Introduction

During 2005, the Securities and Exchange Commission ("SEC" or the "Commission") filed 947 enforcement actions and obtained a record amount of more than $3 billion in penalties and disgorgement.[1] As in any given year, the vast majority of these cases were not litigated but filed as settlements.[2] In addition to money penalties and disgorgement, most SEC settlements levy "obey-the-law" injunctions--injunctions (or consent decrees) against future violations of securities laws in which a perpetrator agrees to "sin no more" or risk contempt of court--as a remedy. The injunction has been a "cornerstone" of the SEC's enforcement program since the Commission's founding in 1934.[3]

On August 10, 2005, the Eleventh Circuit challenged the Commission's use of injunctions in SEC v. Smyth, declaring in footnote 14 of its opinion--dictum[4]--that SEC obey-the-law injunctions are defective in some circumstances.[5] This Article argues that the Eleventh Circuit's footnote should not be regarded as precedential or accorded substantial weight by the courts, the SEC, or other affected parties. Besides the fact that it was improper for the circuit court to rule on an issue that was not presented on appeal or briefed by the parties, SEC obey-the-law injunctions do not violate the law. Contrary to the Eleventh Circuit's arguments in footnote 14 of Smyth, obey-the-law injunctions and consent decrees are consistent with the Federal Rules of Civil Procedure, the Due Process Clause of the Fifth Amendment, and the right to a jury trial guaranteed by the Seventh Amendment. The Eleventh Circuit's dictum does, however, raise a number of interesting questions about SEC obey-the-law injunctions, suggesting that a reexamination of this important enforcement tool is appropriate. If, as some commentators have suggested, SEC injunctions were limited only to the prevention of substantially identical fraudulent schemes, the SEC's duty to protect financial markets against fraud would be unduly restrained. But the Commission should consider voluntarily tweaking its future approach by creating obey-the-law injunctions with specific and demanding compliance terms, for both corporations and individual defendants.

Part I of this Article will outline the background of SEC v. Smyth and the history of obey-the-law injunctions as civil penalties. Part II will discuss the Eleventh Circuit's three principal legal arguments in footnote 14 against SEC obey-the-law injunctions. Part III addresses the Commission's future use of obey-the-law injunctions, and concludes that the SEC should not significantly alter its approach to injunctions but should include more specific and demanding compliance provisions with these orders.

I. History of SEC Injunctions and Background of Smyth

Since the founding of the Commission more than seventy years ago, the injunction has served as the SEC's most reliable enforcement tool. Part I.A discusses the history and development of the obey-the-law injunction and why the SEC continues to rely on this remedy even though it now has a host of other enforcement tools at its disposal. Part I.B will discuss the background and procedural history of SEC v. Smyth, in which the defendant consented to an obey-the-law injunction typical of many Commission settlements. Parts II and III discuss whether the Eleventh Circuit was correct to attack the Smyth case injunction and whether the court's footnote 14 should influence the SEC's future approach.

a. History of SEC Obey-the-Law Injunctions

From its earliest days, the SEC has had the power to seek injunctions to prevent ongoing and future violations of securities laws. Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act") empowers the Commission to seek permanent or temporary injunctions in federal court "whenever it shall appear to the Commission that any person is engaged or about to be engaged in acts or practices constituting a violation of any provision" of the Exchange Act or the rules of one of the self-regulatory agencies.[6] Section 20(b) of the Securities Act of 1933 ("Securities Act")[7], Section 42(d) of the Investment Company Act of 1940 ("Investment Company Act")[8], and Section 209(d) of the Investment Advisers Act of 1940 ("Investment Advisers Act")[9] provide the Commission with similar authorization.

Historically, an injunction was not only the Commission's most important form of relief but often its only option for a remedy.[10] From 1934, when the SEC was created, until 1984, when Congress passed the Insider Trading Sanctions Act ("ITSA"),[11] the primary tool available to the SEC Enforcement Division was an injunction. Prior to ITSA, the SEC's civil penalty authority was found in one very narrow provision of the Exchange Act, which permitted it to assess a penalty of $100 per day for the failure to file certain statutorily required reports.[12] The SEC had no other authority to seek, and the courts had no authority to impose, financial penalties in civil proceedings for violations of federal securities laws. Accordingly, the Commission's only legitimate power was to seek injunctions authorized by the Exchange Act, Securities Act, Investment Company Act, and the Investment Advisers Act, as well as judicially-compelled disgorgement of ill-gotten gains (or other forms of relief mandated by courts).[13]

Following a series of insider trading scandals in the early 1980s, Congress passed ITSA and empowered the SEC with retrospective relief provisions--specifically, the ability to obtain significant monetary penalties.[14] ITSA, the Securities Enforcement Remedies and Penny Stock Reform Act of 1990,[15] and the Sarbanes-Oxley Act of 2002 [16] have given the SEC a broad range of remedies. With the authority of these statutes, today the SEC may seek civil monetary penalties or disgorgement, bar or suspend an individual from serving as a corporate officer or director, or require audits, accounting for frauds, or special supervisory arrangements.[17] Nonetheless, the SEC continues to use the injunction as one of its principal enforcement tools[18] against both perpetrators of securities fraud and those who aid and abet violators of securities fraud because injunctions allow the Commission to sanction repeat offenders with contempt of court.[19] Defendants who disobey previous injunctions may be prosecuted for civil or criminal contempt,[20] which can result in civil monetary damages or criminal sanctions (i.e., imprisonment).[21] Prosecution for contempt is both easier for the Commission and potentially more troublesome for the violator because an individual has no constitutional right to an indictment prior to the trial of a criminal contempt charge,[22] may not have a right to a jury trial,[23] and, when a jury is empanelled, a contempt sanction can be more severe than a penalty imposed under the equivalent sections of the securities laws.[24]

