The Advantages of a Dual System: Parallel Streams of Civil and Criminal Enforcement of the US Securities Laws
| DOI | https://doi.org/10.1108/eb027229 |
| Pages | 176-192 |
| Date | 01 April 1999 |
| Published date | 01 April 1999 |
| Author | Thomas C. Newkirk,Ira L. Brandriss |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 3 No. 2
The Advantages of a Dual System:
Parallel Streams of Civil and Criminal
Enforcement of the US Securities Laws
Thomas C. Newkirk and Ira L. Brandriss
INTRODUCTION
In a high-profile case that first drew big media head-
lines last February, a New York brokerage firm and a
ring of eight brokers on the floor of the New York
Stock Exchange were charged with perpetrating a
scheme in which they made over $11.1m in illegal
profits and at the same time covered their tracks
with an elaborate fraud.1
Floor brokers generally are not allowed to trade
for their own accounts because their first-line knowl-
edge of what is happening on the market gives them
unfair advantage over the public. Enforcement
authorities allege that these brokers colluded with
the brokerage firm to buy and sell for the firm's
account, with the owners of the firm falsifying the
records after the fact to make it seem as if it was the
firm that placed the orders. The brokers received 70
per cent of the profits; the brokerage, 30 per cent.
According to press reports, it was the first time fed-
eral prosecutors ever brought charges against
anyone executing trades on the actual floor of the
exchange.2
Later, in May, the owners of the firm and five of
the floor brokers were also charged with 'front-
running' — buying and selling for their own
accounts before executing orders they had from
customers for the same securities. Front-running is
illegal because when a floor broker trades for his
own account first, he may not obtain as favourable
a price for his customer. But more seriously, when
he receives a large customer order to buy or sell, he
knows that the size of the transaction itself may
well affect the price of the stock. If he trades for his
own account with the benefit of that inside knowl-
edge,
he is breaking both the rules of the stock
exchange and the federal securities
laws.3
These and other violations were uncovered as the
result of a concerted investigation involving the
New York Regional Office of the United States
Securities and Exchange Commission (SEC), the
United States Attorney's Office for the Southern
District of New York, the Internal Revenue Service
Criminal Investigation Division, the Federal Bureau
of Investigation (FBI), and the investigatory branch
of the New York Stock Exchange. The SEC brought
a civil action against the offenders in federal court.4
The US Attorney's Office — which is a branch of
the US Justice Department — brought criminal
charges in federal court.
For a person unfamiliar with our American system
of law enforcement — and indeed for many an
average US citizen in the street — this array of
authorities, investigations and court actions may
seem perplexing. What is this all about? Is there not
just one set of federal securities laws? How can a
person find himself in both civil criminal cases for
the same offence? And what is the role of the FBI
and the Department of Justice here? Is the SEC
not the agency charged with enforcing the federal
securities laws?5
THE CIVIL-CRIMINAL DISTINCTION:
BACKGROUND
A key to understanding our way of enforcing securi-
ties law is to go back to the fundamental distinction
between criminal and civil law. Some say this dis-
tinction, a 'hallmark of English and American
jurisprudence',6 was still 'cloudy (and perhaps non-
existent)' as late as the era of the Magna Carta.7 But
others see it as a tenet common to nearly every
legal system in the world. The distinction in fact
seems to be so rooted in the human conception of
justice that it is found in legal systems as diverse as
the dissimilarities of worldwide human society. In
the words of one scholar:
'The communist Chinese have distinct criminal
and civil systems, as do the democratic Swiss and
the monarchist Saudis. The criminal-civil distinc-
tion is also a basic organizing device for legal sys-
tems of Islamic Pakistan, Catholic Ireland, Hindu
India, the atheistic former Soviet Union, indus-
trialized Germany, rural Papau New Guinea, the
ournal of Money Laundering Control
ol.
