I almost feel sorry for Mary Jo White, the Chairman of the SEC, and Andrew Ceresney and George Canellos, soon to be Co-Directors of the SEC’s Division of Enforcement. Four days after Ms. White was sworn in, Gretchen Morgenson of the New York Times was reminding Ms White on page one of the Times’ Sunday Business Section that time was running out on the SEC’s ability to bring cases based on “questionable practices and disclosures arising from the mortgage bust of 2008.” See Gretchen Morgenson, Note to New S.E.C. Chief: The Clock is Ticking, NY Times Sunday Business, April 14, 2013. Somehow, I tend to believe that Ms. White didn’t need reminding.
So as Ms. White, Mr. Ceresney and Mr. Canellos begin their great journey together to enforce the securities laws, I congratulate them on their appointment and admire them for having the courage to take important jobs where, no matter what they do, they will be subjected to criticism. For it is a certainty that no matter what they do, some people will claim that they were too aggressive and others will claim that they were not aggressive enough. However, before they even start down their new path together, it is worth considering how to measure the success or failure of the SEC’s Division of Enforcement more generally. Here are some suggestions, in order of importance.
Was the Division of Enforcement run scrupulously and ethically? Based on their histories, Ms. White, Mr. Ceresney and Mr. Canellos’ ethics cannot be questioned. And it is certain that they will set the proper tone from the top down. However, one scandal involving a Staff Attorney anywhere in the country will result in the long knives coming out, alleging lack of adequate supervision.
Did the Division of Enforcement deter securities fraud? This is a more complicated question. At its core, the question is whether potential wrongdoers are frightened enough about getting caught and suffering painful penalties that they will refrain from bad acts. In order to create this fear in potential wrongdoers, the SEC must bring enough fraud cases so that the word goes out that if you commit securities fraud, the SEC will find you and punish you. How many is “enough” cases? That requires a very subjective analysis. If there is a one percent chance of getting caught, are even harsh penalties a real deterrent? There is no good way to measure these issues because, among other things, there is no way to know (1) how many people committed securities fraud without being detected, and (2) how many people did not commit securities fraud because they were afraid of being caught.
Did the SEC act fairly? This is not an ethical issue. It is a judgment issue. As such, it will be the subject of great debate and there will be no universal right answer. Fair is in the eye of the beholder. In some cases, there can be genuine questions about whether the target of the investigation really engaged in securities fraud. In other cases, there can be legitimate debate about whether the settlement demanded by the SEC was fair. One barometer of fairness is the reaction of U.S. District Court judges to cases brought by the SEC. To the extent that there are more than a few isolated instances of judges ruling against the SEC, there will be additional questions about whether the SEC is overreaching. In the past, the SEC has used its considerable power against large financial institutions to exact very significant penalties that are ultimately paid by the shareholders of those institutions. Thus, the SEC’s website mentions a number of large financial institution that have settled with the SEC in connection with the Financial Crisis, including Citibank, Goldman Sachs, J.P. Morgan Chase, Wachovia and Wells Fargo. Reasonable minds can differ in isolated cases whether the amount of the settlement is just. However, if a pattern develops of penalties that seem to arrive at an arbitrary number instead of one that bears some relation to the harm caused by the offending conduct, that would be cause for concern.
Did the Staff Attorneys continue investigations or bring cases because, having invested so much time in the investigation, the Staff Attorneys did not want to acknowledge that their investigation ultimately showed no wrongdoing? In the real world, this is a very serious concern. Settlements or complaints should not be influenced by whether Staff Attorneys will be embarrassed or disappointed because they pursued investigations long after the evidence showed that the investigation should have ended with no enforcement action. This is an area where close supervision of Staff Attorneys is very important.
Did the taxpayers get bang for the buck from the Division of Enforcement? The SEC’s recent request for appropriations for the next fiscal year states that additional funding of the SEC will not increase the national debt because for every dollar spent on the SEC, the SEC gets back more from the collection of fees on securities transactions. Anyone who has litigated against the SEC knows that the SEC, like private law firms, has some truly great, really hardworking attorneys, and others who merely punch the clock. Getting more out of the less productive Staff attorneys will always be a challenge for the SEC’s top management.
How many cases did the SEC bring? This is less important than most people believe. The SEC’s statistics on how many cases they have brought overstates the importance of the total number of cases brought by including cases where a public company failed repeatedly to file SEC reports or the SEC brought an administrative proceeding to seek a bar from the industry after the SEC had already obtained an injunction against the wrongdoer. What is important is the quality of the cases and whether there are enough quality cases to create the deterrent effect that the SEC needs to create.
Ms. White, Mr. Ceresney and Mr. Canellos are all outstanding lawyers, with great judgment. Let us all give them time to put their mark on the SEC, after which, we can look back on their legacy and ask the questions raised above.
To read more from Lawrence Bader, please visit www.maglaw.com