The Supreme Court Should Curb the SEC’s Excessive Penalties

The Securities and Exchange Commission has an active enforcement program that seeks monetary penalties from defendants. In fiscal 2022, the SEC brought 462 enforcement cases that ordered total penalties of $4.2 billion, over $9 million on average for each case.

The fines grab headlines, but they often damage investors or are shockingly high compared to the conduct that occurred. They also disregard Congress’s statutory limitations on penalty amounts.

The Supreme Court will soon have an opportunity to rein in the SEC’s harmful penalty practices. It will consider a request to review the meaning of the maximum penalty amounts in the securities statutes in Murphy v. SEC.

The governing statutes permit a maximum penalty of $11,000 to $1.1 million for a violation of the securities laws, but the SEC has used the laws to extract extremely large civil monetary penalties from defendants, especially in settled cases.

In 2022, several large broker-dealers agreed to pay a penalty of $125 million each because they failed to keep records of instant messages. In 2010, the SEC obtained a $535 million penalty from Goldman Sachs for a single transaction.

Sky-high penalties in SEC enforcement cases are possible because the maximum statutory penalty amounts are for “each violation” of the securities laws. The method of counting the number of violations is limited only by human ingenuity.

Did a broker-dealer commit one violation when the document retention system did not cover WhatsApp, or did it commit a violation with each of the tens of thousands of instant messages it didn’t retain?

In the Murphy case before the Supreme Court, the lower courts imposed a fine based on the number of months a defendant hadn’t registered as a broker with the SEC and on the number of inaccurate zip codes a defendant submitted to securities sellers.

In reaching settlements with defendants, the SEC takes advantage of the lack of meaningful controls on penalty amounts. A high percentage of SEC enforcement cases are settled and result in high or inconsistent penalty amounts. In settlement negotiations, SEC staff has total discretion over the penalty amount, and most defendants face strong pressure to capitulate to excessive SEC demands.

The SEC’s view that it and courts have complete discretion over penalty amounts harms investors and the securities markets, and it treats defendants unfairly. Investors suffer the loss when they’re shareholders in a company making an excessive penalty payment.

Businesses with good ideas shy away from the securities markets because of the threat of irrational enforcement and exorbitant penalty demands. Defendants can’t make informed settlement decisions and end up paying unjust amounts.

The Supreme Court should accept the Murphy case for review and test the SEC’s position. In a legal system devoted to the rule of law and congressional control of administrative agencies, a statute setting a maximum of $1.1 million for each serious violation of the securities laws shouldn’t be read to give the SEC and courts unrestricted and unreviewable discretion to impose fines in the tens or hundreds of millions of dollars.

The Supreme Court should step in and bring some reason and consistency to the system.

The case is Murphy v. SEC, U.S., No. 22-1241, distributed for conference 10/27/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Vollmer is a scholar with the Mercatus Center at George Mason University and a former deputy general counsel of the SEC. He was part of a group filing a brief to support the Supreme Court’s review of the Murphy case.

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