Bipartisan bill would raise SEC's limits on securities fines, tie penalties to scope of harm, and crackdown on repeat offenders

WASHINGTON, DC - In an effort to prevent financial fraud and strengthen oversight and accountability of Wall Street, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) are introducing bipartisan legislation to strengthen the Securities and Exchange Commission's (SEC) ability to crack down on securities laws violations.

The Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2012 will increase the statutory limits on civil monetary penalties, directly link the size of these penalties to the scope of harm and associated investor losses, and substantially raise the financial stakes for repeat offenders of our nation's securities laws.

Under existing law, the SEC can only penalize individual violators a maximum of $150,000 per offense and institutions $725,000.  In some cases, the SEC may calculate penalties to equal the gross amount of ill-gotten gain, but only if the matter goes to federal court, not when the SEC handles a case administratively.  The SEC Penalties Act increases the per violation cap applicable to the most serious securities laws violations to $1 million per violation for individuals, and $10 million per violation for entities.  In cases where the penalty is tied to the amount of money gained by the bad action, the SEC would be able to triple the penalty.  It would also triple the penalty cap for recidivists who have been convicted of securities fraud or subject to SEC administrative relief within the past five years.  The agency would be able to assess these types of penalties in-house, and not just in federal court.

"In order to protect taxpayers and investors, we need tougher anti-fraud laws and forceful oversight of Wall Street.  Some of these institutions that are 'too big to fail' have also become 'too big to care.'  If they look at the bottom line and see they can break the law, get caught, pay a nominal fine, and still profit, the cycle of misconduct will continue.  The law needs to change to ensure the punishment fits the crime.  This bill gives the SEC more tools to demand meaningful accountability from Wall Street," said Reed, the Chairman of the Banking Subcommittee on Securities, Insurance, and Investment.  "I am pleased to be joined by Senator Grassley in this bipartisan effort to enhance the SEC's ability to protect investors and crack down on fraud."

"If a fine is just decimal dust for a Wall Street firm, that's not a deterrent," Grassley said.  "It's just the cost of doing business.  A penalty should mean something, and it should get the recidivists' attention.  I especially like the increased penalties for repeat offenders in this bill.   That should help change the dynamic of business as usual.  If this legislation is enacted, as I hope it will be, I expect the SEC to use these new penalties.  The SEC doesn't always use all of the penalties at its disposal, and it should."

The SEC is responsible for overseeing approximately 35,000 entities, as well as the Financial Industry Regulatory Authority (FINRA), which itself oversees 4,500 brokers; the Public Company Accounting Oversight Board (PCAOB), which oversees auditors of public companies; and the Municipal Securities Rulemaking Board (MSRB), which regulates municipal securities firms and municipal advisors.

Last year, the SEC successfully brought 735 enforcement actions which resulted in the transfer of $2.8 billion in penalties and returned funds to harmed investors.

However, in a recent case between the SEC and two former Bear Stearns hedge fund managers who were indicted on charges of wire and securities fraud for misrepresenting the health of their funds that cost investors $1.6 billion, the SEC was forced to settle for civil penalties of $800,000 and $250,000, respectively.  Neither of the former executives admitted nor denied the allegations and were banned from the securities industry for three years and two years, respectively.

A summary of the SEC Penalties Act of 2012 follows:

Update Civil Money Penalties for Securities Law Violations. The bill modernizes and updates the maximum money penalties that may be obtained from individuals and entities charged with securities law violations in administrative and civil actions.

Most Serious Violations. The maximum penalty for an individual charged with the most serious violations (i.e., third tier violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement that resulted in substantial losses to victims or substantial pecuniary gain to the violator) could not exceed, for each violation, the greater of (i) $1 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.  The maximum amount that could be obtained from entities charged with the most serious violations could not exceed, for each violation, the greater of (i) $10 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.

Other Violations. The maximum penalties for individuals and entities charged with other violations would be revised as follows:

1.         The maximum penalty for an individual charged with less serious violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (i.e., second tier violations) could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation.  The maximum penalty that could be obtained from entities charged with these violations could not exceed, for each violation, $500,000 or the gross pecuniary gain as a result of the violation.

