Trekking toward über regulation: Prospects for meaningful change at SEC enforcement?

University of Pittsburgh Law Review

Volumn 71, Issue 3, 2010, Pages 545-566

  Branson, Douglas M ^a  

^a UNIVERSITY OF WASHINGTON   (United States)

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EID: 77953318264     PISSN: 00419915     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (114)

1. Trends in SEC Enforcement 2009, 41 Sec. Reg. & L. Rep. (BNA), at 1255 (Jury 6, 2009) (prepared by Thomas O. Gorman, a highly respected former SEC enforcement attorney).
2. Ralph Nader, The Monopoly Makers: Ralph Nader's Study Group Report on Regulation (Mark J. Green ed., 1973).
3. See, e.g., Kara Scannell SEC Botched Inquiries into Madoff Scheme, WALL ST. J., Sept. 3, 2009, at C3 (report of SEC Inspector General David Kotz).
4. See discussion and notes infra Part IV.
5. This is evidenced by law review and other symposia discussing proposals for regulatory reform. See, e.g., Symposium, New Models for Regulating the Financial Markets-The SEC's Future as it Turns 75, U. On. L. Rev. (forthcoming 2009).
6. Symposium, New Paradigms for Financial Regulation in the United States and the European Union, Brook. L. Rev. (forthcoming 2009).
7. Stephen Labaton, Finance Reform's Middle Ground; Frank's Committee Announces Proposal that Preserves Core of White House Plan but Removes Obstacle, Pittsburgh Post-Gazette, Sept. 24, 2009, at A11.
8. Über is a German word whose literal meaning is "over" or "above." Collins German Dictionary 490 (3d ed. 1998) (reprint 2001). In German, über ineffably connotes superiority and perhaps dominance as well. Deutschland Über Alles is the German national anthem.
9. See SEC Must Remain Independent, State Pension Funds Urge Geithner, 41 Sec. Reg. & L. Rep. (BNA), at 1007 (June 1, 2009).
10. In a $3.6 billion bonus case, the SEC had charged Bank of America (BofA) with a misleading proxy disclosure when BofA sought shareholder approval of the acquisition of Merrill Lynch. BofA led shareholders to believe that Merrill would not pay bonuses when, in fact, it had already paid billions. The SEC named no individuals as defendants, accepted a nolo contendere plea from BofA, and proposed a mild $33 million settlement (the dinky fire truck). Federal District Court Judge Jed Rakoff rejected the SEC's proffered settlement, finding that the very shareholders who had been misled would pay the settlement and that the proposed settlement "does not comport with even the most elementary notions of justice and morality."
11. Kara Scannell, Liz Rappaport & Jess Bravin, Judge Tosses Out Bonus Deal, Wall St. J., Sept. 15, 2009, at A1;
12. Editorial, Rakoff Rakes the SEC, Wall St. J., Sept. 15, 2009, at A20. The episode "puts new pressure on the agency to show that it is fighting for investors.⋯" Scannell supra. To some it was indicative of worse than a lack of fight: "That doesn't restore your reputation very well. They were hoping to slip a quick and dirty settlement past the judge and got called on it."
13. Kara Scannell, BofA Ruling Questions an SEC Weapon, Wall St. J., Sept 16, 2009, at C3 (comment of Professor Peter Henning).
14. Edmund L. Andrews, Treasury's Plan Would Give Fed Wide New Power, N.Y. TIMES, Mar.29, 2008, at A1.
15. See also Press Release, U.S. Dept. of the Treasury, Treasury Releases Blueprint for Stronger Regulatory Structure (Mar. 31, 2008) ("The U.S. regulatory structure does not serve America as well as it could, and modernization is inevitable.").
16. Associated Press, Treasury Secretary Requests Greater Powers for the Federal Reserve, N. Y. Times, June 20, 2008, at C3.
17. Sanford L Weill & Judah S. Kraushaar, Six Steps to Revitalize the Financial System, Wall St. J., Oct 26, 2009, at A19.
18. Harvey Pitt, Former Chairman, SEC, Address at the University of Dayton School of Law Symposium: The Fallout from the Bailout: The Impact of the 2008 Bailout on Lending Regulation, Securities Regulation and Business Ethics (Mar. 20, 2009).
