Speech by SEC Staff:
The Advantages of a Dual System:
Parallel Streams of Civil and Criminal Enforcement of the U.S. Securities Laws

Remarks by

Thomas C. Newkirk

Associate Director, Division of Enforcement

Ira L. Brandriss

Staff Attorney, Division of Enforcement
U.S. Securities & Exchange Commission

16th International Symposium on Economic Crime
Jesus College, Cambridge, England

September 19, 1998

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the authors' views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

I. Introduction

Floor brokers generally are not allowed to trade for their own accounts because their first-line knowledge of what is happening on the market gives them an unfair advantage over the public. Enforcement authorities allege that these brokers colluded with the brokerage firm to buy and sell for the firm's account, with the owners of the firm falsifying the records after the fact to make it seem as if it was the firm that placed the orders. The brokers received 70% of the profits; the brokerage, 30. According to press reports, it was the first time federal prosecutors ever brought charges against anyone executing trades on the actual floor of the exchange.²

Later, in May, the owners of the firm and five of the floor brokers were also charged with "front-running" – buying and selling for their own accounts before executing orders they had from customers for the same securities. Front-running is illegal because when a floor broker trades for his own account first, he may not obtain as favorable a price for his customer. But more seriously, when he receives a large customer order to buy or sell, he knows that the size of the transaction itself may well affect the price of the stock. If he trades for his own account with the benefit of that inside knowledge, he is breaking both the rules of the stock exchange and the federal securities laws.³

These and other violations were uncovered as the result of a concerted investigation involving the New York Regional Office of the United States Securities and Exchange Commission (SEC), the United States Attorney's Office for the Southern District of New York, the Internal Revenue Service Criminal Investigation Division, the Federal Bureau of Investigation (FBI), and the investigatory branch of the New York Stock Exchange. The SEC brought a civil action against the offenders in federal court.⁴ The U.S. Attorney's Office – which is a branch of the U.S. Justice Department – brought criminal charges in federal court.

For a person unfamiliar with our American system of law enforcement – and indeed for many an average U.S. citizen in the street – this array of authorities, investigations, and court actions may seem perplexing. What is this all about? Isn't there just one set of federal securities laws? How can a person find himself in both civil and criminal cases for the same offense? And what is the role of the FBI and the Department of Justice here? Isn't the SEC the agency that's charged with enforcing the federal securities laws?⁵

II. The Civil-Criminal Distinction: On Background

A key to understanding our way of enforcing securities law is to go back to the fundamental distinction between criminal and civil law. Some say this distinction, a "hallmark of English and American jurisprudence,"⁶ was still "cloudy (and perhaps nonexistent)" as late as the era of the Magna Carta.⁷ But others see it as a tenet common to nearly every legal system in the world. The distinction in fact seems to be so rooted in the human conception of justice that it is found in legal systems as diverse as the dissimilarities of worldwide human society. In the words of one scholar:

The communist Chinese have distinct criminal and civil systems, as do the democratic Swiss and the monarchist Saudis. The criminal-civil distinction is also a basic organizing device for legal systems of Islamic Pakistan, Catholic Ireland, Hindu India, the atheistic former Soviet Union, industrialized Germany, rural Papau New Guinea, the tribal Bedouins, wealthy Singapore, impoverished Somalia, developing Thailand, newly organized Ukraine, and ancient Rome. Apparently every society sufficiently developed to have a formal legal system uses the criminal-civil distinction as an organizing principle. . . .⁸

Back in the United States – at the risk of sounding pedestrian – people are fond of illustrating the two regimes with the example of the celebrated O.J. Simpson case.⁹ First, O.J. was tried for the criminal offense of murder – and acquitted. Subsequently, he was brought to court in a civil action for wrongful death by those who claimed damages from his purported acts – and he was found liable. In this conception, it is the state that prosecutes the actor to punish him for his crime; it is the private individual who is harmed who brings the actor to court civilly to be made whole from his injuries. Here, we have no trouble understanding the rationale of two proceedings – civil and criminal – for the same misbehavior.

A wrinkle is added when the state is the plaintiff in the civil case, too. The government is not necessarily seeking compensation for a loss or somehow to be made whole. And yet the notion of it bringing civil action to enforce the law is not foreign to us. Being fined for parking in a no-parking zone does not automatically make a person a criminal. We all see the difference between a civil misdeed like this and offenses like arson, theft, murder – which we look to the state to prosecute as blatant, punishable crime. It may take the state to bring action against you, in the interests of society as a whole, but we do not necessarily want it wagging a moral finger at you.

There are many forms of antisocial behavior, however – conduct it takes the state to halt – that require a more complex response. Driving while drunk, cheating on taxes, purveying pornography, violating health and safety rules: how do we regard them – as civil wrongs, or moral crimes? Dumping toxic chemicals, peddling drugs, defrauding consumers: if we are forced to make a choice between the two regimes, civil or criminal, in which courts should we try them? In combatting many forms of conduct, it is obvious that we want society to do both: take corrective action civilly, and mete out justice through punishment of the crime. How then should we proceed?

Other questions arise, as well. When it comes to a subject area like protecting the investor, for example, some laws and rules – particularly those that are compliance oriented, like reporting requirements for issuers of securities and registration of broker-dealers – seem more naturally to fall into the civil category. Others – like laws against fraud and market manipulation, or, to take a position on a more controversial topic, insider trading – deal with behavior that seems more criminal. Still, there is no crisp distinction. Including a blatant falsehood in a routine filing can rise to the criminal, and taking advantage of inside information certainly includes a harm we would consider civil.

To address these questions, we can look at the civil-criminal dichotomy – as, indeed, courts, lawmakers, scholars, and law enforcement authorities in the United States have done – from two different perspectives. The one is theoretical and conceptual; the other, real-worldly and practical.

III. Conceptual Frames

Conceptually, the thrust of criminal law is to get at the evil. As legal scholars have amply demonstrated,¹⁰ criminal law looks at the subjective, the mens rea, scienter, the guilty mind. Civil law, on the other hand, is interested in objective liability, at protecting legal rights, at getting plaintiffs restitution for their losses, even when those losses result from a wrongdoer's mere negligence. Civil law is compensatory and businesslike; criminal law is retributive and, say some, non-utilitarian.¹¹ Civil law is concerned with the damages incurred by individuals; criminal law is concerned with the menace to society.