The entry of an injunction can also have substantial collateral consequences for a defendant. The Supreme Court originally observed in SEC v. Capital Gains Research Bureau that Commission injunctions were only a "mild prophylactic,"[25] but in a more recent opinion Chief Justice Burger commented that injunctions in the securities field are, in fact, "a drastic remedy, not a mild prophylactic."[26] An SEC obey-the-law injunction is not just "a slap on the wrist" but can have far-reaching consequences.[27] Besides related civil and criminal penalties, an injunction can result in the "the loss of one's business or livelihood, the loss of benefits that would otherwise be available under the securities laws, and . . . the loss of personal and professional reputation."[28] An injunction, if material, must be disclosed in subsequent securities transactions, whether or not the disclosure is mandated by a specific statute or rule.[29] Whether through the press, a credit reporting agency, or simply by word of mouth, an injunction can cause serious harm to an individual.[30] In SEC v. Thermodynamics, for example, the Tenth Circuit pointed out several collateral consequences of an SEC injunction issued against a Securities Act violator:

The injunction appeared on his Dun and Bradstreet report, and he had to explain it to the people he did business with. There was evidence that the injunction may have hampered him in securing a line of credit from a local bank. It also prevented him from being considered for a place on a board of directors . . . . The appellant also testified that the presence of the injunction was a "mark" against him which he wanted to remove for family reasons. In one instance the injunction prevented him from making a Regulation A offering of stock in his corporation, and a waiver of the rule relating to injunctions against officers was sought but denied.[31]

Obey-the-law injunctions may also affect individual or company proceedings before federal agencies such as the Federal Communications Commission[32] and the Commodities Futures Trading Commission,[33] before regulatory agencies such as the National Association of Securities Dealers and New York Stock Exchange,[34] and under state securities proceedings as well.[35]

In ruling on SEC injunctive relief requests, a court may consider the collateral consequences of an injunction before consenting to its order.[36] Courts also take into account other factors including, but not limited to, the severity of the violation, the degree of scienter involved, the defendant's recognition of the wrongful nature of his conduct, and the defendant's sincerity in refraining from future violations. The Eleventh Circuit, for example, employs a multiprong test balancing "the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations." [37] Other circuit courts have articulated similar balancing tests.[38] Regardless of the specific test imposed, the SEC cannot obtain injunctive relief on a bare showing that a violation has been committed.[39] Injunctions are designed to be prophylactic, not punitive.[40] The fundamental purpose of SEC injunctions is to protect investors or the financial markets from future harm.[41]

The vast majority of SEC enforcement proceedings (over ninety percent), however, never make it to the courts.[42] Most SEC enforcement proceedings are settled--not litigated on the merits. Reasons for this high rate of settlement vary. From the subject's perspective, litigation itself (even if ultimately successful) can be expensive and create unwanted publicity.[43] A loss at trial may result not only in immediate sanctions but also in the defendant being collaterally estopped from relitigating related issues in subsequent private actions.[44] From the Commission's perspective, its staff is too small to try more than a fraction of the cases being investigated.[45] Settlements allow the SEC quick and easy victories without dedicating timely and expensive resources to investigation and litigation.[46]

In the settlement context, the Commission has developed a practice of seeking broad injunctions which generally forbid future violations of the statutes or regulations at issue rather than narrow injunctions which only forbid more of the specific conduct in which the violator had engaged. The Commission designs the orders to be as "sweeping"[47] and all-encompassing as possible so that recidivist offenders cannot evade the reach of obey-the-law injunctions through technical maneuvering. Broad obey-the-law injunctions have become the Commission's "non-negotiable" position, with the SEC insisting on these injunctions in virtually every settlement that includes an injunctive relief provision.[48]

b. Background of SEC v. Smyth

SEC v. Smyth arose out of a "relatively ordinary"[49] enforcement action in which defendants consented to the entry of an obey-the-law injunction by the SEC. In June 2001, the Commission filed a complaint in the Northern District of Georgia against three former officers and the outside auditor of Vista 2000, Inc., a consumer products company based in Roswell, Georgia.[50] The Commission charged the defendants with violations of federal securities laws, including the antifraud, periodic reporting, recordkeeping, and internal accounting control provisions.[51] The former outside auditor defaulted, and defendants entered into partial settlements with SEC in which they consented to disgorgement of ill-gotten gains, civil money penalties, and an Order of Permanent Injunction (i.e., an obey-the-law injunction) enjoining them from future violations of the securities laws cited in the SEC's complaint. They did, however, reserve the right to litigate the amount they would have to pay in disgorgement and monetary penalties.[52] The injunction was nearly identical to other recent SEC injunctions[53]--it simply tracked the general language of the statutes and rules alleged to have been violated, and ordered the defendants (along with others acting in concert with them or on their behalf) not to violate those statutes and rules again.[54]

