IS regulatory settlement the Securities Commission (SC)’s enforcement tool of choice? Judging by the numbers, the answer is clearly yes.
The regulator’s website provides details of its four categories of enforcement actions: criminal prosecution, civil actions and regulatory settlements, cases compounded, and administrative actions.
We can skip the third; for some reason, the last time the SC compounded an offence was three years ago. An administrative action is a sanction for a relatively light offence and doesn’t require going to court. The punishment is usually in the form of a penalty, a reprimand or a directive.
It’s in the first two categories that we see the upper range of the SC’s enforcement firepower. These actions are the regulator’s responses to serious breaches of securities laws such as insider trading, false financial reporting and failure to safeguard the interest of clients.
Last year, the SC filed criminal charges against six people and initiated a civil suit against eight defendants. So far this year, there have been only one new criminal case, involving one person, and a sole civil suit against seven defendants.
Court cases often go on for years and they demand a lot of time and resources. In 2013, the SC was juggling 15 criminal trials at the Sessions Court, 17 appeals at the High Court and Court of Appeal, and five civil trials at the High Court.
In 2009, the regulator decided on another option for dealing with market misconduct. It reported that in July that year, it had compensated – the actual term used is restituted – 13 investors who had traded in the shares of Malaysian Oxygen Bhd (MOX).
This was made possible following an early settlement with a former stock broker when he agreed, without the admission of liability, to make a payment of RM1.2mil. This was a disgorgement of twice the profits arising from alleged irregularities in the stock broker’s trading of MOX shares in February 2007.
Since then, there have been similar regulatory settlements every year, except in 2010. Typically, these begin with the SC proposing to institute claims against individuals (or a bank, in one instance) for offences such as insider trading.
These individuals agree to settle the claims “without admission or denial of liability” and to fork out the equivalent of two or three times the gains from the alleged wrongdoings. Some of those named in these settlement cases are familiar to most corporate observers, although the SC doesn’t provide other personal details such as ages, occupations or designations.
The money from these settlements are used to reimburse the SC for all costs of investigations and proceedings. Anything left is usually used to compensate those who suffered losses because of the alleged offences.
The use of regulatory settlements has been uneven – for example, there was none in 2010 and only one case in 2012 – but when the SC choose to actively pursue that course, the amounts extracted and the number of people it targets, are increasingly large.
In 2011, 12 people agreed to settle and they paid almost RM974,000. There were only four regulatory settlements last year, but they resulted in the SC collecting RM2.7mil.
To date, this year’s regulatory settlements involved 21 people and payments totalling close to RM10mil. One case alone yielded RM7mil. It revolved around the alleged manipulation of MyEG Services Bhd shares in 2007 and 14 people were the subjects of the SC’s enforcement action.
These figures suggest that the regulator is getting better at closing files through these so-called no-contest or no-fault settlements.
Yes, such settlements enable quicker and more efficient conclusions. The alleged wrongdoers are not allowed to keep profits from the transactions that the SC has investigated, and in fact, they have to cough up additional amounts as a form of penalty.
However, speed, expedience and cost-effectiveness aren’t the only criteria for an enforcement policy. Transparency, public interest and deterrence matter too, and this is why the SC could do better by articulating when and why it goes for regulatory settlements.
By being clear about the circumstances in which it accepts settlement as an outcome, the regulator ensures consistency and avoids an overreliance on settlements.
When pushing for a no-contest settlement becomes the default option, market discipline is likely to soften. The people will perceive that the culprits are being let off after paying disgorgements, which is a little more than a rap on the knuckles for those with deep pockets.
Also, the lack of admission of liability is confusing. Are those guys innocent but are forced to settle to avoid being entangled in messy and costly trials? Or did they indeed commit the offences but seized the opportunity to avoid prosecution by paying money?
In addition, the SC should reconsider how it informs the market about its regulatory settlements. It issues press releases on criminal prosecution and civil actions, but not on the settlements. To get details of the latter, you need to check the SC website or refer to the commission’s annual reports or enforcement bulletins.
Could it be that the settlements are never meant to pack a deterrent punch? After all, how could they serve as a warning when they mostly escape public attention?
> Executive editor Errol Oh perks up when he sees new information in the SC’s website about enforcement actions.
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