The insider trading case against Raj Rajaratnam, founder of Galleon Fund, and others, discussed here, is being heralded as the most significant in years, leading some to ask if its signals the rejuvenation of SEC enforcement. The significance of the case, and whether it eclipses those such as Guttenberg, discussed here, which just a short time ago many were comparing to the SEC cases of the 1980s, remains to be seen. What is clear now however, is what the Rajaratnam case says about SEC enforcement. There are still miles to go.

Start with the recent revelations about the person identified in the SEC complaint as “Tipper A” or as “CW” in the criminal complaints, Roomy Khan. Accordingly to recently released documents, Ms Kahn pleaded guilty in 2002 to wire fraud and was placed on home confinement and ordered to pay a fine and make restitution. Those charges stem from a 1998 incident in which she faxed confidential sales and pricing information for computer chips sold by her then employer, Intel, to Galleon. Later she worked for the fund. DOJ was there. Where was the SEC?

Another report indicates that a Galleon executive sometimes demanded that his broker at Hambrecht & Quest give him order flow information about large investment firms such as Fidelity Investments. The brokerage firm reported this to the SEC. No action appears to have been taken. While the SEC may have overlooked this complaint, that should not have been true about Ms. Khan’s theft of inside information.

More importantly, the case against Mr. Rajaratnam appears to have been driven by the U.S. Attorney’s Office in the Southern District of New York. It is built at least in part on information from wire taps that office initiated after making a deal with CW on criminal charges. The SEC appears to be simply a passenger on the bus. In fact, the agency seems more and more to be simply a passenger on the DOJ express. In many areas, such as the FCPA for example, the SEC appears to be largely following the lead of DOJ and the criminal prosecutors.

This was not always the case. In the 1970’s the SEC was the leader in developing what were then called “questionable payment” cases. In a series of actions brought following the Watergate hearings, the SEC took the lead in investigating corruption in public companies doing business abroad and creating remedies to prevent a reoccurrence. Eventually those cases, and the revolutionary Volunteer program which saw hundreds of companies cooperate with the SEC, resulted in the passage of the Foreign Corrupt Practices Act in the latter part of the decade.

Again, in the 1980’s the Commission took the lead in the war on insider trading. Up until that time, few cases had been brought in the area. Yet, following the questionable payment cases the SEC lead the charge which resulted in blockbuster cases to which all others have been compared. In those days, the Commission drove the bus, it was not a passenger on a trip lead by others.

The difference between then and now is vision. In the 1970’s, SEC enforcement was guided, perhaps driven, by a vision of what the securities laws are and how they should govern in the marketplace. That vision said a new code of ethics governs: that when executives are using the money and the assets of the company, its owners are entitled to know. Those owners should be told how their money is spent and about the conduct of the executives doing it. The owners, that is, the shareholders, are entitled to know. It’s called disclosure.

In the 1980’s, SEC enforcement was guided by the same vision. There it said that if executives are using information that belongs to the company it should be for the benefit of the company. The information is, after all, owned by the company, not the executives. This also meant that the executives cannot use it for their personal enrichment or that of their friends through stock trading. The information belongs to the company and its owners, the shareholders.

Today, SEC enforcement does not seem to be guided by this vision. While the current administration is working hard in an effort to rejuvenate enforcement, more will be needed than reorganizations, professional managers and business plans. These initiatives will no doubt improve the overall functioning and efficiency of the Division of Enforcement. They will not rejuvenate it.

The restoration of enforcement begins with vision from the top. As in the 1970s and 1980s, there must be a vision of the securities laws bringing a new ethics to the market place under the guidance of the Commission. Whatever the merits of focusing on short sales, flash trading, dark pools and what ever other topic surfaces in a congressional letter or headline, dealing with these matters will alone will not do it. If the Commission wants to restore enforcement, if it wants to once again be the driver of the bus and not just a passenger on DOJ’s travels, it should look to its past and find the future.