The question of how we relate to securities laws violations in the context of these distinctions is an important one, of course, and we will touch upon it further when we look at how the U.S. securities statutes were drafted. Quite aside from how we view violators conceptually, however, is the question of how to deal with their wrongdoing pragmatically. And that brings us to the more practical differences traditionally associated with the criminal-civil divide.

IV. Practical Differences

Different countries have different rules, but generally we might look at three broad areas in which the distinction between criminal and civil law enforcement plays out on the practical side: (a) the investigation of the alleged misbehavior, to determine whether in fact a suit should be filed; (b) the rules of procedure we follow once a case is filed – including how we gather evidence and what degree of proof it takes to determine guilt or liability; and (c) the kinds of remedies available with which to sanction or deter the wrongdoing, if in fact wrongdoing is found.¹²

A. Investigations

In terms of investigating unlawful behavior, at least in the United States, the criminal authorities – the police, the FBI – have far more power in their respective domains than do civil authorities.¹³ And that has to do with the seriousness with which we look at criminal misbehavior.

There are, to be sure, constitutional restrictions on police powers, but by and large criminal authorities have a considerable number of tools at their disposal in their mission of detecting and rooting out crime. These include the right to search for and seize evidence, conduct undercover operations, intercept electronic communications, pay informants, and interrogate and subpoena witnesses before a grand jury.¹⁴ Moreover, although in the U.S., as elsewhere, a witness cannot be forced to testify against himself if it will implicate him in a crime – we call it "the Fifth Amendment"¹⁵ – our criminal authorities nevertheless have the means to circumvent this barrier to obtaining evidence. They can compel a person's testimony by conferring upon him immunity from criminal prosecution – even against his will.¹⁶

A civil law enforcement authority, on the other hand, has nowhere near the powers of the police or the FBI. For instance, under our country's Privacy Act of 1974, an investigator for a civil agency like the SEC cannot even solicit information from an individual without first identifying himself and explaining the purpose of his inquiry.¹⁷ A civil authority may issue investigative subpoenas to compel people to testify and produce documents, but in the face of a reluctant witness invoking the Fifth Amendment, it does not have the authority to grant immunity from criminal prosecution without the approval of the Attorney General.¹⁸

B. Procedure

On the other hand, once a case has been filed, the civil side allows the government – as well as the defendant – much more leeway to get at the facts and prove its case. In the United States, discovery rules under the Federal Rules of Civil Procedure allow for substantially more pre-trial gathering of evidence.¹⁹ Each side, for instance, can freely depose not only the other side and (if it is an organizational entity) its employees, but also third party witnesses. It may also submit written interrogatories and requests for admission by the other party – which must be answered. Each side may demand permission to inspect another party's property, require and obtain the results of physical and mental examinations, and require that the other party produce any documents or other information it has that is relevant to the case. Our Federal Rules of Criminal Procedure, by contrast, limit a prosecutor substantially once an indictment has been handed down, and grant the defendant only very limited discovery rights.²⁰

Another major difference is that when a witness invokes his Fifth Amendment privilege not to testify, in a criminal trial his closed mouth cannot be used against him. In a civil trial, however, the decider of fact is allowed to draw adverse inferences from the silence; a defendant's refusal to testify is in itself evidence.²¹

Perhaps most importantly, to prove guilt in a criminal case, the government must prove each element of the offense beyond a reasonable doubt.²² In a civil case, generally, all that is required to prove a plaintiff's case is a preponderance of evidence.²³

C. Available Remedies

The main forms of criminal punishment we usually think of are imprisonment, corporal and capital punishment, public shaming, and severe monetary fines.

In the civil sphere, we have a much more flexible array of remedies available.²⁴ First of all, there are the classic civil remedies familiar to us from the sphere of private civil action: the injunction, an order a private plaintiff obtains from the court commanding the wrongdoer to stop his harmful actions; and restitution or compensation, paying the injured party for her losses, making her whole.

The injunction has a very long and ancient pedigree,²⁵ and it takes no great legal leap of mind to see it as a remedy the courts should reasonably grant to governmental agencies entrusted with the job of regulating industry and commerce and preventing certain citizens from harming others. But what about compensation and restitution? Is there any way payments or fines exacted by government from a wrongdoer can be considered as righting a wrong, making someone whole?²⁶ At first blush, it would not seem so.

Interestingly, however, the original rationale for the right of government to impose a civil fine does in fact stem from the notion of compensation. In old English law, it was considered as if there was an implied contract between every citizen and the King that the citizen would obey the law. If a citizen broke the law, he breached the contract. The fine was seen as a kind of "liquidated damages" – a predetermined amount – that he had to compensate the King – or, in contemporary terms, society – for his breach.²⁷

A related rationale for the state imposing monetary penalties for a civil violation is to look at it as a wrongdoer's obligation to "repay the government for the cost of enforcing the law," or what jurists and legal scholars call "rough compensation."²⁸ It costs money to hire government watchdogs, investigators, and attorneys to bring a malfeasor to court. Of course, this particular rationale must be examined closely when it comes to our practice today of imposing stiff monetary penalties on wrongdoers in many different civil contexts. In the United States, for instance, we make insider traders and other fraudsters pay penalties of up to triple the amounts of profits they make on their illegal shenanigans. Is this simply a matter of compensating the government, or are we really working with a different theory?²⁹

We will return to this question later. For now, we should add that in the United States, we have another rationale for making a wrongdoer pay money in a civil suit brought by the government. Our nation's courts have recognized the right of an agency like the SEC to bring an action seeking what we inelegantly call "disgorgement." The idea here is to force the violator to give back, or "disgorge," at a minimum the ill-gotten gains he received as the result of his unlawful conduct.³⁰

Now this is not to be confused with the right of private individuals who were victims of a stock fraud, for instance, to sue the perpetrators to get their money back. This is a governmental action. And while monies retrieved through such actions are generally placed into a fund from which the victims may be compensated,³¹ the remedy is not restricted to such purposes.³² There may not even be such victims. Rather than restitution or compensation, disgorgement is viewed as a method the court is allowed to exercise in its discretion "to prevent unjust enrichment."³³

Still another remedy available on the civil side is the ability of government to deny privileges – like licenses – to wrongdoers. In the securities context, this would include the ability of the SEC, for instance, to suspend or bar a broker from the industry, or prohibit a director or officer of a public company who has perpetrated a fraud from ever again being a director or officer of a public company.³⁴

V. Civil and Criminal Law "Complements"

When it comes to deciding what kind of regime we want to set up to enforce any particular law – civil, criminal, or some kind of combination – ultimately the question may depend on the conceptual factors we spoke about earlier: How much does this wrongdoing arouse our need to punish, to stigmatize wrongdoing, to resort to society's heaviest "moral artillery" to condemn an action?³⁵ But the practical factors we have enumerated play an equally important role.

