UPDATE: SEC Seeks Greater Penalties In Fraud Cases

WASHINGTON (Dow Jones)--The Securities and Exchange Commission is asking lawmakers for authority to impose greater financial penalties on individuals and Wall Street firms that commit fraud following a federal judge's ruling questioning the adequacy of a proposed $285 million SEC settlement with Citigroup Inc. (C)

In a letter to key senators late Monday, SEC Chairman Mary Schapiro said the agency is constrained by statute from imposing financial penalties that match investor losses. She also warned the agency can't adequately take into account the seriousness of misconduct nor its impact on victims.

Schapiro's letter asks Sens. Jack Reed (D., R.I.) and Mike Crapo (R., Idaho), to increase the legal formulas by which the agency calculates financial penalties. The senators hosted a hearing this month on the issue of SEC structural reforms.

For civil cases such as the Citi matter, Schapiro is asking for authority to seek penalties equal to three times the "pecuniary gain," or a firm's net profits, from a fraudulent transaction. The SEC is currently limited to seeking penalties equal to a firm's net profits in such deals.

"That 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," Schapiro wrote.

Another proposed statutory change would allow the agency to calculate penalties based on the amount of investor losses incurred as a result of the misconduct, for both civil cases and administrative proceedings.

A third change, which would also be used in civil cases and administrative proceedings, would allow the agency to impose penalties of up to $1 million per violation for individuals and $10 million for financial firms. That would represent an increase from current caps of $150,000 and $725,000, respectively.

A spokesman said Reed is working on legislation "to improve the SEC's ability to obtain meaningful monetary sanctions for serious securities fraud violations."

The legislation also would seek to improve the SEC's ability to sanction companies and individuals with a pattern of repeated violations of the federal securities laws, another focus of Schapiro's letter. Schapiro said current law "does not provide the commission with adequate tools to deter this category of violators."

The letter came the same day as U.S. District Judge Jed S. Rakoff rejected a $285 million deal by Citi to settle civil fraud charges that it failed to disclose to investors its role in selecting investments in a $1 billion mortgage-bond deal that it was simultaneously betting would fail.

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."

-By Andrew Ackerman, Dow Jones Newswires; 202-569-8390; andrew.ackerman@dowjones.com

Citigroup (NYSE:C)
Historical Stock Chart
From Apr 2024 to May 2024