Risks and Mistakes Come with the Territory: The Difficult Task of the SEC

I served as an enforcement attorney with the Securities and Exchange Commission’s Fort Worth Regional Office for several years in the early 2000s. Looking back with a clarity that, for me at least, comes only with hindsight, it proved to be both a fascinating and exciting time to be a federal securities enforcement lawyer. My arrival at the Commission was closely followed by the painful burst of the Internet bubble and resulting dramatic declines in virtually all of the country’s equity markets.

Enron, WorldCom, Dynegy, and so many other formerly high-flying companies spun out of their orbits and dropped to earth, bringing down with them share prices and countless investors’ life savings.

These life-changing events roughly coincided with the dawn of the 24-hour news cycle that we take for granted today. CNN showed us in “real time” the overnight desolation of Enron’s vast corporate offices, WorldCom’s record-setting bankruptcy (since overtaken by the scandal-ridden collapses of Lehman and Washington Mutual), and the fall of auditing legend Arthur Andersen, naming only a few. Consequently, the overnight decline – and in many cases disappearance – of some of the world’s largest, best-known companies played out publicly and relentlessly for the world to see.

Through the course of those difficult and very public days, I witnessed the tireless efforts of the SEC staff as it picked through the mountains of rubble resulting from this vast and unexpected market destruction. Overnight, the SEC’s front line of lawyers, accountants and examiners set to work investigating the divergent causes behind the fall of so many market giants and, as appropriate, preparing and leveling charges against those responsible.

Having seen firsthand the dedicated performance of the SEC staff during those difficult times, I’ve watched with dismay and disappointment as its Fort Worth Regional Office suffers a continuing onslaught of public criticism and second-guessing in what, to some extent, rings of political gamesmanship. These critiques come from sources as divergent as the SEC itself (its Office of the Inspector General and a handful of current and former employees), the Texas State Securities Board, members of the Senate Banking Committee, management school studies, and the Stanford Victims Coalition, to name only some of its most vocals critics.

According to critics, the SEC’s Fort Worth Office is guilty of severe mishandling of (and effectively facilitating) the apparent billion-dollar Ponzi scheme orchestrated at Stanford Investment Bank, purposefully ignoring significant and complex fraud investigations such as Stanford in favor of “smash and grab,” easy-kill cases that inflated the apparent results of the office, and internal retaliation against the Commission employees who dared shed light on these practices.

To be sure, the staff of the SEC’s Fort Worth Office has made mistakes, and certainly will do so in the future. At last count, there are more than 5,000 public companies in the United States, many of which are based or have significant operations in the vast territorial jurisdiction of that office. The SEC staff regulates thousands of broker-dealers, investment advisers, and almost countless other professionals involved in the nation’s securities markets on a daily basis.

The SEC’s circumstances contrast sharply with the typically well-heeled companies and individuals monitored by the agency. The Commission is staffed with only a fraction of the resources required to perform the essential task rightly placed at its doorstep since its creation in the wake of the Great Depression. According to its mission statement, the SEC’s core function is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

Due to perpetual funding limitations, persistent staff turnover stemming from pay lower than that promised by the private sector, and the sheer enormity of its job, the SEC has been handed the proverbial knife for use at a gunfight.

Unfortunately, this contrasting world of “haves” and “have-nots” forms the backdrop for the cacophony of charges leveled against the Commission’s Fort Worth Office in recent years. When it has – inevitably – fallen short in the face of such challenges, its staff has been roundly criticized and accused of conduct that borders on, or in fact is, criminal and corrupt.

Indeed, in a recent Senate Committee hearing that, sadly typical of such spectacles, was far more electorate pandering than fact-finding, a senator effectively accused the then-director of that office of purposefully misleading the committee about the origins of the Stanford investigation. Lost, however, from the senator’s sound bite was the fact that the director was not even employed by the SEC at the time of the events she allegedly sought to cover up, consequently eliminating any incentive to mislead Congress or anyone else.

To be clear, I am far from a cheerleader for the SEC. As a defense lawyer, I recognize that the Commission staff often gets in wrong, and consequently that it must be challenged. However, I also recognize that the staff, collectively dedicated by all accounts and doing the best it can in difficult circumstances, simply deserves better. This begins with those in Congress and extends to the rest of us.

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