2.         The maximum penalty for an individual charged with violations not involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (i.e., first tier violations) could not exceed, for each violation, $10,000 or the gross pecuniary gain as a result of the violation.  The maximum penalty that could be obtained from entities charged with these violations could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation.

Penalties for Recidivists. The maximum amount of the penalty for repeated misconduct shall be three times the applicable cap when the person or entity within the five years preceding the act or omission is (a) criminally convicted of securities fraud or (b) is subject to a judgment or order concerning securities fraud.

Violations of Injunctions or Bars. The bill provides authority to seek civil penalties for violations of previously imposed injunctions or bars obtained or entered under the securities laws.  It also provides that each violation of an injunction or order shall be considered a separate offense.  However, in the event of an ongoing failure to comply with an injunction or order, each day of the continued failure to comply with the injunction or order shall be considered a separate offense.

Grassley's most recent request for information from the Department of Justice was made Monday in a letter to Attorney General Eric Holder.  The Department of Justice and FBI last week announced a broad review of criminal cases where defendants may have been wrongly convicted because of flawed forensic work in the FBI crime lab following investigative reporting by The Washington Post that indicated that "sloppy" and "unreliable" work may have led to the incarceration of hundreds of innocent people, and that a 2004 review by the Department of Justice didn't go far enough in identifying potential cases of wrongful convictions.

Grassley also had made a request for information from FBI Director Robert Mueller in May, with Senator Patrick Leahy, but the FBI has not responded.

"I'm glad the Department has decided to conduct a more expansive review, but I also want to make sure the wider review avoids mistakes made by a previous task force," Grassley said.  "We still don't have a full accounting of the findings of the previous task force, so my oversight remains focused on accountability and making sure the forensic science system in this country is as good as it can be."

In 1997, Grassley took on the cause of Dr. Frederic Whitehurst, an FBI crime lab scientist who risked his career to come forward with allegations about wrongdoing in the FBI crime lab, which called into question the scientific integrity of the lab and the thousands of prosecutions that relied on evidence it processed.  For his effort, Whitehurst was retaliated against by the FBI.  Ultimately, however, Whitehurst's disclosures resulted in an independent investigation that recommended lab changes, including accreditation by an outside body.

"Thanks to the actions of Dr. Whitehurst, cases where faulty procedures, flawed analysis, and improper testimony were given were reviewed," Grassley said.

Click here to see Grassley's July 16, 2012, request for information from the Attorney General.

Click here to see Grassley's May 21, 2012, request for information, with Leahy, from the FBI Director.

Grassley's statement from this morning's Judiciary Committee hearing is below.

Prepared Statement of U.S. Senator Chuck Grassley

Ranking Member of the Senate Committee on the Judiciary

Hearing on "Improving Forensic Science in the Criminal Justice System"

Wednesday, July 18, 2012

Mr. Chairman, thank you for holding this hearing.  I join you in wanting to make sure that the forensic science system in this country is as good as it can be.   This is an important subject for the Judiciary Committee to address, since forensic science is the application of science in the courtroom, designed to identify the guilty and exclude the innocent.  It's not about academic or pure scientific research.  And I'm pleased that we are able to have a consensus panel of witnesses today.

Years ago, I supported a whistleblower who exposed serious problems at the FBI Crime Lab, Dr. Frederic Whitehurst.  And he's here in the room with us today.

Dr. Whitehurst risked his career to come forward with allegations about wrongdoing in the FBI crime lab.  In the words of the Federal District Court for the District of Columbia, "Dr. Whitehurst has made a number of very serious allegations that call into question the scientific integrity of the FBI crime lab and the thousands of prosecutions that rely on evidence it has processed."    For his effort, he was retaliated against by the FBI and spent years litigating with the FBI via the Freedom of Information Act to obtain documents outlining the retaliation he faced by the FBI.

