SEC Seeks More Power to Punish Corporate Wrongdoers

Speaking to the Glasser LegalWorks 20th Annual Federal Securities Institute, Stephen Cutler, director of the Division of Enforcement of the Securities and Exchange Commission (SEC), said the SEC is asking Congress for more power to punish corporate wrongdoers.

A push for more power

The SEC is asking for added authority to impose penalties on officers and directors through administrative cases that do not require federal court proceedings. Specifically, it wants to able to bar executives found to have committed wrongdoing from future service at any public company. “I am determined to be more aggressive,” said Mr. Cutler “in seeking officer and director bars.”

Ed Fleischman, a former SEC commissioner and now a securities lawyer in New York, reportedly told Bloomberg he expects Congress will grant the SEC regulators greater disciplinary authority as part of a legislative response to Enron's bankruptcy.

Worries about ruined careers

Bloomberg reports the reaction among the attendees at the meeting was mixed. For example, Mr. Fleischman said, “Stronger penalties are like motherhood and apple pie in these post-Enron days, I question, though, whether they need extra authority. They're always asking for more authority. Who's to stand up for the executive who feels he's been unfairly charged?”

Dixie Johnson, vice chairman of the American Bar Association's committee on federal regulation of securities, said the proposed expansion of SEC power was “a little frightening because careers might be ruined unfairly.” But Mr. Johnson, a law partner at Fried Frank Harris Shriver & Jacobson, added, “There's a comfort level to having the courts oversee if someone's career in a public company should be ended.”

The need to brandish a bigger stick

In his speech, Mr. Cutler noted that there are three categories of violators against whom the Commission is seeking stiffer sanctions: (1) those who interfere with Commission processes, e.g., by destroying documents after receiving an SEC subpoena, (2) recidivists, i.e., repeat offenders, and (3) deliberate wrongdoers, such as those who engage in deliberate and egregious misconduct, particularly when they abuse positions of shareholder trust.

“Real-time enforcement… is not only about offering a more enticing carrot,” summed Mr. Cutler. “It also calls for brandishing a bigger stick.” Download the complete speech from the SEC’s website.

-Rosemary Schlank