NERA: 2009 SEC Settlements Hit Post-SOX Low

For the second consecutive year, the number of Securities and Exchange Commission settlements declined in fiscal 2009, representing the lowest number of settling defendants since the Sarbanes-Oxley Act was implemented in 2002.

The SEC also saw fewer settlements for the third quarter, according to the latest data tracked by NERA Economic Consulting. In the third quarter, 181 defendants settled with the SEC, compared to 160 in the previous quarter and 216 in the third quarter of 2008, according NERA's SEC Settlements Trends report.

Six settlements during the quarter passed the $10 million mark: A $50 million settlement with General Electric for alleged financial misstatements in 2002 and 2003 topped the list, followed by the $29.8 million summary judgment award against James Duncan for his role in running an affinity fraud, and an $18.3 million settlement with AGCO Corp. for an alleged violation of the Foreign Corrupt Practices Act.

For the entire 2009 fiscal year, 626 defendants settled with the SEC, compared to 673 in 2008, marking the second consecutive year of decline and the lowest annual number of settling defendants since the Sarbanes-Oxley Act.

For the full fiscal year, 22 settlements hit or surpassed the $10 million mark, including six settlements of $50 million or more.

The report notes however, that, because of the time that it takes for an investigation to become an enforcement action and settlement, the full impact of SEC reforms implemented this year to strengthen enforcement "is likely yet to be seen." Those measures include ending a penalty pilot program that required the SEC staff to obtain pre-approved settlement ranges prior to negotiating with companies and streamlining the process for obtaining formal orders of investigation.

The report shows that the majority of both company settlements (58.6 percent) and individual settlements (58.9 percent) in 2009 included a monetary payment.

Among companies with settlements that included a payment, the average settlement was $10.7 million, compared to $4.7 million in 2008, while the median company settlement amount remained flat, at $1 million.

NERA notes that the increase in the 2009 average was driven by three settlements of 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 KBR for alleged FCPA violations. If those settlements are removed, the 2009 average company settlement amount falls to $4.4 million.

Meanwhile, the average individual settlement was $1 million in 2009, compared to $1.2 million in the prior year. The median settlement for individuals was $0.1 million, as it has been in every year since SOX.

NERA notes that public company misstatements are among the most frequent allegations in SEC enforcement actions, accounting for 1,013, or 19 percent of the post-SOX settlements it tracked.

According to the report, individuals have historically been more likely to be targeted in SEC misstatement cases than the companies themselves.

In 353 cases relating to the alleged misstatements of public companies from the passage of SOX to the end of fiscal 2009, the SEC settled with the company only in 62 cases, while it settled with individual directors or employees only in 99 cases.

In the remaining 192 cases, the Commission settled with both the company and individuals. In all, 699 individuals have settled in public company misstatement cases since SOX, according to the report.

Companies, meanwhile, have picked up the majority of the misstatement settlement tab. Post-SOX, NERA found that company settlements in the cases total $3.7 billion, or nearly 87 percent, compared to $0.6 billion for individuals.

Still, the top individual settlement, $81 million settlement in 2007 with former HealthSouth CEO Richard Scrushy would rank ninth on the list of company misstatement settlements.

Mirroring the trend in overall settlements, the number of settling defendants in misstatement cases fell to 121 in 2009, from 131 last year. Only 2006 saw fewer settling defendants in public company misstatement cases.

The median company settlement value in misstatement cases also declined for the third straight year, to $8 million, the lowest in any fiscal year since 2003.

The report notes that the $33 million proposed settlement with Bank of America would've been the second-largest settlement in the quarter. In that case, the SEC accused BofA of inadequate disclosures of provisions for bonus pay to Merrill Lynch employees in proxy documents sent to shareholders of both firms before a vote on the Merrill acquisition. Judge Jed Rakoff rejected the settlement because it fined the company, rather than the culpable individuals, and ordered the case to proceed. A trial is set for Feb. 1, 2010.

According to the report's authors, the SEC's failure to get approval of the BofA settlement may result in its pursuing claims against individuals with "renewed vigor" in cases involving public companies.

Meanwhile, the SEC reached fewer insider trading settlements in 2009 than in any fiscal year since the passage of SOX. While the number of settling companies in insider trading cases reached a post-SOX high of 10, only 56 individuals settled insider trading cases with the SEC, down from 76 in the prior fiscal year. However, the report notes that, since the end of the fiscal year, the SEC has brought insider trading charges in the Galleon case and sent at least three dozen subpoenas to hedge funds and brokerages.

The full report is available here.