Toward More Effective SEC and DOJ Remedies

Since the market crisis there has been a continuing outcry about holding senior corporate executives responsible. From Capitol Hill to citizens across the land there has been a continuous demand for some kind of Judge Roy Bean justice – hang them high! The Department of Justice has brought a series of actions against major Wall Street banks and others. The SEC has prosecuted dozens of cases, some of which named individual corporate officers as defendants. The penalties have grown in size from the hundreds of thousands of dollars initially imposed on one prominent Wall Street bank by the SEC to the billions the banks have recently paid to resolve actions. New polices like the Yates memo, demanding firms point the figure at executives to win cooperation credit have been adopted. Yet the clamor continues.

The latest iteration of the demand for a return to Judge Bean justice emerged from the Office of Senator Elizabeth Warren in a Report titled “Rigged Justice: 2016, How Weak Enforcement Lets Corporate Offenders Off Easy” (here). One need not read past the title of what promises to be an annual review, to garner the key theme — why are senior corporate executives such as those who run Wall Street banks not in jail? The Report explains: The Department of Justice “rarely seeks prosecution of individuals.” Their failure seems to be augmented by the SEC which is “particularly feeble, often failing to use the full range of its enforcement toolbox. Not only does the agency fail to demand accountability, the SEC frequently uses its prosecutorial discretion to grant waivers to big corporations so that those companies can continue to enjoy special privileges . . .”

In support of its thesis the Report goes on to summarize a number of key DOJ and SEC cases. Those cases are divided into seven categories: 1) Financial crimes and offenses; 2) education and student loans; 3) automobile safety law violations; 4) occupational safety laws; 5) environmental laws; 6) trade laws; and 7) drug manufacturer laws.

Threaded through the cases summarized in each category are two central themes: No individual prosecutions; no admissions made by the company. The discussion of the SEC’s settlement with Deutsche Bank is emblematic: “In May 2015, Deutsche Bank AG agreed to pay approximately $55 million to the SEC to settle allegations that the bank hid losses of over $1.5 billion in 2008-2009. The SEC stated that Deutsche Bank’s statements did not accurately reflect the ‘significant risk” it faced. Despite the fact that this was the second significant Deutsche Bank settlement of 2015, the company did not admit any wrongdoing, no individuals were held accountable, and the settlement was so small that one analyst stated that it ‘isn’t relevant for Deutsche Bank.’”

The thesis for the Judge Bean approach is simple and straight forward: “If a corporation has violated the law, individuals within the corporation must also have violated the law,” according to the report. Unstated is the thesis that jail for a few executives will cure what ails the world of Wall Street and big corporations as will being forced to make admissions. While these points seem intuitive their premise is at best doubtful. While admissions may satisfy a craving for retribution, the reason such a requirement will change the behavior of a large corporate entity is unclear.

To be sure corporations act through individuals. That does not necessarily mean, however, that the individual acts of various executives were undertaken with the requisite wrongful intent which must be established as the predicate to the kind of criminal liability that ends with a prison term. One need only recall the DOJ prosecution of two Bear Stearns portfolio managers which ended in not guilty verdicts despite a case built on their own emails which looked open and shut on its face; or the SEC’s attempt to prosecute a mid-level executive at a major New York bank which settled a market crisis case with a large fine that ended in a finding of not liable but, nevertheless, destroyed the man’s career (hardly justice). Given the repeated investigation of market crisis actions by numerous prosecutors from the DOJ, the SEC and an alphabet soup of other agencies, coupled with the enormous pressure to bring individual cases, it seems likely that if the evidence was there, the cases would have been brought.

Perhaps more importantly what gets lost in this race to the gallows is protecting the public against a repetition of the wrongful conduct in the future. Halting wrongful conduct and inflicting punishment is only really effective if the public is protected from a repetition in the future – a point the Report and many supports of the Judge Bean approach neglect. Stated differently, if big fines are just a cost of doing business – an unstated these of the Report – then the sanctions imposed failed while the remedies proposed by the Report and others are unworkable.

Key to protecting the public – including investors and shareholders of the firms involved — should be to install policies and procedures which ensure against a repetition of the wrongful conduct in the future. That frequently begins with “tone at the top.” It continues with good corporate governance procedures which ensure that executives are acting as stewards of the shareholder’s money and for their benefit, not some wrongful purpose. Ensuring excellence in corporate governance going forward should benefit everyone – the shareholders, the company and the public. While these remedies may not draw the kind of headlines and accolades on the street that huge fines and jail terms spawn, they can do what neither of those can — safeguard the public interest in the future. Its time to move past Judge Roy Bean justice (who despite his reputation as a hanging judge only tried to hang two man but really hung one – one other got away) and into a better future.

Program: The Second Annual Dorsey Enforcement Forum will be held on Wednesday February 24, 2016 beginning at 1:00 p.m. Three panels of experts will discuss: 1) Trends in SEC enforcement; 2) FERC and CFTC market manipulation actions; and 3) Current developments in Financial Services Regulatory Enforcement. The program will be video cast, webcast and live in Washington, D.C. at the Willard Office building, 1455 Pennsylvania Ave. Lunch will be available beginning at noon; open bar at the conclusion of the program. No charge but registration is required by contacting Mr. Gorman’s assistant, Hanan Romodan at

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