Let us say we decide, for instance, that bilking elderly citizens of their life's savings is morally outrageous and criminal. If we confine our public law enforcement efforts against it to the criminal sphere – leaving it to the private citizen who is victimized to pursue any civil remedies – we have made it that much harder to quash the misconduct.³⁶

As Robert Jackson, one of our great American jurists, wrote: "[T]he criminal law has long proved futile to reach the subtler kinds of fraud at all, and [is] able to reach grosser fraud, only rarely."³⁷ So even when we would like to label a particular misdeed criminal, we in one sense tie our hands by doing so. We must meet higher burdens of proof to convict the wrongdoer, and we have relatively few sanctions to impose upon him when we do.

For these reasons, over the past century – at least in the United States – lawmaking and law enforcement has looked more and more to the civil sphere to assure compliance with the law, even when we regard a particular offense as a crime. The trend has been observed by numerous legal scholars. In the words of one:

Police and prosecutors have embraced civil strategies not only because they expand the arsenal of weapons available to reach antisocial behavior, but also because officials believe that civil remedies offer speedy solutions that are unencumbered by the rigorous constitutional protections associated with criminal trials, such as proof beyond a reasonable doubt, trial by jury, and appointment of counsel.³⁸

Not only are civil remedies "easier and faster to implement," but they are regarded by some as being "more effective in deterring crime in particular instances."³⁹

This growing historical trend to "mix and match" remedies⁴⁰ has been attributed to other causes as well. Over the last century, we have entered an era in which an ever-widening variety of sophisticated scientific, technological, industrial, and communications capabilities have become available to us. For all the improvements they have brought to our lives, however, a heightened potential for mischief is the price of their promise.

Similarly, an increasingly complex web of economic, financial, and social relationships has tied us all together in new ways. The sheer numbers of interpersonal transactions that now occur between us every day has multiplied exponentially – and so has the potential for harm-doing and advantage-taking that comes with them.

Government has had to create entire new bodies of law and administrative structures in order to bring a measure of basic peace and harmony, order, fairness, health and safety to our lives. Professor Kenneth Mann has shown how the rise of the administrative state has led to the increasing use of civil remedies as a tool to deter antisocial behavior.

Administrative agencies have long possessed a wide range of tools: the power to dispense money, to set standards, to bring civil suits seeking cease-and-desist orders or injunctions, to initiate contempt proceedings for violations of such orders or injunctions, to issue licenses, and to order compensation awards, forfeiture, disqualification, and, of course, money penalties.⁴¹

He is particularly interested in the last category, the use of monetary penalties – a topic we will yet come to – which he wants to remove from the civil category and consider as a new category of what he calls "middleground jurisprudence." Whatever one thinks of his particular thesis, he and others see our era as a time of great transformation and a dynamic shift in our approach to law enforcement, in which through a new coordination of our civil and criminal strategies, we are developing a more flexible and more effective response to wrongful conduct.

Significantly, the U.S. securities laws have been seen not only as exemplifying the trend, but even being at its forefront.

VI. The U.S. Securities Laws

A. A Short Bit of History

Going back for a moment to the "conceptual" issue in the civil-criminal dichotomy, it is interesting to speculate about how the view of misconduct in our capital markets may have impacted our law. Historically, the lawmakers who drafted our original statute, the Securities Act of 1933, were faced not with the civil-criminal issue, but with a different, somewhat related choice.⁴²

In deciding how to frame the law, they had two major legislative models before them.⁴³ One – based on a statute in place in England⁴⁴ – was founded on a disclosure theory, broadening the role of government and focusing on methods to ensure that investors were provided with all the facts they needed concerning securities sold to them. The other – based on the State of New York's Martin Act⁴⁵ – was essentially an antifraud statute, limiting government's authority to investigative and injunctive powers placed in the hands of the Attorney General.

While controversy swirled around the various proposals, the arguments in favor of a federal securities law both cited the need for confidence in the nation's capital markets and played upon the public's ire at evil perpetrators of deceit who became wealthy at the expense of defrauded investors. Now one might argue that the disclosure concept tends towards the civil view of securities law, while the antifraud philosophy tends toward the criminal, but in fact, even the antifraud model granted the Attorney General civil, as well as criminal, powers. Some of its proponents, however – motivated as they were by a resistance to securities regulation in general – would have preferred a statute that authorized only "stern enforcement of the penal laws without even the power somewhere to enjoin frauds."⁴⁶

In the end, Congress more or less combined the two models, but it is instructive to see how the statute was characterized.

[The Securities Act] was aptly termed "the truth-in-securities act." Congress did not take away from the citizen "his inalienable right to make a fool of himself." It simply attempted to prevent others from making a fool of him.⁴⁷

Both of our original statutes, the Securities Act of 1933 and the Securities Exchange Act of 1934, included both civil and criminal provisions – as did all the securities statutes that followed them. For those here who are not familiar with our laws, a word about their general scheme:

The Securities Act of 1933⁴⁸ is concerned with the initial public offering of securities. It requires every such issuance to be registered before the securities are allowed to be sold in interstate commerce. The information a company must provide about its operations, plans, and financial condition is not judged by the administrative agency on its merits – that is, whether it is a wise or foolish investment. All the Act requires is that everything be disclosed honestly, with no misleading statements or omissions.

