By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
Stephanie Avakian, the co-director of enforcement for the Securities and Exchange Commission (SEC), last week delivered in which she defended the agency’s enforcement program despite a drop in fines collected and cases brought during the 2018 fiscal year.
Statistics such as the number of actions the SEC brought in a fiscal year and the dollar amount of judgments and orders obtained in that year are interesting so far as they go, but they only tell us so much. Put simply, statistics do not provide a full and meaningful picture of the quality, nature, and effectiveness of the Division’s efforts.
The speech is clearly an attempt to get out in front of soon-to-be released figures– as yet unavailable, as the Commission’s fiscal year closes on September 30. Earlier accounts suggest these figures are declining, thus continuing a downward trend, according to the :
Total fines ordered through SEC enforcement activity fell 7.2% in 2017 to about $3.8 billion, the lowest total since 2013, according to SEC figures.
SEC Drops “Broken Windows” Approach to Enforcement
Nearly a year ago, Steven Peikin, the SEC’s other co-director of enforcement, announced the agency would abandon the “broken windows” enforcement strategy pursued under SEC chair Mary Jo White (see this November 2017 post, SEC Soon to Have Five Sitting Commissioners; Budget Constraints Will Stymie Enforcement). As summarised by :
White first dropped the phrase “broken windows” on the compliance world during a speech in October 2013. Just as police officers deter serious crime by tackling small quality-of-life issues—from graffiti to turnstile jumpers to, yes, breaking windows—White’s idea was to do the same with SEC rules and requirements. “It is important to pursue even the smallest infractions,” she said, suggesting that this dedication would both increase the Commission’s number of enforcement actions and send a strong message to those who would do greater harm.
As I discussed in my November post, the SEC’s enforcement record during White’s tenure was much less impressive than what she took credit for. Some of the drop in fines collected and cases brought during the last year represents the abandonment of the broken windows approach. I find myself agreeing with Republican Congressman Bill Huizenga about how such statistics can be manipulated, as spelled out in Compliance Week:
“I am pleased to see that the enforcement division under Chairman Clayton has diverted its attention away from the broken windows enforcement philosophy.”
“In my mind, this misguided approach to enforcement appears to have only been successful at boosting statistics, rather than meaningfully improving investor protections,” [Huizenga] added. “I’m pleased to see that the Commission is shifting away from minor violations in securities laws and instead taking a more selective approach to enforcement. After all, we should not evaluate the true effectiveness of a regulatory agency or its enforcement program solely based on how many headlines it can generate.”
Avakian’s speech highlighted two other factors that also contributed to the declining enforcement numbers. First, the agency suffers from a shortage of qualified personnel. It has been unable to fill some enforcement slots, due to a federal hiring freeze (a problem Peikin anticipated and which I mentioned in my November post). Several senior staff members in DC and larger regional offices have left the agency for the private sector during the past year. The revolving door still swings.
This policy is no accident: Congress starves the agency’s budget, so as to cripple its effectiveness.
Second, the United States Supreme Court’s decision in shortened to five years the time during which the SEC can bring a claim for disgorgement of profits. Adapting to this decision, according to Avakian:
has required the entire Division, but particularly those in the Trial Unit, to divert considerable attention to older matters – many of which had been substantially resolved. … As we have noted previously, the Commission has already had to forgo hundreds of millions of dollars in disgorgement – much of which could have been returned to harmed investors – and that number will continue to go up over time.
Her speech didn’t include any more precise details on funds forgone to date, but, according to the WSJ:
SEC officials have previously said the decision prevented them from getting more than $800 million in fines that they could have sought under the law before the Kokesh decision.
What Is the SEC’s Focus?
I am in theory open to accepting the argument that numbers of cases brought or fines collected don’t tell the whole story about the effectiveness of the SEC’s enforcement division.
So, what do we see when we take a closer look?
Alas, the record isn’t promising. Although Avakian didn’t discuss this issue in her speech, the agency has gutted its whistleblower program, imposed by Congress as part of the Dodd-Frank reforms (see these two recent posts by Yves, Wall Street Journal Parrots SEC’s Excuses for Big Delays in Whistleblower Payouts; and SEC Knifes Its Whistleblower Program; these problems didn’t commence under Trump’s watch, either, as I wrote in SEC Takes Victory Lap for Pathetic Performance of Whistleblower Program).
An agency interested in ferreting out corporate misconduct would be expanding, rather than gutting such a program; ditto for rapid disbursement of payouts, rather than the slow-walking we currently see instead.
Instead, the SEC has continued to concentrate on insider trading. Avakkian noted the in August. While the transgressions of Collins and his cronies certainly shouldn’t be overlooked, insider trading is an area that occupies all too much attention at the SEC– and the Department of Justice for that matter– at the expense of more serious misdeeds. (This is yet another problem that didn’t just manifest itself on Trump’s watch, as I discussed in The SEC Fiddles While the System Burns: Insider Trading Enforcement As Securities Law Theater).
Peikin emphasized in May testimony before a subcommittee of the House Financial Services Committee a focus on charging individuals, when possible, as reported by Compliance Week:
Since May 2017, a number of the Commission’s enforcement actions have also involved charges against one or more individuals, Peikin added. “These actions have involved charges against the senior-most executives of large companies and firms, including CEOs, CFOs, presidents, and senior partners, he said. “The Commission also has charged individuals in several cyber-related matters.”
Sounds sensible, no? Avakian picked up this theme in her Dallas speech:
We have also continued to focus on individual accountability by pursuing charges against individuals for misconduct in the securities markets, including registered individuals, executives at all levels of the corporate hierarchy, including CEOs, CFOs and other high-ranking executives, and gatekeepers.
She highlighted charges brought against executives at Clovis Oncology, Theranos, and Rio Tinto. Yet when one peeks behind the curtain and looks at some details, the SEC’s performance fails to inspire.
Merely bringing some charges– any charges!– against individuals alone does not suffice. They need to be the right charges, they should be vigorously pursued, and the SEC shouldn’t be content with puny settlements. Take the case of Theranos and its CEO, Elizabeth Homes, which Avian cites as a success and which Yves discussed in this May post, Jay Clayton’s SEC Lets Theranos Founder Elizabeth Holmes Get Away With Brazen Fraud:
This case proves that the Trump SEC is setting new lows by giving get out of jail nearly free cards to fraudsters.
Holmes settled with the SEC, paying a puny $500,000 when she raised and torched $700 million of investor funds. She also surrendered 18.9 million shares and gave up control of the company by converting her Class B shares, which give her voting control, to Class A shares. She is also barred from serving as the director or officer of a public company for 10 years. That bizarrely means she remains as CEO of Theranos. She did not admit or deny guilt.
Pursuing such a soft approach in this high profile case doesn’t exactly strike fear into the hearts of bad corporate actors.
Dealbreaker was also not gulled by Avakian’s Speech– as this headline makes clear, :
[T]he SEC still . And nothing’s providing quite so many of those as the , where the regulator is focusing much of its somewhat distracted attention. Also . Those are great ways to keep the numbers from falling too much without putting in too much effort.
Despite those limitations, the SEC has been vigilant in pursuing illegal activity in the market for initial coin offerings, Ms. Avakian said…. In the case of ICOs that don’t involve fraud, but still trampled various investor-protection laws, “we will likely recommend more substantial remedies against issuers that fail to comply,” Ms. Avakian said.
The Securities and Exchange Commission today announced it has obtained a court order halting an ongoing Ponzi-like scheme that raised more than $345 million from over 230 investors across the U.S…. The defendants were allegedly using a web of lies, fabricated documents, and forged signatures in an elaborate scheme to entice investors and perpetuate the fraud…. The SEC also alleges that Merrill and Ledford stole at least $85 million of the investor funds to maintain lavish lifestyles, spending millions of dollars on luxury items, including $10.2 million on at least 25 high-end cars, $330,000 for a 7-carat diamond ring, $168,000 for a 23-carat diamond bracelet, millions of dollars on luxury homes, and $100,000 to a private fitness club.
Thanks, bros! That’s the kind of stuff that keeps us entertained, and the complaints basically write themselves.
Over to Avakian for (nearly) the last word (my emphasis):
While statistics provide some information, they do not present a real, full picture of the nature or effectiveness of an enforcement program. Any assessment that suggests our effectiveness should be measured solely based on the number of cases we bring over any particular period of time is misguided. We are committed to quality: to have as broad an impact on the landscape we police as possible; to bring cases that send messages of general and specific deterrence; and to seek and obtain remedies tailored to the conduct at issue and the message we want to send.
That, indeed is the problem. There’s a time and place for a lay-up. But to be an effective regulator, the SEC needs to attempt more types of shots, including the occasional three pointer. The will to attempt all but the easiest shots– and the skills necessary to complete them– are unfortunately, missing.