1Q09 Update. SEC Settlements Trends: Settlement Activity Increases As Change Comes to the SEC. April 9, 2009

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1 April 9, 2009 SEC Settlements Trends: 1Q09 Update Settlement Activity Increases As Change Comes to the SEC By Dr. Elaine Buckberg with Dr. Baruch Lev and former NERA Senior Consultant Jan Larsen

2 Settlement Activity Under heightened scrutiny, but with its staff empowered by reforms mandated by Chair Mary Schapiro, the SEC reached 182 new settlements in the first quarter of This exceeds both the 123 settlements in the previous quarter and the 157 settlements in the first quarter of The 10 largest settlements in the first quarter are shown in Exhibit 1. Exhibit 1. Ten Largest SEC Settlements in the First Quarter of 2009 Date of SEC Total Settling Defendant Announcement ($ mil) Description of Allegation 1 UBS AG 02/18/ Facilitated Tax Evasion 2 Halliburton Co.* 02/11/ Bribery of Foreign Officials 3 E*Trade Capital Markets LLC 03/13/ Specialist Conflict of Interest 4 One Universe Online, Inc.** 03/30/ Ponzi Scheme 5 SG Americas Securities, LLC 02/13/ Insider Trading 6 James T. Anderson*** 02/26/ Insider Trading 7 Susquehanna Investment Group 03/04/ Specialist Conflict of Interest 8 Goldman Sachs Execution & Clearing, L.P.**** 03/04/ Specialist Conflict of Interest 9 Merrill Lynch, Pierce, Fenner & Smith Inc. 03/11/ Insider Trading 10 Tecumseh Holdings Corporation 03/17/ Microcap Fraud * Jointly liable with KBR, Inc., a wholly-owned Halliburton subsidiary. ** Jointly liable with Christian Rochon, James Bunchan, Seng Tan, and WMDS, Inc. *** Co-founder and former CEO of Zomax, Inc. **** Jointly liable with SLK-Hull Derivatives LLC. Both companies are wholly-owned subsidiaries of The Goldman Sachs Group, Inc. The largest settlement was the $200 million that UBS agreed to disgorge in connection with allegations that it operated as an unregistered broker/dealer in the United States. According to the SEC, this allowed certain US investors to evade taxes by maintaining undisclosed accounts in foreign countries. The SEC further alleged that UBS client advisers received training on how to avoid detection of their domestic broker/dealer activities by US authorities. In a parallel criminal investigation, UBS entered into a deferred prosecution agreement with the Department of Justice under which it agreed to disgorge $180 million and to make $400 million in tax-related payments. 1 Halliburton Co. and one of its subsidiaries, KBR, Inc., agreed to disgorge $177 million to settle charges that KBR bribed Nigerian government officials over a 10-year period in order to obtain construction contracts. KBR also agreed to pay a $402 million fine to settle parallel criminal charges brought by the Department of Justice. The combined $579 million paid to settle the civil and criminal FCPA charges represents the largest-ever combined FCPA settlement with a US company. 2 This marks the second straight quarter that the SEC has settled an FCPA case for over $100 million. In the fourth quarter of 2008, the agency settled with Siemens AG for $350 million, alleging that the company had paid $1.4 billion in bribes to various foreign officials. 1. UBS Agrees to Pay $200 Million to Settle SEC Charges for Violating Registration Requirements, SEC Litigation Release, February 18, 2009, 2. SEC Charges KBR, Inc. with Foreign Bribery; Charges Halliburton Co. and KBR, Inc. with Related Accounting Violations, SEC Litigation Release, February 11, 2009, 1

3 E*Trade Capital Markets LLC, a specialist firm, agreed to pay $34 million to settle SEC charges that it engaged in unlawful proprietary trading on the Chicago Stock Exchange. The SEC alleged that instead of matching customer orders, E*Trade Capital Markets filled customer orders through trades in the firm s proprietary account. The SEC settled similar charges against 13 other specialist defendants in the first quarter, for a combined total of $36 million. Trends in Settlement Values Monetary payments were a component of 66% of company settlements and 61% of settlements with individuals in the first quarter of Settlement values increased for companies whose settlements included a monetary payment (Exhibit 2). The mean settlement amount was $12.6 million in the first quarter, up from the 2008 average of $8.4 million. The median company settlement amount, i.e., the settlement with an equal number of values above and below it, was $1.7 million, up from $1.3 million in The mean settlement amount for individuals was $0.7 million in the first quarter, a decline from the 2008 mean of $1.1 million. The median settlement amount for individuals was $0.1 million, as it has been in every year since Exhibit 2. Company Settlement Values Increased in the First Quarter of 2009 $ $ Settlements of $250+ MM Median Settlement ($ MM) Penalty Pilot Program; Only One Settlement of $250+ MM Mean Settlement ($ MM) Q09 (Aug 1 - Dec 31) Note: $0 settlements have been excluded from the calculations. Median Mean 2