The Securities Exchange Act of 1934⁴⁹ is concerned with the trading of securities and the national securities markets. First of all, it created the SEC to administer the federal securities laws. It placed the Commission in a supervisory position vis a vis the stock exchanges, giving it the power to pass on certain of their trading practices, to require broker-dealers to register, and to suspend or bar them from the industry when they break the securities laws. Every security listed on these exchanges must be registered with the SEC, and every issuer of a listed security must file quarterly and annual reports providing generally the same kind of information required in the '33 Act registration statement.

Both acts contain antifraud sections.⁵⁰ Both make willful violations of not just the fraud and manipulation sections, but any of the Acts' respective provisions, criminal⁵¹ – and that must tell us something about how the drafters viewed these laws conceptually. But the statutory scheme as a whole has a distinctly civil, regulatory and administrative cast. The SEC, a civil agency, is charged with assuring compliance with the laws and establishing further rules to regulate the industry. It was given authority to act administratively, and – further – to initiate injunctive action in the civil courts when those laws and rules are broken. The statutes add that the Commission is authorized to refer cases to the criminal authorities.

In other words, our statutes unhesitatingly label the violation of their provisions a crime, but they establish a law enforcement and compliance scheme that relies substantially on administrative and regulatory powers and remedies of a civil nature – obviously recognizing their greater flexibility. At the same time, referring violations to the criminal authorities was always a contemplated recourse. And, to dispel any questions one might raise over the matter, our Supreme Court has specifically held it constitutional for Congress to impose both civil and criminal sanctions for the same act, and for both sanctions to be sought in the civil and criminal courts at the same time.⁵²

But let us look at how the civil enforcement mechanisms work before turning to the criminal.

B. Our Civil Enforcement Authority and Its Development

1. Regulatory and Administrative Power

It is important to realize – before we even begin to talk about SEC action in the civil courts – that there is an entire layer of administrative and regulatory authority below the civil litigation level through which the SEC assures compliance with the securities laws, in a manner sometimes forgotten when it comes to discussing enforcement authority.

We mentioned earlier "the rise of the administrative state." As an administrative agency, the Commission was granted from the beginning the power to supervise the entire securities industry. This includes the power, for example, to set standards of disclosure and maintain them by refusing to register the securities of would-be issuers⁵³ or to approve the credentials of broker-dealers⁵⁴ unless they supply the public sufficient information about themselves. The SEC staff can halt trading in a stock if it has evidence indicating that information about the issuer in the market is incomplete or false.⁵⁵ It can stop a registration statement from becoming effective – thus preventing public sale of an issuer's securities – if it suspects fraud.⁵⁶ It can walk in and inspect the offices of brokerage firms, without notice, for compliance with the law.⁵⁷

This power, moreover, piggy-backs on a layer of enforcement even below that of the Commission's own administrative authority. Under the regulatory supervision of the SEC, each of the stock exchanges implements its own system of rules to assure fair dealing and honest trading. Each of them has established a variety of sanctions with which it disciplines unscrupulous brokers and delists companies guilty of nefarious practices.⁵⁸ Even below that layer, every individual brokerage firm is obligated to have its own compliance program.⁵⁹ So on a base line level, even before any kind of governmental action is taken, many abuses are ferreted out and more are deterred.

2. The Administrative Proceeding and its Original Sanctions

From the beginning, the Commission was granted the power, as part of its regulatory function, to sanction certain types of misbehavior by brokers, public companies, and other actors in the industry – without even going to the federal courts – through a quasi-judicial process known as the "administrative proceeding."⁶⁰ Originally, the kinds of sanctions the Commission could impose in an administrative proceeding were limited. Typically they involved suspending or revoking a broker-dealer's registration or issuing a stop-order halting the distribution of a new public offering.⁶¹

But in recent years, as will be detailed below, the Commission was given the authority to impose monetary sanctions, cease-and-desist orders, and other penalties through the administrative process, and as a result, administrative proceedings have become an increasingly important weapon in the arsenal of securities law enforcement on the civil side.

3. The Power of Injunction

For many years, the only remedies the SEC could seek in the federal courts were either an injunction⁶² ordering a wrongdoer to refrain from present or future violations, or – in the rare instance – a writ of mandamus,⁶³ a command of the district court ordering an individual to comply with the law or orders of the Commission.

As an enforcement tool, the civil injunction might sound like a relatively toothless mechanism, although the United States Supreme Court has alternately called it "a mild prophylactic" and a "drastic remedy."⁶⁴ An injunction is most effective in a case when a court order is needed to stop a violation going on right now, and less meaningful, of course, when the wrongdoing was completed two years ago. Violation of a civil injunction can be criminal contempt.⁶⁵ It also carries with it collateral consequences, serving, for example, as a basis for denying or revoking a violator's license to participate in the securities industry.⁶⁶ For fifty years, the injunction (and its related ancillary relief)⁶⁷ was the SEC's core remedy, and it remains a staple of the Commission's law enforcement program.

4. The Power to Seek Disgorgement

Because the injunction invokes the judiciary's authority in equity, it carries with it the full array of a court's equitable powers. The most important of these – in our context – is disgorgement. We have already noted how the federal courts long ago recognized the ability to seek disgorgement of a wrongdoer's ill-gotten gains, an equitable remedy to prevent unjust enrichment.

5. The New Civil Sanctioning Power of Monetary Penalties

In the 1980's, however, believing the remedies the SEC then had were inadequate to stem unlawful conduct, Congress granted it broad new powers. With the Insider Trading Sanctions Act of 1984 ("ITSA")⁶⁸ – and its expansion under the Insider Trading and Securities Fraud Enforcement Act of 1988 ("ITSFEA")⁶⁹ – the Commission was now given the authority to bring suit in federal civil court to claim penalties from insider traders equalling up to three times the illegal profits they made, or losses they avoided, by trading while in possession of material non-public information.⁷⁰

6. New Monetary Penalties under the Remedies Act

In the Securities Enforcement Remedies and Penny Stock Reform Act of 1990,⁷¹ the SEC was granted still broader powers.⁷² One of them was the authority to bring action in federal court to exact monetary penalties from any person who violates any provision of the federal securities laws. While the penalties for insider traders remain the same as enacted under ITSA and ITSFEA – up to three times the amount of illegal profits made – the penalties for other violations under the 1990 Act are assessed according to a three-tiered hierarchy, depending on the seriousness of the wrongdoing.

