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“The SEC Penalty Racket”


Russ Ryan spent ten years in the SEC’s Division of Enforcement, including his last three years as Assistant Director of the Enforcement Division. He also spent substantial time in private practice at King & Spalding and is currently Senior Litigation Counsel at the New Civil Liberties Alliance.

Ryan is one of the best commentators around on many SEC issues and his candor is delightful.

His latest piece published on his LinkedIn page is titled “The SEC Penalty Racket” and it discusses two recent SEC FCPA enforcement actions against Rio Tinto and Flutter International (see prior posts here and here) to illustrate the SEC’s “largely unchecked power to shake down companies with astronomical penalties that far exceed statutory limits set by Congress.”

Ryan writes:

“This month the Securities and Exchange Commission announced two settlements that illustrate the agency’s largely unchecked power to shake down companies with astronomical penalties that far exceed statutory limits set by Congress. The broader scandal is that these cases are now routine rather than exceptional.

The cases include the SEC’s $15 million settlement with UK-based global mining giant Rio Tinto and a separate $ 4 million settlement with Ireland-based Flutter International, which currently owns the PokerStars website and other gaming and sports betting brands.

The SEC charged both companies with control deficiencies and inaccurate recordkeeping surrounding payments made to government officials in other countries, allegedly violating the Foreign Corrupt Practices Act of 1977. In its settlements, the SEC extolled both companies for their “cooperation” with agency investigators, a familiar regulatory signal that the penalties could have been even higher.

But why were the penalties still so high despite the companies’ cooperation? The SEC didn’t say, presumably because there’s no plausible explanation traceable to any law passed by Congress. The SEC imposed and collected the penalties administratively, so it also knew it would never have to explain its penalty calculations to any court.

The penalties in these cases, and many similar ones, are profoundly unlawful. The SEC’s power to unilaterally impose administrative penalties against companies like Rio Tinto and Flutter, which are outside the securities industry, derives from the Dodd-Frank Act of 2010. Dodd-Frank capped those penalties at $75,000 per violation. (The caps increase if the SEC proves fraud or reckless disregard of a regulatory requirement, but the SEC alleged neither against Rio Tinto or Flutter.)

Congress separately allows the SEC to adjust penalty caps periodically for inflation, so the $75,000 cap is now approximately $112,000 per violation. Still, the SEC charged Rio Tinto and Flutter with only two violations each, so the maximum lawful penalty for each company was about $224,000—and that’s before any putative credit for cooperation. Thus, Rio Tinto paid nearly 70 times more than the law allows, while Flutter paid nearly 20 times more.

Don’t blame the companies. Having likely already spent millions—if not tens of millions—on lawyers and consultants conducting internal investigations and cooperating with government investigators, they stood to spend millions more defending themselves though years of further investigation and litigation sure to distract their personnel and cloud their corporate brands. Better to cut a big check now and put matters behind them.

Corporate shakedowns like these go a long way toward explaining the SEC’s skyrocketing penalty totals in recent years. In just its 2022 fiscal year, the agency boasted a staggering $4.2 billion in aggregate penalties, its biggest haul ever. Divided by the approximately 450 enforcement cases the agency files in a typical fiscal year, last year’s totals averages out to more than $9 million per case.

It’s long past time for Congress and the courts to rein in this illegal SEC penalty racket. One promising sign is last month’s US Supreme Court decision in Bittner v. United States, which put an end to similar heists perpetrated by the Internal Revenue Service.

Like the SEC, the IRS was flouting statutory penalty limits for unintentional tax-reporting violations by artificially multiplying the maximum penalty amount by the number of unreported accounts a taxpayer failed to report rather just the number of unfiled annual reports that should have listed all those accounts. By insisting that the IRS abide by the penalty limits passed by Congress, the Supreme Court trimmed the taxpayer’s penalty in the case from $2.7 million down to $50,000.

Forcing bureaucrats to obey the laws passed by elected representatives. What a nice idea.”

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