The Illusory Nature of the SEC’s New Corporate Penalty Standards

    In the post-Enron era, civil penalties imposed against public companies by the Commission seemed arbitrary and consistent.  In January 2006, commentators applauded the SEC for issuing its Statement Concerning Financial Penalties (“Statement”).  Chairman Cox intended this document to provide guidance and transparency regarding the factors the Commission would consider in deciding whether to impose a civil penalty against a public company, and if so, the amount of such a penalty.  However,  the “major factors” set forth in the Statement - the benefit to shareholders resulting from the misconduct,  and the degree to which the penalty will unfairly harm injured shareholders – have posed conceptual problems.  As discussed below, an intellectually honest application of these factors would preclude all corporate penalties, since the first is rarely, if ever, satisfied, and the second always is present.  This article suggests that the Commission has chosen to interpret these two factors in a manner that renders them illusory and meaningless, and is instead giving great weight to the size of the company being sued, as well as remediation and cooperation, factors that are characterized by the Statement as “minor.”