At the lowest level, a natural person may be fined no more than $5,000. For "any other person" – a corporation or partnership, for instance – the maximum is $50,000. On the second tier, however – for violations involving fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement – the maximum rises to $50,000 for a natural person and $250,000 for any other person. If the violation also resulted in substantial losses to other persons, or even so much as created the risk of such losses, the penalty can increase to as much as $100,000 for a natural person and $500,000 for any other person. At every tier, however, if the gross pecuniary gain is greater than the statutory amount, then the fine may be in the amount of such gain. Note that all these fines are "per violation" and that a continuing course of conduct may involve multiple violations.⁷³

Thus, we can now impose stiff fines not only on insider traders, but on the whole universe of fraudsters, stock manipulators, and other assorted crooks – all on the civil side.⁷⁴

7. Officer and Director Bars

The same Act also confirmed the power of the federal courts, when granting an injunction, to ban any person who committed securities fraud from serving as an officer or director of any company that issues publicly held stock in our country.⁷⁵

8. New Power to Impose Monetary Penalties and Obtain Disgorgement in an Administrative Proceeding

But the 1990 Act went much further, and granted the Commission a wide array of new administrative powers. Today, we no longer need to bring action in a federal civil court to impose monetary penalties on a person who violates the securities laws. If he is a "regulated person," such as a broker-dealer or officer or director of a public company, the sanctions can be ordered by the Commission in an administrative proceeding.⁷⁶ In addition, any person – regulated or not – can be ordered to disgorge ill-gotten gains in an administrative proceeding.⁷⁷

9. Administrative Cease-and-Desist Orders

Finally, the Commission now has the power to impose a "cease-and-desist" order upon any person who has violated or is about to violate one of the federal securities laws.⁷⁸ This is somewhat similar to an injunction issued by a civil court, but it is issued by the Commission itself upon the decision of an administrative law judge in an administrative proceeding. One of its advantages is that to obtain it, enforcement officials do not need to jump all the technical and procedural hurdles of bringing an action in federal court. Although the parameters are not, as yet, entirely fleshed out, it is the position of the SEC staff that the imposition of a "C&D" requires a lesser showing of the likelihood of a future violation than does an injunction.⁷⁹ There is no automatic contempt of court penalty for violating a "C&D" order, but someone who disobeys is subject to a court-imposed civil penalty.⁸⁰

VII. The Monetary Penalties and Their Implications for the Civil-Criminal Dichotomy

Taken together, then, the array of tools we have on the civil side is formidable. Before we look at how these remedies interplay with the weapons of criminal enforcement, it is time to elaborate now on the subject of our stiff monetary penalties, since these remedies – today the teeth of our civil enforcement program – might be seen as standing at the border between civil and criminal sanctions. As intimated earlier, they have generated no small degree of controversy – not only in academia, but in our courts of law.

This is where we get back into a little bit of conceptual philosophy. How can such steep money penalties be seen as non-punitive and hence non-criminal? One cannot any longer rationalize them as "liquidated damages" owed by the citizen to the state for violating some kind of social contract to obey the law, or see them as "rough compensation" to the state for its law enforcement costs – the old ways of justifying fines assessed by government for civil wrongs.

Actually, Congress was explicit, but careful, in stating its aim with these penalties. Our lawmakers did not present them as "remedial," the old way of distinguishing civil remedies from criminal sanctions.⁸¹ But they did not use the term "punishment," either. They used the concept of deterrence.⁸² The tricky issue is that deterrence was traditionally thought of as an objective of the criminal law. Even if one is willing to confine the idea of criminal sanctions to strict punishment, deterrence relies on the pain of punishment. As one scholar puts it, "when it comes to deterrence, civil and criminal remedies are essentially indistinguishable and interchangeable."⁸³ Nonetheless, Congress determined to impose these stiff monetary penalties as part of the civil enforcement regime, and our courts have approved.⁸⁴

This is, in other words, where we set aside philosophy and get down to practice. Even if we view a certain behavior as a crime, we will not be successful in quashing it if we insist on sanctioning it only through the criminal process, with its many procedural hoops to jump and its heightened burden of proof requirements.⁸⁵

Our need and our willingness to institute such steep money penalties to discourage lawbreaking that is otherwise regarded as criminal – while not requiring the offenses to be adjudicated in criminal court – is one part of the phenomenon we mentioned earlier, the overall shift in law enforcement strategies in the modern era. Securities law enforcement is not the only area where we have introduced such penalties on the civil side. We now use civil and administrative law enforcement to establish non-criminal consequences for an entire catalogue of antisocial behaviors that are also viewed as crimes.⁸⁶ But the use of civil monetary penalties in the enforcement of the federal securities laws has been seen as one of the harbingers of the trend.⁸⁷

Neither the courts nor the academics have had problems with the use of monetary sanctions outside the criminal sphere, per se. Generally, legal scholars have applauded the trend, affording as it does new flexibility and creativity in the realm of law enforcement. They do raise some important legal issues, however. For instance, even if we call them "penalties," are they not punishment enough to at least make us meet higher burdens of proof, even in civil court, to impose them? Are they not, in fact, so punitive that it would constitute "double jeopardy" for the SEC to bring a civil action against a wrongdoer for treble monetary penalties, and then have the Justice Department, on the criminal side, bring him to trial again?

Our courts have struggled mightily with these issues. But in the end, they have come down on the side that so long as the lawmakers' intent was a civil sanction, and the statutory scheme was not "so punitive either in purpose or effect" so as to "transfor[m] what was clearly intended as a civil remedy into a criminal penalty," they are not criminal sanctions.⁸⁸ Today we can get penalties not only in civil actions before a federal court, but even in administrative proceedings, with the "preponderance of the evidence" standard of proof.