One of the defendants, Arnold E. Johns, Jr., appealed, challenging the district court's failure to convene an evidentiary hearing prior to determining the amount of disgorgement.[55] On appeal, the Eleventh Circuit vacated the district court's order and remanded the case, holding that the court abused its discretion by entering judgment without holding an evidentiary hearing.[56] Although the enforceability of the consent injunction was not before the Eleventh Circuit and the court acknowledged the appealing defendant's voluntary consent to the injunction imposed by the district court, and thus his waiver to challenge the injunction on appeal, the court noted it "would be remiss" if it did not inform the district court that the injunctions it had issued in the case were "unenforceable."[57] In footnote 14 of the Smyth opinion, the court argued that these commonly-used injunctions violate Federal Rule of Civil Procedure Rule 65(d) because they are overbroad and nonspecific, that the orders violate a defendant's due process rights because they permit the SEC to bring a future case by filing a contempt proceeding in the district where the injunction was issued regardless of whether the defendant would otherwise be subject to personal jurisdiction in that district, and that a contempt proceeding resulting from an injunction denies the defendant the rights he or she would receive-- including the right to a jury trial guaranteed by the Seventh Amendment--if the SEC had to file a new case:

This Circuit has held repeatedly that "obey the law" injunctions are unenforceable . . . . The specificity requirement of Rule 65(d) is no mere technicality . . . . An injunction must be framed so that those enjoined know exactly what conduct the court has prohibited and what steps they must take to conform their conduct to the law . . . . By persuading the district court to sign the consent decree it presented pursuant to its stipulation with Johns, the SEC apparently is of the belief that the Due Process Clause would present no hurdle to the enforcement of the injunction it has obtained . . . . The SEC is also apparently of the belief that the Rules of Civil Procedure would have little application in a contempt proceeding . . . not to mention [the defendant's] Seventh Amendment right to a trial by jury. [58]

On September 22, 2005, the SEC petitioned the Eleventh Circuit to remove footnote 14 from its opinion because the remedy--obey-the-law injunctions--was never presented to the court or briefed by the parties.[59] As the Commission argued, the issue should not have been summarily resolved without allowing the SEC an opportunity to present its position. Footnote 14 could have the effect of unfairly "casting a shadow" over all the general practice of SEC obey-the-law injunctions.[60] Aside from this procedural consideration, the SEC attempted to refute the Eleventh Circuit's argument against the enforceability of obey-the-law injunctions by addressing the merits of the court's claim, arguing that the Smyth defendants consented to the injunction imposed and suggesting that the Commission had acted based on the public interest.[61] Despite the Commission's concerns, the Eleventh Circuit denied the Commission's request to delete footnote 14.[62]

II. Eleventh Circuit's Concerns Are Not Compelling

The Eleventh Circuit presented three main vulnerabilities in the SEC's practice of entering broad obey-the-law injunctions: (1) Obey-the-law injunctions violate the specificity requirement of Federal Rule of Civil Procedure Rule 65(d); (2) contempt proceedings resulting from obey-the-law injunctions violate a defendant's due process right to personal jurisdiction; and (3) contempt proceedings resulting from injunctions violate the right to trial by jury. This section argues that the court's concerns are not compelling. Part II.A outlines the Smyth court's arguments pertaining to Rule 65(d) and the counterarguments briefed to the court by the SEC. Part II.B will discuss the court's argument that SEC obey-the-law injunctions violate in personam jurisdiction, and Part II.C will address the contention that injunctions can violate the Seventh Amendment jury trial right.

a. Rule 65(d) Specificity Requirement

In the Smyth settlement, as in most SEC enforcement settlements, the Commission demanded, and the defendants consented to, an injunction with boilerplate language that reached almost any future securities law violations.[63] The Eleventh Circuit argued such injunctions that "track the provisions of the statute or regulation the violation of which is enjoined" are too broad and thus violate the specificity requirement of Rule 65(d) of the Federal Rules of Civil Procedure.[64] Under Rule 65(d), an injunctive order must be "specific in terms" and "describe in reasonable detail . . . the act or acts sought to be restrained . . . ."[65] Civil injunctions must apprise a party enjoined of the conduct that will risk contempt so as to protect those who are enjoined by informing them of what they must do or refrain from doing in order to comply with the injunction.[66] The specificity requirement also facilitates appellate review because an appellate court cannot assess the correctness of a district court's judgment without knowing its precise bounds.[67] The Eleventh Circuit, citing Rule 65(d), noted, "[a]n injunction must be framed so that those enjoined know exactly what conduct the court has prohibited and what steps they must take to conform their conduct to the law."[68] The court argued that it has "held repeatedly that 'obey-the-law' injunctions are unenforceable" when they do not conform to the specificity requirement.[69] The specificity requirement is not a mere technicality--"the command of specificity is a reflection of the seriousness of the consequences which may flow from a violation of an injunctive order."[70] The SEC's injunction in Smyth would deny the defendants the clarity that Rule 65(d) demands since the terms of the injunction "reach any violation of the securities laws and regulations . . . ."[71]

In response to the Eleventh Circuit's Rule 65(d) contention in the Smyth footnote, the SEC argued that the defendants, represented by counsel, had expressly consented to the injunctive provision contained in the consent decree and thereby waived their rights under Rule 65(d). Paragraph 13 of the defendant's official consent decree contained the following unambiguous language: "Defendant . . . agrees that he will not oppose the enforcement of the Order of Permanent Injunction on the ground that it fails to comply with Rule 65(d) of the Federal Rules of Civil Procedure, and hereby waves any objection based thereon."[72] As the Commission noted, case law from the Supreme Court, the Eleventh Circuit, as well other circuit courts, supports the notion that "protections provided by Rule 65(d), like most rights and protections, are subject to waiver."[73] For example, in Combs v. Ryan's Coal Co., in which appellants challenged a civil contempt judgment on the ground that it violated Rule 65(d), the Eleventh Circuit concluded that the specificity requirement was indeed waivable:

[A]t no time before the trial court did appellants ever complain about the adequacy of the consent decree which they themselves helped to craft. They made no attempt to request more specific language; they chose not to exercise their right to the usual remedy for inadequacies of this sort: a motion for clarification or modification of the consent decree. At this point any possible objection they might have to the decree is stale.[74]

The Supreme Court has similarly found that the Rule 65(d) specificity requirement can be waived.[75] As the Commission argued in its petition to the Eleventh Circuit, Rule 65(d) "is not jurisdictional, in the sense that an injunction that does not comply with its requirements is a nullity even where no party has objected to it."[76] Rule 65(d) creates a right for a party to insist on specificity, but the defendant can give up that right by choice.

