Mary Schapiro, Chair of the Securities Exchange Commission, defended the SEC policy of allowing cheats and frauds to settle cases without admitting or denying fault. In recent remarks, she offered the same limp defense that the SEC proposed to Judge Jed Rakoff in New York, and it doesn’t improve as it moves from legal forums to meetings with the media. Edward Wyatt begins his article in the New York Times Dealbook quoting Schapiro saying

… she believed the agency’s practices “clearly have deterrent value,” even though firms were often charged repeatedly for violating the same securities laws.

It makes you wonder what “deterrent value” means in Schipiro world, because in the real world the same firms get several wrist slaps for the same offense. Schapiro explains that people on Wall Street have short memories, so the SEC has to file the same kind of suit over and over. Gee, you know what sticks in the memory? Perp walks. Shackles covered with overcoats on 90-degree summer days. That’s the kind of thing you remember.

It’s hard for the poor Wall Streeters to control their far-flung businesses, says Schapiro. Who knows what is going on in these behemoths? Why, it’s perfectly possible for the SEC to catch someone in Miami committing a fraud, and then up pops the fraud in Seattle. Who could have suspected? And who could have expected management to have done anything? We make them overhaul their compliance departments, says Schapiro, apparently unaware that these two ideas are contradictory.

Schapiro explains that defendants won’t settle if they have to admit wrong-doing, because then they would face civil suits. She also says that the SEC only settles when it gets at least as much as it could expect if it tried the cases. These two ideas are also contradictory. The SEC can win all kinds of damages, including disgorgement, in a fraud case. Disgorgement means that the defendant has to pay back the money it swindled, cheated and defrauded people out of. So, if the SEC is getting all the money it could get if it won the case, what more could a private party get?

What she means is, in the simplest case, that the SEC estimates three figures: what are my chances of winning, how much will I win, and how much will it cost. They multiply the first by the second and subtract the third, and that is the estimated value of the case. You can make tons of adjustments, different levels of chances of winning, different amounts, and allowing something for the time value of money, but that’s the rough idea.

That isn’t going to make people whole, though. The defendant is going to keep some of the money he/she/it stole, and the people who got cheated are going to lose money. That doesn’t happen if the SEC tries the case to conclusion. In that case, the defendant has to pay all losses, and pre-judgment interest, and whatever civil penalties might be applicable. Yes, it might take a while, but that is also the kind of thing that sticks in the memory.

Criminal trials are a different matter. Convict the defendant, and that establishes liability, so the only thing to be tried is the calculation of damages. Criminal cases get tried faster too, because the defendants are entitled to a speedy trial. Insurance issues are really complicated, as well, and corporations can expect to pay enormous amounts in connection with the criminal trials of their employees, not to mention the misery of dealing with conflicts of interest that arise as each tries to blame the other.

The SEC hasn’t created a single criminal case, despite the reams of evidence collected by the Financial Crisis Inquiry Commission, the Senate Permanent Subcommittee on Investigations headed by Senators Levin and Coburn, and in dozens of civil cases. Schapiro says she hopes there will be some “serious cases” arising from the Great Crash someday, maybe this year.

That’s what we expect from the SEC: pick a little, talk a little.



I read a lot of books.