From “In Cox Years at the SEC, Policies Undercut Action”:
During Cox’s tenure, penalties imposed on companies fell 84 percent, from $1.59 billion in 2005 to $256 million in 2008.
Speaks for itself, doesn’t it? The Washington Post seems to think so, printing the above sentence without further explanation.
But I wonder.
Was the level of culpable conduct similar in 2005 and 2008? If so, the drop in fines may be interesting. If not, the drop in fines is not interesting.
Which was a more “normal” year for fines: 2005 or 2008? 2005 was the year the SEC booked $765 million in fines in connection with Adelphia – two of its largest fines ever – so perhaps the 2005 total is a bit of an outlier. Or is a year without an Adelphia the outlier?
Did the number of enforcement actions also drop? According to a recent GAO report, 272 formal orders of investigation were initiated in 2005. Although this dropped to 233 in 2008, the 14% difference does not come close to explaining the 84% drop in fines.
What probably does explain the drop in fines, and what is mentioned only in passing in the Post article, is the enforcement policy the SEC formalized in 2006 of not double-penalizing shareholders. The policy recognizes that when a company’s action is wrong because it harms the company’s shareholders, there is little point in penalizing the company with fines because those fines just penalize the shareholders. It makes more sense to penalize the individuals involved and/or require corrective procedures at the company to prevent future harm to shareholders.
But then penalizing individuals and implementing corrective actions won’t boost fine totals, disappointing those keeping score by that metric.