Ladies and gentlemen of the jury, you have heard the people’s case against the Securities and Exchange Commission’s Division of Enforcement. It now rests in your hands to decide whether this is a guilty party.
In a span of less than one year, the public’s assessment of the Enforcement Division—particularly by certain members of Congress and the media—has gone from highly positive to today’s incendiary charges that the Enforcement Division is incompetent, non-existent, misguided, and somehow responsible for the financial crisis spreading across the globe.
These charges are false, and you should find the Enforcement Division not guilty in this matter.
Created in 1934, the SEC celebrates its 75th anniversary this year. The Division of Enforcement was created as a stand-alone entity in 1972. For nearly all its 37 years in existence, the SEC’s enforcement program has been widely regarded as the finest in the world, the gold standard, and has served as a model for other nations. Indeed, the Enforcement Division has been described for decades as an example of lean and effective government in action; many of the finest securities lawyers and accountants in our country devote their talents and significant portions of their careers to the cause of pursuing securities fraud and enforcing the laws against it.
Less than two years ago, former SEC Chairman Christopher Cox delivered a speech to thousands of knowledgeable listeners in his opening remarks at the 2007 SEC Speaks conference. He took that opportunity to discuss the mission, record, and legacy of the Enforcement Division. Cox stated that, “never has the nation been blessed with a more professional team in enforcement in all of this agency’s history.” He said the history of the Enforcement Division was one of zealous protection of the nation’s investors, and recounted its successes in important cases against the likes of Drexel Burnham Lambert, Michael Milken, Ivan Boesky, Enron, WorldCom, and Adelphia, as well as newer cases such as Fannie Mae and Tyco. He described the enforcement staff as “1,100 smart, thoughtful, hardworking, measured individuals who come to work each day looking for the right answer. They are honest people who are committed to fairness.” He described them as “heroes” and said that America could be proud of them.
Cox’s comments were not greeted with laughter or scorn by the audience, or afterwards by the financial and legal press. I suggest to you these statements were a fair (albeit glowing) commentary on the Enforcement Division at the time, and were received as such.
What, then, has happened in recent months to lead to the charges that bring us here today? Why has the Enforcement Division been thrust into the crosshairs in this way? It is largely the result of two highly unfortunate developments that have unfolded, regrettably, in a span of just a few months.
First was the onset of the financial crisis, which arguably began with the bankruptcy of Lehman Brothers in September 2008. Almost immediately, the media began to produce “Where Was the SEC?”-type stories suggesting that the SEC’s failure to enforce the securities laws was to blame. Why wasn’t the SEC’s Enforcement Division out in front of this problem, clamping down on issues in the sub-prime market before they caused worldwide damage?
Asking, “Where was the SEC?” after financial fraud has occurred or a financial crisis has developed is like asking, “Where was the police department?” when you come home to find that your house has been robbed.
Ladies and gentlemen, that is that is not the Enforcement Division’s function. The Enforcement Division’s function is akin to a securities fraud policeman, investigating issues after they arise and bringing cases where appropriate. Asking, “Where was the SEC?” after financial fraud has occurred or a financial crisis has developed is like asking, “Where was the police department?” when you come home to find that your house has been robbed. As Linda Chatman Thomsen, director of the Enforcement Division, reiterated in a hearing before the Senate Committee on Banking, Housing, and Urban Affairs in late January 2009, the Enforcement Division can’t do anything until someone breaks the law.
The second development, which served as gasoline thrown on the fire started by the financial crisis, was the Bernard Madoff scandal. And let’s be clear: From what we know about the SEC’s investigation of Bernard Madoff and the alleged $50 billion Ponzi scheme he carried out, the Enforcement Division utterly failed to follow up on credible evidence of a fraud in this case. There is no disagreement about this. Indeed, the SEC has admitted as much and ordered an investigation by its inspector general into why and how this occurred.
