SEC Enforcement Drives Ethical Conduct 19:29, July 3, 2016

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SEC Enforcement Drives Ethical Conduct

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In June 2016, the Securities and Exchange Commission (SEC) pursued 35 enforcement actions and received over $50 million against various persons and companies who violated, or were believed to have violated, federal securities laws. Breaking these actions apart can inform how companies should focus their anti-corruption and ethical conduct compliance efforts.


Nearly half (46%) of the enforcement actions in June involved the SEC filing charges against companies and individuals. Most (63%) were charges of fraud. Under 17(c) of the Securities Act of 1933, fraud involves offering or selling securities to others through deception or material omissions. The Investment Advisers Act of 1940 has similar prohibitions against fraud by investment advisers. For example, one company misrepresented the fees it would charge investors for managing their particular investments, which resulted in SEC fraud charges under both laws.

Settlements, Final Judgments and Prison

Out of the 19 enforcement actions that were not charges, five were settlements involving fraud, insider trading, and contempt (violating court orders). The total costs of settlement, which includes penalties, disgorgement (paying back what you stole), and interest charges, amounted to $19,220,266. One case involved a senior engineering executive misusing confidential information about an acquisition to buy securities. The SEC doubled the $254,858 of ill-gotten gains as a penalty.

Of the 19 enforcement actions the highest number (37%) ended in Final Judgments, where a federal court ordered defendants to pay. The total costs of final judgments to defendants in June amounted to $14,398,175. One action involved a “pump-and-dump” scheme where an attorney wrote false and misleading opinion letters that promoted company stock to sell it at a higher price than it was worth.

Finally, three enforcement actions led to people going to prison, paying fines, and disgorging ill-gotten gains. The average time individuals were sentenced was 92 months (over seven years) and the total amount of fines, disgorgement, and interest was $19,720,643. In total, and not including costs of contempt or previous orders, defendants paid $53,339,084 for deceptive and unfair securities practices.

Preventable Conduct

To be clear, the SEC can only enforce actions against defendants if they did something to violate the law in the first place. Allegations of wrongdoing aren’t always actionable, as seen with a VP who unreasonably believed that Oracle defrauded investors. Businesses naturally want to avoid being hit with an investigation, charge, lawsuit or other forms of liability that arise from not complying with the law. What’s nuanced is the how—how businesses manage risk, promote a code of conduct, and evaluate decisions that may violate the law.

There are many ways to do this. Some companies have chosen to investigate and self-report violations of bribery laws instead of covering them up. Others do not take responsibility for their actions, such as StratoComm appealing a federal judge’s order that held it liable for fraud, later denied by the Second Circuit Court of Appeals.

In the long run, however, the best option is to create a workplace culture of compliance that intrinsically imbues ethical decision-making. A company that has effective ethics training and robust policies to promote ethical behaviors in employees will be ahead of the compliance curve. This helps create a strong code of ethics, which helps organizations cultivate a culture of openness and trust in their organization, empowering employees to make effective decisions.

LawRoom provides online compliance training on sexual harassmentethics, FCPA and data security to thousands of companies and universities. To learn more, visit us here:

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Douglas Kelly
Douglas Kelly is EverFi's lead legal editor. He writes on corporate compliance and culture, analyzing new case law, legislation and regulations affecting US companies. Before joining EverFi, he litigated federal and state employment cases and wrote about legal trends. He earned his JD from Berkeley Law and BBA from Emory University.

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