Calling Out the SEC: We Need Better Enforcement, Not a Better Extortion Racket

Mary Jo White built a well-oiled machine: Go to the biggest financial services firms in the nation and tell them that if they turn over hundreds of billions of dollars of their shareholders’ money, wrongdoers can avoid prosecution. And, in order to convince the American people that the SEC is being tough on crime and deserves its growing budget, destroy little guys over late forms and other de minimis infractions by forcing them to face unwinnable hearings in front of in-house SEC ALJs (in-house administrative law judges).

It was brilliant and everybody wins (everyone in Washington, at least). Congress can say it’s making Wall Street less corrupt. The SEC can say it’s catching bad guys. The U.S. Treasury gets hundreds of billions of dollars without having to raise taxes.  Everybody wins, that is, except for the people whose 401(k)s or pension plans own shares in the companies that paid off the government to avoid prosecution.

Whose money do you really think went into the Treasury? I’ll give you a hint: If it came off the balance sheet of a corporation, it came from the owners of that corporation, i.e. its shareholders. In other words, if you own any large-cap mutual funds, have a public or private pension, or are living off the income from a portfolio of stocks, it quite likely came from you.

Who wouldn’t hand out someone else’s money to avoid going to jail?

So when you read about her speech-making activities, please keep all this in mind.

SEC Chair Calls For Further Expansion Of Agency Power

By Carmen Germaine

Law360, New York (November 18, 2016, 3:46 PM EST) — Departing U.S. Securities and Exchange Commission Chair Mary Jo White praised the agency’s expansion of its enforcement efforts during her tenure in a speech Friday, but urged lawmakers to consider new laws that could further strengthen the agency’s power after she steps down in January.

White, who announced Monday afternoon that she will leave the SEC when President Barack Obama leaves office, told attendees at a talk held by the NYU School of Law that the agency has pursued a “bold and unrelenting” enforcement agenda under her guidance as chair, but said white-collar enforcement could be made even stronger.

She suggested a number of reforms, including tightening laws to hold senior executives liable for corporate wrongdoing and increasing the penalties the SEC can recover, noting that the civil securities agency doesn’t have the same authority to jail wrongdoers that she enjoyed while U.S. attorney for the Southern District of New York.

“I do miss that power, but no one seemed that anxious to give it to me while I was in Washington — I think Preet didn’t want to give it to me either,” White joked, referring to current Manhattan U.S. Attorney Preet Bharara.

White, still the only woman to have served as U.S. attorney for Manhattan, served in the post from 1993 to 2002, building a name for herself after winning convictions against the 1993 World Trade Center bombers, Mafia boss John Gotti and other high-profile defendants. She came to the SEC in April 2013, leaving her post as head of litigation at Debevoise & Plimpton LLP.

In Friday’s speech, White recalled that at her confirmation hearing she had pledged to “pursue a ‘bold and unrelenting’ enforcement agenda,” and said that she felt the agency had “really delivered on that promise.” She highlighted enforcement efforts and new policies, including a policy she implemented to require admissions of wrongdoing in certain settlements, and said the enforcement program is “bringing about new, demonstrable benefits for investors.”

But White acknowledged that “strong enforcement and deterrence can — and should — always be made stronger,” recommending a number of legislative changes.

“As I often said when I was the U.S. attorney in Manhattan, white-collar crime is no place for timidity,” White said. “Although we have enhanced SEC enforcement in major ways, I am the first to say that there is still more work to be done to further strengthen white-collar enforcement.”

First, White said, legislators and regulators should “think outside the box of current laws” if they want to impose more liability on executives and officers for wrongdoing committed by junior employees.

White suggested lawmakers look to the “Senior Management Regime” implemented in the United Kingdom in March, which she said makes it easier for law enforcement authorities to hold top brass accountable for misconduct that occurs within their purview even if they weren’t involved in the violations themselves.

Changes to compensation systems could also motivate good behavior among executives, White said, pointing to an approach floated by Federal Reserve Bank of New York President Bill Dudley that would require financial institutions to defer a portion of executive compensation as a kind of “performance bond.”

“Given the seemingly intractable persistence of serious corporate wrongdoing, the time for deciding whether to impose greater accountability, by expanding the reach of our laws, would seem to be at hand,” White said.

