the face of a reluctant witness invoking the Fifth Amendment, it does not have the authority to grant immunity from criminal prosecution without the approval of the Attorney General.18
On the other hand, once a case has been filed, the civil side allows the government as well as the defendant much more leeway to get at the facts and prove its case. In the United States, discovery rules under the Federal Rules of Civil Procedure allow for substantially more pre-trial gathering of evidence.19 Each side, for instance, can freely depose not only the other side and (if it is an organizational entity) its employees, but also third party witnesses. It may also submit written interrogatories and requests for admission by the other party which must be answered. Each side may demand permission to inspect another party's property, require and obtain the results of physical and mental examinations, and require that the other party produce any documents or other information it has that is relevant to the case. Our Federal Rules of Criminal Procedure, by contrast, limit a prosecutor substantially once an indictment has been handed down, and grant the defendant only very limited discovery rights.20
Another major difference is that when a witness invokes his Fifth Amendment privilege not to testify, in a criminal trial his closed mouth cannot be used against him. In a civil trial, however, the decider of fact is allowed to draw adverse inferences from the silence; a defendant's refusal to testify is in itself evidence.21
Perhaps most importantly, to prove guilt in a criminal case, the government must prove each element of the offense beyond a reasonable doubt.22 In a civil case, generally, all that is required to prove a plaintiff's case is a preponderance of evidence.23
C. Available Remedies
The main forms of criminal punishment we usually think of are imprisonment, corporal and capital punishment, public shaming, and severe monetary fines.
In the civil sphere, we have a much more flexible array of remedies available.24 First of all, there are the classic civil remedies familiar to us from the sphere of private civil action: the injunction, an order a private plaintiff obtains from the court commanding the wrongdoer to stop his harmful actions; and restitution or compensation, paying the injured party for her losses, making her whole.
The injunction has a very long and ancient pedigree,25 and it takes no great legal leap of mind to see it as a remedy the courts should reasonably grant to governmental agencies entrusted with the job of regulating industry and commerce and preventing certain citizens from harming others. But what about compensation and restitution? Is there any way payments or fines exacted by government from a wrongdoer can be considered as righting a wrong, making someone whole?26 At first blush, it would not seem so.
Interestingly, however, the original rationale for the right of government to impose a civil fine does in fact stem from the notion of compensation. In old English law, it was considered as if there was an implied contract between every citizen and the King that the citizen would obey the law. If a citizen broke the law, he breached the contract. The fine was seen as a kind of "liquidated damages" a predetermined amount that he had to compensate the King or, in contemporary terms, society for his breach.27
A related rationale for the state imposing monetary penalties for a civil violation is to look at it as a wrongdoer's obligation to "repay the government for the cost of enforcing the law," or what jurists and legal scholars call "rough compensation."28 It costs money to hire government watchdogs, investigators, and attorneys to bring a malfeasor to court. Of course, this particular rationale must be examined closely when it comes to our practice today of imposing stiff monetary penalties on wrongdoers in many different civil contexts. In the United States, for instance, we make insider traders and other fraudsters pay penalties of up to triple the amounts of profits they make on their illegal shenanigans. Is this simply a matter of compensating the government, or are we really working with a different theory?29
We will return to this question later. For now, we should add that in the United States, we have another rationale for making a wrongdoer pay money in a civil suit brought by the government. Our nation's courts have recognized the right of an agency like the SEC to bring an action seeking what we inelegantly call "disgorgement." The idea here is to force the violator to give back, or "disgorge," at a minimum the ill-gotten gains he received as the result of his unlawful conduct.30
Now this is not to be confused with the right of private individuals who were victims of a stock fraud, for instance, to sue the perpetrators to get their money back. This is a governmental action. And while monies retrieved through such actions are generally placed into a fund from which the victims may be compensated,31 the remedy is not restricted to such purposes.32 There may not even be such victims. Rather than restitution or compensation, disgorgement is viewed as a method the court is allowed to exercise in its discretion "to prevent unjust enrichment."33
Still another remedy available on the civil side is the ability of government to deny privileges like licenses to wrongdoers. In the securities context, this would include the ability of the SEC, for instance, to suspend or bar a broker from the industry, or prohibit a director or officer of a public company who has perpetrated a fraud from ever again being a director or officer of a public company.34
V. Civil and Criminal Law "Complements"
When it comes to deciding what kind of regime we want to set up to enforce any particular law civil, criminal, or some kind of combination ultimately the question may depend on the conceptual factors we spoke about earlier: How much does this wrongdoing arouse our need to punish, to stigmatize wrongdoing, to resort to society's heaviest "moral artillery" to condemn an action?35 But the practical factors we have enumerated play an equally important role.
Let us say we decide, for instance, that bilking elderly citizens of their life's savings is morally outrageous and criminal. If we confine our public law enforcement efforts against it to the criminal sphere leaving it to the private citizen who is victimized to pursue any civil remedies we have made it that much harder to quash the misconduct.36
As Robert Jackson, one of our great American jurists, wrote: "[T]he criminal law has long proved futile to reach the subtler kinds of fraud at all, and [is] able to reach grosser fraud, only rarely."37 So even when we would like to label a particular misdeed criminal, we in one sense tie our hands by doing so. We must meet higher burdens of proof to convict the wrongdoer, and we have relatively few sanctions to impose upon him when we do.
For these reasons, over the past century at least in the United States lawmaking and law enforcement has looked more and more to the civil sphere to assure compliance with the law, even when we regard a particular offense as a crime. The trend has been observed by numerous legal scholars. In the words of one:
- Police and prosecutors have embraced civil strategies not only because they expand the arsenal of weapons available to reach antisocial behavior, but also because officials believe that civil remedies offer speedy solutions that are unencumbered by the rigorous constitutional protections associated with criminal trials, such as proof beyond a reasonable doubt, trial by jury, and appointment of counsel.38
Not only are civil remedies "easier and faster to implement," but they are regarded by some as being "more effective in deterring crime in particular instances."39
This growing historical trend to "mix and match" remedies40 has been attributed to other causes as well. Over the last century, we have entered an era in which an ever-widening variety of sophisticated scientific, technological, industrial, and communications capabilities have become available to us. For all the improvements they have brought to our lives, however, a heightened potential for mischief is the price of their promise.
Similarly, an increasingly complex web of economic, financial, and social relationships has tied us all together in new ways. The sheer numbers of interpersonal transactions that now occur between us every day has multiplied exponentially and so has the potential for harm-doing and advantage-taking that comes with them.
Government has had to create entire new bodies of law and administrative structures in order to bring a measure of basic peace and harmony, order, fairness, health and safety to our lives. Professor Kenneth Mann has shown how the rise of the administrative state has led to the increasing use of civil remedies as a tool to deter antisocial behavior.
- Administrative agencies have long possessed a wide range of tools: the power to dispense money, to set standards, to bring civil suits seeking cease-and-desist orders or injunctions, to initiate contempt proceedings for violations of such orders or injunctions, to issue licenses, and to order compensation awards, forfeiture, disqualification, and, of course, money penalties.41
He is particularly interested in the last category, the use of monetary penalties a topic we will yet come to which he wants to remove from the civil category and consider as a new category of what he calls "middleground jurisprudence." Whatever one thinks of his particular thesis, he and others see our era as a time of great transformation and a dynamic shift in our approach to law enforcement, in which through a new coordination of our civil and criminal strategies, we are developing a more flexible and more effective response to wrongful conduct.
Significantly, the U.S. securities laws have been seen not only as exemplifying the trend, but even being at its forefront.
