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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-30-11 08:11 AM
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20. SEC Pushes to Toughen Penalties for Offenders

The Securities and Exchange Commission, bruised by a judge's rejection of a proposed settlement with Citigroup Inc., sought the power to impose much-larger penalties on financial firms and individuals that commit fraud. SEC Chairman Mary Schapiro, in a letter sent to senators late Monday, asked Congress to pursue legislation that changes the legal formulas used by the agency to calculate penalties. Ms. Schapiro's proposals would allow the SEC to impose fines up to nine times greater than the maximum currently allowed by U.S. law. The changes would include increasing the maximum penalty to triple the net profit made as a result of the alleged wrongdoing, up from the current limit of no more than the profit. Ms. Schapiro also sought power to further triple penalties for repeat offenders, or firms or individuals who have been the subject of another SEC enforcement action or criminal conviction in the previous five years.

The move came after U.S. District Judge Jed S. Rakoff spurned a $285 million settlement between the SEC and Citigroup. That pact addressed civil-fraud charges that the New York firm failed to disclose to investors its role in selecting investments in a $1 billion mortgage-bond deal that it was simultaneously betting would fail. Judge Rakoff ordered the matter to go to trial next summer, saying the settlement was "neither fair, nor reasonable, nor adequate, nor in the public interest." Citigroup neither admitted nor denied the SEC's findings. A Citigroup spokeswoman declined to comment Tuesday.

If the toughened powers sought by Ms. Schapiro had been used in the Citigroup case, the maximum penalty would jump to $1.44 billion from $160 million. That compares with the penalty Citigroup agreed to pay of $95 million as part of the larger settlement, a penalty denounced as "pocket change" by the judge in his order Monday.

Ms. Schapiro's push faces uncertain prospects. Since she took over the agency, the SEC has been under fire from Republican critics in Congress over everything from financial controls to handling of insider-trading referrals. As a result, lawmakers might be reluctant to hand the SEC more power, though some favor a tougher stance by the agency in dealings with Wall Street...In her letter, Ms. Schapiro said the SEC is constrained by statute from seeking penalties that match investor losses. She also warned that the agency can't adequately take into consideration the severity of misconduct or its impact on victims. The letter was sent to Sens. Jack Reed (D., R.I.) and Mike Crapo (R., Idaho), the top members of the Senate banking subcommittee on securities...The SEC already can seek triple damages in insider-trading cases. Expanding that power to other civil cases "would allow the commission to address situations where the actual pecuniary gain to the violator is relatively small compared to the nature or magnitude of the wrongdoing," Ms. Schapiro wrote. Another proposed change would allow the SEC to calculate penalties based on the amount of investor losses incurred as a result of misconduct. A further change would allow penalties of as much as $1 million per violation for individuals and $10 million for financial firms, an increase from current caps of $150,000 and $725,000, respectively. Sen. Reed said he is working on legislation to give the SEC additional firepower. "If they don't have the tools to effectively police the market and protect investors, then we need to give them those tools," Mr. Reed said in a statement. The legislation also would increase the SEC's ability to sanction companies and individuals that repeatedly violate securities laws. Current law "does not provide the commission with adequate tools to deter this category of violators," Ms. Schapiro wrote in the letter.

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