The SEC’s penalty authority could expand, White said, arguing “current law too narrowly limits the amount of penalties that the SEC can seek and recover” because the agency can only assess penalties based on ill-gotten gains or statute, rather than the amount of investor losses.

“Even civil litigants have the ability to obtain recoveries based on investor losses,” White said. “Surely, Wall Street’s cop on the beat should also have that authority.”

The Financial CHOICE Act introduced over the summer by Rep. Jeb Hensarling, R-Texas, does include provisions to add “real teeth” to the agency’s penalty authority, White acknowledged, although she called the bill’s goal of repealing most of the Dodd-Frank Act “otherwise very worrisome.”

White also stated her opposition to bills currently pending in Congress to modernize the Electronic Communications Privacy Act, the law governing how law enforcement can obtain emails from internet service providers, which would require a criminal warrant to request such communications.

The SEC currently obtains emails from ISPs using subpoenas, and as a civil agency lacks the ability to issue criminal warrants. White said the ECPA updates currently on the table would harm “the ability of the SEC to protect our nation’s citizens from securities fraud.”

She also responded to criticism of the SEC’s administrative process, which has been the subject of numerous constitutional challenges. White disputed claims that the administrative courts lack due process, noting that the agency recently adopted changes to give respondents additional time and discovery, and said the in-house proceedings offer a “fair and efficient way to determine liability.”

“We should — and will — fight efforts to roll back our authority to bring these important proceedings to protect investors in our markets,” White said.

–Editing by Orlando Lorenzo.

Author: Eric D. Wanger

Eric has nearly 30 years of experience as a creative and entrepreneurial professional in roles ranging from general management, team leadership and project management to technical rolls in IT, software development financial services and law. He has run business units, managed teams and delivered projects for established global enterprises and as the founder of a number of startups. Over his nearly 30 years at work, his job titles have included Board Member (public, private and non-profit), President, Founder, Chief Operating Officer, Director of Research, Chief Investment Officer, Fund Manager, Software Developer, Securities Analyst, Web Designer, Systems Integrator, Investment Advisor, Fundraiser, Consultant and Attorney. As a software consultant, cloud based, mobile app software as a consultant to one of the world’s leading electronic medical records companies (Cerner). As Chief Investment Officer and Director of Research for a startup financial services firm (Wanger OmniWealth, LLC), he developed a proprietary, risk-based holistic reporting platform for wealthy families and a set of allocation models based on it. He has developed automated trading systems for equity and equity ETF's. Between 2002 and 2013, Eric served as a portfolio manager of the Long Term Opportunity fund (small/micro-cap equities), the Alternative Fixed Income Fund (blend of exchange traded and privately negotiated debt) and as the strategist and founder (with Ralph Wanger) for the Income and Growth Fund (multi-asset class dividend strategy). Eric was a senior investment analyst at Barrington Research Associates (Chicago) covering technology and business services. Prior to that, Eric was a software, communications, and technology analyst for the Edgewater Funds, a private equity/venture capital firm with over $1 billion under management. Before joining Edgewater funds in 2000, Eric worked in Silicon Valley providing consulting, training, and software development to early-¬stage firms. Between 1991 and 1996, Eric was a principal consultant at EDW, Ltd, a firm he founded to provide software development, training in rapid software development techniques (NeXT), and systems interoperability consulting services for large multi-vendor and distributed computer networks. EDW's clients included such companies as Fannie Mae, MCI, Swiss Bank Corp (UBS), Chrysler, Merrill Lynch, Apple Computer, Stanford University, and The Acorn Funds. Eric received his J.D. from Stanford Law School and is a member of the California Bar. He was co-founder and managing editor of the Stanford Technology Law Review. Eric was awarded a National Merit Scholarship in 1981. He holds a B.S. in Mathematics from the University of Illinois at Urbana-¬Champaign and received a Chartered Financial Analyst designation in 2005. Eric lives in Chicago with his three children and a fat English Labrador retriever named Casper. He enjoys classical and jazz piano, hiking and aviation. He is an instrument rated pilot. Eric serves as a trustee for the Acorn Foundation and is active at Chicago’s Museum of Science and Industry.

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