Second, the SEC argued in its petition that the Smyth footnote incorrectly suggested "injunctions that track the language of the relevant legal provision are per se invalid" because they are too vague and thus violate Rule 65(d).[77] In fact, the Supreme Court, the Eleventh Circuit, and other circuit courts have held that there is no "absolute bar" against injunctions that track statutory language.[78] In McComb v. Jacksonville Paper Co., for example, in considering a decree that tracked the language of the Fair Labor Standards Act and "enjoined any practices which were violations of those statutory provisions," the Supreme Court concluded that "[d]ecrees of that generality are often necessary to prevent further violations where a proclivity for unlawful conduct has been shown."[79] Citing to a prior Eleventh Circuit decision, the SEC pointed to an opinion by Judge Gerald Tjoflat--the author of the Smyth opinion and its footnote[80]--holding that injunctions "that order the defendant essentially to do nothing more than obey the securities laws" are indeed "permissible."[81] Although an injunction's validity depends "at least in part on the breadth of the relevant statutory language,"[82] an injunction with boilerplate language can still fairly apprise a party enjoined of the precise conduct that will risk contempt, Judge Tjoflat wrote.

Finally, the Commission argued that injunctions tracking statutory language do not violate Rule 65(d)'s specificity requirement because the Commission, as a government agency charged with regulating the securities industry, is given special authority. That is, SEC injunctions are allowed to be broad and sweeping in scope because of the "public law nature" of SEC activities and thus should be given deferential treatment relative to Rule 65(d).[83] The Fifth Circuit has acknowledged "broader authority accorded administrative agencies in their effort to enforce administrative schemes of regulation."[84] Similarly, the Seventh Circuit held that "[t]he broad framework of the injunction in this case is particularly appropriate because of the public interest involved and the necessity of protecting the investing public from fraud and deceit." [85] Indeed, courts have long recognized that injunctions sought by government agencies are permitted to be of greater breadth than those sought by private litigants. SEC obey-the-law injunctions receive a degree of deference because, unlike private litigants, the Commission acts on the basis of public interest in furtherance of its statutory charge to regulate the securities industry.

In its petition to the Eleventh Circuit defending obey-the-law injunctions against the court's specificity argument, the SEC failed to acknowledge that other courts--including the Supreme Court--have shown signs of being less than completely comfortable with obey-the-law injunctions due to their lack of specificity.[86] In the context of the National Labor Relations Act, the Supreme Court held that "the mere fact that a court has found that a defendant has committed an act in violation of a statute does not justify an injunction broadly to obey the statute and thus subject the defendant to contempt proceedings if he shall at any time in the future commit some new violation unlike and related to that with which he was originally charged."[87] In other words, injunctive power extends only to activities that a court "can both anticipate and specifically describe."[88] Boilerplate injunctions that track broad statutory provisions may not meet this requirement. Many precedents have upheld SEC obey-the-law injunctions framed in terms of statutory language,[89] but other precedents strictly adhere to the specificity requirements of Rule 65(d). For example, in the D.C. Circuit's decision in SEC v. Savoy Industries, that court struck from an injunction at-issue language that tracked Section 17(a) of the Securities Act.[90]

Although some courts have expressed concerns with the generality of obey-the-law injunctions, the practice under the authority of the SEC has received broad approval in many other jurisdictions. The Second Circuit concluded that there "can be no abuse of discretion in framing an injunction in terms of the specific statutory provision which the court concludes has been violated."[91] That circuit court approved a district court decision to frame an injunction "in language virtually identical to that of Rule 10b-5."[92] Similarly, the D.C. Circuit, in the context of a cease and desist order, ruled out "any requirement on the part of the Commission to tailor its order more narrowly to the specific types of violations of the provisions involved."[93] The court reasoned that the SEC had broad authority "to curb a wider range of securities violations in an effort to combat recidivism," and limiting injunctive orders to "copy-cat violations" would undercut this purpose.[94] The D.C. Circuit observed that quoted regulations in an injunction--however broad--provide sufficient guidance for a defendant, and that, if necessary, the defendant can always seek clarification from the SEC.[95]

The Eleventh Circuit failed to balance the specificity requirements for injunctions with the right of a defendant to waive the specificity requirements of Rule 65(d). In Smyth, the defendant consented to entry of an injunction tracking language of the statute that he was alleged to have violated and expressly waived his rights under Rule 65(d).[96] Such a waiver renders enforceable what may otherwise be an unenforceable order.[97] Indeed, an injunction that does not comply with Rule 65(d) is not a nullity per se when no party objects to its lack of specificity. Courts have consistently upheld SEC injunctions framed in terms of statutory language, and SEC injunctions, particularly because the Commission has the special duty to regulate the securities industry on the public's behalf. There is a long history of case law to support the proposition that the Rule 65(d) specificity requirement is waivable, as the SEC's petition to the Eleventh Circuit made clear.[98] The Eleventh Circuit's suggestion that SEC obey-the-law injunctions are a nonwaivable exception and should receive special treatment from courts is unpersuasive.

