The United States Securities and Exchange Commission (SEC), having closed-out its fiscal year on September 30, has taken a moment from its pressing schedule to publish the results of its 2016 enforcement efforts.
To summarize, SEC enforcement actions achieved the highest number of enforcement actions ever recorded against investment advisors or investment companies, the most individual cases involving investment advisors or investment companies and an unprecedented level of Foreign Corrupt Practices Act enforcement actions. Unsurprisingly, they also scored a record $57 million in payouts to whistleblowers. In 2014, the SEC brought 755 actions, 807 in 2015 and 868 in 2016. Put another way, 2015 actions were up 6.89 percent over 2014 and 2016 actions were up 7.56 percent over 2015’s results. Interestingly, the value of disgorgements and penalties were virtually flat over these 3-years, standing at just over $4 billion.
The Good, the Bad and the Ugly
If anything was a surprise in the SEC’s somewhat boastful press release, it was the fact that hedge funds represented a small fraction of the total enforcements highlighted, which is good. The bad news, however, is that banks, brokers, traders, investment advisors, investment firms and publicly-held companies seem to be a veritable nest of nastiness. The truly ugly revelation to surface is that hedge funds continue to receive the lion’s share of the bad press when they are clearly a fractional part of the problem.
Leon G. Cooperman, founder of Omega Advisors was listed in the SEC’s press release as one of a handful of enforcement actions the commission deemed significant. Another hedge fund titan, Daniel S. Och of Och-Ziff was also listed in the significant group.
While technically it may be accurate to portray the Cooperman case as an enforcement action (the SEC has sued), it is highly dubious to include him with the likes of Och-Ziff, Merrill Lynch and J.P Morgan, all of whom have settled and/or admitted wrongdoing.
As Hedge Fund Marketing Association recently reported, Mr. Cooperman is vigorously fighting these charges. Apparently, the SEC is unacquainted with the concept of due process and the presumption of innocence.
The SEC’s press release was extremely transparent with respect to the identities of the accused, less so, with respect to the outcomes, and completely opaque with respect to the disposition of the penalties and disgorgements collected, which exceeded $4 billion.
The lack of transparency regarding the disposition of the more than $12 billion in penalties and disgorgements collected over the past three fiscal years is disturbing.
SEC practices seem to have more in common with those of ambulance chasers and trial lawyers than the sober pursuit of justice. The figures published in the release, obviously intended to be self-aggrandizing, actually reveal an agency doing more and achieving less, evidenced by the fact that the number of actions has increased while the value of penalties and disgorgements have remained flat. It is also worth noting that the SEC’s reliance on whistleblowers has increased exponentially, calling into question the competency of its investigative skills.