Law Professor Says SEC Enforcement Metrics ‘Deeply Flawed’

Dec 2nd 2015
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Anyone who works with numbers is probably all too familiar with Mark Twain's famous quote: “There are lies, damned lies and statistics.” That's apropos of how a recent study by Emory University School of Law associate professor Urska Velikonja evaluates the US Securities and Exchange Commission's (SEC) enforcement reports.

The SEC grabbed a lot of attention in October when it announced it had brought 807 enforcement actions (of which 507 were a record for independent actions) and obtained orders of about $4.2 billion in disgorgement and penalties in fiscal year 2015.

That's close to what the commission reported in fiscal year 2014: 755 enforcement actions and orders totaling $4.16 billion in disgorgement and penalties. Of those actions, 413 were independent.

“The [Enforcement Division's] hard work, tremendous energy, and efficiency uncovered significant misconduct during the past fiscal year, and helped bring a significant number of high-impact, first-of-their-kind actions,” Andrew Ceresney, director of the SEC's Enforcement Division, said in October. “I continue to be proud of the division's record of accomplishments, and we have already continued to pave new ground in the new fiscal year.”

But according to Velikonja's study, a 15-year review of SEC enforcement actions indicates that the agency's enforcement metrics are “deeply flawed.” They are invalid “because they do not measure what they purport to measure and [are] unreliable because they can be manipulated all too easily.”

“The SEC double and triple counts many of its cases and overstates the fines it orders,” the study states. “This article constructs better measures. These measures reveal that the SEC's statistics mask the fact that core enforcement has remained steady since 2002, and obscure a shift in enforcement toward easier-to-prosecute strict-liability violations.”

Velikonja specifically cites the SEC's fiscal year 2014 statistics and the claim that the agency set “all-time records” and were “significant increases over the prior fiscal years.”

But, citing the study's 15-year period, Velikonja states that the term “enforcement action” includes all legal proceedings that the SEC brings. That includes suspensions, bars, and license revocations that involve two or three proceedings against the same defendant for the same violation.

“Between 23 percent and 34 percent of SEC enforcement actions brought each year have already been counted at least once,” the study states.

Likewise, “monetary penalties ordered” is an overstatement that includes disgorgement orders that are “offset by restitution ordered in a parallel criminal prosecution, civil fines imposed by and paid to FINRA or the exchanges, and penalties ordered but waived due to defendant's financial inability to pay. The figure also obscures the fact that the SEC collects only about half of the total,” the study states.

Inaccuracies also allow:

  • Distortion of defendant count and subject-matter classification.
  • The suggestion of “bogus” trends that obscure actual trends.
  • Concealment of where enforcement is lacking.
  • Easy-to-prosecute strict-liability offenses.

The SEC, as it turns out, isn't the only agency that reports flawed numbers, according to the study. It also calls out the US Environmental Protection Agency, the Federal Trade Commission, and the US Commodity Futures Trading Commission.

But the SEC's enforcement reporting â€œif anything … is more transparent than reporting by other agencies, making the analysis offered in this article possible,” the study states.

The SEC did not respond to AccountingWEB's request for comment.

Related article:

SEC Filed 807 Enforcement Actions in FY 2015