When regulators jointly settled a big sales practice case in May with NationsBank and NationsSecurities, SEC Chairman Arthur Levitt Jr. defended to reporters the $6.75 million in total fines. The case involved alleged misleading sales practices in the banks sale of two bond funds in 1993 and 1994, which raised more than $300 million, and Levitt was asked if a $6 million penalty was enough of a deterrent
The penalty should be judged in conjunction with the overall actions that were taken against the firms, Levitt said, including private class actions and state fines. So this is a package, and I think that this is an appropriate response by the regulators in conjunction with the other actions that have been taken.
NationsBank earlier settled two investor class-action suits for a total of $59 million.
Then in July and August, several press reports quoted unnamed sources as saying the SEC, in fining Merrill Lynch $2 million for alleged disclosure violations in the Orange County, Calif., case, took into account Merrills previous $400 million settlement with the county.
The SEC, in seeking fines, looks for a number thats in the public interest, says an agency spokesperson, and will take into account settlements and other regulatory fines. But these other payments are not determinative. They are one of many factors taken into account, the spokesperson says. An NASD spokesperson confirms that the regulator looks at all factors in meting out fines, and points to NASD sanction guidelines that allow restitution paid to investors to be considered in meting out punishment. Neither the SEC nor the NASD say they ever delay an investigation while waiting to see what damages will arise from other legal proceedings.
Awards investors receive in individual arbitration cases, however, dont appear to be factored in. The SEC spokesperson was unsure how the agency would look at arbitrations, if at all--even well-publicized cases involving large damages. An NASD spokesperson says NASD arbitration is not a punishment mechanism or an enforcement tool. Thats why the NASD is supporting a cap on punitive damages investors can win in arbitration.
But the proposal to cap damages has come under increasing criticism as several penny-stock shops have recently been hit with major fines In August, for example, a $13.1 million arbitration award was granted to a client of the now defunct Firm Stratton Oakmont. The damages included $10.1 million in punitives. Plaintiffs attorneys claim such damages are important deterrents.