COMPLIANCE WATCH: Injunctions May Not Deter Bad Conduct
By Suzanne Barlyn
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--The Securities and Exchange Commission often resolves enforcement proceedings with consent orders that may include fines and penalties, such as barring advisers or requiring advisers to pay back money acquired illegally. It also typically obtains consent judgments that prohibit respondents from committing future securities-laws violations.
Many lawyers, however, say the effectiveness of such injunctions is minimal.
Securities laws, by nature, aim to deter bad conduct.
So what can the SEC gain by seeking orders to enjoin defendants from violating those laws again?
Injunctions theoretically allow the SEC to ask a federal judge to hold a defendant in contempt for violating the order.
That step could result in jail time--a far more intimidating penalty that the agency can impose on its own.
But the possibility of contempt proceedings and jail time may not truly deter future misconduct, says Harvey Pitt, a former SEC chairman who heads a consulting group in Washington, D.C.
The SEC, in fact, often seeks to enjoin offenders from violating securities law a second and even a third time, rather than bringing contempt proceedings, says Michael Perlis, a securities lawyer for Stroock & Stroock & Lavan LLP in Los Angeles.
Many courts also are reluctant to grant contempt decrees, says Pitt.
Defendants often argue that their later conduct wasn't clearly specified in the original injunction.
A recent consent order in an insider-trading case illustrates the point. It says the defendant is permanently enjoined from violating certain securities laws that generally prohibit fraud, deception and manipulation.
Many judges, however, are hesitant to incarcerate a defendant unless the injunction precisely explains the prohibited activity--such as overstating the value of fund assets or misrepresenting the nature of an investment.
There can be other consequences, however, even if courts decline to step in, Pitt says. Injunctions, for example, are subject to disclosure in regulatory filings--a dubious distinction that is better to avoid. A previous injunction can also create difficulties for those who are accused of violating the law again.
The demise of Arthur Andersen LLP may be the most notorious example of how an injunction in a previous case can cause problems later on, Pitt says.
In 2001, the firm consented to a $7 million civil penalty and a permanent injunction against violating anti-fraud provisions of securities laws for issuing false and misleading audit reports for Waste Management Inc. (WM).
That injunction, along with other factors, led to even more serious sanctions against the company for its role in auditing the former Enron Corp., the energy company that collapsed amid a massive fraud in 2002.
Lawyers say injunctions are a necessary weapon in the SEC's enforcement arsenal, especially since the agency's jurisdiction is generally civil, not criminal, and limited to regulating.
Some securities-law violations that are considered knowing or willful, such as insider trading, can be prosecuted criminally, but only if the U.S. Attorney agrees to take on the case.
Many injunctions may not ultimately deter people who can cause the most harm, says George Brunelle, a New York-based securities lawyer.
An honest person who happens to get caught up in questionable activity may think twice about doing it again, he says, "but a real criminal doesn't care."
An SEC spokesman declined to comment.
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