SEC Aims to Get Tougher on Fraud; Chairman White, Fleshing Out Goals, Touts Settlements That ‘Have Teeth’ and Deter Wrongdoing

Updated September 26, 2013, 5:50 p.m. ET

SEC Aims to Get Tougher on Fraud

Chairman White, Fleshing Out Goals, Touts Settlements That ‘Have Teeth’ and Deter Wrongdoing

ANDREW ACKERMAN

CHICAGO—Wall Street’s main cop, under the new leadership of a former prosecutor, plans to ramp up its policing of financial fraud. Securities and Exchange Commission Chairman Mary Jo White, laying out a broad enforcement agenda for the first time since taking the helm at the agency five months ago, said the agency will seek charges against more individuals and pursue larger fines against companies that commit wrongdoing.“We need to be certain our settlements have teeth and send a strong message of deterrence,” Ms. White said in a speech before institutional investors. “That is why in each case I have encouraged our enforcement teams to think hard about whether the remedies they are seeking would sufficiently redress the wrongdoing and cause would-be future offenders to think twice.”

Ms. White’s comments build on a June interview in which she said the agency in select cases would insist on admissions of guilt as a condition in settlements. That marked a shift from a long-established practice of allowing companies to settle allegations without admitting wrongdoing. Some of those earlier settlements, such as those in connection with some of the worst blowups of the financial crisis, drew fire from some judges and lawmakers.

In an example, the agency last week required J.P. Morgan Chase & Co. to admit it violated securities laws as part of its $200 million settlement with the agency over a trading blunder that cost the bank more than $6 billion.

The SEC’s investigation, which is continuing, could be a test case of Ms. White’s policy of pursuing more charges against individuals. The SEC’s complaint against the firm last week mentions various senior managers; the agency could ultimately decide to bring charges against some of them if it believes they were complicit in the wrongdoing the bank has admitted to, some observers have said.

“Anyone who has witnessed a guilty plea understands the power of such admissions; it creates an unambiguous record of the conduct,” Ms. White said Thursday.

Ms. White said the agency should tackle both big and small cases, and signaled a willingness to litigate more cases in court. She also said the agency would pursue charges against individuals “wherever possible,” rather than charging companies. In what she called a “subtle shift,” she has instructed the agency’s enforcement staff to look first at misconduct at the individual level, “working out to the entity, rather than starting with the entity as a whole and working in.”

“When people fear for their own reputations, careers or pocketbooks, they tend to stay in line,” she said.

James Cox, a law professor at Duke University, said pursuing more admissions of guilt by individuals would be a significant shift. Such settlements are more powerful than the acceptance of a monetary penalty, without an admission of wrongdoing, because of the moral stigma, he said.

“I don’t think the dollar amount matters,” Mr. Cox said. “All that matters is the opprobrium.”

Ms. White in her speech said seeking larger fines would only get the SEC so far. She acknowledged the SEC is constrained by legal limits on the size of fines it can impose on wrongdoers. Under current law, the SEC can’t assess a penalty based on investor losses but rather on a typically much-lower figure based on a firm’s profits from the misconduct.

In seeking larger fines against companies, Ms. White said the agency would distance itself from 2006 guidance that emphasized the impact of the fines on shareholders, giving it more leeway to seek larger penalties.

“Today, we have an entirely new commission,” Ms. White said.