19. See Caiola v. Citibank, N.A., N.Y., 295 F.3d 312 (2d Cir. 2002) (describing synthetics generally).
20. Administration Regulatory Overhaul Would Concentrate Many New Powers at Fed, 41 Sec. Reg. & L. Rep. (BNA), at 1137 (June 22, 2009) [hereinafter Regulatory Overhaul]. During the financial meltdown, of course, many formerly financial firms such as Morgan Stanley and Goldman Sachs had become banks so that they could have access to borrowings from the Federal Reserve.
21. The new "agency would monitor the fine print on such products as credit cards and mortgages. Such oversight is now scattered." Anne Flaherty, Geithner: Oversight in Need of Reform, Pittsburgh Post-Gazette, July 25, 2009, at A7.
22. Under the Obama proposal, the new agency would also dictate terms for "plain vanilla" versions of those items, such as 30-year mortgages and low-interest, low-fee credit cards. Republicans argued that such a legislative feature was "the first step toward having government bureaucrats approve and disapprove an array of products." The Obama proponents withdrew that feature of the proposed legislation. Labaton, supra note 6.
23. Regulatory Overhaul, supra note 15, at 1138.
24. Presaging his Administration's proposals, President Obama had stated earlier his guiding principles for reform: Citing "turmoil on Wall Street like we haven't seen in decades," Obama called for "clear rules of the road ⋯ to protect consumers and investors and ultimately to keep those financial institutions strong." He listed seven principles to guide Congress in planning a new financial regulatory framework: serious oversight to prevent systemic risk, reform of the regulatory structure, transparency, uniform supervision of financial products, accountability, comprehensiveness, and recognition of the global nature of the challenge.
25. Obama Lists Key Principles for Reform of Nation's Financial Regulatory System, 41 Sec. Reg. & L. Rep. (BNA), at 335 (Mar. 2, 2009).
26. See, e.g., Administration Sees Expanded SEC Role in Proposed Financial Regulatory Regime, 41 Sec. Reg. & L. Rep. (BNA), at 1139 (June 22, 2009).
27. Damian Paletta, Finance Reforms Pared Back, Wall St. J., June 9, 2009, at A1.
28. Id. at A4.
29. Securities Regulation under the Obama Plan, 41 Sec. Reg. & L. Rep. (BNA), at 1209 (June 29, 2009) [hereinafter Obama Plan] (Prepared by Stephen J. Crimmins, a former high-level SEC enforcement and trial attorney).
30. Jamie Dimon, A Unified Bank Regulator Is a Good Start, Wall St. J., June 27, 2009, at A13 (Mr. Dimon is Chairperson and Chief Executive Officer of J.P. Morgan Chase & Co.).
31. A push for an über regulator for investments reemerged as well, with SEC Commissioner Luis Aguilar's advocacy of a merger of the SEC, the Commodities Futures Trading Commission (CFTC), and the Employment Retirement Income Security Act of 1974 functions of the Department of Labor. The latter currently are performed by the Employee Benefits Security Administration within the Department of Labor.
32. See Aguilar Expressly Supports Single Regulator Urges SEC CTFC to Combine with DOL Entity. 41 Sec. Reg. & L. Rep. (BNA) at 1053 (June 8, 2009).
33. Stephen Labaton, Leading Senator Pushes New Plan to Oversee Banks, N.Y. Times, Sept. 20, 2009, at A1.
34. Id.
35. Senator Dodd and the senior Republican Senator, Richard Shelby, "agree generally ⋯ on skepticism of a more powerful Federal Reserve, reflecting a view widely held by lawmakers.''
36. Id.
37. Under the Dodd proposal the Fed would lose authority over banks, its ability to regulate mortgages and credit cards, and a leading role as the über regulator of systemic risk which the Obama administration had planned for it Id.
38. David A. Moss, An Ounce of Prevention: Financial Regulation. Moral Hazard, and the End of "Too Big to Fail," Harvard MaG., Sept-Oct 2009, 25, 26-27 (According to Moss, "the biggest culprits of all were the supersized financial institutions.").
