For good or ill, one of my themes over the last 18 months has
been frustration with the Securities and Exchange Commission's
enforcement efforts. And according to a recently published study
by Berkeley Law professor Stavros Gadinis, I'm not alone.
Gadinis's paper, posted Wednesday at the Harvard Law School
Forum on Corporate Governance, said that it's been three decades
since any academic analysis of SEC enforcement actions against
broker-dealers. In that time, Gadinis wrote, the information
vacuum has been filled with complaints about the commission's
perceived foot-dragging and questions about the so-called revolving door between the SEC and private law firms. To add
some substance to the discussion, Gadinis undertook what he said
was the first systematic examination of SEC enforcement actions
against broker-dealers -- a category that includes major
financial institutions -- in 30 years, analyzing more than 400
cases finalized in 1998 and 2005-2007. (Gadinis added 1998 to
the study so it would include cases brought in a Democratic
administration.) His overall conclusion: Size matters, at least
when you're a broker-dealer facing off against the SEC.
According to the prof's data, firms with more than 1,000
employees fared much better than their smaller counterparts in
terms of whether cases are brought against individual
defendants; whether the SEC brought cases as administrative
proceedings; and what kind of sanctions the SEC extracted.
"Big firms get different treatment," Gadinis said in a phone
interview Thursday. "That could be for many reasons (but) it's
not a nice result for the SEC, which is supposed to be a
unbiased regulator of markets. Whatever the motivation, the
results are not good."
Gadinis said it's too soon to opine on the SEC's actions
since the first four months of 2007, which is when his study
ended. He also said that ideally, his data would have included
SEC investigations that did not result in enforcement actions,
but, as I've noted, those aren't captured in publicly available
materials. But with those caveats, Gadinis said his study
indicates that, historically, the SEC "is reluctant to bring
cases against individuals connected with big firms."
Let's look at the numbers. Of the cases Gadinis analyzed,
103 involved broker-dealers with more than 1,000 employees. In
40 percent of those cases, only the corporation was charged. (In
another 20 percent, both the corporations and individuals were
targeted; the remaining 40 percent involved only allegations
against individuals.) By contrast, of the 345 cases against
smaller broker-dealers, just 10 percent involved actions only
against the corporation. Sixty-four percent of the cases were
brought only against individuals.
Gadinis checked to see whether the gap is explained by the
kind of claims the SEC asserted against large and small
broker-dealers and found that it isn't. He also concluded that
the driver behind SEC decisions not to sue big-firm employees
isn't the difficulty in collecting evidence or attributing
wrongdoing. Inde e d, Gadinis told me, "In those cases they do
bring against individuals," he told me, "the decision to charge
or not is not obvious."
That's particularly worrisome for small firms because their
employees face significantly more severe penalties than big-firm
employees who are sued by the SEC. According to the study, "for
the same violation and comparable levels of harm to investors,
big firms and their employees were less likely to receive a ban
from the securities industry, compared to small firms and their
employees." And in cases in which the SEC obtained bans against
individual defendants, those against small-firm employees
averaged 22 months longer than those against their big-firm
counterparts charged with the same violation.
Big firms and their employees were also likelier to face
administrative proceedings -- and not federal-court litigation
-- than their small-firm counterparts, according to the study.
(Seventy-one percent of big-firm cases, compared to 41 percent
of small-firm suits, were handled administratively.) There has
been academic speculation that the SEC has been filing tougher
cases as administrative proceedings, which are perceived to
favor the commission, but Gadinis's study discounted that
theory. Instead, he considered it a benefit to defendants to
resolve their cases in administrative proceedings, which
generally involve less negative publicity.
All of these factors led Gadinis to conclude that as of the
first four months of 2007, it was better to be a big
broker-dealer than a small one before the SEC. That's a finding
with significant public policy implications.
In fairness -- and as Gadinis notes in his study -- the SEC
redesigned its enforcement model when SEC Chairman Mary Schapiro
took office in 2009, so it could be that the enforcement gap
Gadinis uncovered has narrowed since the new model was completed
in 2010. I sent the study to SEC spokesman John Nester for
comment but didn't hear back.
(Reporting by Alison Frankel)
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