SEC faces setbacks, skepticism in trying to reform its enforcement image
Tuesday, April 6, 2010
A year-long effort by the Securities and Exchange Commission to overhaul its enforcement of laws against corporate crime has run into courtroom setbacks and internal skepticism, underlining how difficult it is for the agency to remake itself as a get-tough cop.
Top SEC officials have undertaken what they describe as the most significant reform of the agency's enforcement operations in nearly 40 years, pledging to bring big cases as never before. SEC Chairman Mary Schapiro and her hand-picked enforcement director, Robert Khuzami, have trumpeted measures designed to rapidly file major cases, send more lawyers to the front lines of investigations and set up teams specializing in specific areas of financial crime. The actions are in response to years of criticism by former officials and investor advocates that the SEC took too light a touch with Wall Street.
But now, some senior SEC officials question whether the new measures will yield the kind of results that Schapiro and Khuzami are promising. "I'm looking to see whether or not all of the new initiatives are actually resulting in improved sanctions," said SEC Commissioner Luis A. Aguilar. "I don't yet see the empirical evidence."
Last year, after long getting beat by other law enforcement agencies, SEC investigators decided to race ahead on one of the most high-profile cases of alleged wrongdoing to come out of the financial crisis. The SEC abruptly broke off its teamwork with the New York attorney general's office, going it alone to reach a deal with Bank of America, forcing it to pay $33 million in fines for allegedly lying to investors.
But a judge threw out the settlement, ruling it was flimsy, and dealt an embarrassing setback to the SEC's efforts to energize its enforcement activities.
In pursuing the case, the SEC had differed with New York Attorney General Andrew M. Cuomo over strategy, according to an official familiar with the disagreement. Cuomo wanted to take more time to build a case against individual executives at the company. The SEC, which had been widely criticized for regulatory failures that contributed to the financial crisis, wanted to bring fast action against a major bank.
U.S. District Judge Jed S. Rakoff, however, called the SEC deal at odds with the "most elementary notions of justice and morality." He faulted it for providing almost no accounting of the bank's conduct and allowing the company's executives to escape punishment. The SEC later added new charges, provided more details of its investigation and nearly quintupled the fine, winning the judge's approval.
The SEC is Wall Street's top regulator, charged with ensuring that brokerages, mutual funds, hedge funds, money managers and other financial firms treat their customers fairly and don't break the law. The agency also is supposed to make sure that public companies give investors honest information. The enforcement division is expected to investigate allegations of wrongdoing and file suits when it finds violations, seek to bar individuals from the industry, fine executives and companies, and stop bad conduct.
But for the past several years, penalties have declined and the enforcement division's reputation has suffered, culminating in revelations that the division repeatedly failed to stop Bernard L. Madoff's Ponzi scheme. Schapiro, who was named by President Obama, and Khuzami wanted to restore the agency's reputation.
"I wanted to do whatever I could do to strip out the inefficiencies and delays," said Khuzami, who as a federal prosecutor had sent terrorists as well as white-collar criminals to jail. "A large part of the deterrent impact of our actions has to do with the immediacy of our actions."
Khuzami cites statistics and cases showing that the agency's efforts are yielding results. In 2009, the agency opened nearly 500 investigations, more than double the 2008 level, and ordered companies to pay 35 percent more in fines and repay 170 percent more in ill-gotten gains.
The agency has filed cases in new, complex areas, such as insider trading involving exotic financial instruments known as derivatives, and reached high-profile settlements, such as forcing General Electric to pay $50 million to settle charges it misled investors about its accounting.