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Towards a Responsive Regulatory Regime: The SEC and the Task of Policing the Markets

By Eze Nwagbaraji
Events in the Nigerian and global business world over the past     three years have focused attention on various aspects and functionalities of businesses, the role of government in regulation of businesses, the role of shareholders in corporate governance, how public corporations use publicly raised funds, who determines how corporate entities function in the market place, etc.

Arunma Oteh

In the aftermath of the global financial crises that began in the United States in 2007 and ricocheted through Europe, Asia, and various African countries, including Nigeria, there were coordinated government efforts in various markets to stem what was perceived as the first global market failure of the 21st century. The United States, United Kingdom, China, Japan, etc. responded pragmatically in their markets, shoring up numerous private corporate entities in attempts to avoid the permanent effects of a cascading global financial crisis on their local economies.

The after math of the market realities have continued and most economies are readdressing their various market regulatory regimes in attempts to shore up the abilities of their regulatory authorities to better understand the complex terrain of private and public market operatives.

Advocates of expanded role for shareholders in corporate governance for example, are seeking new legal rights for shareholders. Their arguments include the notion that expanded rights better provide the shareholders of corporations the abilities to provide better oversight over corporate governance. It is through this oversight that the conducts of management are better monitored. Their critics aver to reasons why such rights are unnecessary and ill conceived. Issues concerning existing shareholder rights are more fundamental, these critics contend. Some further argue that existing shareholder rights are adequate and can be improved to better deal with questions of corporate governance.

A school of thought that have continued to gain ground among pro-investor groups, fund managers, private investors, and individual market participants in more advanced and actively regulated markets is the fundamental role of the Securities and Exchange Commission (SEC). While the SEC in these countries have invigorated their market regulatory mechanisms in attempts to catch up with the enhanced skills of private market operatives, the SEC in developing countries such as Nigeria seem to lack the abilities to engage the markets in decisive ways that may help shore up investor confidence in these markets.

The primary mission of the SEC is to protect investors, maintain fair, efficient, and orderly markets in attempts to assist the country in facilitating capital formation. Facilitating capital formation require bold and decisive attempts to engage market participants in ways that assure potential local and international investors into our economy, that they can be rest assured that ours is a market, driven by sound policies, competent regulators, and effective operatives that swiftly respond to debilitating market conditions.

The enforcement unit of the SEC has the awesome burden of championing these visions. How effective is the Enforcement Unit of our SEC? Is punishing wrong doers after they have been caught a sufficient tool in the new paradigm or are these no longer sufficient in assuring investors about the competence of our market regulators? What do we do with market operatives who have successfully gamed the system in industries or corporate entities that the government consider too big to fail?

The Nigerian SEC for several years have maintained the mechanism of imposing civil sanctions on corporate and market participants who are caught in under handed dealings in the market, and they have exhibited lax abilities in catching up with gamers of the market in recent years.

Current fast passed business environments with the overwhelming technology driven global markets that local corporations face, have made the SEC’s method of policing the market antiquated. The new paradigm require accelerated and large scale prosecutions with the objective of effecting compliance, change to corporate internal controls, supervisory procedures, and change in long term corporate behavior. The SEC can also become a front row cheerleader in the push for expanded shareholder rights. After all, it is the shareholder that the SEC protects in the first place.

Both criminal and civil prosecutions can be catalysts for an accelerated rearrangement of corporate DNAs. They can effectively put violators on express notice that when caught, the consequences of gaming the system are severe.

The Limits of Civil Prosecution in Securities Violations
The bulk of cases and or proceedings brought by the Nigerian Securities and Exchange Commission have been civil proceeding, mostly through internal investigations that lead to fines, penalties that include suspensions from the equity markets for a limited time, and monetary penalties imposed on dealers in the market.

Rarely have any actions been brought against corporations, especially those who operated in the markets to raise funds or government institutions, especially States who have come to the market to raise funds for various stated purposes.

The structural capability of the SEC to understand and investigate the operational conducts of corporate entities and states who have raised funds through the markets remain questionable. The responsibility for continued regulation, post fund raising is also vital in the scheme of securities regulation. The extent of this structural cloud is additive to the collective investor confidence or lack thereof on our security markets.

