SEC Settlements Compared to Settlements in Private Shareholder Class Actions

 

 

NERA Economic Consulting has just published a report on SEC Civil Enforcement Settlements over the past few years. The study, SEC Settlements: A New Era Post-SOX, provides an overview of trends NERA has identified in the number of settlements and settlement values in the six years since the enactment of SOX. The data stems from a database of litigation releases and administrative proceedings  published from 31 July 2002 through 30 September 2008.

 

Of interest is a comparison of some of the SEC settlements with those achieved by private securities fraud class actions. While the comparison is not made in the report, NERA also published a report entitled   2008 Trends: Subprime and Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High .

 

Each report contains a chart of top 10 settlements, which is set out below. The first is a chart of  the top 10 settlements for SEC settlements for the period of July 2002 - September 2008. The second  is for the top ten private class action settlements. Interestingly, the lowest of the  top ten settlements in private shareholder class actions covers starts out higher than the highest SEC settlement ($895 million versus $800 million).

 

The settling companies are not the same either, except for a few. For example, the SEC disgorged no funds for investors in Worldcom. While it accessed a $750 million civil penalty, civil penalties do not necessarily go to investors. Since enactment of  the Sarbanes-Oxley Act of 2002, penalties may be added to disgorgement funds for the benefit of investors. Section 308 of Sarbanes-Oxley (the Fair Funds provision) allows the Commission to take penalties paid by individuals and entities in enforcement actions and add them to disgorgement funds for the benefit of victims. Penalty moneys no longer always go to the Treasury, but there is no hard and fast rule. By way of contrast, the private shareholder class action against Worldcom recovered over $6 billion for investors, not including institutional investors who opt-outed out of the securities fraud class action and received their own substantial recoveries.

 

Similarly, the SEC accessed penalties of $300 million from Time Warner, and received no disgorgement for investors. By way of contrast, the private shareholder class action against AOL Time Warner recovered over $2.6 billion for investors. This recovery does not include the recoveries of institutions that opted-out of the class action and pursued their own suits.

 

The SEC Settlement report also states that the number of SEC enforcement actions  with recoveries relating to misrepresentation claims for the 6 - year period totals 197 settlements. The Private Shareholder Class Action report, by way of contrast reveals that over 200 class actions are filed per year with a 60% settlement rate---or over 1200 suits with 720 settlements.

 

Our comparisons, here, are rough. Hopefully, NERA will do a more in depth statistical and case by case comparison that would stand up to expert review. But even based on this rough comparison, what do we conclude?

 

• Private class actions remain the most important vehicle for investor recovery, and dollar-wise provide the biggest deterrent to securities fraud in the area of public company misstatements or omissions. 
• The SEC report, however, remains the primary watch dog for actions involving boiler room operations, pump. and dump schemes, Ponzi schemes, financial services (brokers) misappropriation fo funds and misrepresentations to clients, and insider selling, and recoveries against individuals. NERA's report has statistics covering each of these area too. 

This first chart is from the SEC Settlements: A New Era Post-SOX :

 

 

The following is a list of top settlements in Private Securities Class Actions from the NERA Shareholder Class Action Report:

 

 

 

 

Comments

[taxpayer]

He (a lawyer and a CPA) should have known better. Here is another interesting case.

Lawyer indicted in tax-shelter fraud scheme

By Chad BrayLast update: 4:29 p.m. EST Nov. 15, 2008Comments: 9NEW YORK (MarketWatch) -- A one-time lawyer and certified public accountant has been indicted on criminal charges related to an allegedly fraudulent tax shelter that helped wealthy persons avoid paying more than $103 million in taxes.

John B. Ohle III, who worked for a time as a supervisor for Bank One in Chicago and later co-owned Dumaine Group LLC in Chicago, has been charged with conspiracy, five counts of tax evasion and obstructing the due administration of internal revenue laws, according to an indictment unsealed Friday.

Dumaine Group was formed in February 2002 by Ohle with several former members of Bank One's Innovative Strategies Group after he left the bank. The ISG unit provided estate planning and tax-shelter strategies for wealthy clients.

"He did not commit any crimes and we're going to defend vigorously against these charges," said David Spears, Ohle's lawyer.Ohle faces up to five years in prison each on the conspiracy and tax evasion charges.

Prosecutors have alleged that Ohle, between 2001 and 2004, conspired with lawyers at now defunct law firm Jenkens & Gilchrist PC to market a tax-shelter known as Hedge Option Monetization of Economic Remainder, or Homer, to help high-net-worth individuals reduce or eliminate the amount of income taxes they would pay to the Internal Revenue Service.

The wealthy individuals were clients of Bank One and Jenkens & Gilchrist.

The Homer transactions resulted in taxpayers claiming about $429.5 million in false and fraudulent tax losses and evading more than $103 million in taxes, prosecutors said.Jenkens & Gilchrist earned about $12.1 million in fees on the transactions and the bank earned about $5.2 million in fees.The bank has since been acquired by JPMorgan Chase & Co.

Ohle and William Bradley, a lawyer in Hammond, La. and an Ohle acquaintance, also have been charged with conspiracy in a separate scheme to unlawfully obtain the payment of referral fees in several Homer transactions by submitting false and fraudulent invoices to the law firm for payment, to unlawfully obtain funds for an Ohle client and failing to pay taxes on the ill-gotten fees, according to the government.

Ohle allegedly evaded taxes on at least $642,000 in income in 2001 and at least $1.4 million in income in 2002, prosecutors said.Bradley didn't return a phone call seeking comment Friday.Prosecutors are seeking a forfeiture of $1.75 million, including Ohle's home in Wilmette, Ill.; Ohle's condominium in New Orleans and his sports memorabilia collection.