More imaginative penalties are needed

Constructing appropriate penalties for violation of the commodities laws in no easy undertaking.  Entities that can do the most damage to the economy are often "too big to fail/too big to jail."  Fines in the hundreds of millions of dollars may be the equivalent of a traffic ticket -- as U.S. District Judge Jed Rakoff has noted.  On the other hand, fines of a ruinous amount inflict punishment on a broad swath of the investing public and could have adverse impacts on entire markets.  But to limit the range of possible sanctions to monetary penalties takes too narrow an approach in my view.

The law of equity has a wide range of remedies, developed over centuries of dealing with novel situations.  At the top end of the spectrum is the imposition of a receivership.  This is a truly draconian step, in which the receiver -- an officer of the court -- actually takes control of the entity in question.  This remedy is unlikely to be feasible when a wrongdoer is still a going concern, but has, of course, been widely used when the entity has failed.  Less aggressive measures include the appointment of a party with special powers tailored to the problems to be corrected.  These parties are often referred to as private inspectors general, monitors, or consultants.  Such a party might be empowered to conduct periodic audits of financial transactions, review the structure of an organization and recommend changes, assure compliance with court-ordered conditions, make reports to parties in interest, and the like.  At the lower end of the spectrum, a wrongdoer might agree to the use of a third party simply to verify its compliance with the conditions of a settlement.

The use of flexible, third-party involvement in the operation of a company or in assuring compliance with the requirements of a court order or settlement agreement is not novel -- the Department of Justice has used mechanisms of this sort for years in the criminal prosecution of corporations.  The key is to assure that the scope of the powers of the third party is sufficiently broad to give the monitorship real teeth and yet not so intrusive as to be counterproductive.

Use of a sanction of this type would help address the chronic lack of resources available to regulators, because the wrongdoer bears the expense of the monitor.  Non-monetary sanctions are also rebarbative to entities who must host the third party and so may incentivize them to more carefully obey the law.

These suggestions are just that -- the ultimate point is that monetary sanctions, by themselves, are not adequate to deal with the complexities of modern market regulation.  Regulators should use a much broader range of remedies if they are to make any meaningful progress in policing the commodities markets.  Your further suggestions would be greatly appreciated.