At one point, it seemed as if the Supreme Court, based on its much-debated 1989 decision in the Halper case,⁸⁹ would be inclined to judge many such penalties severe enough to invoke the double jeopardy protection – even when they were conceived by Congress as civil. But in Hudson v. United States – a landmark case decided just last December – the court largely disavowed its outlook in Halper, saying it had deviated from previous doctrine.⁹⁰ And that is why we may today bring action for serious monetary penalties without much concern about compromising a parallel criminal prosecution for the same conduct.

That said, let us look at the criminal side.

VII. The Statutory Basis for Criminal Enforcement

On what basis do the criminal law enforcement agencies in our country – the Department of Justice, the FBI – investigate and prosecute people for their securities laws violations? Many people do not realize that there are actually several grounds.

First, each of the securities statutes themselves includes a provision making it a criminal offense to willfully violate any of their provisions.⁹¹ Market manipulators, fraudsters, insider traders – all risk criminal as well as civil prosecution. The criminal monetary penalties and the terms of imprisonment for these violations are written right into the statute.

Second, the same misconduct may be prosecuted under our federal mail and wire fraud statutes.⁹² Third, if the facts fit, violators can be prosecuted under RICO, our Racketeer Influenced and Corrupt Organizations statute.⁹³ Perjury,⁹⁴ obstruction of an SEC investigation⁹⁵ and making false statements to the staff of the Commission⁹⁶ are also all criminal offenses, as are aiding and abetting a criminal violation⁹⁷ and conspiracy to violate the securities laws.⁹⁸

So our friends on the criminal side have plenty to work with. Often, they turn up many of the cases they bring themselves. But often it is we who alert them to the most flagrant cases of wrongdoing. And that was what Congress contemplated when it drafted our securities legislation. Our lawmakers included in each of the statutes specific provisions authorizing the SEC, beyond the exercise of its own powers, to refer any securities laws violation to the criminal authorities.⁹⁹

And that brings us to a more close up look at parallel proceedings.

VIII. Parallel Proceedings: The Two Tracks

Because of our dual system, it will often happen that a crook or fraudster will find himself being investigated and prosecuted by both the SEC and the Department of Justice at the same time, on two totally different tracks.¹⁰⁰ For those uninitiated in our system of justice, let us explain briefly:

On the SEC side, when the Commission's staff attorneys are alerted to suspicions of securities law violations, they may begin looking informally into the surrounding facts as a "matter under inquiry" or an informal investigation. Individuals and officials of corporations may be requested to provide information through voluntary interviews and the production of documents surrounding the matter, and securities firms may also be requested to submit their own records relevant to the case. If further probing is warranted, the Commission may order a formal investigation, giving the staff the authority to issue subpoenas compelling testimony and document production. If the staff believes there is enough evidence of wrongdoing, it will recommend to the Commission that it file a civil action in federal court, or institute administrative proceedings before an administrative law judge, or both.¹⁰¹

In federal court, in a purely injunctive action, the defendant has no right to a trial by jury.¹⁰² If the Commission is seeking civil penalties in a federal court, however, both the defendant and the Commission have the right to demand a jury trial.¹⁰³ In the civil context, the broad discovery provisions of our Federal Rules of Civil Procedure enable attorneys for all parties to freely depose witnesses and compel the defendant to disclose any information or documents relevant to the case before the trial begins.¹⁰⁴ A defendant may assert his Fifth Amendment privilege not to testify on any matter that may incriminate him criminally, but the court or the jury may consider that refusal to testify itself as evidence of wrongdoing as far as the civil case is concerned.¹⁰⁵ To win in civil court or at an administrative proceeding, SEC attorneys must prove each element of the violation by a preponderance of the evidence.

Meanwhile, if a U.S. Attorney's Office, a branch of our nation's Department of Justice, suspects some kind of foul play involving securities – from its own sources, or as a result of a referral from the SEC – it will typically launch a criminal investigation, with the assistance of agents from the FBI, the Postal Inspection Service, or the Criminal Investigation Division of the Internal Revenue Service. These agents have much broader investigative authority than SEC attorneys, including, for instance, the ability to tap phones and search for and seize evidence with the proper court authorization, conduct undercover operations, pay informants, confer immunity from prosecution on reluctant witnesses – the entire gamut of options discussed earlier.

In practice, criminal investigators rely heavily on witness interviews and "proffer" sessions, in which a participant in the wrongdoing – or his attorney – will hypothetically indicate to them the kind of information he has and is willing to provide in testimony, in exchange for immunity from prosecution or leniency as to his own role in the crime. Under what is colloquially called a "Queen-for-a-Day" arrangement, prosecutors may allow a witness to speak in such a session without risk of his own words being used against him except for purposes of impeachment.¹⁰⁶

If the Assistant U.S. attorney assigned to the case believes he has sufficient basis to bring criminal charges, he presents the case before a grand jury, which decides whether or not there is enough evidence to "indict" – that is, send the case to trial. The grand jury, which operates in secrecy, may issue subpoenas to compel witnesses to testify at its proceedings before it renders a decision.

If an indictment is handed down, the case goes to trial before a jury, except in cases when both sides waive the jury requirement. After the indictment, the Federal Rules of Criminal Procedure permit the government and the defendant only limited discovery. Depositions are mandated only under exceptional circumstances.¹⁰⁷ As we have already mentioned, at trial, the factfinder may draw no inference of guilt if the defendant asserts his Fifth Amendment privilege not to testify. And to prove his case, the prosecutor must show evidence proving to the jury each element of the crime beyond a reasonable doubt.

A person who finds himself a defendant in both civil and criminal proceedings must respond separately in each jurisdiction. On the civil side, he may face an injunction, monetary penalties, a bar from the industry if he is a broker-dealer and other civil sanctions. On the criminal side, he may face imprisonment, monetary penalties, or both.
If this sounds unfair, or seems like double jeopardy, one must bear in mind the distinction we have been making all along between criminal and civil law. One must remember that the civil sanctions are meant to be dispassionate, corrective, to halt further injury, to remediate the wrongs and deter harmful behavior. Criminal sanctions are meant to punish the evil, to bring the criminal to justice.

