In March of this year, I gave a speech to the Council of Institutional Investors suggesting that the SEC should reconsider its approach to assessing penalties against corporate wrongdoers. [1] Rather than calibrating penalties to actual misconduct, some Commissioners have viewed corporate benefits as a limiting constraint on penalty amounts. [2] This approach posits that any penalty that exceeds the easily quantifiable benefits resulting directly from a securities law violation unfairly burdens the corporation’s shareholders. As I explained in March, this approach is flawed.

Corporate benefits are notoriously difficult to quantify. If we limit penalties to only those benefits that are easy to count, we will invariably undercount, leaving the corporation in a potentially better economic position for having committed the violation. That is precisely the wrong outcome to advance our goals of punishing misconduct and delivering effective specific and general deterrents. Paying a penalty cannot be just a cost of doing business.

And the imprecision of measuring corporate benefits is not just a result of complexity. Corporate defendants strategically release bad news in ways that dampen or obscure the market’s reaction. The resulting change in stock price therefore may not be an effective way to measure corporate benefits. Today’s enforcement action against The Kraft Heinz Company (“Kraft”) highlights this problem. In my view here’s why penalties should not be constrained by a mechanistic approach to corporate benefit:

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