United States: SEC Settlements Trends: 3Q09 Update - Number Of Settlements Declines In Transitional FY 2009

Last Updated: December 8 2009

Article by Jan Larsen with Dr. Elaine Buckberg and Dr. Baruch Lev*


The Securities and Exchange Commission (SEC) settled with 181 defendants in the third calendar quarter of 2009, compared to 160 in the previous quarter and 216 in the third quarter of 2008. With the end of the third quarter of 2009, the SEC's 2009 fiscal year came to a close. In its 2009 fiscal year ("FY 2009"), the SEC settled with 626 defendants, compared to 673 in fiscal year 2008.1 In this paper, we examine recent trends in SEC settlements, including a comparison of settlements with public companies versus settlements with individuals, an issue brought to the forefront by the recent rejection of the SEC's proposed settlement with Bank of America.

Settlement Activity

Six settlements in the third quarter exceeded $10 million, topped by the $50 million settlement with General Electric for alleged financial misstatements in 2002 and 2003.2 The 10 largest settlements of the third quarter of 2009 are detailed in Exhibit 1.

The allegations against General Electric included a $585 million overstatement of the company's 2002 net earnings relating to accounting practices for aircraft parts sales, avoidance of a $200 million pre-tax charge to earnings due to accounting practices for the company's commercial paper, acceleration of revenue recognition relating to $370 million of locomotive sales in 2002 and 2003, and improper accounting for interest-rate swaps.3

The second-largest amount of the quarter was the $29.8 million summary judgment award against James Duncan for his role in running an affinity fraud that took the form of a "Ponzi-like scheme."4,5 According to the SEC, Mr. Duncan, along with codefendants Hendrix Montecastro and Maurice McLeod, targeted members of the Southern California Filipino community, fellow church members, and military personnel.

The third-ranking settlement was the $18.3 million settlement with AGCO Corporation for an alleged violation of the Foreign Corrupt Practices Act (FCPA). AGCO, a manufacturer of agricultural equipment, is alleged to have paid $5.9 million in bribes to Iraqi officials over the period 2000 – 2003 in exchange for contracts under the UN Oil-for-Food program.

Exhibit 1. Ten Largest SEC Settlements In The Third Quarter Of 2009

Trends In The Number Of Settlements

The number of settling defendants declined to 626 for FY 2009, the second consecutive year of decline and the lowest annual number of settling defendants since the Sarbanes-Oxley Act ("SOX") (Exhibit 2). However, there are important caveats to this observation. First, this has been a year of transition and staff turnover at the SEC, including in the top positions. Notably, the agency has a new Chairman, Mary Schapiro, and a new director of enforcement, Robert Khuzami. Further, many of the cases settled in FY 2009 were likely the result of investigations opened in earlier years.6

Trends In Settlement Values

Monetary payments were a component of 58.6% of company settlements and 58.9% of individual settlements in FY 2009. Among companies whose settlements included a monetary payment, the average settlement was $10.7 million, compared to $4.7 million in the previous year (Exhibit 3). On the other hand, the median company settlement amount, i.e., the settlement amount with an equal number of values above and below it, was $1.0 million, equal to the median from the previous year. An important reason that the average settlement increased markedly while the median remained constant is that there were three FY 2009 settlements for over $100 million: the $350 million settlement with Siemens for alleged violations of the FCPA, the $200 million settlement with UBS for allegedly facilitating customer tax evasion, and the $177 million settlement with Halliburton and its subsidiary KBR for alleged FCPA violations. In contrast, the largest settlement in FY 2008 was the $37.4 million settlement with Ritchie Capital Management for alleged late trading. Removing settlements in excess of $100 million reduces the FY 2009 average company settlement amount to $4.4 million.

The average settlement with individual defendants was $1.0 million for the fiscal year, compared to $1.2 million in the prior year. The median settlement was $0.1 million for individuals in the second quarter, as it has been in every fiscal year since SOX.