VI. The U.S. Securities Laws
A. A Short Bit of History
Going back for a moment to the "conceptual" issue in the civil-criminal dichotomy, it is interesting to speculate about how the view of misconduct in our capital markets may have impacted our law. Historically, the lawmakers who drafted our original statute, the Securities Act of 1933, were faced not with the civil-criminal issue, but with a different, somewhat related choice.42
In deciding how to frame the law, they had two major legislative models before them.43 One based on a statute in place in England44 was founded on a disclosure theory, broadening the role of government and focusing on methods to ensure that investors were provided with all the facts they needed concerning securities sold to them. The other based on the State of New York's Martin Act45 was essentially an antifraud statute, limiting government's authority to investigative and injunctive powers placed in the hands of the Attorney General.
While controversy swirled around the various proposals, the arguments in favor of a federal securities law both cited the need for confidence in the nation's capital markets and played upon the public's ire at evil perpetrators of deceit who became wealthy at the expense of defrauded investors. Now one might argue that the disclosure concept tends towards the civil view of securities law, while the antifraud philosophy tends toward the criminal, but in fact, even the antifraud model granted the Attorney General civil, as well as criminal, powers. Some of its proponents, however motivated as they were by a resistance to securities regulation in general would have preferred a statute that authorized only "stern enforcement of the penal laws without even the power somewhere to enjoin frauds."46
In the end, Congress more or less combined the two models, but it is instructive to see how the statute was characterized.
- [The Securities Act] was aptly termed "the truth-in-securities act." Congress did not take away from the citizen "his inalienable right to make a fool of himself." It simply attempted to prevent others from making a fool of him.47
Both of our original statutes, the Securities Act of 1933 and the Securities Exchange Act of 1934, included both civil and criminal provisions as did all the securities statutes that followed them. For those here who are not familiar with our laws, a word about their general scheme:
The Securities Act of 193348 is concerned with the initial public offering of securities. It requires every such issuance to be registered before the securities are allowed to be sold in interstate commerce. The information a company must provide about its operations, plans, and financial condition is not judged by the administrative agency on its merits that is, whether it is a wise or foolish investment. All the Act requires is that everything be disclosed honestly, with no misleading statements or omissions.
The Securities Exchange Act of 193449 is concerned with the trading of securities and the national securities markets. First of all, it created the SEC to administer the federal securities laws. It placed the Commission in a supervisory position vis a vis the stock exchanges, giving it the power to pass on certain of their trading practices, to require broker-dealers to register, and to suspend or bar them from the industry when they break the securities laws. Every security listed on these exchanges must be registered with the SEC, and every issuer of a listed security must file quarterly and annual reports providing generally the same kind of information required in the '33 Act registration statement.
Both acts contain antifraud sections.50 Both make willful violations of not just the fraud and manipulation sections, but any of the Acts' respective provisions, criminal51 and that must tell us something about how the drafters viewed these laws conceptually. But the statutory scheme as a whole has a distinctly civil, regulatory and administrative cast. The SEC, a civil agency, is charged with assuring compliance with the laws and establishing further rules to regulate the industry. It was given authority to act administratively, and further to initiate injunctive action in the civil courts when those laws and rules are broken. The statutes add that the Commission is authorized to refer cases to the criminal authorities.
In other words, our statutes unhesitatingly label the violation of their provisions a crime, but they establish a law enforcement and compliance scheme that relies substantially on administrative and regulatory powers and remedies of a civil nature obviously recognizing their greater flexibility. At the same time, referring violations to the criminal authorities was always a contemplated recourse. And, to dispel any questions one might raise over the matter, our Supreme Court has specifically held it constitutional for Congress to impose both civil and criminal sanctions for the same act, and for both sanctions to be sought in the civil and criminal courts at the same time.52
But let us look at how the civil enforcement mechanisms work before turning to the criminal.
B. Our Civil Enforcement Authority and Its Development
1. Regulatory and Administrative Power
It is important to realize before we even begin to talk about SEC action in the civil courts that there is an entire layer of administrative and regulatory authority below the civil litigation level through which the SEC assures compliance with the securities laws, in a manner sometimes forgotten when it comes to discussing enforcement authority.
We mentioned earlier "the rise of the administrative state." As an administrative agency, the Commission was granted from the beginning the power to supervise the entire securities industry. This includes the power, for example, to set standards of disclosure and maintain them by refusing to register the securities of would-be issuers53 or to approve the credentials of broker-dealers54 unless they supply the public sufficient information about themselves. The SEC staff can halt trading in a stock if it has evidence indicating that information about the issuer in the market is incomplete or false.55 It can stop a registration statement from becoming effective thus preventing public sale of an issuer's securities if it suspects fraud.56 It can walk in and inspect the offices of brokerage firms, without notice, for compliance with the law.57
This power, moreover, piggy-backs on a layer of enforcement even below that of the Commission's own administrative authority. Under the regulatory supervision of the SEC, each of the stock exchanges implements its own system of rules to assure fair dealing and honest trading. Each of them has established a variety of sanctions with which it disciplines unscrupulous brokers and delists companies guilty of nefarious practices.58 Even below that layer, every individual brokerage firm is obligated to have its own compliance program.59 So on a base line level, even before any kind of governmental action is taken, many abuses are ferreted out and more are deterred.
2. The Administrative Proceeding and its Original Sanctions
From the beginning, the Commission was granted the power, as part of its regulatory function, to sanction certain types of misbehavior by brokers, public companies, and other actors in the industry without even going to the federal courts through a quasi-judicial process known as the "administrative proceeding."60 Originally, the kinds of sanctions the Commission could impose in an administrative proceeding were limited. Typically they involved suspending or revoking a broker-dealer's registration or issuing a stop-order halting the distribution of a new public offering.61
But in recent years, as will be detailed below, the Commission was given the authority to impose monetary sanctions, cease-and-desist orders, and other penalties through the administrative process, and as a result, administrative proceedings have become an increasingly important weapon in the arsenal of securities law enforcement on the civil side.
3. The Power of Injunction
For many years, the only remedies the SEC could seek in the federal courts were either an injunction62 ordering a wrongdoer to refrain from present or future violations, or in the rare instance a writ of mandamus,63 a command of the district court ordering an individual to comply with the law or orders of the Commission.
As an enforcement tool, the civil injunction might sound like a relatively toothless mechanism, although the United States Supreme Court has alternately called it "a mild prophylactic" and a "drastic remedy."64 An injunction is most effective in a case when a court order is needed to stop a violation going on right now, and less meaningful, of course, when the wrongdoing was completed two years ago. Violation of a civil injunction can be criminal contempt.65 It also carries with it collateral consequences, serving, for example, as a basis for denying or revoking a violator's license to participate in the securities industry.66 For fifty years, the injunction (and its related ancillary relief)67 was the SEC's core remedy, and it remains a staple of the Commission's law enforcement program.
4. The Power to Seek Disgorgement
Because the injunction invokes the judiciary's authority in equity, it carries with it the full array of a court's equitable powers. The most important of these in our context is disgorgement. We have already noted how the federal courts long ago recognized the ability to seek disgorgement of a wrongdoer's ill-gotten gains, an equitable remedy to prevent unjust enrichment.
5. The New Civil Sanctioning Power of Monetary Penalties
In the 1980's, however, believing the remedies the SEC then had were inadequate to stem unlawful conduct, Congress granted it broad new powers. With the Insider Trading Sanctions Act of 1984 ("ITSA")68 and its expansion under the Insider Trading and Securities Fraud Enforcement Act of 1988 ("ITSFEA")69 the Commission was now given the authority to bring suit in federal civil court to claim penalties from insider traders equalling up to three times the illegal profits they made, or losses they avoided, by trading while in possession of material non-public information.70
6. New Monetary Penalties under the Remedies Act
In the Securities Enforcement Remedies and Penny Stock Reform Act of 1990,71 the SEC was granted still broader powers.72 One of them was the authority to bring action in federal court to exact monetary penalties from any person who violates any provision of the federal securities laws. While the penalties for insider traders remain the same as enacted under ITSA and ITSFEA up to three times the amount of illegal profits made the penalties for other violations under the 1990 Act are assessed according to a three-tiered hierarchy, depending on the seriousness of the wrongdoing.