b. Due Process Right to Personal Jurisdiction

In addition to its Rule 65(d)-based specificity objection to obey-the-law injunctions, the Eleventh Circuit argued that these orders violate a defendant's due process right to personal jurisdiction.[99] Injunctions issued by the Commission reach any future violation of securities laws, no matter where the violation has occurred.[100] When an injunction is broad enough to cover later conduct unrelated to the conduct that sparked the injunction, a defendant can still be dragged into a contempt proceeding.[101] The court that issued the original injunction simply has to issue a show-cause order on the SEC's contempt motion and convene a hearing to permit the defendant a chance to rebut its proof. [102] The SEC could thus hold an individual in contempt for a future violation in a federal district in which the due process clause would bar prosecution of an independent suit.[103] Following the Eleventh Circuit's logic, in personam jurisdiction would be lacking as a defendant could be sanctioned for violating a crime in a district in which he/she has no presence.[104] To hold a defendant in contempt for infractions related to obey-the-law injunctions when personal jurisdiction is lacking violates due process.[105] The SEC does not have the unique ability to waive the Constitution's jurisdictional requirements. Indeed, the securities laws only "permit[] the exercise of personal jurisdiction to the limit of the Due Process Clause of the Fifth Amendment."[106]

The Eleventh Circuit's jurisdictional concern with obey-the-law injunctions would be legitimate if these orders were only a license for the SEC to bring a separate case in a jurisdiction with no other connection to the subsequent violation. But the court failed to recognize that SEC injunctions and consent decrees preserve the connection between two infractions by demanding that the defendant consent to the continuing jurisdiction of the original trial court. SEC injunctions almost uniformly stipulate that a defendant waive the procedural due process right to personal jurisdiction for future securities law violations.[107] The Eleventh Circuit failed to balance its concern for this procedural due process right with the fact that, if an individual voluntarily, knowingly, and expressly consents to the jurisdiction of a court over him, the right to in personam jurisdiction is waived.

Fundamentally, personal jurisdiction is a "waivable right."[108] As the Supreme Court held in Burger King Corp. v. Rudzewicz, "there are a 'variety of legal arrangements' by which a litigant may give 'express or implied consent' to the personal jurisdiction of the court":

For example, particularly in the commercial context, parties frequently stipulate in advance to submit their controversies for resolution within a particular jurisdiction. Where such forum-selection provisions have been obtained through "freely negotiated" agreements and are not "unreasonable and unjust," their enforcement does not offend due process.[109]

Federal Rule of Civil Procedure 65(d) also demands that a defendant have "actual notice" of a waiver of personal jurisdiction for the waiver to be binding.[110] Although there is no clear test for determining what qualifies as "express or implied consent" under the Burger King standard or "actual notice" under Rule 65(d), there can be little doubt that express consent by a defendant to a consent degree that is "freely negotiated" with the SEC would satisfy both rules.[111] In the Smyth case, for example, defendants consented to an Order of Permanent Injunction which enjoined them from disobeying any of the securities laws cited in the SEC complaint and specifically stipulated that they "admitted the in personam jurisdiction of"[112] the Northern District of Georgia (the trial court) which "retain[ed] jurisdiction over this matter for all purposes . . . ."[113] The jurisdictional waiver was clear and unequivocal. The Smyth defendants were represented by counsel and consented to an injunction that contained an obvious waiver of personal jurisdiction. Thus there can be little doubt that their waiver would satisfy the standard provided by Supreme Court and Rule 65(d).

Almost all SEC obey-the-law injunctions contain language similar to the order in the Smyth case requiring that defendants consent to the jurisdiction of the court over them.[114] Assuming proper notice and consent, individuals burdened with obey-the-law injunctions agree to specific jurisdictional provisions, thereby waiving the right to personal jurisdiction that would exist in a separate suit. [115] Once this consent to continuing jurisdiction of the trial court is entered it applies to future securities law violations regardless of whether that jurisdiction would be appropriate under independent circumstances. Although the Eleventh Circuit correctly recognized that obey-the-law injunctions can create procedural due process concerns, the court's footnote 14 failed to recognize that the right to personal jurisdiction was waived in the Smyth case and that jurisdictional waivers are standard practice for SEC obey-the-law injunctions. Open, equitably negotiated settlements between the Commission, securities law violators, and their respective counsel satisfy the standard for waiver of personal jurisdiction.

c. Right to Jury Trial

The Smyth footnote suggested a third major problem with obey-the-law injunctions: Contempt proceedings resulting from an injunction may violate the Seventh Amendment right to trial by jury. As the Eleventh Circuit argued, "[t]he SEC is also apparently of the belief that the Rules of Civil Procedure would have little application in contempt proceeding . . . not to mention [defendant's] right to a trial by jury."[116] The court hinted that it may be improper for a district court to hold a contempt hearing without affording a defendant "his rights under the Rules, including . . . a jury trial of the issues the SEC would ordinarily submit to a jury were the SEC to sue . . . in a separate action rather than seek enforcement of the injunction . . . ."[117] If the SEC held a defendant in contempt for future violations of a securities law pursuant to an injunction, that individual could be deprived of his jury trial right--a right to which he would be entitled in an independent suit on the same matter--in the ensuing contempt proceeding.