Exhibit 2. The Number Of Settling Defendants Declined For The Second Straight Fiscal Year

Exhibit 3. The Average Company Settlement Amount Increased In 2009, But The Median Held Steady

The Proposed Bank Of America Settlement

Had the $33 million proposed settlement with Bank of America not been struck down in federal court, it would have counted as the second-largest settlement in the quarter. In that case, the SEC has accused Bank of America of inadequate disclosures of provisions for bonus compensation to Merrill Lynch employees in proxy documents sent to shareholders of both firms before a vote on the Merrill acquisition.

Finding that the proposed settlement "[did] not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct," Judge Jed Rakoff ordered the case to proceed with a trial date of February 1, 2010.7

Judge Rakoff found particular fault with the settlement in that it fined the company (and hence its shareholders) rather than the culpable individuals.8 The failure of the SEC to obtain approval for this settlement may therefore be expected to result in the SEC pursuing claims against individuals with renewed vigor in cases involving publicly-traded companies. Indeed, the SEC itself has acknowledged that, "Where shareholders have been victimized by the violative conduct, or by the resulting negative effect on the entity following its discovery, the Commission is expected to seek penalties from the culpable individual offenders acting for a corporation."9 To examine how this has played out in practice, we have studied every post-SOX settlement relating to alleged public company misstatements.

We find that in the post-SOX era, individuals have been more likely to be targeted by the SEC in misstatement cases than the companies themselves. From the passage of SOX to the end of FY 2009, the SEC has reached settlements in cases relating to the alleged misstatements of 353 public companies.10 In 62 of these cases, the SEC has settled with only the company, compared to 99 cases where the SEC has settled with individual directors or employees only (Exhibit 4). In the remaining 192 cases, the SEC has settled with both the company and individuals.11,12

Exhibit 4. In The Post-Sox Era, Most Public Company Misstatement Cases Have Led To Both Company And Individual Settlements

Although allegedly culpable individuals have been historically more likely to be involved in an SEC settlement in misstatement cases than the companies themselves, the company settlement amounts have been much larger. Post-SOX company settlements in these cases total $3.7 billion, compared to $0.6 billion for individuals. Therefore, on an overall basis, companies pick up nearly 87% of the settlement tab.

Although companies have paid more than individuals in aggregate, a comparison of the 10 largest company and individual settlements in misstatement cases (Exhibits 5 and 6) shows that the largest individual settlements are of similar size to large company settlements. Indeed, the $81 million settlement with former HealthSouth CEO Richard Scrushy would rank ninth on the list of company misstatement settlements. The 10th ranked individual settlement, with former Enron Corporation executive Kenneth D. Rice for $14.7 million, would rank 28th if ranked among company settlements.

Exhibit 5. Ten Largest Post-SOX SEC Settlements With Public Companies For Alleged Misstatements

Exhibit 6. Ten Largest Post-SOX SEC Settlements With Individuals for Alleged Public Company Misstatements

Trends In Public Company Misstatement Cases

The allegations in the Bank of America case are not unusual for an SEC matter. Public company misstatements are among the most frequent allegations in SEC enforcement actions, accounting for 1,013, or 19%, of the 5,362 post-SOX settlements in NERA's proprietary database. Mirroring the trend in overall settlements, the number of settling defendants in public company misstatement cases fell to 121 in FY 2009 from 131 in the prior fiscal year, representing the second straight year of decline (Exhibit 7). Only FY 2006 saw fewer settling defendants in public company misstatement cases.

Exhibit 7. The Number Of Settling Defendants In Misstatement Cases Fell For The Second Straight Fiscal Year

The median company settlement value in misstatement cases also declined, for the third straight year, to $8.0 million (Exhibit 8). The $8.0 million company median was the lowest in any fiscal year since 2003. The median settlement amount for individuals in misstatement cases has ranged from a low of $72,000 in FY 2003 to a high of $120,000 in FY 2007.

