Securities and Exchange Commission

Tough Talk And Fuzzy Math: The SEC Enforcement Division Isn't Even Trying

The SEC is bringing record-breaking numbers of enforcement actions. Or are they?

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600px-US-SecuritiesAndExchangeCommission-Seal.svgWhen folks criticize the SEC for failing to encourage a culture of lawfulness on Wall Street, this is what they’re talking about. After Mary Jo White carried the pedigree of a tough prosecutor into office, many expected the agency to reorient itself around enhanced enforcement work. And that’s certainly what White tells people her agency is doing. But a deeper look at the numbers that White and the SEC trot in front of the public reveals bookcooking that would make the SEC’s Wall Street charges proud.

In a quote from White, highlighted by David Dayen in a recent piece, she applauds the growth in SEC enforcement actions:

We also had a very strong year in enforcement. In 2014, we brought the highest number of cases in the history of the Commission, 755, and obtained over $4.1 billion in monetary relief ordered – also an agency record. The quality and breadth of our actions, however, are the more meaningful measure of a strong and effective enforcement program. And last year, we focused on innovative, high impact cases and punished and deterred wrongdoers in a way that sent important messages to the market, including by obtaining more admissions to achieve heightened accountability and acceptance of responsibility from entities and individuals.

Which certainly sounds impressive until you scrub at the superficial veneer as Urska Velikonja, an assistant professor at Emory School of Law, has. Her work found that the SEC’s impressive new numbers rest on a shaky foundation of double-counting and loose interpretations. For example, the SEC counts every follow-on action where they go after professional licenses or bar individuals from appearing as separate enforcement actions even though they involve the same person and the same behavior. Speaking of double-counting the same behavior, the SEC also sees fit to count the same actions brought before a federal court and an administrative judge separately. Damn, they’re one good insider trade away from 300 enforcement actions in one swoop!

It turns out that when you cut through the fog, the SEC is pretty much unchanged when it comes to actual enforcement. But that doesn’t mean the SEC isn’t more focused on enforcement… it just means it’s focused on enforcement in a more troublesome way.

At a recent event hosted by Above the Law and Wolters Kluwer discussing the SEC’s proposed clawback rules, former SEC General Counsel Ralph Ferrara struck a chord with the audience when he lamented that the SEC had retreated from its role in crafting sound prophylactic regulations by fixating too much on backward-looking enforcement. That sounds curious given that the statistics give life to the “more enforcement actions” mantra, but Ferrara’s observation is still valid. Perhaps it’s more fair to say the SEC is fixating on creating more future-backward-looking enforcement.

New regulations are necessary if you think the markets have effectively outstripped existing regulations (which is, in many ways, one of the skills of markets). But approaching regulation from the perspective of shaping behavior is not the same as approaching it to prosecute. Enforcement should be a result, not an aim.

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A lot of ink has spilled over the phenomenon of overcriminalization. Dense, overlapping, and hypertechnical codes littered with aggravators and fuzzy distinctions of degree have given prosecutors carte blanche to effectively replace the judge and jury by threatening the vast range of prosecutorial options to bully defendants into plea agreements. The result is a broken criminal justice system based on selective enforcement and little to no bedrock guidance for future behavior. Drafting securities regulations with an eye more firmly fixed on how an enterprising SEC lawyer could trap or leverage future offenders as opposed to how to shape the markets isn’t going to put any more bankers in jail, it’s just going to unnecessarily clutter the legal landscape.

Take that enforcement mentality and put it properly back into the enforcement division. It sounds like, as usual, they’ve got time on their hands.

SEC Data Show Reduction in Criminal Prosecutions Since 2010 [Naked Capitalism]

Earlier: Is The Proposed SEC Clawback Rule A Mistake? Some Expert Perspectives
Watch The SEC’s Mary Jo White Get Publicly Shamed
Obama Throws Down The Gauntlet With New Pick To Head The SEC
Just How Rich Is Mary Jo White, Debevoise Partner and Likely Future SEC Chair?
SEC To Second Circuit: ‘Please Don’t Make Us Do Our Jobs!’
Remembrance of Things Past, Like When We Had Simpler Laws

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