The Eleventh Circuit's view that a jury trial is required for a contempt proceeding resulting from an SEC obey-the-law injunction is unconvincing because contempt sanctions are few in number compared to the total number of actions in which the Commission seeks injunctive relief. In 2004, for example, the SEC filed twenty-one contempt proceedings for violations of prior injunctions, representing only 3% of the Commission's 639 enforcement actions.[118] SEC actions to enforce injunctions are increasingly rare[119] as "the [C]ommission usually chooses to address new enforcement issues with a new enforcement action."[120]

More importantly, although Federal Rule of Criminal Procedure 42(a) does provide for jury trials in certain criminal contempt proceedings,[121] the right to jury trial in criminal contempt proceedings is not absolute.[122] The Supreme Court has held that when a criminal offense is classified as "petty" (i.e., punishable by up to six months in prison), there is no constitutional right to jury trial,[123] thus SEC contempt proceedings involving sentences of six months or less do not demand that a jury be convened. Some courts have held that SEC criminal contempt defendants cannot be sentenced to a period of confinement longer than six months without a jury trial,[124] but a defendant guilty of violating an SEC injunction can be given a suspended sentence and placed on probation for three years without a jury trial.[125] The contempt penalty imposed determines whether a defendant is entitled to a jury trial. Based on penalty criteria alone, in many cases an SEC obey-the-law injunction contemnor is not entitled to a jury trial.

The Eleventh Circuit also failed to recognize an important statutory exemption. 18 U.S.C. § 3691 mirrors Federal Rule of Criminal Procedure 42(b) by outlining the right to jury trial in contempt proceedings but it also provides for the following important exception: "This section shall not apply . . . to contempts committed in disobedience of any lawful writ, process, order, rule, decree, or command entered in any suit or action brought or prosecuted in the name of, or on behalf of, the United States."[126] SEC injunctions qualify for this statutory exemption. An SEC criminal contempt proceeding can properly be brought "in the name of, or on behalf of, the United States"[127] even if the related injunction was obtained by the Commission.[128] Thus, even when the Commission seeks a contempt penalty for an offense that does not qualify as petty and necessitates incarceration of more than six months, the Commission is not required to conform to the requirements of the Seventh Amendment. The Eleventh Circuit incorrectly suggested that there is an absolute right to jury trial in criminal contempt proceedings resulting from SEC obey-the-law injunctions.

The claim that a jury trial is required for a civil contempt proceeding resulting from an SEC obey-the-law injunction is similarly unavailing because civil contempt penalties are remedial, not punitive.[129] A civil contempt proceeding can result from SEC obey-the-law injunctions when, for example, an injunction is limited to "compliance with filing requirements or orders the production of records" without prohibiting the defendant from engaging in certain types of illegal conduct going forward.[130] Because of the Commission's tendency to include prospective language in its injunctions that tracks the language of statutes or rules and prohibits future violations, civil contempt proceedings resulting from SEC obey-the-law injunctions are very rare.[131] More importantly, because civil contempt sanctions are "considered to be coercive and avoidable through obedience, and thus may be imposed in ordinary civil proceeding upon notice and opportunity to be heard," jury trials are not required.[132] Civil sanctions are designed only to enforce compliance with the order and are lifted as soon as there is compliance. In a case of criminal contempt a judge can assess a nonpetty penalty for failure to comply with an order, but in the civil arena the extent of the penalty completely depends on cooperation of the violator.

Thus, although the defendant in the Smyth case did not specifically waive his right to jury trial in a consent decree, and SEC obey-the-law injunctions normally do not demand this waiver, the Eleventh Circuit's footnote incorrectly suggested that Commission injunctions violate the right to jury trial. On the rare occasion that the SEC does pursue civil or criminal contempt resulting from violation of one of its orders, the right to jury trial does not apply.

III. The SEC Need Not Remake Its Injunctive Practice

The Eleventh Circuit's concerns about the enforceability of obey-the-law injunctions are unconvincing. The court's misguided footnote should not be allowed to restrain the Commission from preventing market fraud. Footnote 14 is not, however, irrelevant. As Part III will discuss, although the SEC is under no duty to follow the Eleventh Circuit's dictum, the Commission should voluntarily temper its approach to obey-the-law injunctions in some circumstances. The SEC should only alter its practice of issuing broad obey-the-law injunctions to the extent that it does not dilute the effectiveness of its enforcement practice, but it should consider incorporating more specific and demanding compliance provisions in these orders. Part III.A will briefly discuss why the Eleventh Circuit's dictum should not be regarded as precedential or accorded substantial weight by other courts, and Part III.B will consider possible revisions to SEC obey-the-law injunctions.

a. Eleventh Circuit's Footnote Does Not Bind the SEC

As discussed in Part II, the analysis presented by the Eleventh Circuit in Smyth footnote 14 is unpersuasive. SEC injunctions do not violate the Rule 65(d) specificity requirement, procedural due process rights, or the right to jury trial. The court failed to recognize that these rights can be, and in some cases are, explicitly waived in SEC injunctions and consent decrees, and that the waiver of these rights is both acceptable and proper. These arguments are particularly less-than-persuasive considering the context in which they were raised: The court placed them in the footnote of a decision on an unrelated securities law matter without giving the Commission a chance to brief or address the merits of the issues in any way.[133]

Furthermore, the Eleventh Circuit's attack on obey-the-law injunctions is difficult to reconcile with an earlier decision by the same court reversing, as an abuse of discretion, a district court's denial of such an injunction. In SEC v. Ginsburg, the district court refused to permanently enjoin a corporate principal from future Exchange Act violations after a jury found him liable for communicating information about pending acquisitions by his company to family members, but the Eleventh Circuit reversed, holding that the SEC need only show a reasonable likelihood that the defendant would violate the securities laws in the future to be entitled to injunctive relief.[134] Contrasting the Ginsburg and Smyth decisions leaves the Eleventh Circuit--which, along with the Second Circuit, hears more securities-related cases with the government as the plaintiff than any other circuit court[135]--with confused precedent regarding the enforceability of the SEC's use of injunctions.