Exhibit 8. The Median Company Settlement In Misstatement Cases Continued To Decline

The 2009 decline in public company misstatement settlement amounts occurred despite Mary Schapiro bringing the SEC's penalty pilot program to an end in January. Under the penalty pilot program, instituted under former SEC Chairman Christopher Cox in January 2007, SEC staff members were required to obtain pre-approved settlement ranges from the Commission prior to beginning negotiations with publicly held companies. Ms. Schapiro, citing staff concerns that the program sometimes led to lower corporate penalties than were warranted, announced that she was bringing this program to an end in January 2009.13 However, it is not yet apparent that ending the penalty pilot program has led to an increase in public company misstatement settlement amounts.

The Number Of Insider Trading Settlements Hit A Post-SOX Low

Insider trading is another frequent allegation in SEC enforcement actions, accounting for 570, or 11%, of the post-SOX settlements in NERA's proprietary database. Although the SEC has cracked down on insider trading since the end of the fiscal year by bringing charges in the Galleon case and sending at least three dozen subpoenas to hedge funds and brokerages,14 there were fewer insider trading settlements in FY 2009 than in any full fiscal year since the passage of SOX (Exhibit 9). Fifty-six individuals settled in insider trading cases, compared to 76 in the prior fiscal year. Although the number of settling companies in insider trading cases reached a post-SOX high of 10, seven of these settlements were with entities related to Gryphon Partners. The Gryphon Partners entities were alleged to have engaged in insider trading in connection with certain PIPE offerings.15

Exhibit 9. The SEC Reached Fewer Insider Trading Settlements In FY09 Than In Any Fiscal Year Since SOX

The median settlement amount for individuals in insider trading cases also fell in 2009, to $0.10 million from $0.14 million in FY 2008 (Exhibit 10). Penalties in these cases are limited to three times the gain realized or loss avoided as a result of the insider trading, so these trends are driven both by the size of the implicated trades as well as the punitive stance of the SEC and the courts.

Over the full period of FY 2003 to FY 2009, the median insider trading settlement for companies was $0.1 million, while the mean was $0.4 million. The trends in the annual settlement amounts may be less meaningful for companies, because of the small number of such settlements in each year.

Exhibit 10. After Four Years Of Steady Increase, The Median Settlement Amount With Individuals In Insider Trading Cases Fell In FY 2009


Fiscal year 2009 brought substantial changes to the SEC, in both leadership and its enforcement process. Mary Schapiro replaced Christopher Cox as Chairman of the agency, and Robert Khuzami took over as the Director of Enforcement. Under new leadership, the SEC has enacted several reforms to its enforcement process. The penalty pilot program, which required SEC staff to obtain pre-approved settlement ranges from the Commission before negotiating with public companies, was brought to an end.16 Ms. Schapiro has streamlined the process by which SEC staff obtain formal orders of investigation, in an effort to speed up the investigative process.17

A number of additional reforms have been proposed that could strengthen enforcement activity. As a result of fallout from the Madoff matter, the SEC is seeking authority to reward whistleblowers in cases involving any violations of the securities laws.18 The agency is also seeking penalty authority against aiders and abettors under the Investment Advisors Act.19 Finally, the Department of the Treasury's report "Financial Regulatory Reform—A New Foundation" recommended several reforms directly impacting the SEC's powers, including stronger SEC regulation of hedge funds and credit rating agencies, SEC authority to require that compensation committees of public companies are more independent, and harmonization of SEC and CFTC regulation of securities and futures.20 However, the Bank of America case will also test the SEC's powers. The SEC suffered a defeat when Judge Jed Rakoff rejected the $33 million settlement it had reached with Bank of America Corporation and called for a trial, which is set for February 2010.

Because of the time that it takes for an investigation to become an enforcement action and settlement, the full impact of the reforms already implemented is likely yet to be seen. We will continue monitoring trends in SEC settlements and enforcement-related policy changes in this series of quarterly reports. For additional information and previous reports, please visit www.SecuritiesLitigationTrends.com.


