The number of settlements entered by the U.S. Securities and Exchange Commission was more or less unchanged last year, but the value of deals soared, led by a settlement with a couple of Canadians.
In a new report, NERA Economic Consulting says that the SEC reached a total of 682 settlements in fiscal 2011 (the year ending Sept. 30, 2011), essentially unchanged from 680 settlements it recorded in fiscal 2010. However, median settlement values with companies nearly doubled from US$800,000 in 2010 to US$1.47 million in 2011; approaching the high of US$1.5 million since Sarbannes-Oxley was passed, which was reached in fiscal 2006. Median settlement values for individuals were US$175,000 in 2011, a 35% increase from the previous high of US$130,000 in 2008 (post-SOX).
NERA notes that while high-value settlements with companies declined in the year, high-value settlements with individuals reached new post-SOX highs. “This result is consistent with recent statements by SEC officials emphasizing individual accountability for actions taken by individuals responsible for corporate decisions,” it says.
The biggest settlement reached during the year was for US$310 million with two Alberta men, Milowe Allen Brost and Gary Allen Sorenson, who are alleged to have carried out a large Ponzi scheme. They agreed to a deal ordering them to pay disgorgement of over USUS$210 million of ill-gotten gains and a civil penalty of USUS$100 million. Their huge deal was more than double the next largest settlement, a US$154 million settlement with J.P. Morgan Securities LLC.
The report says that while the total number settlements remained relatively constant in 2011 over the previous fiscal year, there has been a substantial shift in the composition of allegations. It has observed an increase in settlements with financial firms for misrepresentations to customers or misappropriation of funds, and an offsetting decrease in settlements relating to public company misstatements.
NERA says that a three-year rise in the percentage of SEC settlements involving misrepresentations or misappropriation by financial firms suggests a shift in the SEC’s enforcement focus since the financial crisis began and the Madoff fraud was revealed. These types of settlements accounted for 41.6% of all SEC deals in 2011, compared to the average of 23.7% between 2003 and 2008, it says.
Illegal offering and market manipulation cases were the second most common in 2011, representing 27.3% of settlements, the highest level since 2005. Public company misstatement settlements continued to decline for a fourth consecutive year, to 10.4% of total settlements, the lowest level since SOX was passed.
“The data from 2011 show the impact of settlements for conduct occurring during the financial crisis,” said NERA vice president and report co-author, Dr. James Overdahl. “Given recent statements made by senior SEC officials emphasizing individual accountability, we may see more individual settlements arising from these cases. In addition, the recent court decision failing to approve the SEC’s proposed settlement with Citigroup Global Markets and the broader implementation of Dodd-Frank in the year ahead may have far-reaching, but at this point unpredictable, implications for settlement trends in the months and years ahead.”