39. Sarah N. Lynch, Frank's Plan Criticized as Too Lax, Wall St. J., Oct 8, 2009, at C3;
40. CTFC's Gensler and SEC's Hu Highlight Potential Thorns in Frank's Derivatives Draft, 41 Sec. Reg. & L, Rep. (BNA), at 1856 (Oct 12, 2009).
41. Len Boselovic & Elwin Green, G-20 Leaders Eager to Regulate Banking Executives' Pay, Pittsburgh Post-Gazette, Sept. 25, 2009, at A4.
42. Cindy Skrzycki, G-20 Leaders Likely to Fault Sluggish Financial Reform in U.S., Pittsburgh Post-Gazette, Sept. 25, 2009, at A6.
43. Damian Paletta & Deborah Solomon, Geithner Vents as Overhaul Stumbles, Wall St. J., Aug. 4, 2009, at A1.
44. See, e.g., Douglas M. Branson, The Very Uncertain Prospect of Global Convergence in Corporate Governance, 34 Cornell Int'l LJ. 321, 352-356 (2001).
45. See, e.g., Charles Forelle, Microsoft Yields to EU on Web Browsers, Wall St. J., July 25, 2009, at B1.
46. Interview with Larry H. Summers, Chair, President's National Economic Council, in Maria Bartiromo, Facetime: Summers on Obama's New Financial Regulations, Bus. Wk., July 6, 2009, at 8.
47. Id.
48. Ryan Lizza, The Contrarian; Sheila Blair and the White House Financial Debate, The New Yorker, July 6, 2009, 30, 30.
49. John Cassidy, Rational Irrationality; The Real Reason that Capitalism is so Crash-Prone, The New Yorker, Oct 5, 2009, 30, 34.
50. See. e.g., Editorial, Troubled Banks, Huge Bonuses, N.Y. Times, Aug. 3, 2009, at A20 (receiving $45 billion each, Citigroup paid out $5.33 billion in bonuses to employees while Bank of America paid out $3.3 billion).
51. Kara Scannell, Exchanges Offer Varying Views as Regulators Discuss Turf, Wall St. J., Sept 3, 2009, at C3 (remarks of CME CEO Craig Donahue).
52. See, e.g., Jonathan G. Katz, Reviewing the SEC, Reinvigorating the SEC, 71 U. Prrr. L. Rev. 489 (2010).
53. The SEC is a surprisingly small agency. As of June 1,2009 the Commission had 3,652 staff. Its fiscal year 2010 request was for $1,026 million and its 2011 request was $1,241 million. Its staff size is much smaller than, say, the FDIC, which has more than 5,000 employees.
54. SEC Seeks Significant Increase in Funding for FY 2010, 2011, Citing Staffing Shortage, 41 Sec. Reg. & L. Rep. (BNA), at 1049 (June 8, 2009).
55. Amendments to Regulation SHO, Exchange Act Release No. 34-59748 (Apr. 10, 2009) (modified uptick rule release).
56. Amendments to Regulation SHO, Exchange Act Release No. 34-60388 (Jury 27, 2009) (fail to deliver release).
57. Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Exchange Act Release Nos. 33-8177, 34-47235 (Mar. 3, 2003).
58. "The expectations gap is real: securities regulation is far from any assurance of corporate transparency, delivering neither as much protection as many investors assume nor as much as is optimA1." Donald C. Langevoort, Managing the "Expectations Gap " in Investor Protection: The SEC and the Post- Enron Reform Agenda, 48 Vill. L. Rev. 1139, 1140 (2003). "New rules that are not enforced effectively become part of the problem-they exacerbate the gap, rather than help reduce it"
59. Id. at 1164. So, too, big new agencies, whose power and capability does not match appearances, exacerbate the gap.
60. James Surowiecki, Caveat Mortgagor, The New Yorker, July 6, 2009, at 28.
61. Id.
62. Witnesses Testify to Regulatory Gaps; Schapiro Warns of "Monolithic Regulator, "41 Sec. Reg. & L. Rep. (BNA), at 549 (Mar. 30, 2009).
63. See supra Part I discussion and notes.
64. Obama Plan, supra note 21, at 1209.
65. Id at 1210.
66. Id.
67. Id. at 1211.
68. Of course, a great, although perhaps not insurmountable, inconsistency exists between the broker-dealer's traditional role as a salesperson and role as a fiduciary, with duties of the utmost good faith and loyalty. See generally Donald C. Langevoort, Brokers as Fiduciaries, 71 U. Pitt. L. Rev. 439 (2010).
