By Robert Khuzami
The following guest post is by Robert Khuzami, Director of
Enforcement at the Securities and Exchange Commission. It's a
response to a piece I wrote earlier this month -- "New study says SEC revolving door not important. Don't believe it" --
which questioned the findings of the first empirical examination
of the impact on SEC enforcement actions of the so-called
"revolving door," lawyers moving between the SEC and private
practice. The study concluded the revolving door has no
quantitative impact on how vigorously the SEC prosecutes
enforcement actions. I raised doubts about whether the authors
could account for the subtle influence SEC alumni might exert on
their former colleagues before matters become enforcement
actions. When an SEC spokesman contacted me about Khuzami's
response, we agreed that the enforcement director's detailed
comments about my piece should be highlighted as a guest post,
with the hope of inspiring additional discussion. Khuzami's
response is unedited except to be consistent with Reuters'
grammatical style.
Alison Frankel's On the Case column challenged the findings of
an academic study designed to measure the impact of the SEC's
so-called "revolving door." The academic study, entitled "Does
the Revolving Door Affect the SEC's Enforcement Outcomes," is
the first to actually apply some rigorous analysis to the
proposition that SEC staff let future job considerations affect
their professional judgment. The outcome, not surprising to me,
is an emphatic "no" -- employment considerations had no
measurable impact on enforcement outcomes and that SEC alumni
appear to have no measurable advantage on behalf of their
clients facing investigation.
This conclusion has common sense in its corner. Enforcement
staff, having landed a highly sought-after and
difficult-to-obtain job, often passing up other opportunities in
the process, would not risk reputation and career and even jail
by undermining an investigation for a possible future job
prospect. Any enforcement staff member who would consider such a
betrayal would be so lacking in respect and credibility as to be
of no value to future employers. Nor would they get hired -- to
put it bluntly, would you hire someone so dishonest, so without
principle and held in low esteem by former colleagues (which
they would have to be to consider such an act of deceit) to
represent you in matters of importance? I have seen no evidence
of such a betrayal in my years at the SEC, or in my 15 years in
public service. To believe the critics on this point is to have
a disturbingly cynical and misguided view of public service and
the dedicated and professional members of the Enforcement
Division.
In addition, the reality is that enforcement case
recommendations are made by teams of attorneys, with multiple
levels of review and scrutiny throughout the agency -- all of
which means that it is virtually impossible for any one person
to make decisions on a case based on anything other than the
facts, the evidence, and the law. This latest academic study
simply confirms what I experience every day: that we bring our
cases on the merits and the merits alone.
Yet Frankel rejects the study's conclusion, arguing instead
that the study was not sufficiently "statistically nuanced" to
measure the purported influence of SEC alumni on enforcement
staff. No amount of nuance will alter the fundamental fact that
there is no evidence to support her view. She cites to a 2011
analysis by the Project on Government Oversight (POGO). Among
other things, POGO's work relies on four reports by the SEC's
Inspector General, none of which found any improper impact on
the particular enforcement cases where SEC alumni were engaged
as defense counsel. And, the POGO database mentioned in
Frankel's column is actually a compilation of the disclosure
forms that must be filed by SEC alumni for two years after
leaving the commission if retained by a client where an
appearance before the commission is contemplated -- just one of
several ethics protocols in place to ensure transparency. In
fact, just two months after the POGO analysis cited by Frankel,
in July 2011, the Government Accountability Office (GAO)
completed a Dodd-Frank mandated study of the so-called
"revolving door" and found that the SEC has a number of strong
post-employment and conflict-of-interest controls in place to
prevent undue influence by alumni. GAO's singular recommendation
was to standardize the documentation for ethics advice provided
to departing employees.
The truth is that the enforcement staff are skilled and
dedicated professionals who have chosen public service because
they believe deeply in the SEC's mission to protect investors
and the markets from those who would commit securities fraud.
Each day brings new proof of this professionalism, as cases are
filed and wrongdoing exposed. In the face of overwhelming proof
to the contrary, and armed with nothing but cynical assumptions
and speculation, commentators perpetuating this revolving door
myth do a disservice to the hard-working and dedicated
enforcement staff. Equally importantly, they create unfounded
cynicism about public institutions and public servants, and the
last thing any of us need is more cynicism.
Follow us on Twitter @AlisonFrankel, @ReutersLegal | Like us on Facebook