The Top 10 SEC Enforcement Events Of 2011

Summary: 2011 was an eventful year for the Division of Enforcement at the U.S. Securities and Exchange Commission ("SEC"). Our assessment of the top ten SEC Enforcement events of 2011 is discussed below.1 WilmerHale discussed the major enforcement events of 2011 in a webcast on December 14, 2011. A recording of the webcast is available here.

1. Record-setting Enforcement Year

   The Division continued its three-year trend of increased activity by filing a record 735 enforcement actions in fiscal year 2011. The Division credited improved collaboration with other SEC offices, increased use of technology, and the recent restructuring of the Division with its success. Areas for enforcement activity involved insider trading, highly complex financial products, and market practices, including those related to the financial crisis. The Division also increased the number of actions brought against investment advisers and broker-dealers, filing a total of 146 actions related to investment advisers and investment companies (a thirty percent increase over fiscal year 2010) and 112 actions against broker-dealers (a sixty percent increase over fiscal year 2010).2 According to the Division, these enforcement actions resulted in more than $2.8 billion in penalties and disgorgement.

2. Insider Trading

   Insider trading cases continued to be a major area of activity for the SEC's enforcement program. In fiscal year 2011, the SEC brought 57 insider trading cases, charging 124 individuals and entities.3 The most prominent of the insider trading cases brought by the SEC and the Department of Justice ("DOJ") centered on Raj Rajaratnam, the Galleon Management hedge fund manager who was convicted in 2011 on fourteen counts of securities fraud and conspiracy. Rajaratnam received an eleven-year prison sentence and was fined $63.8 million in criminal penalties and forfeiture, as well as $92.8 million in SEC civil penalties.4 The Galleon-related cases highlight the convergence of SEC civil and DOJ criminal enforcement, and raise questions about double and excessive penalties in government enforcement actions.

   In October 2011, Rajat Gupta, a former Goldman Sachs and Procter & Gamble director, was indicted on six counts of securities fraud and conspiracy and was also sued by the SEC for allegedly passing inside corporate information to Rajaratnam.5 More cases stemming from the Galleon investigation should be expected in 2012.

3. Financial Crisis Cases

   Enforcement actions against firms and individuals linked to the financial crisis also remained a high priority for the SEC in 2011. The Division filed several actions alleging that firms concealed from investors the risks, terms, and improper pricing of collateral debt obligations ("CDOs"). In the most publicized of the CDO cases, the SEC charged Citigroup Global Markets, Inc. with misrepresenting to investors the quality of fund assets and with failing to disclose its short position against the assets.6 The fund ultimately defaulted and investors sustained heavy losses, while Citigroup profited. Although the allegations against Citigroup appeared to be based on knowing and fraudulent intent, the SEC charged Citigroup only with negligence-based fraud under Section l7(a)(2) and (3) of the Securities Act of 1933. The SEC similarly charged firms and individuals in other CDO-related cases only with negligence-based fraud.7 Although the SEC has defended bringing negligence-based claims instead of harder-to-prove intentional claims, the penalties for negligence-based misconduct are much less harsh and, while perhaps warranted, are unlikely to satisfy critics of the SEC.

   In October 2011, the SEC reached a settlement with Citigroup.8 Judge Rakoff of the Southern District of New York rejected the settlement as against the public interest because the SEC did not provide adequate factual support for the court's approval, and because Citigroup did not admit to any misconduct.9 If other courts adopt Rakoff's reasoning,10 the SEC may have to provide more evidence to support settlement during judicial proceedings, pressure...