Table 29-Investigations of Possible Violations of the Acts Table 32-Public Utility Holding Company Systems Table 33-Key Financial Statistics of Registered Public Utility 116 117 .... Table 34-Public Financing of Holding Company Systems 118 120 Table 36-Fuel Program Expenditures of Holding Company 121 Table 37-Fuel Program Expenditure of Holding Company Corporate Reorganizations. Table 38-Reorganization Proceedings Under Chapter 11 of the Chart-Appropriated Funds vs Fees Collected 122 123 123 125 126 127 128 Enforcement Program Key 1983 Results The Commission maintains an aggressive enforcement program. In fiscal 1983, it commenced 261 enforcement actions, as compared with 254 in 1982, which was a 30% increase over fiscal 1981. The total includes 151 civil injunctive actions, compared with 136 brought in 1982 and 115 in 1981. There were 416 defendants named in the injunctive actions brought during fiscal year 1983 compared with 418 in 1982. In addition to injunctions against further violations of the Federal securities laws, the Commission obtained court orders during fiscal 1983 that required defendants to divest themselves of illicit profits amounting to more than $11 million, either as disgorgement or restitution to defrauded investors. In response to actions initiated by the Commission, courts froze assets estimated to exceed $55 million to protect the assets until appropriate dispositions could be made by the judge involved. The Commission instituted 94 administrative proceedings in fiscal 1983, compared with 106 proceedings begun during 1982 and 72 during 1981. There were 189 respondents named in 1983 and 287 respondents named in 1982. The Commission staff also provided substantial assistance to the Department of Justice and state authorities in connection with potential or pending criminal cases. There were 75 criminal indictments or informations obtained in such cases, many of which arose out of prior Commission investigations. The emphasis on civil and criminal contempt proceedings is reflected in the 14 actions brought in fiscal 1983 as compared with 9 in 1982. In addition, there were two reports of investigation under Section 21(a) of the Securities Exchange Act of 1934 (Exchange Act), including one concerning the Silver Crisis of 1980. One court order was obtained under Section 21(e) of the Exchange Act ordering compliance with a previously issued Commission order. Introduction The Commission's enforcement program seeks to preserve the integrity, efficiency and fairness of the securities markets. The Federal securities laws provide civil and administrative remedies designed to rectify past violations and prevent future violations. The Commission's primary enforcement remedy is a Federal court injunction. An injunction directs an individual or entity to comply with the law in the future. If the injunction is violated, contempt of court proceedings may result in imprisonment or the imposition of fines. In addition to "obey the law" injunctions, courts often enter orders providing other equitable relief such as restitution, disgorgement of illicit profits, or other remedies appropriate to a particular case. Another enforcement remedy against regulated entities is an administrative proceeding. The principal regulated entities are broker-dealers, investment companies and investment advisers. An administrative proceeding may result in a censure or a revocation or suspension of registration for up to 12 months. Regulated entities may not conduct business without an effective registration. Administrative proceedings may also be instituted against persons associated with regulated entities. The remedies include censure, suspension for up to 12 months or a bar from participation in the securities industry. In addition, issuers of securities may be subject to administrative proceedings if they fail to comply in a material respect with the Exchange Act's disclosure requirements and certain other provisions. They may be ordered by the Commission to comply with these provisions upon specified terms and conditions. Criminal sanctions for Federal securities law violations include a fine of up to $10,000 and imprisonment for up to five years for each violation. The Commission has proposed legislation to increase the maximum criminal fine for most Exchange Act violations from the $10,000 established in 1934 to $100,000. Program Areas Some of the areas of enforcement activity in fiscal 1983 are discussed below, along with illustrative cases. Corporate Reporting and Accounting-This category includes violations of the periodic reporting requirements. The Commission initiated 51 cases in this area in fiscal 1983 compared to 36 in 1982.1 Financial disclosure violations may involve valuation of inventories, assets or liabilities; the remuneration of officers and other related parties; the ability of a corporation to meet its obligations; or the recognition of revenue and expenses. Violations with respect to non-financial information may include material misstatements concerning corporate operating information, or a failure to disclose material facts concerning corporate management. The cases in this category include 22 delinquent filing actions, as compared with nine in 1982 Closely related to the emphasis on fraud by reporting companies is enforcement of the accounting provisions of the Foreign Corrupt Practices Act (FCPA). In fiscal 1983 12 such actions were brought. There were 10 in fiscal 1982. The 22 cases brought during the past two years represents two-thirds of all such actions brought since the FCPA was enacted in 1977. Recent cases brought under the accounting provisions have included some in which issuers have improperly deferred expenses, recognized sales prematurely, overstated inventories and used other improper techniques to inflate profits or decrease losses. One case involved systematic deferral of the recognition of promotional and advertising expenses in amounts of up to $3.6 million in a fiscal period. In another case, the Commission alleged that the defendants caused the preparation of false documents that failed to reflect a diversion of $2.2 million to an off-the-books account. Audited financial statements are the backbone of the disclosure system established under the Federal securities laws. In the past fiscal year, the Commission has alleged that certain fraudulent filings reflected deficient audits by issuers' accounting firms. An injunctive action was brought against an accounting firm with respect to its audits of the financial statements of three separate issuers. In another case, the Commission brought an administrative