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The SEC's $3.4 Billion Christmas Present to Itself

By Justin Loiseau – Dec 21, 2013 at 9:45AM

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These three companies contributed to the SEC's record-breaking $3.4 billion in sanctions for 2013. From oil spills to troublesome traders to Facebook's IPO fail, here are the losers that helped the SEC win big.

Schadenfreude is a German word that loosely translates to deriving pleasure from another's pain. Nothing could better describe the SEC's record-breaking $3.4 billion in fines it snagged from rule-breaking corporations. With individual sanctions and settlements in the hundreds of millions of dollars, here are three losers that helped the SEC win big.

1. BP

Source: National Institute for Occupational Safety and Health. 

The SEC is getting a lot of pleasure from BP's (BP 2.38%) pain. The commission collected a whopping $525 million from the energy company for misleading investors as its Deepwater Horizon oil rig was "gushing into the Gulf of Mexico." The severity of BP's understatement was extreme, with publicly available information indicating flow rates of just 5,000 barrels per day, while internal data pointed as high as 146,000.

BP's $525 million settlement is the third-largest penalty in SEC history -- and that's not an understatement .

2. JPMorgan Chase

Source: Wikimedia Commons, Steve Jurvetson. 

JPMorgan Chase(JPM -0.70%) supersized the SEC's schadenfreude. Along with a $200 million penalty, the investment company will ultimately dole out around $920 million globally for fibbing on its financial statements and overvaluing investments.

Two JPMorgan traders managed to chalk up an extra $660 million onto their company's Q1 pre-tax income. The "terrible two" are being charged criminally, but the SEC also slapped JPMorgan with major fines for failing to have proper preventative firewalls in place.

"JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses," said George Canellos, co-director of the SEC's Division of Enforcement. "While grappling with how to fix its internal control breakdowns, JPMorgan's senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company's problems and determine whether accurate and reliable information was being disclosed to investors and regulators."

Source: Wikimedia, ProducerMatthew

3. Nasdaq
Exchanges aren't excluded from the SEC's scrutiny, either. When
Nasdaq OMX Group (NDAQ -0.52%) botched Facebook's (META -4.27%) IPO, the SEC stepped in to slap the largest fine ever levied on an exchange. While $10 million is pennies compared with BP and JPMorgan Chase, it sends an important message that functional markets are essential to the investing world.

Facebook's IPO was touted as one of the biggest and most popular initial offerings of all time -- and Nasdaq OMX Group knew that. Dubbed "Code Blue," Nasdaq's senior leadership made the disastrous decision to go ahead with Facebook's IPO by removing a "few lines" of troublesome computer code. The result: More than 30,000 would-be Facebook investors saw their orders sit for more than two hours instead of being instantaneously executed or cancelled.

A bad year to be bad
The SEC's record-breaking $3.4 billion in fines beat last year's bounty by a solid 10%, even as the number of cases dropped from more than 730 for 2011 and 2012 to just 686 this year.

Looking ahead, the SEC doesn't seem set to let up. "We are focused on addressing wrongdoing in all corners of the financial industry," said co-director Canellos. "Going forward, we will continue to be aggressive but fair in our pursuit of those who violate the securities laws."

The SEC got its fair share of schadenfreude this year, and rule-breaking corporations shouldn't expect to feel any less pain in the years to come.

Fool contributor Justin Loiseau owns shares of Facebook. The Motley Fool recommends Facebook and owns shares of Facebook and JPMorgan Chase. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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