First, the kerfuffle surrounding the Citi matter has wholly obfuscated the SEC staff’s achievement. Understand that these structured products cases are extremely complicated. Even when assisted by whistleblowers, the facts do not leap off the page. It takes a substantial amount of intelligent work to distinguish between the good cases and the junk that is also being sent into the SEC from well-intentioned but less focused whistleblowers. Having done that, it takes a lot more intelligent work to identify the key documents and elicit the testimony necessary to establish that one sophisticated party tricked another sophisticated party into going long on an investment that was being stacked with strategically chosen bad assets. All of this appears to have been lost on Judge Rakoff and commentators, who have focused solely on the SEC’s supposed failures in this matter. It seems unfortunate that a significant case bringing almost $300 million in financial relief from the defendant has drawn only condemnation from observers.
Second, some suggest that the SEC should blow up its current model, worry less about the numbers of cases it can bring, and get maximum deterrent value by essentially destroying a few key players in the financial industry. It’s not a crazy position, but I don’t think it ultimately works. If the scope of the SEC’s responsibilities were more like, say, that of the IRS, I might be more persuaded. The IRS has the luxury of being able to focus on a relatively narrow field. Tax law is obviously quite complex, but there are only so many ways for regular individuals to evade paying one’s income taxes. Bringing a few harsh and well-placed enforcement actions in that area can have a great scare effect for taxpayers all over the country. But one can violate the federal securities laws in an almost infinite variety of ways. I am not at all convinced that shutting down Citigroup and making an extreme example out of it will do much to deter would-be insider traders, or FCPA violators, or naked short sellers. I think the field is just too broad to get the deterrent value some people might expect if the SEC went that route.