The Legal Penalties for Financial Misrepresentation

55 Pages Posted: 29 Sep 2006  

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

D. Scott Lee

University of Nevada, Las Vegas - Lee Business School

Gerald S. Martin

American University - Kogod School of Business

Date Written: May 2, 2007

Abstract

This paper provides the first integrated analysis of the complex mix of private and regulatory penalties for financial misrepresentation. We examine the sizes, types, and determinants of legal penalties imposed for all 697 enforcement actions initiated by the Securities and Exchange Commission for financial misrepresentation from 1978 through 2004. These penalties include private class action awards, monetary penalties imposed by the SEC and Department of Justice, and such non-monetary sanctions as censures, trading suspensions, and jail time. Contrary to many criticisms of private lawsuits and regulatory actions, we find that legal penalties are highly systematic, and in particular, are positively related to the size and severity of the harm from the misconduct. The data also indicate deep pockets effects, as both private and regulatory monetary penalties are related to defendants' abilities to pay. A recent increase in regulatory penalties has coincided with a decrease in private monetary penalties, consistent with regulatory penalties crowding out the use of private penalties.

Keywords: Fraud, penalties, Securities and Exchange Commission, financial misrepresentation

JEL Classification: G38, K22, K42, M41, M43

Suggested Citation

Karpoff, Jonathan M. and Lee, D. Scott and Martin, Gerald S., The Legal Penalties for Financial Misrepresentation (May 2, 2007). Available at SSRN: https://ssrn.com/abstract=933333 or http://dx.doi.org/10.2139/ssrn.933333

Jonathan M. Karpoff (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

D. Scott Lee

University of Nevada, Las Vegas - Lee Business School ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States
702-895-2526 (Phone)
702-895-4630 (Fax)

HOME PAGE: http://faculty.unlv.edu/slee

Gerald S. Martin

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

Paper statistics

Downloads
1,567
Rank
8,437
Abstract Views
6,891