proceeding in which it alleged that two auditors, in performing an audit of an insurance company, acquiesced in the use of financial reports based upon an obsolete mortality table. Several fiscal 1983 reporting cases involved non-financial issues. In one case, the Commission alleged that an insurance company failed to disclose that it faced possible loss of the endorsement of two non-profit organizations whose members bought a substantial portion of its policies. In another case, the Commission alleged that the issuer failed to report that a customer, which had accounted for 15 percent of its revenue and one-third of its earnings, would be making no purchases during the relevant reporting period, and thereafter would make purchases at drastically reduced levels. In a third case, the Commission alleged that an issuer failed to disclose that a control person who had resigned from the company continued to dominate and control the issuer, and also continued to receive remuneration and other significant benefits. Securities Offering Violations-Some issuers fail to register public offerings of their securities, although required to do so by the Securities Act. Some may rely on purported exemptions to registration requirements which are not available to them. Some may violate anti-fraud provisions of the Federal securities laws by making material misrepresentations in connection with a securities offering or omitting material information in connection with such an offering. There were 41 cases principally involving offering violations by issuers and other persons brought during 1983.2 (This figure does not include 32 cases principally involving offering violations on the part of regulated entities, which are classified as regulated entity cases.) A total of 48 cases were brought in the securities offering category in 1982 (exclusive of those cases involving violations principally on the part of broker-dealers). Among the injunctive actions alleging securities offering violations were cases involving issuers that offered investments in tax shelters and oil and mineral interests. In one case an issuer offered participation interests in an arbitrage trading program involving U.S. government securities. The Commission alleged in its complaint that more than 2,000 investors were defrauded of $16 million in a scheme that promised an eight-to-one tax write-off. The promoters allegedly made personal use of the funds instead of investing them. In another case the Commission alleged the sale of $35 million in limited partnership interests in coal mining projects, without compliance with the registration requirements of the Securities Act. Among other things, the defendants allegedly inflated various projections, failed to disclose the identities of the principal promoters and failed to disclose the profits the promoters made in selling mining interests to the partnerships. Offerings by first-time issuers increased significantly in fiscal 1983. A number of these had no operating history, no permanent employees, or no stated business purpose. In response to these developments the Commission established a "Hot Issues Task Force" to co-ordinate investigations involving issuers and related entities. The Task Force consists of members of the staffs of the Commission's Divisions of Enforcement, Market Regulation and Corporation Finance, various regional offices of the Commission, and examiners from the National Association of Securities Dealers. The Commission also emphasized remedial actions during fiscal 1983 against professionals who provide issuers with access to the securities markets. Brokerdealers and underwriters who engage in questionable or improper sales practices are being subjected to increased scrutiny. One example is an administrative proceeding involving a Denver-based broker-dealer. The Commission alleged that the broker-dealer, acting as an underwriter, had used a false and misleading prospectus in connection with two offerings, and had failed to escrow funds received from investors in a “best efforts" underwriting. Several cases involving the fraudulent sale of unregistered securities have been brought against those holding themselves out as investment advisers. In addition, the Commission alleged in one case that a sham transfer agent was used to facilitate the distribution of a shell corporation's securities by improperly removing a restrictive legend from the stock certificates. Regulated Entities and Associated Persons-Fiscal 1983 actions involving regulated entities, including broker-dealers, investment companies, investment advisers and transfer agents, ranged from books and records violation to attempts to defraud customers. There were 110 cases involving regulated entities compared with 118 in fiscal 1982.3 Thirty-two cases involved securities offering violations by regulated entities. Of the other 78 cases, 43 primarily involved broker-dealers, 16 investment advisers, four investment companies and three transfer agents. The total includes 12 actions in which customers or employees were alleged to have defrauded a regulated entity. During fiscal 1983 the Commission revoked the registration of 19 firms, suspended 3 and censured 12. This compared with 11 revocations, 9 suspensions, and 28 censures in fiscal 1982. There were 54 individuals barred, 44 suspended, and 8 censured in fiscal 1983, compared with 44 bars, 82 suspensions, and 19 censures in fiscal 1982. One action against a regulated entity involved a failure to maintain proper books and records. The district court found that a broker-dealer's books and records were inaccurate, that it had failed to do proper box counts, failed to deliver customers' money and securities, and used customers' fully paid securities to satisfy its obligations to deliver securities to other broker-dealers. In another case involving two investment companies and their investment adviser, the investment companies were found to have improperly maintained their books and records and inaccurately valued the price of their common shares. The investment companies had recorded as accounts receivable various expenses they incurred for which they allegedly were going to be reimbursed by the investment adviser, when the investment adviser was actually insolvent and unable to meet its obligations. The Commission brought several cases involving fraud against regulated entities in fiscal 1983. One involving a fraud perpetrated against a broker-dealer by its managing partner, illustrates the swiftness with which the Commission can respond to emergency situations. In late January 1983 the Commission acquired |