SEC Data Show Reduction in Criminal Prosecutions Since 2010

Every year the SEC delivers an annual report right around the holidays that gets virtually forgotten by everyone. But a tipster highlighted one part of the document that matches recent research about the way in which the agency plays with numbers.

Urska Velikonja, assistant professor at Emory School of Law, released the study late last year, showing that the SEC artificially over-counts and inflates its enforcement statistics to position itself as a tough regulator. Once you weed all that out, you find that the agency has not increased its enforcement numbers significantly since 2002, financial crisis be damned. Here’s a sample of the SEC’s statistical schemes:

For example, the SEC includes in its enforcement statistics what Velikonja calls “follow-on” actions, such as barring offenders from various professional associations, or revoking registrations of broker-dealers or investment advisers, or preventing individuals from appearing as an attorney or auditor before the SEC. These follow-on actions are all based on a “primary enforcement action against the same offender based on the same set of facts,” Velikonja writes. Yet they are counted separately.

The SEC, for instance, followed a civil action against Robert A. Gist in 2013 for defrauding clients of $5.4 million with an associational bar and a suspension of Gist’s ability to practice law before the SEC. All three of these actions are counted in the SEC’s 2013 tally.

Plenty more on this at the link.

Which brings us to the annual enforcement report for fiscal year 2014, the most recent update. And if you go to page 43, you find “Performance Indicator 2.3.4,” subtitled “Criminal actions related to conduct under investigation by the SEC.” The data comes from the SEC’s case management and tracking system. And it shows a regression.

FY2010 139
FY2011 134
FY2012 126
FY2014 126
FY2014 127

After a high-water mark in 2010, criminal actions have steadily declined and flattened out. You might expect this, given the mountain of fraud in the wake of the financial crisis, and statutes of limitations petering out. But this is not the story the SEC tells publicly. In a speech last February, SEC Chair Mary Jo White touted FY2014 – which hovers around the low-water mark on that chart – as an “an unprecedented year in enforcement, in terms of the number of cases and, more importantly, their subject matter.”

We also had a very strong year in enforcement. In 2014, we brought the highest number of cases in the history of the Commission, 755, and obtained over $4.1 billion in monetary relief ordered – also an agency record. The quality and breadth of our actions, however, are the more meaningful measure of a strong and effective enforcement program. And last year, we focused on innovative, high impact cases and punished and deterred wrongdoers in a way that sent important messages to the market, including by obtaining more admissions to achieve heightened accountability and acceptance of responsibility from entities and individuals.

A footnote clarifies that White is talking about fiscal year 2014, the same year that criminal actions related to conduct under investigation by the SEC, by their own data, remained flat year over year, and over 8 percent below 2010 levels.

Now remember, this data is massaged within an inch of its life. Follow-on actions are counted, discontinued actions are counted, cases resolved by default are counted, the same actions brought before a federal court and an administrative judge are counted separately. But even with all that craftwork, the SEC couldn’t boost its internal criminal enforcement numbers. Admittedly you cannot engage in some of this fudging with criminal cases, which aren’t heard before administrative judges and don’t usually have dual criminal follow-on actions (a note in the SEC report says that “In some instances, conduct may involve both civil and criminal violations and may be investigated by both the SEC and the criminal authorities,” however).

Now there is a jump in FY2014 on the monetary penalties ordered by the agency. That goes to $4.16 billion, well ahead of the $2.4 billion number in FY2009. However, there’s another figure here. The SEC has only collected $2.1 billion of the $4.16 billion in penalties so far. Remember, these penalties were issued, at the latest, on September 30, 2014 – it’s the fiscal year – so we’re 15 months out from the last order. Collecting half of what’s owed is actually an improvement on FY2012, where the collection rate is 34.4%, but worse than FY2013 (56%).

Compared to some other federal agencies, the SEC is an aggressive collector. This incredible stat from the Wall Street Journal, showing that the Department of Justice hovers around a 25% collection rate, and the Commodity Futures Trading Commission never hits 1%! Their achievement in the Gensler years of 2012-13 was to get close to 0.6% in collections.

That’s pretty sad, and of course it’s hard to even trust these numbers in the first place, given the public relations gauntlet they’re put through. But even with all that effort, the raw numbers tell a story of an SEC just going through the motions, rather than living up to its rhetoric as a paragon of enforcement.