At the lowest level, a natural person may be fined no more than $5,000. For "any other person" a corporation or partnership, for instance the maximum is $50,000. On the second tier, however for violations involving fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement the maximum rises to $50,000 for a natural person and $250,000 for any other person. If the violation also resulted in substantial losses to other persons, or even so much as created the risk of such losses, the penalty can increase to as much as $100,000 for a natural person and $500,000 for any other person. At every tier, however, if the gross pecuniary gain is greater than the statutory amount, then the fine may be in the amount of such gain. Note that all these fines are "per violation" and that a continuing course of conduct may involve multiple violations.73
Thus, we can now impose stiff fines not only on insider traders, but on the whole universe of fraudsters, stock manipulators, and other assorted crooks all on the civil side.74
7. Officer and Director Bars
The same Act also confirmed the power of the federal courts, when granting an injunction, to ban any person who committed securities fraud from serving as an officer or director of any company that issues publicly held stock in our country.75
8. New Power to Impose Monetary Penalties and Obtain Disgorgement in an Administrative Proceeding
But the 1990 Act went much further, and granted the Commission a wide array of new administrative powers. Today, we no longer need to bring action in a federal civil court to impose monetary penalties on a person who violates the securities laws. If he is a "regulated person," such as a broker-dealer or officer or director of a public company, the sanctions can be ordered by the Commission in an administrative proceeding.76 In addition, any person regulated or not can be ordered to disgorge ill-gotten gains in an administrative proceeding.77
9. Administrative Cease-and-Desist Orders
Finally, the Commission now has the power to impose a "cease-and-desist" order upon any person who has violated or is about to violate one of the federal securities laws.78 This is somewhat similar to an injunction issued by a civil court, but it is issued by the Commission itself upon the decision of an administrative law judge in an administrative proceeding. One of its advantages is that to obtain it, enforcement officials do not need to jump all the technical and procedural hurdles of bringing an action in federal court. Although the parameters are not, as yet, entirely fleshed out, it is the position of the SEC staff that the imposition of a "C&D" requires a lesser showing of the likelihood of a future violation than does an injunction.79 There is no automatic contempt of court penalty for violating a "C&D" order, but someone who disobeys is subject to a court-imposed civil penalty.80
VII. The Monetary Penalties and Their Implications for the Civil-Criminal Dichotomy
Taken together, then, the array of tools we have on the civil side is formidable. Before we look at how these remedies interplay with the weapons of criminal enforcement, it is time to elaborate now on the subject of our stiff monetary penalties, since these remedies today the teeth of our civil enforcement program might be seen as standing at the border between civil and criminal sanctions. As intimated earlier, they have generated no small degree of controversy not only in academia, but in our courts of law.
This is where we get back into a little bit of conceptual philosophy. How can such steep money penalties be seen as non-punitive and hence non-criminal? One cannot any longer rationalize them as "liquidated damages" owed by the citizen to the state for violating some kind of social contract to obey the law, or see them as "rough compensation" to the state for its law enforcement costs the old ways of justifying fines assessed by government for civil wrongs.
Actually, Congress was explicit, but careful, in stating its aim with these penalties. Our lawmakers did not present them as "remedial," the old way of distinguishing civil remedies from criminal sanctions.81 But they did not use the term "punishment," either. They used the concept of deterrence.82 The tricky issue is that deterrence was traditionally thought of as an objective of the criminal law. Even if one is willing to confine the idea of criminal sanctions to strict punishment, deterrence relies on the pain of punishment. As one scholar puts it, "when it comes to deterrence, civil and criminal remedies are essentially indistinguishable and interchangeable."83 Nonetheless, Congress determined to impose these stiff monetary penalties as part of the civil enforcement regime, and our courts have approved.84
This is, in other words, where we set aside philosophy and get down to practice. Even if we view a certain behavior as a crime, we will not be successful in quashing it if we insist on sanctioning it only through the criminal process, with its many procedural hoops to jump and its heightened burden of proof requirements.85
Our need and our willingness to institute such steep money penalties to discourage lawbreaking that is otherwise regarded as criminal while not requiring the offenses to be adjudicated in criminal court is one part of the phenomenon we mentioned earlier, the overall shift in law enforcement strategies in the modern era. Securities law enforcement is not the only area where we have introduced such penalties on the civil side. We now use civil and administrative law enforcement to establish non-criminal consequences for an entire catalogue of antisocial behaviors that are also viewed as crimes.86 But the use of civil monetary penalties in the enforcement of the federal securities laws has been seen as one of the harbingers of the trend.87
Neither the courts nor the academics have had problems with the use of monetary sanctions outside the criminal sphere, per se. Generally, legal scholars have applauded the trend, affording as it does new flexibility and creativity in the realm of law enforcement. They do raise some important legal issues, however. For instance, even if we call them "penalties," are they not punishment enough to at least make us meet higher burdens of proof, even in civil court, to impose them? Are they not, in fact, so punitive that it would constitute "double jeopardy" for the SEC to bring a civil action against a wrongdoer for treble monetary penalties, and then have the Justice Department, on the criminal side, bring him to trial again?
Our courts have struggled mightily with these issues. But in the end, they have come down on the side that so long as the lawmakers' intent was a civil sanction, and the statutory scheme was not "so punitive either in purpose or effect" so as to "transfor[m] what was clearly intended as a civil remedy into a criminal penalty," they are not criminal sanctions.88 Today we can get penalties not only in civil actions before a federal court, but even in administrative proceedings, with the "preponderance of the evidence" standard of proof.
At one point, it seemed as if the Supreme Court, based on its much-debated 1989 decision in the Halper case,89 would be inclined to judge many such penalties severe enough to invoke the double jeopardy protection even when they were conceived by Congress as civil. But in Hudson v. United States a landmark case decided just last December the court largely disavowed its outlook in Halper, saying it had deviated from previous doctrine.90 And that is why we may today bring action for serious monetary penalties without much concern about compromising a parallel criminal prosecution for the same conduct.
That said, let us look at the criminal side.
VII. The Statutory Basis for Criminal Enforcement
On what basis do the criminal law enforcement agencies in our country the Department of Justice, the FBI investigate and prosecute people for their securities laws violations? Many people do not realize that there are actually several grounds.
First, each of the securities statutes themselves includes a provision making it a criminal offense to willfully violate any of their provisions.91 Market manipulators, fraudsters, insider traders all risk criminal as well as civil prosecution. The criminal monetary penalties and the terms of imprisonment for these violations are written right into the statute.
Second, the same misconduct may be prosecuted under our federal mail and wire fraud statutes.92 Third, if the facts fit, violators can be prosecuted under RICO, our Racketeer Influenced and Corrupt Organizations statute.93 Perjury,94 obstruction of an SEC investigation95 and making false statements to the staff of the Commission96 are also all criminal offenses, as are aiding and abetting a criminal violation97 and conspiracy to violate the securities laws.98
So our friends on the criminal side have plenty to work with. Often, they turn up many of the cases they bring themselves. But often it is we who alert them to the most flagrant cases of wrongdoing. And that was what Congress contemplated when it drafted our securities legislation. Our lawmakers included in each of the statutes specific provisions authorizing the SEC, beyond the exercise of its own powers, to refer any securities laws violation to the criminal authorities.99
And that brings us to a more close up look at parallel proceedings.