3, No. 2, 1999, pp. 176-192
enry Stewart Publications
SSN 1368-5201
Page
176
Journal of Money Laundering Control — Vol. 3 No. 2 — Newkirk and Brandriss
tribal Bedouins, wealthy Singapore, impoverished
Somalia, developing Thailand, newly organized
Ukraine, and ancient Rome. Apparently every
society sufficiently developed to have a formal
legal system uses the criminal-civil distinction as
an organizing principle . . .'8
Back in the US — at the risk of sounding pedestrian
— people are fond of illustrating the two regimes
with the example of the celebrated O. J. Simpson
case.9 First, OJ was tried for the criminal offence of
murder — and acquitted. Subsequently, he was
brought to court in a civil action for wrongful
death by those who claimed damages from his
purported acts — and he was found liable. In this
conception, it is the state that prosecutes the actor to
punish him for his crime; it is the private individual
who is harmed who brings the actor to court civilly
to be made whole from his injuries. Here, we have
no trouble understanding the rationale of two
proceedings — civil and criminal — for the same
misbehaviour.
A wrinkle is added when the state is the plaintiff in
the civil case, too. The government is not necessarily
seeking compensation for a loss or somehow to be
made whole. And yet the notion of it bringing civil
action to enforce the law is not foreign to us. Being
fined for parking in a no-parking zone does not auto-
matically make a person a criminal. We all see the
difference between a civil misdeed like this and
offences like arson, theft, murder — which we look
to the state to prosecute as blatant, punishable
crime. It may take the state to bring action, in the
interests of society as a whole, but we do not
necessarily want it wagging a moral finger.
There are many forms of antisocial behaviour,
however — conduct it takes the state to halt —
that require a more complex response. Driving
while drunk, cheating on taxes, purveying pornogra-
phy, violating health and safety rules: how do we
regard them — as civil wrongs, or moral crimes?
Dumping toxic chemicals, peddling drugs, defraud-
ing consumers: if we are forced to make a choice
between the two regimes, civil or criminal, in
which courts should we try them? In combating
many forms of conduct, it is obvious that we want
society to do both: take corrective action civilly,
and mete out justice through punishment of the
crime. How then should we proceed?
Other questions arise. When it comes to a subject
area like protecting the investor, for example, some
laws and rules — particularly those that are com-
pliance-oriented, like reporting requirements for
issuers of securities and registration of broker-dealers
— seem more naturally to fall into the civil category.
Others — like laws against fraud and market
manipulation, or, to take a position on a more
controversial topic, insider trading — deal with
behaviour that seems more criminal. Still, there is
no crisp distinction. Including a blatant falsehood in
a routine filing can rise to the criminal, and taking
advantage of inside information certainly includes a
harm we would consider civil.
To address these questions, we can look at the
civil-criminal dichotomy — as, indeed, courts, law
makers, scholars and law enforcement authorities in
the US have done — from two different perspec-
tives.
The one is theoretical and conceptual; the
other, real-worldly and practical.
CONCEPTUAL FRAMES
Conceptually, the thrust of criminal law is to get at the
evil. As legal scholars have amply
demonstrated,10
criminal law looks at the subjective, the mens rea,
scienter, the guilty mind. Civil law, on the other
hand, is interested in objective liability, in protecting
legal rights, at getting plaintiffs restitution for their
losses, even when those losses result from a wrong-
doer's mere negligence. Civil law is compensatory
and businesslike; criminal law is retributive and, say
some, non-utilitarian.11 Civil law is concerned with
the damages incurred by individuals; criminal law is
concerned with the menace to society.
The question of how we relate to securities laws'
violations in the context of these distinctions is an
important one, of course, and we will touch upon
it further when we look at how the US securities
statutes were drafted. Quite aside from how we
view violators conceptually, however, is the question
of how to deal with their wrongdoing pragmatically.
And that brings us to the more practical differences
traditionally associated with the criminal-civil divide.
PRACTICAL DIFFERENCES
Different countries have different rules, but generally
we might look at three broad areas in which the dis-
tinction between criminal and civil law enforcement
plays out on the practical side: (a) the investigation of
the alleged misbehaviour, to determine whether in
fact a suit should be filed; (b) the rules of procedure
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