The Eleventh Circuit's dictum is nonbinding and should be ignored by other federal courts. Obey-the-law injunctions constitute an important and indispensable enforcement tool for the SEC which the court's footnote does not and should not destroy. Unlike disgorgement, penalties, suspensions, and other forms of ancillary relief, injunctions are prophylactic and prospective, and thus a key element in the Commission's enforcement arsenal.[136] Potential criminal sanctions for future violations of obey-the-law injunctions, in particular, provide a powerful deterrent to violators of securities laws. The Eleventh Circuit's dictum should not be allowed to dilute the validity of this important sanction or retrospectively render unenforceable past SEC injunctions.

b. Future Commission Injunctions

Footnote 14 provides an opportunity for the Commission to reexamine its practice of issuing obey-the-law injunctions and consent decrees containing sweeping language. The Eleventh Circuit was off-base to suggest that obey-the-law injunctions violate the rights to personal jurisdiction and jury trial, and this criticism should largely be ignored. The court's point about the need for SEC injunctions to conform to the specificity requirement of Rule 65(d), however, although technically incorrect, is worthy of further examination. Commentators have suggested that injunctions more specific in scope may provide a more efficient enforcement tool for the SEC. [137] Indeed, the Commission should be aware that further challenges to obey-the-law injunctions citing similar problems lurk on the landscape and, as a result, may want to include more demanding compliance provisions (e.g., requiring outside monitors or consultants and internal governance reforms), for both corporations and individuals, in these orders. Demanding compliance terms coupled with injunctions broadly prohibiting future conduct would serve two main functions: (1) mitigating specificity concerns (i.e., concerns that broad injunctions do not sufficiently pinpoint what conduct is and is not prohibited in the future) by providing a blueprint for what exactly a defendant must do in order to remain in compliance with the injunction; [138] and (2) providing increased insurance against recidivism (i.e., solidifying the intended prophylactic effect of the injunction).[139] Required outside monitors and consultants as well as internal governance reforms would serve as a check against future fraudulent conduct and as a roadmap for convicted offenders.

Critics have suggested that mechanical requests for obey-the-law injunctions with sweeping language by the SEC have become so routine that the Commission risks diluting the force of its statutory authority.[140] The text of the Exchange Act specifically limits the circumstances in which the SEC may seek an injunction: "Whenever it shall appear to the Commission that any person is engaged or is about to engage" in a violation of federal securities law.[141] A plain reading of the statute implies that injunctions should be allowed only when unlawful conduct is ongoing or imminent, but--particularly in settlements--the SEC frequently seeks and obtains injunctions after violations have ceased.[142] The SEC's unselective approach to injunction issuance "arguably stretches the statute to the point of contradiction, doing no credit to either the Commission or the courts that have facilitated requests for injunctions in marginal cases."[143] If the SEC continues to push the limits of its power to seek injunctions, the Commission not only opens itself up to attacks similar to the Smyth footnote but risks undermining the influence of obey-the-law injunctions in general.

In addition, critics have suggested that if the Commission molds its injunctions to the conduct at issue rather than mechanically copying and pasting broad language from the securities laws into these orders, the SEC's likelihood of achieving early settlements could improve.[144] In settlement negotiations, defendants are often willing to accept ancillary relief in the form of penalties and disgorgement, but the collateral consequences of injunctions, which have the potential to destroy a professional's source of livelihood,[145] can leave defendants no choice other than to litigate an SEC action which seeks to impose injunctive relief.[146] Obey-the-law injunctions can indeed be "a drastic remedy, not a mild prophylactic."[147] Unless cases involve ongoing misconduct and demonstrate a chance of recidivism, it may be more efficient for the SEC to either forgo injunctive relief or at least be flexible in negotiating the terms of its injunctions than to continue to insist on sweeping injunctive provisions. A flexible approach to injunctions, geared toward achieving a higher rate of settlement, could allow the Commission to more efficiently use its very limited staff and budgetary resources, thus enhancing its ability to fight securities law infractions.

Although broad injunctions with boilerplate language are imperfect, the alternative of limited, custom-tailored injunctions and consent decrees would dilute the effectiveness of the Commission's enforcement regime and hinder the SEC's ability to fight securities fraud. Injunctive relief may result in significant collateral damage to individuals,[148] but injunctions are a crucial enforcement mechanism for the Commission. The breadth and generality of the SEC injunction is the foundation of its power. Such broad orders might be unjustified in circumstances when a defendant's actions are isolated or when there is less concern that the defendant will engage in ongoing violations, but in most situations the Commission should continue to insist on broad injunctions because a practice of specific injunctions and decrees would limit the SEC's ability to curtail recidivism and weaken its most powerful sanction--criminal contempt.[149] Especially in the wake of the largest investment frauds in the history of the capital markets--Enron, WorldCom, Tyco, Adelphia, and HealthSouth to name just a few--"the need for a strong, direct response is evident, and the Commission's aggressive attitude toward the protection of the public is generally commendable."[150] The SEC depends on obey-the-law injunctions to vigorously enforce the securities laws, and the Smyth footnote should not serve as a roadblock to its continued enforcement of these regulations.