VIII. Parallel Proceedings: The Two Tracks
Because of our dual system, it will often happen that a crook or fraudster will find himself being investigated and prosecuted by both the SEC and the Department of Justice at the same time, on two totally different tracks.100 For those uninitiated in our system of justice, let us explain briefly:
On the SEC side, when the Commission's staff attorneys are alerted to suspicions of securities law violations, they may begin looking informally into the surrounding facts as a "matter under inquiry" or an informal investigation. Individuals and officials of corporations may be requested to provide information through voluntary interviews and the production of documents surrounding the matter, and securities firms may also be requested to submit their own records relevant to the case. If further probing is warranted, the Commission may order a formal investigation, giving the staff the authority to issue subpoenas compelling testimony and document production. If the staff believes there is enough evidence of wrongdoing, it will recommend to the Commission that it file a civil action in federal court, or institute administrative proceedings before an administrative law judge, or both.101
In federal court, in a purely injunctive action, the defendant has no right to a trial by jury.102 If the Commission is seeking civil penalties in a federal court, however, both the defendant and the Commission have the right to demand a jury trial.103 In the civil context, the broad discovery provisions of our Federal Rules of Civil Procedure enable attorneys for all parties to freely depose witnesses and compel the defendant to disclose any information or documents relevant to the case before the trial begins.104 A defendant may assert his Fifth Amendment privilege not to testify on any matter that may incriminate him criminally, but the court or the jury may consider that refusal to testify itself as evidence of wrongdoing as far as the civil case is concerned.105 To win in civil court or at an administrative proceeding, SEC attorneys must prove each element of the violation by a preponderance of the evidence.
Meanwhile, if a U.S. Attorney's Office, a branch of our nation's Department of Justice, suspects some kind of foul play involving securities from its own sources, or as a result of a referral from the SEC it will typically launch a criminal investigation, with the assistance of agents from the FBI, the Postal Inspection Service, or the Criminal Investigation Division of the Internal Revenue Service. These agents have much broader investigative authority than SEC attorneys, including, for instance, the ability to tap phones and search for and seize evidence with the proper court authorization, conduct undercover operations, pay informants, confer immunity from prosecution on reluctant witnesses the entire gamut of options discussed earlier.
In practice, criminal investigators rely heavily on witness interviews and "proffer" sessions, in which a participant in the wrongdoing or his attorney will hypothetically indicate to them the kind of information he has and is willing to provide in testimony, in exchange for immunity from prosecution or leniency as to his own role in the crime. Under what is colloquially called a "Queen-for-a-Day" arrangement, prosecutors may allow a witness to speak in such a session without risk of his own words being used against him except for purposes of impeachment.106
If the Assistant U.S. attorney assigned to the case believes he has sufficient basis to bring criminal charges, he presents the case before a grand jury, which decides whether or not there is enough evidence to "indict" that is, send the case to trial. The grand jury, which operates in secrecy, may issue subpoenas to compel witnesses to testify at its proceedings before it renders a decision.
If an indictment is handed down, the case goes to trial before a jury, except in cases when both sides waive the jury requirement. After the indictment, the Federal Rules of Criminal Procedure permit the government and the defendant only limited discovery. Depositions are mandated only under exceptional circumstances.107 As we have already mentioned, at trial, the factfinder may draw no inference of guilt if the defendant asserts his Fifth Amendment privilege not to testify. And to prove his case, the prosecutor must show evidence proving to the jury each element of the crime beyond a reasonable doubt.
A person who finds himself a defendant in both civil and criminal proceedings must respond separately in each jurisdiction. On the civil side, he may face an injunction, monetary penalties, a bar from the industry if he is a broker-dealer and other civil sanctions. On the criminal side, he may face imprisonment, monetary penalties, or both.
If this sounds unfair, or seems like double jeopardy, one must bear in mind the distinction we have been making all along between criminal and civil law. One must remember that the civil sanctions are meant to be dispassionate, corrective, to halt further injury, to remediate the wrongs and deter harmful behavior. Criminal sanctions are meant to punish the evil, to bring the criminal to justice.
If we have caught someone who has defrauded scores of poor elderly couples and deprived them of millions of dollars in life's savings, even if we have won on the civil side and made him disgorge his profits and enjoined him from ever doing it again even if we have made him pay severe penalties it does not mean he should be absolved of the punishment and condemnation due him as a criminal. On the other hand, if we are unable to prove every element on the criminal side, at least we have the civil system as a backstop for correction and deterrence.
IX. Technical Matters
There are technical matters to clarify, of course.108 People often want to know how much of a wall there is if any between the civil and the criminal proceedings. How much information can be shared between the SEC and Department of Justice investigators and attorneys? How does the timing of parallel proceedings and the distinct concerns of criminal prosecutors and SEC trial attorneys affect overall strategy?
A. Sharing Information
The law generally provides that information gathered in the course of SEC investigations is non-public and may not be disclosed without the Commission's authorization.109 On the other hand, we have already seen that the SEC is authorized by statute to refer cases to the Department of Justice, and the Commission's Rules expressly allow SEC staff members to discuss non-public investigations with other governmental organizations.110
However, if the criminal authorities want to see the SEC's investigative files, they need to make a formal access request to the Commission.111 Access will usually be granted, unless doing so would interfere with an ongoing investigation, be adverse to the Commission's enforcement interests, or be contrary to the public interest.112 The SEC may even share with the U.S. Attorney's office information it has obtained in civil discovery after it initiated its lawsuit, absent demonstrable harm to the defendant.113
The other way around, information the U.S. Attorney or FBI obtains in the course of its investigations may be shared with the Commission's investigators, but here it can get a little sticky. The grand jury secrecy rules114 forbid government employees from revealing matters "occurring before the grand jury," and that includes revealing them to the SEC. The courts do have discretion to allow disclosure to SEC attorneys in certain circumstances in connection with a civil proceeding, but it is not particularly easy to obtain such permission.115
B. Strategic Concerns
The interesting issues come up when, for strategic reasons, the SEC, or the criminal authorities, or the defendants, want to stay a civil proceeding that is, delay it so as not to jeopardize any one of their positions in the criminal case.116
For instance, if the SEC goes forward with its civil case first and the defendant takes advantage of the right to see everything the Commission has as a result of the civil discovery rules it may jeopardize the United States Attorney's criminal case. That was the situation in the case with which this paper began, involving the floor brokers and that is why enforcement authorities wanted the judge on the civil side to stay the proceedings.
Often, however, it is the other way around. The defendant does not want the civil case to go forward first because he is afraid that the fruits of the SEC investigation will be handed directly over to the criminal prosecutor, who as already noted is limited in his rights to discovery after an indictment has been handed down.
The leading case on this kind of issue is Dresser Industries,117 where the Court of Appeals for the District of Columbia said that so long as an indictment has not been returned, at any rate, a stay of the civil investigation is not required. After all, before the criminal case is filed, anything the SEC can get, the FBI can get, too on its own; it is only that the SEC can make it easier for the criminal authorities by adding its resources to theirs. As a matter of fact, the court noted that Congress expected the SEC and the Justice Department to cooperate with each other in investigations.118 What the Commission staff needs to watch out for, however, is that they are not allowed to launch a civil investigation or issue a subpoena solely for the purpose of obtaining criminal evidence. They need their own independent basis to proceed, and cannot act in bad faith.119
The court in Dresser acknowledged that there are other problems a defendant in parallel proceedings might face when the civil proceeding advances ahead of the criminal. To protect himself from criminal exposure, for instance, a defendant might want to plead the Fifth Amendment. But if the civil trial goes first, he might feel pressured to testify and jeopardize himself criminally since his silence can be used as evidence against him in the civil case.120 Or, he might be forced as the result of the civil case to expose his defense strategy to the criminal prosecutors.
