Study Claims Revolving Door at SEC Not a Problem
Today in “Don’t Mindlessly Parrot Every Yahoo With a Contrarian Academic Study,” we have this effort, written up approvingly in the New York Times, suggesting that the revolving door is actually helpful to efforts by the SEC:
The study, by researchers at Emory University, Rutgers, the University of Washington and Nanyang Technological University in Singapore, found that S.E.C. enforcement lawyers who leave to join private law firms that specialize in commission matters actually produced tougher enforcement results than their peers while at the agency.
The study also found no evidence that law firms that have hired large numbers of S.E.C. alumni are able to extract more lenient enforcement outcomes from the agency. Results from the research are scheduled to be presented Monday in Washington at the annual meeting of the American Accounting Association […]
In addition, revolving-door lawyers who specifically went on to law firms that specialized in S.E.C. matters produced, while at the agency, more aggressive enforcement outcomes, with higher penalties, a greater likelihood of criminal charges and a greater chance that a chief executive was named as a defendant in the S.E.C. action.
Yves Smith protests that focusing on the midlevel SEC enforcement lawyers yields far less information than focusing on the senior leadership. And the fact that the current chief of enforcement, Robert Khuzami, was general counsel at Deutsche Bank while they played a role in the securitization bubble and CDO-related fraud, tells you most of what you need to know about the SEC’s desire for vigorous enforcement of the financial sector. They have none, in short, because Khuzami doesn’t want to implicate his former employer, or worse, himself.
You could also focus simply on results. What have we seen out of the SEC since the financial crisis? Multiple settlements on single mortgage-backed securities deals with big banks, where the offending party didn’t have to admit or deny wrongdoing, and where all the other deals they generated at that time go unexamined. Big swings and misses at easy prosecutions in the case of Bear Stearns and, more recently, Citi trader Brian Stoker. A big zero on the financial fraud enforcement task force or the RMBS working group (remember that?), both of which Khuzami serves as a co-chair. I guess Khuzami’s position didn’t impact the vigor with which the SEC goes after insider trading, but that’s about it.
As for the idea that SEC lawyers who left the agency for white show law firms defending the banking sector “produced, while at the agency, more aggressive enforcement outcomes, with higher penalties, a greater likelihood of criminal charges and a greater chance that a chief executive was named as a defendant in the SEC action,” this just proves that the finance sector simply poached the top talent at the SEC, to quote Yves:
They have the causality backwards. What this actually says is prospective employers are smart enough to recruit the best lawyers from the SEC’s enforcement division. Duh! And we are supposed to believe a plus for the SEC, that it’s real job is to serve a a cheap training ground for white shoe law firms?
This is likely to become a study that gets waved around by elites proving that there’s nothing wrong with the corrupt dynamic of bouncing back and forth between Wall Street and Washington. It will be extrapolated to justify all kinds of federal agencies, Congressional and White House positions. And yet the study doesn’t say much of value at all, at least not from this read.