In our November Business Valuation Update™ article, “What Will the Wall Street Meltdown Mean to the BV Profession?” several respected industry insiders surmised that the current financial crisis will be the basis of a lot of future litigation that will require business valuation experts. 

Data suggests this might actually be the case. Indeed, Securities and Exchange Commission (SEC) enforcement action settlements are projected to reach a three-year high in 2008, continuing a dynamic period of SEC enforcement since the enactment of Sarbanes-Oxley (SOX) in 2002.  This is reported in the National Economic Research Associates (NERA) Economic Consulting’s study, SEC Settlements: A New Era Post-SOX. NERA reviewed every SEC litigation release and administrative proceeding document published from July 31, 2002 through September 30, 2008 for its study.

Since the passage of SOX, the SEC has imposed unprecedented monetary penalties on a range of defendants. Prior to SOX, the largest penalty imposed in an SEC enforcement action against a publicly traded company for financial fraud was a $10 million penalty against Xerox in April 2002. By contrast, NERA’s research shows that since SOX, the SEC has imposed penalties of $10 million or more against 115 parties, including 14 that were penalized at least $100 million. Other findings show that: 

• The number of settlements with individuals is on the rise, projected to reach 568 by year-end 2008. Company settlements, on the other hand, are declining, and will total just 171 by year-end, which would be the lowest number in any full year since SOX.
• Slightly more than half (56%) of SEC settlements with company defendants since SOX have included monetary penalties.
• In 2007, the median company settlement dropped to $0.7 million, less than half the 2006 high of $1.5 million.
• Forty-three percent of company payments have been in the form of disgorgement, and 57% in the form of civil penalties. For individuals, disgorgement penalties account for 88% of payments.
• Insider trading is the most frequent allegation in SEC settlements for individuals; NERA projects 92 settlements with individuals will occur in 2008, compared to 52 in 2007.

In conjunction with the release of its study, NERA has launched a website that features additional statistics and analysis, as well as a searchable database of documents relating to SEC settlements. You can check out the new website and the study here.