By Vincent McKnight, Shaun Rosenthal, and Erica Roberts
As we discussed in Part I of this series, the Government Accountability Office (GAO) 2024 Report, “Fraud Against the Government,” revealed that the annual losses from fraud range from $233 billion to $521 billion. Because of a lack of resources and financial support for the enforcement programs, the government is losing hundreds of billions of dollars each year.
Estimates of corporate fraud, unbelievably, are even higher. One academic study published by the Chicago Booth: George J. Stigler Center for the Study of the Economy and the State found that, based on a conservative estimate, “corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021.”
The Securities and Exchange Commission (“SEC”) protects investors from misconduct, including by enforcing against companies that engage in fraud. While the SEC’s efforts have been substantial, this agency also suffers from a lack of resources. Yet the strength of the SEC program’s current recoveries suggests that if it had more funds, the sky is the limit in terms of recovering lost dollars to investors.
The SEC Enforces a Variety of Securities Fraud
The SEC’s civil law enforcement authority enables it to investigate and prosecute actions on behalf of harmed investors with the goal of recovering funds from those who have violated federal securities laws. This includes violations under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b). These enforcement actions include federal court filing and administrative proceedings.
The SEC’s Division of Enforcement was created in 1972 and was aimed at devoting more resources to investigating and enforcing against fraud. In 2010, Congress created the SEC Whistleblower Program, which was amended in 2020 to streamline the processing of claims and give greater benefits to whistleblowers.
The SEC Recovers Billions of Dollars Annually
In fiscal year 2023, the SEC filed 784 enforcement actions, representing a 3% increase over the prior fiscal year.[1] These actions include crypto asset securities fraud, cybersecurity threats, false and misleading statements made to investors, and failing to maintain recordkeeping requirements. Some notable recoveries include:
- $400 million in civil penalties paid by 25 different advisory firms, broker-dealers, and credit rating agencies including Wells Fargo, HSBC, and Scotia Capital for alleged violations of recordkeeping requirements of the federal securities laws
- $178.6 million paid by Danske Bank for allegedly misleading investors regarding its compliance program
- $75 million civil penalty paid by ABB, Ltd., a technology company that resolved bribery charges
- $55.9 million paid by Vale S.A., an iron ore producer that allegedly made false and misleading disclosures to investors regarding the safety of its company
Overall, the SEC recovered $4.95 billion in financial remedies and distributed $930 million to harmed investors in fiscal year 2023.
The SEC’s Whistleblower Program played a substantial role in the SEC’s enforcement actions. In FY 2022, the SEC reported that “[e]nforcement actions brought using information from meritorious whistleblowers have resulted in orders for more than $6.3 billion in total monetary sanctions.” With the SEC receiving more than 18,000 tips in FY 2023 and awarding over $1.9 billion to whistleblowers the previous year, this program is poised to continue growing and assisting in the government’s fight against corporate fraud.
The SEC has Insubstantial Resources to Support its Efforts
Despite the enforcement program’s success, the SEC does not have enough resources to support the growth of its program and adequately address the massive amounts of corporate fraud.
The government receives substantial returns on its investments in the SEC, but these returns do not even scratch the surface of the estimated amounts of annual corporate fraud. And the SEC will continue to lag in its enforcement efforts without being given more resources.
As shown in the graph above, the SEC utilizes its resources effectively. Its recoveries are more than double its entire budget (not just the budget for enforcement efforts). In fact, in FY 2023, the SEC’s Enforcement Division had a budget of approximately $690 million, meaning the division’s approximate $4.94 billion recoveries represented over 7 times its budget.
Despite the return, in the past two years, Congress held the SEC’s total budget flat at approximately $2.1 billion. The SEC’s head count actually shrank from FY 2016 through FY 2022. And this year, the House tried to remove $149 million from the SEC’s budget.[2]
When it comes to money well spent, the return on investment on SEC enforcement is undeniable. So why not increase the budget and see the returns roll in?
Until then, the public needs whistleblowers to come forward and expose the fraud.
If you have information about fraud against the government and believe you have a whistleblower claim, please feel free to fill out our online intake form to contact a whistleblower attorney at our firm today.
Footnotes
[1] https://www.sec.gov/newsroom/press-releases/2023-234
[2] https://www.secunion.org/news/sec-budget-released#:~:text=Overnight%20congressional%20leaders%20released%20the,than%20the%20House%20majority’s%20bill.