69. Obama Plan, supra note 21, at 1211.
70. The SEC had already reversed itself on the near polar opposite, namely, no 1, supervision or light supervision of large diversified financial firms. In Fall 2008, after the failures and near failures of Lehman Brothers, Bear Stearns, and Merrill Lynch, the SEC terminated its voluntary supervision (supervision lite) program for "consolidated supervised entities" (CSEs).
71. Id.
72. Sarah Lynch, SEC Plan Aims to Better Foretell Risks, Wall St. J., July 2, 2009, at C3.
73. Kara Scannell "Urgency" Drives SEC Crackdown, Wall St. J., Aug. 11, 2009, at CI (reporting comments of new SEC enforcement chief Robert Khuzami).
74. Id.
75. These and other steps to bolster enforcement are also reviewed in detail by Professor Jayne Barnard. See generally Jayne Barnard, Evolutionary Enforcement at the Securities and Exchange Commission, 71 U. Pitt. L. Rev. 403 (2010).
76. See, e.g., The SEC's Blueprint to Reinvigorate Enforcement, 41 Fed. Sec. Reg. & L. Rep. (BNA), at 671 (Apr. 13, 2009) [hereinafter Blueprint] (presently the duty officer or commissioners in seriatim may authorize a formal order allowing staff to use the agency's subpoena power).
77. Enforcement Division to Tighten Processes; Penalty Guidance, Manual are Under Review, 41 Fed. Sec. Reg. & L. Rep. (BNA), at 805 (May 4, 2009).
78. See Blueprint, supra note 59, at 669 (paraphrasing testimony of Chairperson Schapiro before the House Committee on Appropriations and the Senate Committee on Banking, Housing and Urban Affairs).
79. See Arden Dale, Tax Whistle-Blowers Await Big Pay Day, Wall St. J., Oct. 14. 2009, at B5 (noting that in 2008 the IRS received 476 submissions, blowing the whistle on 1, 246 taxpayers, but that under the program overall, after three years no whistle-blower had yet to receive a cent). Another complicating factor is that the SEC receives approximately 700, 000 tips and referrals per year.
80. See Blueprint supra note 59, at 669.
81. Teicher v. SEC, 177 F.3d 1016 (D.C. Cir. 1999), holds that the SEC had no authority to seek wider bar orders. Previously, the Commission had tried to erect such bars.
82. See Matter of Westerfield, Exchange Act Release No. 34, 41126, 54 SEC Docket 25 (Mar. 1, 1999).
83. See Obama Plan, supra note 21, at 1212.
84. Kara Scannell, SEC to Give Attorneys More Power, Wall St. J., Aug. 6, 2009, at C3;
85. Khuzami Cites Move to Specialized Teams, Other Initiatives to Improve SEC Enforcement, 41 Fed. Sec. Reg. & L. Rep. (BNA), at 849 (May 11, 2009).
86. See Back to the Future: Chairman Schapiro Ends Pilot Program for Corporate Penalties, Eliminates Commission Pre-authorization, Allows Staff to Negotiate, 41 Fed. Sec. Reg. & L Rep. (BNA), at 307 (Feb. 23, 2009).
87. See, e.g., Langevoort, supra note 45, at 1142 (the SEC hit "its apotheosis in the campaign against Wall Street insiders like Ivan Boesky and Michael Milken").
88. In 2008, the SEC Enforcement Division brought 671 enforcement actions, its second highest total on record. The highest total was 679 in 2003, ballooned by financial reporting scandals following Enron and WorldCom. Insider trading prosecutions increased 25 percent and market manipulation cases 45 percent, albeit from a very small number. In particular, the SEC trumpeted its settlements with the largest financial services firms in the auction rate securities cases.
89. FY '08 Saw 671 Enforcement Actions, SEC Reports: Is Second Highest Number, 40 Fed. Sec. Reg. & L. Rep. (BNA), at 1751 (Oct. 27, 2008). These statistics came from a draft of the SEC's annual Performance and Accountability Review, which it has published each November since 2004.