The Commission should not, however, dismiss suggestions by the Eleventh Circuit and legal commentators that obey-the-law injunctions be curtailed. The SEC does need to be more agile and creative when implementing injunctions. It should not just blindly rubber stamp all settlements with broad obey-the-law injunctions as it does today. The SEC must be aware of the changing landscape in the obey-the-law injunction arena and should anticipate future opinions from other courts as well as challenges from practitioners similar to the Eleventh Circuit dictum.

The Commission should consider changing its approach to obey-the-law injunctions by issuing specific, demanding compliance provisions along with these orders. The broad language itself of obey-the-law injunctions is not a problem, but the fact that convicted defendants--whether individuals or corporations--don't know what future conduct obey-the-law injunctions prohibit is. If obey-the-law injunctions came with more demanding compliance provisions, concerns about specificity would be mitigated and the prophylactic goals of these injunctions would be cemented as well.

In a series of recent cases involving "market-timing"[151] in the mutual fund industry, the Commission included more demanding compliance terms in its settlements.[152] In a market-timing case involving Banc of America Capital Management, for example, the Commission required the defendant to hire an independent compliance consultant in order to ensure that the company would not continue to engage in market-timing.[153] In a similar market-timing investigation involving Columbia Management Advisors, the SEC required that company not only to hire an independent compliance consultant but also to create an internal compliance and oversight infrastructure, including new ethics and controls committees.[154] Although the Commission did not demand that defendants consent to obey-the-law injunctions in addition to these compliance provisions in the mutual fund market-timing cases, it could apply a similar model and demand compliance terms such as monitors, consultants, and governance reforms in cases when it seeks injunctive relief. This approach would not be limited to corporate defendants. An individual investor could be required to have oversight of his trading or the process by which his investments are made, for example, or a rogue broker could be required to put in place supervisory or compliance procedures at a future employer.

Although it seems unlikely that the SEC will significantly revamp its use of all-encompassing injunctions in view of its long-established reliance on this approach,[155] in the wake of Smyth, the Commission should heed the advice of some critics and consider altering its approach to obey-the-law injunctions. The SEC should not overhaul its practice of issuing broad injunctions because a consistent tendency toward narrow injunctions would undermine the Commission's ability to provide a strong deterrent against egregious conduct, but injunctions combined with demanding compliance terms would provide a better tool for the Commission--one that would be better for defendants seeking increased guidance on their future conduct and would strengthen the SEC's power to prophylactically prevent further misconduct. Broad obey-the-law injunctions remain a crucial component of the Commission's enforcement program for fighting determined and committed fraudsters, but with demanding compliance terms included in the bargain both the efficiency and effectiveness of these injunctions would be improved, and the fraud prevention goals of the Enforcement Division would not suffer as a result.

Conclusion

The obey-the-law injunction is a "statutory mechanism that seeks to lock the barn door in good time."[156] These injunctions provide the SEC with a form of relief that stops violators of securities laws "dead in their tracks."[157] In Smyth, the Eleventh Circuit reasoned unpersuasively that the SEC's obey-the-law injunctions can be defective. Obey-the-law injunctions are consistent with the Federal Rules of Civil Procedure, the Due Process Clause of the Fifth Amendment, and the right to a jury trial guaranteed by the Seventh Amendment. The SEC has enhanced authority relating to its injunctive powers and related contempt proceedings. Congress explicitly authorized the Commission's enforcement of federal securities laws via injunction in the Exchange Act, and courts have recognized that injunctions sought by government agencies are permitted to be of greater breadth than those sought by private litigants in order to protect the public good. The SEC must be vigilant to ensure that it does not overstep its legitimate role and visit unwarranted or gratuitous sanctions on enforcement targets, but the Smyth footnote is nonbinding and should be ignored by other courts.

Although obey-the-law injunctions are a crucial, well-established enforcement tool for the SEC, the application of which should be continued, the Eleventh Circuit's dictum does serve as an opportunity for the Commission voluntarily to reassess its longstanding practice of commonly seeking obey-the-law injunctions. Legal pundits have argued that the practice of insisting on these injunctions as the Commission's "non-negotiable"[158] position and tracking the language of the injunctions to broad statutory provisions may be "anachronistic,"[159] a remnant of a bygone era when the SEC did not have a broad repertoire of remedies at its disposal. If the SEC followed the advice of these critics and limited its injunctions to the prevention of substantially identical schemes, the agency's crucial job of protecting the financial markets against fraud would be restrained. Dedicated fraudsters could maneuver from one technical violation to another without risking contempt and resulting criminal sanctions. Indeed, narrowing injunctions to specific conduct undermines the prophylactic rationale for having obey-the-law injunctions in the first place. However, even though the legal arguments against injunctions are not compelling, the Smyth footnote serves as an opportunity for the Commission to add rigor and specificity to its injunctive practice. The SEC should consider accompanying obey-the-law injunctions for both corporate and individual defendants with demanding compliance terms. Such provisions would provide clarity and specificity to defendants and create greater assurance for the Commission that the terms of an injunction would be followed. The obey-the-law injunction should continue to be a cornerstone of the SEC Enforcement Division's practice in the future, but slight modifications would improve the injunction's efficiency and effectiveness.