The disclosures Dr. Whitehurst made resulted in a DOJ Inspector-General investigation that recommended 40 changes to improve procedures at the Lab, including accreditation by an outside body.  Thanks to the actions of Dr. Whitehurst, cases where faulty procedures, flawed analysis, and improper testimony were given were reviewed.  Ultimately, Dr. Whitehurst's case resulted in the Justice Department creating a regulatory process for whistleblowers to adjudicate their claims.  That process is unfortunately broken and needs our legislative attention.

Additionally, more work needs to be done on the FBI crime lab and DoJ's review of past cases.  Recently, The Washington Post found that a 2004 DoJ review of flawed hair and fiber analysis at the FBI Lab didn't go far enough in identifying potential cases of wrongful convictions.  And even in cases that were identified, DoJ did not ensure that defense counsels were informed.  Mr. Chairman, you and I jointly wrote a letter to the FBI on this matter.  But almost 60 days later we have not received a response.

The FBI publicly announced last week that it was expanding its review, but our request for basic information still hasn't been answered.  On Monday, I sent another letter with further questions.  I expect answers to this serious matter to ensure that the problems Dr. Whitehurst uncovered are not continuing to this day.

So, I appreciate the importance of this hearing and the goal of improving the use of forensic science in the criminal justice system. Wrongful convictions are very rare, but they do happen.  And, flawed use of forensic science accounts for some of them.

I want to be clear that I don't think forensic science as a whole is the problem.  Forensic science has come a long way over the years.  Most important was the development of DNA testing technology.  Nowadays, we don't even need outdated forensic disciplines like hair comparison or blood matching, which account for most of the wrongful convictions due to flawed use of forensic science. Furthermore, those cases are usually the result of bad practice of forensic science, not bad science itself.

Unfortunately, there are those who claim that certain forensic sciences as a whole are invalid.  These critics usually point to one famous case or another to indict an entire discipline.  For example, after more than 100 years of critical contributions to public safety, fingerprints are now called into question because of the Brandon Mayfield incident.  The Washington Post yesterday said that there is some "uncertainty" with fingerprints as a whole.  This latest attack is similar to the attacks which questioned whether DNA analysis was valid when prosecutors first tried to introduce it in the early 1990s.

However, there is plenty of proof on the record that fingerprints are reliable.  One study completed after the Mayfield incident found a 99.9 percent reliability by FBI examiners.  And this study was published in the peer-reviewed Proceedings of the National Academies of Sciences.  That's why, as the DoJ Inspector General has pointed out, every federal court of appeals that has addressed the issue has held that fingerprints are admissible as evidence.

The criminal justice system is adversarial for a reason ? to help uncover the truth through questioning of evidence.  It is a robust system with Constitutional and other legal protections for defendants.

Unlike the adversarial system, some have recommended that we turn over forensic study to unelected and, often, unaccountable bureaucrats.

From my work in the Senate with federal government whistleblowers, I can tell you that I would trust the adversarial court system before I trusted federal bureaucrats.  What happens in a courtroom is public and claims are subject to cross-examination.  Decisions about forensic science shouldn't be made behind closed doors by unelected bureaucrats.

We've all seen how a supposedly neutral scientific regulatory agency, the FDA, handles honest disagreements ? by spying on the dissenters.  I would hate for decisions on forensic science to fall prey to the bureaucracy as well.

There are three main issues, therefore, that I want to examine in this hearing.

First, how do we improve forensic science without throwing out the baby with the bathwater?  I don't want our efforts to improve the system to call into question the hard work that has already been done ? and is being done every day ? in labs across the country.

Second, what kind of improvement will be most efficient and effective?  Should the federal government ? which has some of its own problems ? be regulating the states?  Or should it get its own house in order first?

Third, how will any changes relate to existing policies and procedures?  There is already a lot work going on to improve forensics.  The DoJ-supported Scientific Working Groups for each discipline are crafting new standards for their members.  DoJ and other entities are funding more research.  Labs are being accredited to strict national and international standards.  And prosecutors, defense counsel, and judges are learning more about how to evaluate forensic evidence.  Congress should be careful not to pre-empt that work.