So there are times when a court will delay a civil proceeding on behalf of a defendant. We have an entire jurisprudence about "special circumstances" of serious prejudice to the defendant or to the government that warrant a court staying a proceeding in the interests of either party.121 But the Dresser court stressed the frequent need for the government's civil action to proceed speedily, independent of considerations arising from the criminal case. And the Supreme Court, in another context, has expressly noted Congress's intent to "vest the SEC with considerable discretion in determining when and how" to conduct its investigations.122
"In fact," wrote Bill McLucas, former director of the Division of Enforcement at the SEC, and some of our other colleagues about a year ago, "absent special circumstances, courts rarely stay the discovery process of parallel civil proceedings at the request of a defendant. On the other hand, courts routinely stay the discovery process of parallel civil proceedings at the request of the U.S. Attorney where the U.S. Attorney intervenes and seeks the stay to prevent the defendant from using the civil discovery process to obtain discovery that would not be available in the criminal proceeding."123
That is why an instance like the floor brokers case raises eyebrows. The judge in that case refused to grant a stay, and enforcement officials were forced to ask the court to dismiss the SEC's complaint entirely so the criminal case wouldn't be compromised. But after the criminal case is over, the Commission has the ability to refile and has done so in other, similar cases.124
In the fiscal year that ended on September 30, 1997, the SEC initiated 189 civil injunctive actions, 285 administrative proceedings, and 14 contempt proceedings, involving 1,072 defendants or respondents. In SEC-related cases, criminal authorities obtained 93 indictments or informations and 98 convictions, and access to Commission investigative files was granted to domestic and foreign prosecutorial authorities in 197 instances.125 All in all, our dual system works pretty well.
There are still other advantages in having a two-track system. As expressed by Mann:
- [T]he integrity of decisionmaking processes drew strength from the checks and balances created by the institutional interdependence of agencies and criminal prosecutors; each decisionmaker knew that another entity was making many of the same assessments. In addition, the government enjoyed extra leverage over potential defendants by being able to pursue two avenues simultaneously. In parallel enforcement proceedings, defendants risked getting one penalty "ratcheted up" if they obtained a good settlement in the other; to avoid this risk, defendants had to deal with both antagonists at once.126
This scholar also notes the advantages of having side by side with the criminal system the "special expertise" of an administrative agency that has "firsthand experience with potential offenders and with the substantive law over which they have regulatory authority," providing it with "important advantages in understanding the seriousness of a particular violation" and enabling it to "play a key role in distinguishing cases fit for criminal sanctions from those fit only for punitive civil sanctions, particularly when both kinds of sanctions are available."127
One final point: With all this variety of sanctions available to mix and match, someone might ask, why do we still need the civil-criminal dichotomy? The question has been posed in one fashion or another by, among others, some utilitarian thinkers and adherents of the school of law and economics.128
The answer lies in some of our original observations about the universality of the notion of separate civil and criminal regimes. We still want to see certain things like fraud, stealing money from innocent people as horrifying, terrible, punishable with all our criminal firepower. That is what these kinds of securities violations are: crimes to condemn and root out, with our heaviest moral artillery.
Were we deprived of our criminal remedies, the most flagrant conduct would be insufficiently punished and deterred. Effective criminal prosecution and incarceration is the most powerful combatant against such injurious wrongdoing. But we recognize that successful criminal prosecution may not be possible in every serious fraud case. Many violations are too complex or subtle for effective prosecution to a jury or the evidence that can be marshalled simply not overwhelming enough to meet the extraordinary high burden of proof needed to bring the lawbreakers to full criminal justice. Were solely criminal remedies available as is the case in much of the world we believe the difficulties of prosecution would both make the likelihood of conviction unacceptably low, and render the enforcement system entirely inadequate to meet the aim of overall deterrence.
In determining which cases to pursue, then, on the criminal level which, for instance, the SEC will urge upon the Department of Justice and the FBI the factors we take into account include the seriousness of the incident, the extent of the harm, the evidence of scienter, the strength of the case, it's likely jury appeal and the prosecutorial resources available. Provable perjury, obstruction or false statements in the course of our investigation greatly increase the likelihood of criminal prosecutorial interest, not only because such misconduct is strong evidence of scienter but also to protect the Commission's processes.
In short, our dual system while actually calling it all crime if perpetrated with requisite intent allows us to conserve our criminal prosecutorial energies for the most egregious cases. The civil enforcement power of the SEC, meanwhile, allows us to bring action even in the more difficult cases, furthering the goals of remediation and effective deterrence.
We believe, perhaps chauvinistically, that the SEC is the most effective securities regulator-enforcement body in the international community, and further that to a large extent, its effectiveness is attributable to the dual enforcement system we have endeavored to describe. As a result, our markets are the fairest and most honest, and enjoy the highest degree of investor confidence in the world.129
1 See Big Board Brokers Charged in Illegal Profits, N.Y. Times, Feb. 26, 1998.
2 See, e.g., Ten NYSE Dealers Charged by SEC, AP Online, Feb. 26, 1998; Scandal Shakes NYSE/Damaged reputation puts exchange on defensive, USA Today, Mar. 2, 1998.
3 See SEC v. The Oakford Corp., Lit. Rel. No. 15743, 1998 SEC LEXIS 946 (May 18, 1998).
4 As will be explained in detail below, the SEC may bring two different types of law enforcement actions. It may file a civil complaint in a U.S. federal court, and it may institute proceedings before an administrative law judge.
5 Actually, it can become even more complex. Later in 1998, for instance, as the parallel civil and criminal actions in our instant episode were going forward in their respective courts, enforcement officials wanted the judge to stay the civil proceedings delay them until the criminal case was concluded so that the SEC would not be forced to divulge information to the defendants that would jeopardize the prosecution's strategy in the criminal case, information that would not have been available to the defendants pursuant to the rules governing criminal prosecutions. When the judge refused the stay, the SEC was forced to dismiss the case entirely with the possibility it could file the complaint again after the criminal case was over. See SEC Dismisses Trading Complaint to Aid Other Cases, Wall St. J., July 27, 1998. See also SEC v. The Oakford Corp., 1998 U.S. Dist. LEXIS 12314 (S.D.N.Y. Aug. 10, 1998), a decision involving yet another complication in the case related to parallel proceedings issues.
6 Mary M. Cheh, Constitutional Limits on Using Civil Remedies to Achieve Criminal Law Objectives: Understanding and Transcending the Criminal-Civil Law Distinction, 42 Hastings L.J. 1325, 1325 (1991).
7 Browning-Ferris Indus. v. Kelco Disposal, 492 U.S. 257, 272 (1989).
8Paul H. Robinson, Symposium: The Criminal-Civil Distinction and the Utility of Desert, 76 B.U.L. Rev. 201, 201 (1996).
9 For a general overview of the interplay between criminal and civil proceedings in the Simpson case, see Kenneth B. Noble, THE NATION: In Civil Court, a Second Chance at Retribution, N.Y. Times, Oct. 22, 1995.
10 See generally, Kenneth Mann, Punitive Civil Sanctions: The Middleground Between Criminal and Civil Law, 101 Yale L.J. 1795, 1803-10 (1992).
11 Id. at 1807. But cf. Robinson, supra note 8, at 209-10.
12 See Mann, supra note 10, at 1810-12, for a different breakdown of criminal-civil distinctions examined in this section, which draws on his analysis.
13 See id.. Mann acknowledges that after a case has been filed, under our laws, a civil authority can obtain substantially more discovery than can a government prosecutor in a criminal case. However, writes Mann, "this power does not begin to compare with the power of compulsion under grand jury subpoena or the intrusion incident to a physical search for documents." Id. at 811.
14 See, e.g., 5 U.S.C. § 552a, 18 U.S.C. §§ 3052, 3059, 3061, 3101, 3107, 3109, 3117 (1994).
15 U.S. Const. Amend V.
16 See 18 U.S.C. §§ 6001-6004 (1994); Kastigar v. United States, 406 U.S. 441, 453 (1972).
17 See generally 5 U.S.C. § 552a (1994).
18 See 18 U.S.C. §§ 6001-6004 (1994).
19 See Fed. R. Civ. P. 26. Rule 26(b)(1), for instance, provides:
In general. Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. The information sought need not be admissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence.
20 See Fed. R. Crim. P. 16(a)-(b). See also generally, Robert B. Mitchell, Comment : Federal Discovery in Concurrent Criminal and Civil Proceedings, 52 Tul. L. Rev. 769, 770-81 (1978). In general, "criminal procedure historically put more limitations on the information available [in the decisionmaking process itself]. . . than did civil procedure." Mann, supra note 10, at 1810.
21 Baxter v. Palmigiano, 425 U.S. 308, 318 (1976).
22 See In re Winship, 397 U.S. 358 (1970).
23 See, e.g., Addington v. Texas, 441 U.S. 418 (1979). Other constitutional provisions in our country that afford special protections for a criminal defendant are the right to free counsel for the impecunious defendant and the right to a trial by jury. See Cheh, supra note 6, at 1329, 1348. Also, a criminal defendant has the right to appeal a conviction on the basis of legal error, while the state does not have any right of appeal after an acquittal; when the government loses in a civil case, it does have the right of appeal. See generally Cheh, at 1325 n.2, citing Kate Stith, The Risk of Legal Error in Criminal Cases: Some Consequences of the Assymetry in the Right to Appeal, 57 U. Chi. L. Rev. 1, 3 (1990).
- On the subject of burdens of proof, it should also be pointed out here that some degree of "scienter" guilty knowledge is a basic element in the definition of most crimes. Civil law, on the other hand, often requires only a finding of negligence to hold a person liable. As Mann points out, the negligence standard does more than allow civil law to embrace a wider range of misconduct. It also makes it easier to sanction a person who had knowledge, but about whom we cannot gather enough evidence to prove it. Mann, supra note 10, at 1860.
24 For a comprehensive review of civil remedies that may be used specifically as enforcement tools against offenses that may be criminal in nature, see Cheh at 1334-1344, "Varieties of Civil Remedies", from which many of the observations below have been gleaned.
25 Cheh, at 1342.
26 The question here relates to law enforcement actions, not to suits relating to damages caused to the government itself.
27 See Mann, supra note 10, at 1820.
28 See generally United States v. Halper, 490 U.S. 435, 446, 449 (1989); Mann, at 1823.
29 In Halper, the United States Supreme Court, while acknowledging generally the theory of rough compensation, declared that sometimes a civil monetary penalty may accrue in a way that "bears no rational relation to the goal of compensating the Government for its loss, but rather appears to qualify as punishment' in the plain meaning of the word." The Court held in Halper that where the wrongdoer had previously been convicted criminally, imposing such an additional penalty, even though labeled as civil, constitutes impermissible double jeopardy. As we will see below, the decision was essentially reversed in United States v. Hudson, 118 S.Ct. 488 (1997). While the Hudson decision re-establishes the validity of stiff civil monetary penalties as a non-punitive remedy, it did not rest on a rough compensation rationale.
30 Cheh, supra note 6, at 1335, looks at this concept in the criminal context.
31 See, e.g., SEC v. Certain Unknown Purchasers, 817 F. 2d 1018 (2d Cir. 1987), cert. denied sub nom Olaques v. SEC, 484 U.S. 1060 (1988); SEC v. Levine, 881 F.2d 1165 (2d Cir. 1989).
32 See, e.g., SEC v. Courtois, [1984-85 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶92,000 (S.D.N.Y. April 11, 1985).
33 SEC v. Commonwealth Chemical, 574 F.2d 90, 95 (2d. Cir. 1978). See also SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978); SEC v. First City Fin. Corp., Ltd., 688 F. Supp. 705, 728 (D.D.C. 1988) aff'd, 890 F.2d 1215 (D.C. Cir. 1989) ("Disgorgement is an equitable remedy designed to maintain the integrity of the market and deter future illegal actions by making violations unprofitable."); See also generally Rory C. Flynn, SEC Distribution Plans in Insider Trading Cases, 48 Bus. Law. 107 (1992).
34 Other remedies on the noncriminal side include civil forfeiture and civil detention, which have limited application to the topic at hand. For an elaboration upon these remedies, see Cheh, supra note 6, 1334-1344.
35 The phrase is used by Cheh, who looked at the various approaches that have been advanced towards capturing the gist of why society relates to particular types of wrongdoing as criminal. Cheh, at 1346, 1349-64.
36 An episode illustrating the drawbacks of a legal regime in which securities laws violations are pursued on only a criminal track was the mammoth fraud case brought against the sons of Robert Maxwell the British media magnate whose drowned body was found off the side of his yacht off the coast of the Canary Islands in which a British jury was unable to find guilt in the case despite the disappearance of huge sums of money from the Maxwell empire. See Pennington, Jury's out on fraud trials, The Times, Oct. 18, 1996.
37 R. Jackson, The Struggle For Judicial Supremacy 152 (Vintage ed. 1941), cited in G. Robert Blakey & Scott D. Cessar, Equitable Relief Under Civil RICO: Reflections on Religious Technology Center v. Wollersheim: Will Civil RICO Be Effective Only Against White-Collar Crime?, 62 Notre Dame L. Rev. 526 (1987).
38Cheh, at 1329.
39 See Troy Cahill, Note: The Supreme Court's Decision in Hudson v. United States : One Step Up and Two Steps Back for Multiple Punishment Protection under the Double Jeopardy Clause, 33 Wake Forest L. Rev. 439, 443 (1998), citing Peter Finn & Maria O'Brien Hylton, U.S. Dep't of Justice, Using Civil Remedies for Criminal Behavior: Rationale, Case Studies, and Constitutional Issues 2. Because criminal law is directed at individual criminals, and not at the organizations they set up, Cahill argues that civil enforcement has an added advantage over criminal law in that, with its injunctive mechanisms and speedier process, it can more effectively shut down the criminal enterprise. Cf. Cheh at 1346.
40 Cheh, at 1330.
41Mann, at 1862, drawing on the insights of, among others, Breyer and Stewart in Stephen G. Breyer & Richard B. Stewart, Administrative Law and Regulatory Policy (3d ed. 1992). See also Carol S. Steiker, Twenty-Sixth Annual Review of Criminal Procedure: Foreword: Punishment and Procedure: Punishment Theory and the Criminal-Civil Procedural Divide, 85 Geo. L. J. 775 (1997).
42See Louis Loss & Joel Seligman, 1 Securities Regulation 169-177 (3d ed. 1996), from which the historical facts in this section though not the conceptual analysis are drawn.
43A third approach was ultimately rejected. Id. at 177.
44See Companies Act, 1929, 19 & 20 Geo. 5 (Eng.).
45N.Y. Gen. Bus. Law § 23-A (McKinney 1984).
46Loss, supra note 42, at 169.
47Id., citing 1935 Report of the [Canadian] Royal Commission on Price Spreads, at 38.
48 15 U.S.C. §§ 77a-77aa (1994). Practitioners in the securities field most frequently cite to provisions of the statute by section of the Act itself rather than the equivalent reference in the U.S. Code. For example, Securities Act § 17 is the same as 15 U.S.C. § 77q. For purposes of this paper, for each citation we will refer first to the section in the Act, then the equivalent in the Code.
49 15 U.S.C. §§ 78a-78ll (1994). For each citation, we will refer first to the section in the "Exchange Act," then the equivalent in the Code.
50 Securities Act § 17, 15 U.S.C. § 77q (1994); Exchange Act § 10(b), 15 U.S.C. § 78j(b) (1994).
51 Securities Act § 24, 15 U.S.C. § 77x (1994); Exchange Act § 32(a), 15 U.S.C. § 78ff (1994). See also generally Loss & Seligman, 10 Securities Regulation 4751-56.
52 See, e.g., Standard Sanitary Manufacturing Co. v. United States, 226 U.S. 20, 52 (1912), cited in SEC v. Dresser Industries, Inc. 628 F.2d 1368, 1374 (1980). See also generally Mann, supra note 10, at 1822; Andrew Z. Glickman, Note: Civil Sanctions and the Double Jeopardy Clause: Applying the Multiple Punishment Doctrine to Parallel Proceedings after United States v. Halper , 76 Va. L. Rev. 1251, 1252 (1990).