* Mr. Larsen is a Consultant at NERA; Dr. Buckberg is a Senior Vice President at NERA; and Dr. Lev is the Director of the Vincent C. Ross Institute of Accounting Research and the Philip Bardes Professor of Accounting and Finance at New York University Stern School of Business, and a Special Consultant to NERA. The authors thank Ashley Hartman and Eric Schmitt for excellent research assistance and Paul Hinton for valuable comments and suggestions.

1. There are certain types of settlements that do not meet the criteria for inclusion in our analysis. These include settlements relating to failure to file periodic financial statements with the SEC, administrative proceedings barring accountants because of felony convictions, and administrative proceedings barring brokers, dealers, and accountants for practicing while unregistered.

2. For the full fiscal year, there were a total of 22 settlements of $10 million or more, including six settlements of $50 million or more.

3. "SEC Charges General Electric With Accounting Fraud," SEC Litigation Release, August 4, 2009.

4. "Federal Court Grants Summary Judgment and Orders Principals of Offering Fraud to Pay Disgorgement and Civil Penalties of Over $30 million," SEC Litigation Release, July 9, 2009. Hendrix Montecastro is jointly and severally liable for $27.5 million of the $29.8 million award against James Duncan.

5. While this award is a summary judgment and not a settlement, we use the word "settlement" to describe the resolution of any SEC enforcement action because the vast majority of enforcement actions are resolved this way.

6. For example, 38% of enforcement actions opened in fiscal year 2008 were the result of investigations opened more than two years earlier. 2008 Performance and Accountability Report, US Securities and Exchange Commission, p. 31.

7. Memorandum Order, Securities and Exchange Commission v. Bank of America Corporation, 09 Civ. 6829 (JSR), September 14, 2009.

8. According to Judge Rakoff's order, the SEC claims that lawyers for Bank of America are responsible for the alleged misstatement. In his order, Judge Rakoff asked, "Why are the penalties not then sought from the lawyers?" Ibid.

9. "Statement of the Securities and Exchange Commission Concerning Financial Penalties," SEC press release, January 4, 2006. As discussed in the press release, the origin of this idea is in the Senate Committee on Banking, Housing and Urban Affairs report on the 1990 Securities Enforcement Remedies and Penny Stock Reform Act (the "Remedies Act"), which expanded the SEC's authority to seek monetary civil penalties. Prior to the Remedies Act, the SEC could only seek monetary civil penalties in insider trading cases.

10. This figure includes only companies that were traded on national exchanges at the time the alleged misstatement was operative.

11. These 192 cases include 24 in which the company settled pre-SOX and at least one in which the individual settled post-SOX.

12. The total number of individuals that have settled in public company misstatement cases since SOX is 699.

13. Mary Schapiro, "Address to Practising Law Institute's 'SEC Speaks in 2009' Program," February 6, 2009 (http://www.sec.gov/news/speech/2009/spch020609mls.htm).

14. US Securities and Exchange Commission. Litigation Release No. 21255. October 16, 2009. http://www.sec.gov/litigation/litreleases/2009/lr21255.htm; US Securities and Exchange Commission. Litigation Release No. 21284. November 5, 2009. http://www.sec.gov/litigation/litreleases/2009/lr21284.htm; Scannell, Kara and Jenny Strasburg. "SEC Steps Up Insider-Trading Probes." The Wall Street Journal. December 3, 2009: 023.

15. "Edwin B. Lyon, IV and the Affiliated Gryphon Funds Ordered to Pay $778,016 to Settle PIPE-Related Securities Fraud Charges," SEC Litigation Release, August 12, 2009.

16. Mary Schapiro, "Address to Practising Law Institute's 'SEC Speaks in 2009' Program," February 6, 2009 (http://www.sec.gov/news/speech/2009/spch020609mls.htm).

17. Robert Khuzami, "Testimony Concerning Strengthening the SEC's Vital Enforcement Responsibilities," May 7, 2009 (http://www.sec.gov/news/testimony/2009/ts050709rsk.htm).

18. Ibid.

19. Ibid.

20. "Financial Regulatory Reform––A New Foundation," Department of the Treasury, June 17, 2009.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions