Legal News

A Look at the SEC One Year After Its Overhaul

By Ashby Jones

About a year ago, the Securities & Exchange Commission gave itself an overhaul. At the time, the Commission was viewed as having lost some of its effectiveness. When it found evidence of fraud and the like, it reacted too slowly, critics charged. And there were cases in which it missed the boat completely, like the Bernie Madoff situation.

So, a year later, how is the Commission doing? A story in Tuesday’s Washington Post gives an early verdict: not as well as the agency might have hoped.

According to WaPo reporter Zachary Goldfarb, the overhaul “has run into courtroom setbacks and internal skepticism, underlining how difficult it is for the agency to remake itself as a get-tough cop.”

“I’m looking to see whether or not all of the new initiatives are actually resulting in improved sanctions,” said SEC Commissioner Luis A. Aguilar, to the WaPo. “I don’t yet see the empirical evidence.”

So what’s gone wrong?

For starters, New York federal judge Jed Rakoff tossed out a proposed settlement between the SEC and Bank of America over bonuses paid to executives at Merrill Lynch shortly after BofA took over Merrill. (A revised settlement ultimately won the judge’s approval.)

Earlier this year, New York federal judge Louis Stanton rejected the SEC’s case against Cohmad Securities, which funneled business to Madoff. The judge called some of the SEC’s allegations “speculatively and flimsy.”

And not all of the agency’s proposed fixes have paid off. Robert Khuzami, the commission’s enforcement director (pictured), announced earlier this year that the SEC would use cooperation agreements with potential witnesses by giving immunity to whistleblowing executives. Khuzami predicted the approach would be a “game changer.”

But without similar guarantees from the Justice Department, defense lawyers who represent those potential witnesses are skeptical that they’d sign up.

Still, Khuzami told the Post that the agency’s efforts were yielding results. In 2009, according to the WaPo, “the agency opened nearly 500 investigations, more than double the 2008 level, and ordered companies to pay 35 percent more in fines and repay 170 percent more in ill-gotten gains.”

Perhaps most importantly, the SEC has begun to reclaim some of its street cred.

According to Gibson Dunn’s John Olson, when SEC Commissioner Mary Schapiro began her job last year, “there was a feeling that the SEC was a failed agency. There was talk of carving up the SEC and dividing its functions.” But according to Olson, Schapiro “listened to the criticism and responded. A major part of that was showing that the SEC could bring in a tough former prosecutor in Rob Khuzami who could change the management style.”

Photo: Getty Images

Full post as published by Law Blog - WSJ.com on April 06, 2010 (boomark / email).