53 Securities Act § 8(b), 15 U.S.C. § 77h(b) (1994).
54 Exchange Act § 15(b), 15 U.S.C. § 78o(b) (1994).
55 Exchange Act § 12(k), 15 U.S.C. § 78l(k) (1994)..
56 Securities Act § 8(d), 15 U.S.C. § 77h(d) (1994).
57 Exchange Act § 17(b), 15 U.S.C. § 78q(b) (1994).
58 See generally Exchange Act § 6, 15 U.S.C. § 78f (1994).
59 See, e.g., Exchange Act §§ 15(b), 19, 15 U.S.C. §§ 78o(b), 78s (1994).
60 An administrative proceeding is tried before an administrative law judge, whose decision may be appealed to the Commission. The final order in any administrative case, however whether appealed or not is always issued by the Commission.
61 See Loss & Seligman, supra note 51, at 4942-44.
62 See, e.g., Securities Act § 20(b), 15 U.S.C. § 77t(b) (1994); Exchange Act § 21(d), 15 U.S.C. § 78u(d) (1994).
63 Securities Act § 20(c), 15 U.S.C. § 77t(c) (1994); Exchange Act § 21(e), 15 U.S.C. § 78u(e) (1994).
64 See Loss & Seligman at 4738, citing SEC v. Capital Gains Research Bureau, 375 U.S. 180, 193 (1963) and Aaron v. SEC, 446 U.S. 680, 703 (1980). See also Buffalo Forge Co. v. Ampco-Pittsburgh Corp., 638 F.2d 568, 569 (2d Cir.1981), calling interim injunctive relief an "extraordinary and drastic remedy which should not be routinely granted."
65 See 18 U.S.C. § 3691.
66 Exchange Act § 15(b), 15 U.S.C. § 78o(b) (1994).
67 Ancillary relief refers to equitable remedies deemed implicit in, but not expressly authorized by, a statute. See generally George W. Dent, Jr., Ancillary Relief in Federal Securities Law: A Study in Federal Remedies, 67 Minn. L. Rev. 865, 867 n.5 (1983). In his generally critical article, Dent provides us with a list:
Remedies the SEC has obtained against general issuers without express statutory authority include disgorgement of profits, restitution, rescission of transactions, appointment of receivers, sterilization of voting rights, orders to do (or to forbear from doing) acts not otherwise required (or prohibited) by law, and the restructuring of corporate managements by appointing persons to or removing persons from corporate office.
Id. at n.7. Some of these forms of relief have since been confirmed through specific legislation.
68 Pub. L. No. 98-376, 98 Stat. 1264 (1984) (codified as amended at scattered sections of 15 U.S.C. (1994)). Pursuant to the Insider Trading and Securities Fraud Enforcement Act of 1988 ( ITSFEA) , these provisions are now codified at Section 21(a) of the Exchange Act. Pub. L. No. 100-704, 102 Stat. 4677 (1988).
69 Pub. L. No. 100-704, 102 Stat. 4677 (codified as amended in scattered sections of 15 U.S.C. (1994)).
70 Exchange Act § 21A, 15 U.S.C. § 78u-1 (1994).
71 Pub. L. No. 101-429, 104 Stat. 931 (codified in scattered sections of 15 U.S.C. (1994)).
72 See generally Ralph C. Ferrara et al., Hardball! The SEC's New Arsenal of Enforcement Weapons, 47 Bus. Law. 33 (1991).
73 Securities Act § 20(d), 15 U.S.C. § 77t (1994); Exchange Act § 21(d), 15 U.S.C. § 78u(d) (1994).
74 See Loss & Seligman, supra note 51, at 4984, citing H.R. Rep. No. 101-616, 101st Cong., 2d Sess. 17 (1990).
75 Securities Act § 20(e), 15 U.S.C. § 77t(e) (1994); Exchange Act § 21(d), 15 U.S.C. § 78u(d) (1994).
76 Exchange Act § 21B(a), 15 U.S.C. § 78u-2(a) (1994).
77 Exchange Act § 21C(e), 15 U.S.C. § 78u-3(e) (1994).
78 Securities Act § 8A, 15 U.S.C. §77h-1 (1994); Exchange Act §21C, 15 U.S.C. § 78u-3 (1994).
79 Although Loss and Seligman, authors of the pre-eminent treatise on securities regulation, aver that "[a]n obvious advantage of the administrative cease and desist route in contrast to an injunction is that it does not require the Commission to show a likelihood of future violation," 10 Loss & Seligman, supra note 51, at 4989, the very issue was pending before the Commission as this paper was being prepared. See In the Matter of Warren G. Trepp, Administrative Proceeding File No. 3-8833, Initial Decisions Release No. 115, 1997 SEC LEXIS 1682 (August 18, 1997); Division's Brief in Support of Petition for Review, In The Matter Of Warren G. Trepp, Respondent (Oct. 20, 1997).
80 See generally Loss & Seligman at 4989, comparing a C&D order to an injunction.
81 See Mann, supra note 10, at 1832, citing Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963), as a leading Supreme Court case negotiating the shoals of the civil-criminal divide and "lead[ing] to the use of the word remedial' to characterize many kinds of nonmonetary sanctions . . ."
82 See Mann, at 1851: "Congress could have chosen additional criminal penalties, but instead decided to increase punitive civil sanctions. The House Report stated:
- The principal, and often effectively only, remedy available to the Commission against insider trading is an injunction against further violations of the securities laws and disgorgement of illicit profits. . . . [These] serve[ ] only a remedial function and [do] not penalize a defendant for the illegal conduct. . . . The Committee believes the new penalty provided by the legislation will serve as a powerful deterrent to insider trading abuses." H.R. Rep. No. 355, 98th Cong., 2d Sess. 7 (1984), reprinted in U.S.C.C.A.N. 2274, 2281.
- Of course, Congress has from time to time increased the criminal penalties for securities crime. For example, in 1988, it raised maximum prison sentences for violations of the Securities Exchange Act of 1934 from five to ten years and increased the maximum fine for such violations by natural persons, for instance, from $100,000 to $1 million. Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No. 100-704, Sec. 4, 102 Stat. 4677, 4680, codified at 5 U.S.C. § 78ff(a) (1994)).
83 Cheh, supra note 6, at 1355.
84 Of which we will see more below.
85 As Professor Mann has observed:
Mann, supra note 10, at 1851-52. Note that Mann sees these monetary penalties as a way of "punishing" criminals, as part of his overall thesis.
- In voting to secure [such] statutory changes, Congress acted in the belief that a large portion of the fraud detected escaped sanction because existing institutional structures were inadequate to respond to them. The federal criminal system was already overloaded with complex and serious cases, and expanding its capacity would have entailed heavy costs. The hybrid administrative penalty opened the way for more cost-efficient and streamlined methods for punishing criminals. It expanded the availability of sanctions for [several] regulatory offenses, thereby increasing the deterrent powers of government agencies without enlarging the field of criminal law. This change reflected a growing belief that administrative agencies need direct enforcement powers that are similar but not identical to criminal prosecution. . . . Equally important, lawmakers seem to have thought of the criminal process as somehow inappropriate for "less serious" cases. Most wrongdoers charged with white-collar offenses, it was thought, could be sanctioned effectively by a "civil" process, even though their actions amounted to statutorily defined crimes.
86 See Cheh, at 1325, listing among them domestic violence, drug trafficking, weapons possession, racial harassment and racketeering. See also Glickman, supra note 52, at 1278 n.145 (1990), listing a "diversity of federal statutes calling for parallel civil and criminal proceedings" and penalties, including laws concerning: tax evasion, false claims against the government, insider trading, illicit discharge of oil and hazardous waste, the use of lead in drinking water, antitrust, mining safety, environmentally harmful pesticides, and safety and health in the workplace.