If we have caught someone who has defrauded scores of poor elderly couples and deprived them of millions of dollars in life's savings, even if we have won on the civil side and made him disgorge his profits and enjoined him from ever doing it again – even if we have made him pay severe penalties – it does not mean he should be absolved of the punishment and condemnation due him as a criminal. On the other hand, if we are unable to prove every element on the criminal side, at least we have the civil system as a backstop for correction and deterrence.

IX. Technical Matters

There are technical matters to clarify, of course.¹⁰⁸ People often want to know how much of a wall there is – if any – between the civil and the criminal proceedings. How much information can be shared between the SEC and Department of Justice investigators and attorneys? How does the timing of parallel proceedings and the distinct concerns of criminal prosecutors and SEC trial attorneys affect overall strategy?

A. Sharing Information

The law generally provides that information gathered in the course of SEC investigations is non-public and may not be disclosed without the Commission's authorization.¹⁰⁹ On the other hand, we have already seen that the SEC is authorized by statute to refer cases to the Department of Justice, and the Commission's Rules expressly allow SEC staff members to discuss non-public investigations with other governmental organizations.¹¹⁰

However, if the criminal authorities want to see the SEC's investigative files, they need to make a formal access request to the Commission.¹¹¹ Access will usually be granted, unless doing so would interfere with an ongoing investigation, be adverse to the Commission's enforcement interests, or be contrary to the public interest.¹¹² The SEC may even share with the U.S. Attorney's office information it has obtained in civil discovery after it initiated its lawsuit, absent demonstrable harm to the defendant.¹¹³

The other way around, information the U.S. Attorney or FBI obtains in the course of its investigations may be shared with the Commission's investigators, but here it can get a little sticky. The grand jury secrecy rules¹¹⁴ forbid government employees from revealing matters "occurring before the grand jury," and that includes revealing them to the SEC. The courts do have discretion to allow disclosure to SEC attorneys in certain circumstances in connection with a civil proceeding, but it is not particularly easy to obtain such permission.¹¹⁵

B. Strategic Concerns

The interesting issues come up when, for strategic reasons, the SEC, or the criminal authorities, or the defendants, want to stay a civil proceeding – that is, delay it – so as not to jeopardize any one of their positions in the criminal case.¹¹⁶

For instance, if the SEC goes forward with its civil case first – and the defendant takes advantage of the right to see everything the Commission has as a result of the civil discovery rules – it may jeopardize the United States Attorney's criminal case. That was the situation in the case with which this paper began, involving the floor brokers – and that is why enforcement authorities wanted the judge on the civil side to stay the proceedings.

Often, however, it is the other way around. The defendant does not want the civil case to go forward first because he is afraid that the fruits of the SEC investigation will be handed directly over to the criminal prosecutor, who – as already noted – is limited in his rights to discovery after an indictment has been handed down.

The leading case on this kind of issue is Dresser Industries,¹¹⁷ where the Court of Appeals for the District of Columbia said that so long as an indictment has not been returned, at any rate, a stay of the civil investigation is not required. After all, before the criminal case is filed, anything the SEC can get, the FBI can get, too – on its own; it is only that the SEC can make it easier for the criminal authorities by adding its resources to theirs. As a matter of fact, the court noted that Congress expected the SEC and the Justice Department to cooperate with each other in investigations.¹¹⁸ What the Commission staff needs to watch out for, however, is that they are not allowed to launch a civil investigation or issue a subpoena solely for the purpose of obtaining criminal evidence. They need their own independent basis to proceed, and cannot act in bad faith.¹¹⁹

The court in Dresser acknowledged that there are other problems a defendant in parallel proceedings might face when the civil proceeding advances ahead of the criminal. To protect himself from criminal exposure, for instance, a defendant might want to plead the Fifth Amendment. But if the civil trial goes first, he might feel pressured to testify and jeopardize himself criminally since his silence can be used as evidence against him in the civil case.¹²⁰ Or, he might be forced as the result of the civil case to expose his defense strategy to the criminal prosecutors.

So there are times when a court will delay a civil proceeding on behalf of a defendant. We have an entire jurisprudence about "special circumstances" of serious prejudice to the defendant or to the government that warrant a court staying a proceeding in the interests of either party.¹²¹ But the Dresser court stressed the frequent need for the government's civil action to proceed speedily, independent of considerations arising from the criminal case. And the Supreme Court, in another context, has expressly noted Congress's intent to "vest the SEC with considerable discretion in determining when and how" to conduct its investigations.¹²²

"In fact," wrote Bill McLucas, former director of the Division of Enforcement at the SEC, and some of our other colleagues about a year ago, "absent special circumstances, courts rarely stay the discovery process of parallel civil proceedings at the request of a defendant. On the other hand, courts routinely stay the discovery process of parallel civil proceedings at the request of the U.S. Attorney where the U.S. Attorney intervenes and seeks the stay to prevent the defendant from using the civil discovery process to obtain discovery that would not be available in the criminal proceeding."¹²³

That is why an instance like the floor brokers case raises eyebrows. The judge in that case refused to grant a stay, and enforcement officials were forced to ask the court to dismiss the SEC's complaint entirely so the criminal case wouldn't be compromised. But after the criminal case is over, the Commission has the ability to refile and has done so in other, similar cases.¹²⁴

X. Conclusion

In the fiscal year that ended on September 30, 1997, the SEC initiated 189 civil injunctive actions, 285 administrative proceedings, and 14 contempt proceedings, involving 1,072 defendants or respondents. In SEC-related cases, criminal authorities obtained 93 indictments or informations and 98 convictions, and access to Commission investigative files was granted to domestic and foreign prosecutorial authorities in 197 instances.¹²⁵ All in all, our dual system works pretty well.

There are still other advantages in having a two-track system. As expressed by Mann:

[T]he integrity of decisionmaking processes drew strength from the checks and balances created by the institutional interdependence of agencies and criminal prosecutors; each decisionmaker knew that another entity was making many of the same assessments. In addition, the government enjoyed extra leverage over potential defendants by being able to pursue two avenues simultaneously. In parallel enforcement proceedings, defendants risked getting one penalty "ratcheted up" if they obtained a good settlement in the other; to avoid this risk, defendants had to deal with both antagonists at once.¹²⁶

This scholar also notes the advantages of having – side by side with the criminal system – the "special expertise" of an administrative agency that has "firsthand experience with potential offenders and with the substantive law over which they have regulatory authority," providing it with "important advantages in understanding the seriousness of a particular violation" and enabling it to "play a key role in distinguishing cases fit for criminal sanctions from those fit only for punitive civil sanctions, particularly when both kinds of sanctions are available."¹²⁷

One final point: With all this variety of sanctions available to mix and match, someone might ask, why do we still need the civil-criminal dichotomy? The question has been posed in one fashion or another by, among others, some utilitarian thinkers and adherents of the school of law and economics.¹²⁸

The answer lies in some of our original observations about the universality of the notion of separate civil and criminal regimes. We still want to see certain things – like fraud, stealing money from innocent people – as horrifying, terrible, punishable with all our criminal firepower. That is what these kinds of securities violations are: crimes to condemn and root out, with our heaviest moral artillery.

Were we deprived of our criminal remedies, the most flagrant conduct would be insufficiently punished and deterred. Effective criminal prosecution and incarceration is the most powerful combatant against such injurious wrongdoing. But we recognize that successful criminal prosecution may not be possible in every serious fraud case. Many violations are too complex or subtle for effective prosecution to a jury or the evidence that can be marshalled simply not overwhelming enough to meet the extraordinary high burden of proof needed to bring the lawbreakers to full criminal justice. Were solely criminal remedies available – as is the case in much of the world – we believe the difficulties of prosecution would both make the likelihood of conviction unacceptably low, and render the enforcement system entirely inadequate to meet the aim of overall deterrence.

In determining which cases to pursue, then, on the criminal level – which, for instance, the SEC will urge upon the Department of Justice and the FBI – the factors we take into account include the seriousness of the incident, the extent of the harm, the evidence of scienter, the strength of the case, it's likely jury appeal and the prosecutorial resources available. Provable perjury, obstruction or false statements in the course of our investigation greatly increase the likelihood of criminal prosecutorial interest, not only because such misconduct is strong evidence of scienter but also to protect the Commission's processes.

In short, our dual system – while actually calling it all crime if perpetrated with requisite intent – allows us to conserve our criminal prosecutorial energies for the most egregious cases. The civil enforcement power of the SEC, meanwhile, allows us to bring action even in the more difficult cases, furthering the goals of remediation and effective deterrence.

We believe, perhaps chauvinistically, that the SEC is the most effective securities regulator-enforcement body in the international community, and – further – that to a large extent, its effectiveness is attributable to the dual enforcement system we have endeavored to describe. As a result, our markets are the fairest and most honest, and enjoy the highest degree of investor confidence in the world.¹²⁹

¹ See Big Board Brokers Charged in Illegal Profits, N.Y. Times, Feb. 26, 1998.

² See, e.g., Ten NYSE Dealers Charged by SEC, AP Online, Feb. 26, 1998; Scandal Shakes NYSE/Damaged reputation puts exchange on defensive, USA Today, Mar. 2, 1998.

³ See SEC v. The Oakford Corp., Lit. Rel. No. 15743, 1998 SEC LEXIS 946 (May 18, 1998).

⁴ As will be explained in detail below, the SEC may bring two different types of law enforcement actions. It may file a civil complaint in a U.S. federal court, and it may institute proceedings before an administrative law judge.

⁵ Actually, it can become even more complex. Later in 1998, for instance, as the parallel civil and criminal actions in our instant episode were going forward in their respective courts, enforcement officials wanted the judge to stay the civil proceedings – delay them until the criminal case was concluded – so that the SEC would not be forced to divulge information to the defendants that would jeopardize the prosecution's strategy in the criminal case, information that would not have been available to the defendants pursuant to the rules governing criminal prosecutions. When the judge refused the stay, the SEC was forced to dismiss the case entirely – with the possibility it could file the complaint again after the criminal case was over. See SEC Dismisses Trading Complaint to Aid Other Cases, Wall St. J., July 27, 1998. See also SEC v. The Oakford Corp., 1998 U.S. Dist. LEXIS 12314 (S.D.N.Y. Aug. 10, 1998), a decision involving yet another complication in the case related to parallel proceedings issues.

⁶ Mary M. Cheh, Constitutional Limits on Using Civil Remedies to Achieve Criminal Law Objectives: Understanding and Transcending the Criminal-Civil Law Distinction, 42 Hastings L.J. 1325, 1325 (1991).

⁷ Browning-Ferris Indus. v. Kelco Disposal, 492 U.S. 257, 272 (1989).

⁸Paul H. Robinson, Symposium: The Criminal-Civil Distinction and the Utility of Desert, 76 B.U.L. Rev. 201, 201 (1996).

⁹ For a general overview of the interplay between criminal and civil proceedings in the Simpson case, see Kenneth B. Noble, THE NATION: In Civil Court, a Second Chance at Retribution, N.Y. Times, Oct. 22, 1995.

¹⁰ See generally, Kenneth Mann, Punitive Civil Sanctions: The Middleground Between Criminal and Civil Law, 101 Yale L.J. 1795, 1803-10 (1992).

¹¹ Id. at 1807. But cf. Robinson, supra note 8, at 209-10.

¹² See Mann, supra note 10, at 1810-12, for a different breakdown of criminal-civil distinctions examined in this section, which draws on his analysis.

¹³ See id.. Mann acknowledges that after a case has been filed, under our laws, a civil authority can obtain substantially more discovery than can a government prosecutor in a criminal case. However, writes Mann, "this power does not begin to compare with the power of compulsion under grand jury subpoena or the intrusion incident to a physical search for documents." Id. at 811.

¹⁴ See, e.g., 5 U.S.C. § 552a, 18 U.S.C. §§ 3052, 3059, 3061, 3101, 3107, 3109, 3117 (1994).

¹⁵ U.S. Const. Amend V.

¹⁶ See 18 U.S.C. §§ 6001-6004 (1994); Kastigar v. United States, 406 U.S. 441, 453 (1972).

¹⁷ See generally 5 U.S.C. § 552a (1994).

¹⁸ See 18 U.S.C. §§ 6001-6004 (1994).

¹⁹ See Fed. R. Civ. P. 26. Rule 26(b)(1), for instance, provides: