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Remarks at Columbia Law School Conference (Hot Topics: Leading Current Issues in Securities Regulation and Enforcement)

Commissioner Daniel M. Gallagher

Columbia Law School<br>New York, NY

Nov. 15, 2013

Thank you, Professor Coffee, for your kind introduction and for inviting me to speak at this conference. I’m also pleased to be here with Joel Seligman, who is well known to the SEC community for many, many reasons, not the least of which is that he is the co-author of the treatise Securities Regulation, along with the late Louis Loss and my good friend and former SEC Commissioner Troy Paredes.

I’d like to talk with you today about an issue that has become extremely vexing for the SEC over the past decade: the imposition of penalties on corporations in enforcement matters. In late September, the SEC and other U.S. and U.K. regulators entered into a global settlement of civil charges with JPMorgan Chase for $920 million — the SEC’s penalty was $200 million — in what is colloquially known as the London Whale case. In a column discussing the global settlement, New York Times journalist Andrew Ross Sorkin asked and answered a very thoughtful question:

When the S.E.C. says that JPMorgan is “paying” a record fine, where is the money actually coming from?

The answer: shareholders. The same shareholders who were ostensibly the victims of the scandal that already cost them $6 billion. The victims, if you want to call them that, become victimized twice.[1]

In reaction to the same settlement, a certain professor of securities law at Columbia Law School — yes, our own Professor Coffee — had this to say: “It is perversely inappropriate. You are adding injury to injury. All we’re doing is punishing the shareholders more.”[2]

I’ll refrain from commenting specifically on the JPMorgan case, but as to the larger issue, I agree completely with Professor Coffee’s assessment. The topic of corporate penalties — or maybe we should just call them “shareholder penalties,” since that’s what they are — is a thorny one, and one that has had a long history at the SEC.

For much of the 20th Century, the SEC generally lacked the authority to impose corporate penalties.[3] That changed in 1990 with passage of the Remedies Act,[4] which gave the SEC nuanced corporate penalty authority that Congress expected the SEC to use wisely and cautiously.[5]

But the amounts of the penalties that the SEC imposes against corporations today are eye-popping and likely would have shocked the legislators who voted for the Remedies Act and the Commission that sought penalty authority from Congress. Between the passage of the Remedies Act and the SEC’s case against Xerox Corporation in April 2002, the Commission tallied a total of four corporate issuer penalties adding up to less than $5 million.[6] The Xerox case marked a sea change in this area of the law, imposing the first multimillion-dollar penalty levied by the SEC against a corporate issuer.[7] In the ensuing years, as widely reported in the press, the Commission was sharply divided on the appropriateness of penalizing public companies, particularly in accounting fraud cases.[8] Although the Commission certainly had the legal authority to impose such penalties, many thoughtful observers — and some thoughtful Commissioners and staff — felt that to do so without due consideration of the impact on shareholders was an inappropriate exercise of the discretion given to the Commission by Congress.

In 2006, the agency made a leap forward in this area when the Commission unanimously approved a joint policy statement on corporate penalties.[9] This “Penalties Statement,” however, was not merely a statement of policy. Rather, it was based in pertinent part on an in-depth analysis of the text and legislative history of the Remedies Act and the relevant portions of the Sarbanes-Oxley Act, and it represented an effort to come to a common understanding of those authoritative legal texts.[10] The Statement provided guidance to the SEC staff, corporate issuers, corporate counsel, and the investing public, and it represented an attempt to impose a rational analytic framework on an area of the SEC’s enforcement program that had been characterized for too long by disorder and contentiousness.

I’ll spare you an in-depth discussion of the substance of the Penalties Statement, but I do want to focus on one aspect of it. The Statement, and the legislative history underlying it, acknowledge that corporate penalties can harm shareholders.[11] In fact, the relevant Congressional Committee report stated:

The Committee believes that the civil money penalty provisions should be applicable to corporate issuers, and the legislation permits penalties against issuers. However, because the costs of such penalties may be passed on to shareholders, the Committee intends that a penalty be sought when the violation results in an improper benefit to shareholders.[12]

Importantly, several years before the passage of the Remedies Act, the Commission, led by Chairman David Ruder, wrote a memorandum to Congress that discussed the criteria that the Commission would consider if granted the authority to impose corporate penalties in administrative proceedings.[13] Among other things, the Ruder memo stated that:

  • The Commission would use its sound discretion in determining whether to impose a penalty on an issuer, and could exercise that discretion not to seek a penalty against an issuer, particularly if it chose to pursue individual offenders instead;[14]
  • The Commission “may properly take into account its concern that civil penalties assessed against corporate issuers will ultimately be paid by shareholders who were themselves victimized by the violations;”[15] and
  • The Commission should impose a penalty against an issuer “only where the violation resulted in an improper benefit to shareholders,” and even then, the Commission might choose not to do so in light of the passage of time and any resulting shareholder turnover.[16]

These criteria express the sentiment of the Commission in seeking corporate penalty authority. The single most important issue in this analysis is whether the shareholders have received an improper benefit from the corporation’s misconduct. If so, then a corporate penalty may well be appropriate. This analysis underlies the core principle of the Penalties Statement as well and explains why the improper benefit factor, along with the consideration of whether the imposition of the penalty will recompense or further harm shareholders, are elevated in priority over other factors discussed in the statement.

Despite the 2006 rollout of the Penalties Statement, there remained at the Commission much uncertainty about the appropriateness of penalizing shareholders and, when a penalty was deemed appropriate, the amount of the penalty. So, a year or so after the issuance of the Penalties Statement, the Commission introduced a pilot program governing the issuance of corporate penalties in settlement cases. One purpose of this program was to avert the type of sharp disagreements that had occurred in these matters in the years leading up to, and indeed the months after, the issuance of the Penalties Statement. Under this program, the staff of the Enforcement Division would consult with the Commission before engaging in settlement negotiations in corporate penalty cases.[17] In this way, the staff could get guidance from the Commission — including an acceptable figure, or range of figures, for a corporate penalty — before engaging with defense counsel. The thinking here was that with advance knowledge of the Commission’s preferences, the staff could negotiate a corporate penalty amount that would be acceptable to the Commission and not be the cause of sharp divisions among the Commissioners. As you may have read in press releases, this pilot program was summarily terminated in early 2009 as part of an effort to remove so-called “handcuffs” from the enforcement staff. This move came at the same time the Commission limited its role in the enforcement process by delegating subpoena power to staff.

Over the years, questions have been raised about whether the Penalties Statement is binding on the Commission. This issue is a red herring. The Penalties Statement is an analysis of the law conferring corporate penalty authority on the Commission, and it is that law that binds the Commissioners. Even if there were no Penalties Statement at all, that law would still guide the decision-making of the Commissioners. Revising or rescinding the Statement wouldn’t alter the text or legislative history[18] of the Remedies Act, and therefore it wouldn’t substantively alter the analysis that the Commission should engage in whenever it considers whether to impose a corporate penalty.

Thank you for your attention and the opportunity to address you today.


[1] Andrew Ross Sorkin, As JPMorgan Settles Up, Shareholders Are Hit Anew, N.Y. Times, Sept. 24, 2013, available at .

[2] Id. (quoting Professor John C. Coffee, Jr.).

[3] See S. Rep. No. 101-337, at 7 & n.8 (1990) (committee report on S. 647, the bill that became the Securities Enforcement Remedies and Penny Stock Reform Act of 1990) (noting that SEC did have penalty authority against companies for violations of the Foreign Corrupt Practices Act and limited penalty authority for issuers who failed to file certain required reports).

[4] Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931 (1990).

[5] See S. Rep. No. 101-337, supra note 3, at 12.

[6] See Paul S. Atkins and Bradley J. Bondi, Evaluating the Mission: A Critical Review of the History and Evolution of the SEC Enforcement Program, 13 Fordham J. Corp. & Fin. L. 367, 394 (2008).

[7] See SEC v. Xerox Corporation, Litigation Release No. 17465 (Apr. 11, 2002), available at

[8] See, e.g., Carrie Johnson, SEC Clarifies Philosophy on Penalties, Wash. Post, Jan. 5, 2006, available at .

[9] Press Release, Sec. & Exch. Comm’n, Statement of the Securities and Exchange Commission Concerning Financial Penalties (Jan. 4, 2006), available at [hereinafter Penalties Statement].

[10] See id.

[11] See id.; S. Rep. No. 101-337, supra note 3, at 12; see also Atkins and Bondi, supra note 6, at 402.

[12] S. Rep. No. 101-337, supra note 3, at 12; see also Penalties Statement, supra note 9.

[13] Securities Laws Enforcement: Hearing on H.R. 975 Before the Subcomm. on Telecomms. and Fin. of the H. Comm. on Energy and Commerce, 101st Cong. 44-59 (1989) (Commission memorandum attached to Statement of David S. Ruder, Chairman, Sec. & Exch. Comm’n) [hereinafter Ruder Memo]; see also Atkins and Bondi, supra note 6, at 389-90 & n.131 (citing Ruder Memo).

[14] See Ruder Memo at 47; see also Atkins and Bondi, supra note 6, at 390 (citing Ruder Memo).

[15] Ruder Memo at 47; see also Atkins and Bondi, supra note 6, at 390 (quoting Ruder Memo).

[16] Ruder Memo at 48; see also Atkins and Bondi, supra note 6, at 390-91 (quoting Ruder Memo).

[17] This was a return to the past practice at the Commission, which was to require the Enforcement staff to seek approval from the Commission in every case before engaging in settlement discussions. See Atkins and Bondi, supra note 6, at 378 (citing 1970 internal Commission directive to SEC staff).

[18] In discussing the legislative history of the Remedies Act, commenters occasionally cite to a committee report from the House of Representatives, specifically, H.R. Rep. No. 101-616 (1990) (committee report on H.R. 975). This report accompanied H.R. 975, a bill that proposed to amend the federal securities laws to add certain enforcement remedies. It should be noted, however, that H.R. 975 was not enacted into law and is not the bill that became the Remedies Act. Rather, a different bill in the Senate, S. 647, was enacted into law as the Remedies Act. Thus, the pertinent and authoritative legislative history for the Remedies Act is the legislative history of S. 647, primarily S. Rep. No. 101-337, supra note 3.


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