87 See, e.g., Cheh, at 1332; Mann, at 1798.
88 United States v. Hudson, 118 S.Ct. 488, 493 (1997), citing United States v. Ward, 448 U.S. 242, 248 (1980) and Rex Trailer Co. v. United States, 350 U.S. 148, 154 (1956), and referencing the "guideposts" of Mendoza-Martinez, 372 U.S. at 168-69, in determining "[w]hether a particular punishment is criminal or civil." See also the line of cases cited by Mann, 1830-36, including Oceanic Steam Navigation Co. v. Stranaham, 214 U.S. 320 (1909) (a monetary penalty, if so intended by the legislating authority, is civil, not criminal, and can be imposed even in an administrative proceeding); Atlas Roofing Co. v. Occupational Safety & Health Review Commission, 430 U.S. 442 (1977) (upholding a lower court decision viewing sanctions imposed for the purpose of "prospective deterrence" as civil, not criminal); and Ward, supra, (monetary penalties intended by Congress as civil sanctions were not deemed criminal). Mann, for his part, believes that to deny the punitive character of these penalties is a legal fiction.
89 United States v. Halper, 490 U.S. 435 (1989).
90 118 S.Ct. 488 (1997).
91 See, e.g., Securities Act § 24, 15 U.S.C. § 77x (1994); Exchange Act § 32(a), 15 U.S.C. § 78ff(a) (1994).
92 15 U.S.C. § 1343 (1994).
93 15 U.S.C. § 1963 (1994).
94 18 U.S.C. § 1621 (1994).
95 18 U.S.C. § 1505 (1994).
96 18 U.S.C. § 1001 (1994).
97 18 U.S.C. § 2 (1994).
98 18 U.S.C. § 371 (1994).
99 Securities Act § 20(b), 15 U.S.C. § 77t(b) (1994); Exchange Act § 21(d), 15 U.S.C. § 78u(d) (1994).
100 Still a third track may be added if a local district attorney decides to bring action on state grounds. See Broker Pleads Guilty in Insider Trading Case, N.Y. Times, Jan. 22, 1998; Charge Dropped By Morgenthau, N.Y. Times, May 14, 1998.
101 See Securities Act §§ 19(b), 20(a), 15 U.S.C. §§ 77s(b), 77t(a) (1994); Exchange Act § 21(a)-(c), 15 U.S.C. § 78u(a)-(c) (1994). See generally William R. McLucas et al., A Practitioner's Guide to the SEC's Investigative and Enforcement Process, 70 Temple L. Rev. 53, 53-70 (1997), for a detailed review of SEC investigative procedures.
102 See, e.g., Atlas Roofing Co. v. Occupational Safety & Health Review Commission, 430 U.S. 442, 449 (1977) (only suits in common law, not in equity, entitle party to trial by jury.)
103 See Tull v. United States, 481 U.S. 412 (1987); Letter from the Subcommittee on SEC Practice and Enforcement Matters of the Federal Regulation of Securities Committee of the Section of Business Law of the American Bar Ass'n to Donald Riegle, Jr., Chairman of the Senate Committee on Banking, Housing and Urban Affairs (May 14, 1990) (citing SEC chairman's concession that, under Tull, a defendant would have a right to a jury trial on the issue of liability if the SEC sought a civil money penalty in federal court), cited in Arthur B. Laby and W. Hardy Callcott, Patterns of SEC Enforcement under the 1990 Remedies Act: Civil Money Penalties, 58 Alb. L. Rev. 5, 12 n.20 (1994).
104 Fed. R. Civ. P. 26(b).
105 If the information a witness has is crucial to its case, the Commission may, with the approval of the Attorney General, confer criminal immunity upon him in order to compel his testimony. See 18 U.S.C. §§ 6001-6004 (1994) . Such immunity does not confer any protection, however, from an SEC civil enforcement proceeding.
106A sample letter from the Commission staff stipulating to a witness the parameters of a "Queen-for-a-Day" session might include, for instance, the following language:
With respect to the meeting, the following conditions and understandings exist:
(1) Should any civil or administrative actions be brought against you by the Commission, neither the Commission nor its staff will offer into evidence, at any trial or proceeding, any statements made by you during this meeting, except with respect to false statements made at this meeting evidencing obstruction of justice or perjury;
(2) Notwithstanding paragraph (1) above;
(a) the Commission and its staff may use information derived directly or indirectly from the meeting for the purpose of obtaining leads to other evidence, which evidence may be used in any civil trial or administrative proceeding against you by the Commission; and
(b) the Commission or its staff may use statements made by you at the meeting and all evidence obtained directly or indirectly therefrom for the purpose of cross-examination should you testify, or to rebut any evidence offered by or on your behalf, in connection with any trial or administrative proceeding, should any be undertaken; . . . .
107Fed. R. Crim. P. 15(a).
108See generally McLucas et al., supra note 101, at 98-99, from which much of the analysis in this section is drawn.
109See Rule 122 under the Securities Act, 17 C.F.R. § 230.122 (1996).
110Rule 2 of the Commission's Rules Relating to Investigations, 17 C.F.R. § 203.2 (1996).
111See Exchange Act § 24(c), 15 U.S.C. § 78x(c) (1994) and Rule 24c-1(b) thereunder, 17 C.F.R. § 240.24c-1(b) (1996).
11217 C.F.R. § 200.30-4(b).
113See U.S. v. Fields, 592 F.2d 638, 645-48 (2d Cir. 1979); U.S. v. Bloom, 450 F. Supp. 323, 329 (E.D. Pa. 1978).
114See Fed. R. Crim. P. 6(e).
115See McLucas at 103-104: "Disclosure pursuant to Rule 6(e) [the grand jury secrecy rule] usually will occur only if the Commission can show, through detailed and specific averments, that it has tried and failed to obtain the information through other means, including available discovery methods. . . . When the Commission seeks grand jury materials during the pendency of the grand jury investigation, it will have an especially heavy burden' to meet to obtain disclosure pursuant to Rule 6(e)."
116See Cheh, at 1391, discussing the alternative of a protective order sealing court records rather than staying the proceeding, and the drawbacks with that option.
117SEC v. Dresser Industries, Inc., 628 F.2d 1368 (D.C. Cir. 1980).
118Id. at 1386.
119See id. at 1387; United States v. Kordel, 397 U.S. 1, 11-12 (1969).
120"The government also may lose at this game when the defendant's use of the fifth amendment privilege conceals important evidence." Cheh, supra note 6, at 1390 n.343.
121See Kordel, 397 U.S. at 11; Dresser, 628 F.2d at 1375.
122SEC v. O'Brien, 467 U.S. 735, 645 (1984).
123McLucas, supra note 101, at 102 (emphasis added).
124See, e.g., SEC v. Charles Brumfield , SEC Lit. Release No. 14706, 1995 SEC LEXIS 3015 (October 31, 1995).
125See United States Securities and Exchange Commission, 1997 Annual Report 1, 148.
126Mann, at 1866.
127 Id. at 1867. Mann, we must point out again, has his own ideas about reorganizing law enforcement generally.
128 See Robinson, supra note 8, at 209.
In the context of remarks on our law enforcement efforts against insider trading, but equally applicable to the protections of our securities laws in general, SEC Chairman Arthur Levitt observed at a conference of securities professionals and regulators from across the world in February 1998:
- Our markets are a success precisely because they enjoy the world's highest level of confidence. Investors put their capital to work and put their fortunes at risk because they trust that the marketplace is honest. They know that our securities laws require free, fair, and open transactions. . . . The rest of the world envies America's markets for their honesty, for their regulatory structure, and for their strong reliance on the law. . . . The SEC, other law-enforcement agencies, and the stock exchanges are in this battle for the long haul. We intend to make prosecutions a high priority. . . .
Arthur Levitt, A Question of Integrity: Promoting Investor Confidence by Fighting Insider Trading, Remarks at "SEC Speaks" Conference (February 27, 1998).