Ultimately, it has been these two developments that have led to the serious charges before you today:
Charges such as those at a Congressional hearing in early January by Congressman Gary Ackerman who railed: “I want to know who is responsible for protecting the securities investor because I want to tell that person or those people whose job it is that they suck at it.”
Charges by another Congressman at the same hearing that: “We do not need the SEC at all!”
An avalanche of charges by the media implying that it is now conventional wisdom that the SEC does a poor job overall at enforcement.
Charges in the New York Times and elsewhere that the SEC squanders its precious resources by pursuing ostensibly small-beer cases such as the insider-trading case it recently filed against Mark Cuban.
Charges such as those expressed in a high-profile New York Times op-ed piece in January 2009 that the members of the SEC’s Division of Enforcement actually are motivated not to pursue securities fraud, because “If you work for the Enforcement Division of the SEC you probably know in the back of your mind … that if you maintain good relations with Wall Street, you might soon be paid huge sums of money to be employed by it.”
Yet, what is the evidence for these charges? The SEC’s Enforcement Division has approximately 1,000 members. Almost all of its senior management—people like Thomsen, Joan McKown, and Scott Friestad—have served with distinction at the Commission since the mid-1990s. Since 2001 alone, the Enforcement Division has brought more than 4,900 separate enforcement actions, many of which have been complex and important matters requiring years of persistence.
Does the failure of a handful of employees in one case—the Madoff case—mean that members of Congress can now stand in the Capitol building and declare that the entire division now “sucks” at enforcing the securities laws, or that the whole agency should be dispensed with? That the press can promptly declare the Enforcement Division a failure? Ladies and gentlemen, that is just not right.
As for the criticism of the SEC’s decision to file a case against Mark Cuban for alleged insider trading as “grandstanding” and a waste of precious resources, are we now going to blame the Enforcement Division for bringing cases, too? Members of the jury, insider trading is a violation of this country’s securities laws. For decades, the SEC has been lauded for going after insider trading involving even the smallest dollar amounts because it helps promote confidence that there is a level playing field among investors. The Mark Cuban case is alleged to have involved $750,000 in avoided losses, which is actually a relatively large insider-trading case. Attacks on the Enforcement Division for dedicating resources to such a case might be expected from Cuban’s lawyers, but they are hard to fathom coming from anyone else.
Finally, the integrity of members of the Enforcement Division has been challenged by those who say that a “revolving door” mentality motivates the members of the division not to bring cases, so that they can stay in the good graces of Wall Street and ultimately be paid huge dollars in the private sector. This defies common sense. The motivation for the Enforcement Division is as it has been for decades: to bring big, high-profile, high-impact cases. Some in the Enforcement Division seek to do so to build their credentials and resume for the future. Others with no intention of entering the private sector seek to do so because it’s the most rewarding part of their job. Some are motivated by both factors.
And to this mix of reasons why the Enforcement Division’s true motivation is to bring cases, you can now add a “stick” to the carrot: Those who fail to bring cases may face the global scrutiny, finger-pointing, and damage to reputation, as we now see being heaped upon the lawyers in the SEC’s New York office who did not pursue the Madoff case.
As Linda Thomsen stated in Senate testimony on January 27:
In recent days there have been suggestions that the staff is not motivated to pursue the big case, and somehow is inclined to look the other way. Nothing could be further from the truth. Based on my experience with the hard-working men and women in the Enforcement Division, our staff lives to bring cases, particularly big and difficult cases. The staff is bright, creative, and professionally zealous; for most of us, nothing is more rewarding than pursuing a good case. Athletes may score runs or kick goals, but we bring enforcement actions. The filing of an enforcement action is one of the few solid benchmarks of success in the pursuit of our mission.
Ladies and gentlemen, the SEC’s Division of Enforcement has not been perfect in the past, and it will no doubt make mistakes in the thousands of cases it takes on in the future. It has, however, served this country with distinction for decades and continues to be a lean, effective, and aggressive regulator that is the finest in the world at what it does. The charges in this case are unfounded and should be rejected.
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