Peter J. Henning follows issues involving securities law and white-collar crime for DealBook's White Collar Watch.
The inspector general at the Securities and Exchange Commission, H. David Kotz, created a bit of a furor this week when he disclosed that his office is looking at whether former staff lawyers might have influenced a case.
In a letter to Senator Charles E. Grassley, Republican of Iowa, Mr. Kotz wrote that "we are currently conducting an investigation into allegations very recently brought to our attention that a prominent law firm's significant ties to the S.E.C., specifically, the prevalence of S.E.C. attorneys leaving the agency to join this particular firm, led to the S.E.C.'s failure to appropriate actions in a matter involving the firm."
About White Collar WatchPeter J. Henning, writing for DealBook's White Collar Watch, is a commentator on white-collar crime and litigation. A former lawyer at the Securities and Exchange Commission's enforcement division and then a prosecutor at the Justice Department, he is a professor at the Wayne State University Law School. He is currently working on a book, "The Prosecution and Defense of Public Corruption: The Law & Legal Strategies," to be published by Oxford University Press.
This is not the first time Mr. Kotz has looked at the impact that a former staff member had on an investigation. Reports on the S.E.C.'s handling of investigations of Allied Capital and the Stanford Financial Group included a discussion of former enforcement staff members representing clients shortly after leaving the commission.
The inspector general is certainly not the only person raising questions about the revolving door that takes lawyers from the S.E.C. to private firms subject to its regulations. Senator Ted Kaufman, Democrat of Delaware, described the recent hiring of an associate director of the S.E.C.’s trading and markets division by Getco, a high-frequency trading firm, as "another example of regulatory capture at its worst."
As the Deal Professor pointed out recently, the problem that Mr. Kaufman called "regulatory capture" is intractable in many ways, but it remains the case that "we need to make sure that we have regulators who can truly act independently."
Mr. Kotz's statement about apparent undue influence certainly sounds insidious, and Mr. Kaufman proposed that the S.E.C. ban its staffers from even working for companies affected by rules on which the person worked in the year before leaving the agency. But has concern about the revolving door been overblown in these instances?
Regarding the "prominent law firm," which The American Lawyer noted has not yet been identified, the presence of even a large number of former S.E.C. lawyers working there does not necessarily translate into any undue influence. The number of lawyers with S.E.C. experience is hardly relevant because many cases do not involve a battle in which the strongest or fastest group of lawyers wins.
A single lawyer who is able to influence the S.E.C.'s decision-making is equally troublesome. If any improper inducements were to be offered to S.E.C. staff members to sway a decision, that should be prosecuted under the applicable bribery and conflict of interest statutes. But the focus should be as much on the staff members if they allowed themselves to be influenced by former colleagues who advocated on behalf of a client.
Lawyers representing clients seek the best result possible within the bounds of the law and the professional responsibility rules, and it is not a fair criticism to say that a former S.E.C. staff member caused a failure to take appropriate action if it was the result of that person's advocacy. If a staff member felt intimidated by a former S.E.C. lawyer because that person had served at a senior level and still had close ties to the leadership at the agency, then that is a problem for the S.E.C., not the law firm that hires former staffers.
Mr. Kaufman criticized the hiring of the associate director because the S.E.C.’s trading and markets division is heavily involved in the assessment of the so-called flash crash in the stock market on May 6, an issue of particular importance to high-frequency trading firms that will likely be subject to new regulations. The senator pointed out that the associate director "will be able to inform Getco of her knowledge of the current views of every commissioner and fellow staffers with whom she worked as to the meaning of the May 6 flash crash and the possible direction of future studies and rule-makings involving high-frequency trading, thereby richly informing Getco's future regulatory and business strategies."
If there was an investigation of possible securities law violations involved, then the hiring might be troublesome because it could tip Getco on how the S.E.C. viewed the evidence in the case. But providing information on where the rule-making may be headed and what may have set off the flash crash are things that will be fully disclosed at some point when the S.E.C. drafts rules and seeks public comment on them.
To the extent the high-frequency trading firm learns about where the S.E.C. may be headed and how it will have to adjust its operations to comply with new regulations, that strikes me as a good thing, or at least not worthy of criticism. The point is not that the trading firm somehow gained undue influence over the rule-making process through its hire, but that it can be better prepared for what might be coming down the regulatory road. That hardly seems to constitute regulatory capture.
The revolving door is a problem if the S.E.C. allows former staff members to sway its decisions in a way that others could not. As I wrote in an earlier post on this issue, "The revolving door is a fact of life, but it need not be a problem if the appearance of a former staff member, even an enforcement director, does not create the perception that the S.E.C. will fold its cards and abandon a case."
We should be careful not to read too much into the hiring of a senior staff member by a firm or who represents a client in a new matter before former colleagues. As Sigmund Freud is reputed to have said, "Sometimes a cigar is just a cigar."
– Peter J. Henning
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H. David Kotz’s Letter to Senator Charles E. Grassley
E-mail This Print Share Close Linkedin Digg Facebook Mixx My Space new_york_times:http://dealbook.blogs.nytimes.com/2010/06/18/s-e-c-s-revolving-door-draws-more-scrutiny/ Permalink Financial Services, Legal, Top Headline, White Collar Watch, Allied Capital, Charles E. Grassley, Charles Grassley, H. David Kotz, Securities and Exchange Commission, Stanford Financial Group, Ted Kaufman Related Posts From DealBook How Not to Run an S.E.C. InvestigationReport Questions S.E.C.’s Handling of InquiriesStanford’s Co-Defendants Try to Flee the ‘Circus’White House Moves to Shape the Financial BillCongress Takes Aim at Wall St.’s Wild Trading Previous post Lukoil Chief Denies Eyeing BP Assets Next post Bair’s Next Target: Fannie and Freddie NYTD.CRNR.userContent.getUserContent(25,'default'); Latest DealBook Headlines Trouble Seen for Gothamist Sale to Cablevision // Bair’s Next Target: Fannie and Freddie // S.E.C.’s Revolving Door Draws More Scrutiny // Lukoil Chief Denies Eyeing BP Assets // EMI Shifts Management in New Strategy // DealBook News by Industry Airlines / Autos Basic Industries Consumer Goods Energy / Utilities Financial Services Food & Beverage Healthcare Media Real Estate Retail / Leisure Technology Telecom Contributors Andrew Ross Sorkin Editor Posts | Profile Jack Lynch News Editor Posts Michael de la Merced Reporter Posts | Profile Cyrus Sanati Contributing Reporter Read Full Article »