4 Policy Changes Ms. Schapiro has announced many new policies in 1Q09 that have implications for SEC enforcement actions. For example, she has ended the penalty pilot program initiated by former Chair Christopher Cox in Under this program, SEC staff were required to obtain pre-approved settlement ranges from the Commission prior to beginning negotiations with publicly-traded companies. The press speculated that this program was intended to reduce settlement amounts. Indeed, when she announced that she would bring the penalty pilot program to an end, Ms. Schapiro stated: In speaking to our Enforcement staff, I ve been told that [the penalty pilot program] introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve a penalty; and sometimes resulted in reductions in the size of penalties imposed. 3 Ms. Schapiro also announced that she would put new procedures in place to provide for more rapid approval of subpoena power for SEC staff. As explained in our November 2008 report, 4 the first stage of an SEC investigation is typically an informal investigation, in which SEC staff do not have subpoena power but rather rely on the cooperation of witnesses. Based on their findings in the informal investigation, the staff may request a formal order of investigation from the Commission, which grants subpoena power to designated staff members on the case. Ms. Schapiro noted that many formal orders of investigation are made subject to full review at a meeting of all five Commissioners, necessitating that they be placed on the calendar sometimes weeks in advance. In investigations that require use of subpoena power, time is always of the essence, and every additional day of delay can be costly. 5 In recent testimony before the Senate Banking, Housing, and Urban Affairs Committee, Ms. Schapiro stated her intention to request that the SEC be granted authority to compensate whistleblowers for providing well-documented evidence of fraudulent activity. 6 Such authority would represent an extension of the SEC s existing authority to offer rewards to sources in insider trading cases. Also in the first quarter, Senators Richard Shelby and Charles Schumer introduced legislation that would add 100 new SEC enforcement division employees, 7 while President Obama s fiscal year 2010 budget request for the SEC would represent a 13% increase over the agency s 2008 fiscal year budget Mary Schapiro, Address to Practising Law Institute s SEC Speaks in 2009 Program, February 6, 2009, 4. Jan Larsen, Dr. Elaine Buckberg, and Dr. Baruch Lev, SEC Settlements: A New Era Post-Sox, November 10, 2008, 5. Mary Schapiro, Address to Practising Law Institute s SEC Speaks in 2009 Program, February 6, 2009, 6. Mary Schapiro, Testimony Concerning Enhancing Investor Protection and Regulation of the Securities Markets, March 26, 2009, 7. Edward O Keefe, Agencies Await New Leaders and Direction, The Washington Post, February 6, 2009, Page A15. This would represent an increase of 9% from the Division of Enforcement s staff of 1,169 in fiscal year See U.S. Securities and Exchange Commission 2008 Performance and Accountability Report, p. 27, 8. Mary Schapiro, Statement from Commissioner Schapiro on Proposed Budget for SEC, February 26, 2009, 3

5 Looking Ahead While the first quarter of 2009 has brought changes to the SEC, it remains to be seen what the effects will be on SEC settlements, and how long it will take for these effects to be felt. We will continue monitoring these trends in our quarterly reports. For additional information on SEC settlements, please visit our website, About NERA NERA Economic Consulting ( is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For half a century, NERA s economists have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world s leading law firms and corporations. We bring academic rigor, objectivity, and real world industry experience to bear on issues arising from competition, regulation, public policy, strategy, finance, and litigation. NERA s clients value our ability to apply and communicate state-of-the-art approaches clearly and convincingly, our commitment to deliver unbiased findings, and our reputation for quality and independence. Our clients rely on the integrity and skills of our unparalleled team of economists and other experts backed by the resources and reliability of one of the world s largest economic consultancies. With its main office in New York City, NERA serves clients from more than 20 offices across North America, Europe, and Asia Pacific. Contact Information Dr. Elaine Buckberg Senior Vice President NERA Economic Consulting 1166 Avenue of the Americas 29th Floor New York, NY Tel: Fax: elaine.buckberg@nera.com 4

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