The investigative ability of the SEC is at the core of any attempt at creating a competent regularity institution that can police the market. Large scale civil litigations with massive fines are necessary to stem the conduct of corporate schemers who abuse their fiduciary responsibilities to shareholders and their investors. However, massive civil litigations can only be possible where there are accelerated investigations of corporations that have been implicated in market irregularities.

The slow pace of the current SEC in pursuing corporate entities involved in the various financial and market scandals that have received popular media exposures over the past ten months in Nigeria points to gross incompetence at least in the investigative and or enforcement units of the SEC.

The Economic and Financial Crimes Commission (EFCC) for example, had responded aggressively to some cases of criminal conducts within the financial and non-financial sectors of our economy over the past two years.

The daunting question remain, where is the SEC in all of these? While the EFCC conducts and carries out criminal investigations and litigations, our laws allow parallel prosecution in matters involving securities violations. The EFCC involvement further make an SEC induced civil litigation manageable within the constitutional boundaries of protecting the criminal defendant’s rights and applying the proper rules of evidence.

Parallel prosecution affords the SEC the added advantage of putting the defendant on a clear notice that the regulatory authorities mean business. Normally, seasoned attorneys and defense counsels are more apt to advice quick settlement with the SEC to enable the defense concentrate on criminal defense. Such settlements do not imply that the SEC would get less than what it should from a clearly culpable actor, had the entire civil litigation gone to full trial. It is an attempt to cut the cost of a full litigation, saving the SEC the time needed to pursue other matters.

Naturally, the burden of proof in civil matters are by a preponderance of the evidence, as opposed to matters within the criminal court, where the prosecution must carry the burden and prove the case beyond a reasonable doubt. Forfeiture laws in civil matters may limit the extent within which the SEC may seize assets acquired or gained through manipulating the securities market. Within civil securities fraud litigation, the SEC may seek and seize assets acquired from the direct fraud, but not assets acquired through pay and or salary received from the industry or corporation, where the perpetrator worked (bearing in mind that most securities fraud cases are perpetuated by those on the pay role of corporate entities).

The SEC may also seek to impose strict none financial sanctions against the individual actors and their corporations, up to barring them from further participation from the markets or bringing them under strict direct supervision over specified periods of time.

The Impact of Criminal Prosecution in Securities Violations Sections 418 and 419 of the Nigerian Criminal Code clearly creates the enabling criminal instrument to pursue those who have fraudulently manipulated the market in whatever mode or scheme may have been adopted. The SEC, working with either the EFCC and or the Attorney General of the Federation (if the interest of a State is involved, the SEC have the power to prosecute such matters within State Courts. The primary advantage of this is also the emergence of proper security laws within the various states).

In a criminal prosecution, the forfeiture is part of the punishment after a conviction, while in the civil case the property is technically the guilty party because it was acquired with tainted money. Unlike in a civil litigation, where the government must have or trace the property it seeks to the crime and cannot reach other property owned by the defendant that it cannot prove was acquired with tainted money. In criminal conviction the prosecutors first take the property traceable to the crime, and if that is not sufficient to satisfy the amount in the forfeiture order, a defendant’s substitute assets can be seized, that is, everything else the person owns.

Criminal law is generally retrospective and punitive of individual criminal misconduct. Rationally, several key societal issues at play in criminal sentencing. These include the importance of prevention, deterrence, retribution, and rehabilitation. These issues are important in securities based fraudulent acts. Securities and financial crimes are not situational, opportunistic, or thoughtless. They are premeditated acts, carried out in a rational manner, with a profit seeking motive. An attempt at deterring this profit seeking motivations, devoid of penetrating criminal sanctions risks alienating investor confidence.

Within our legal system, the SEC has the structural instruments to engage all market participants in a constructive market friendly manner. The importance of a trusted securities and equities market, driven by private investors are well known to the SEC. To achieve these objective though, a responsive SEC must be proactive because those who bring private funds into the market need the safety and assurance of a fair play ground.


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.