90. See generally Jeffrey Toobin, End Run at Enron, The New Yorker, Oct 27, 2003, 48.
91. Ryan v. Gifford, 918 A.2d 341, 345 (Del. Ch. 2007), describes backdating, a practice through which corporate officers backdated stock options to a date on which the market price was significantly lower so that the exercise or "strike" price would be lower and the profits correspondingly higher when corporate officers, principally CEOs, exercised those options. In re Tyson Foods, Inc., Consol S'holder Litig., 919 A.2d 563, 572 (Del. Ch. 2007), describes spring loading, a practice through which stock option committees time the grant of options to corporate executives-typically, before public announcements of positive developments likely to result in significant increases in the price of the underlying stock. Bullet- dodging occurs when those in control, sensing that the market has overreacted to negative news and unduly depressed the company's share price, quickly grant options to corporate executives, who thereafter have an inordinately low strike price for the options.
92. Id.
93. See, e.g., Katz, supra note 40, at 489.
94. See, e.g., Douglas M. Branson et al., Business Enterprises: Legal Structures, Governance, and Policy 438-443, 468 (2009).
95. See, e.g., Langevoort, supra note 53, at 439.
96. See supra note 9.
97. See Liz Rappaport, Dan Fitzpatrick & Joann S. Lublin, Cuomo Calls in 5 BofA Directors, Wall St. J., Sept. 17, 2009, at C3.
98. See Lewis's Retirement at Bank of America Will Not Affect Investigation, Cuomo Says, 41 Sec. Reg. & L. Rep. (BNA), at 1834 (Oct. 5, 2009).
99. See, e.g., Edward J. Epstein, Confidence Man, Wall St. J., Aug. 15, 2009, at W8 (total loss estimated to be $15 billion; receiver is attempting to recover $13.7 billion via eight lawsuits).
100. Investors whom affinity fraud schemes have bilked typically are motivated, at least in part, by characteristics they share with the promoter (same race, same religion, same club, same church). Madoff "hawked his investment fund to a largely Jewish clientele⋯Madoffbecame known as the 'Jewish T-bill, ' as in risk-free."
101. Andrea Sachs, Bernie Madoff - Publisher's Best Friend? Time Aug. 17 2009, at 61; "The buying people did more research on buying a car than they did on the man who handled their money."
102. Id. (quoting Erin Arvedlund, Too Good to Be True: The Rise and Fall of Bernie Madoff (2009)).
103. See, e.g., FINRA Publishes Report Showing Inadequate Handling of Stanford Complaints, 41 Sec. Reg. & L. Rep. (BNA), at 1817 (Oct 5, 2009).
104. See, e.g., California AG Sues Investment Adviser Who Allegedly Funneled Money to Madoff, 41 Sec. Reg. & L. Rep. (BNA), at 1795 (Sept 28, 2009).
105. Sachs, supra note 78, at 61 (quoting Erin Arvedlund, Too Good to Be True: The Rise and Fall of Bernie Madoff (2009)). The Madoff fraud, and in part the SEC's failures therein, have already been the subject of three books.
106. In addition to Arvedlund, supra note 78, they include Andrew Kirtzman, Betrayal (2009) and Jerry Oppenheimer, Madoff with the Money (2009).
107. Craig Karmin & Peter Lattman, CalPERS Rocked by "Pay to Play, " Wall St. J., Oct 15, 2009, at A1 (reporting on payments to Al Villalobos and Arvco Financial Ventures, LLC).
108. See Two Plead Guilty in N. Y. Probe Into Corrupt "Pay to Play " Practices, 41 Sec. Reg. & L. Rep. (BNA), at 1872 (Oct. 12, 2009);
109. see also Karmin & Lattman, supra note 82.
110. Stephen Breyer, Regulation and Its Reform 184 (1982).
111. A.C. Pritchard, The SEC at 70: Time for Retirement?, 80 NOTRE DAME L. REV. 1073, 1081 (2005).
112. See, e.g., Robert W. Hahn & John A. Hint, The Costs and Benefits of Regulation: Review and Synthesis, 8 Yale J. on Reg. 233, 258 (1991).
113. See generally Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. Pol. Econ. 169(1968).
114. See, e.g., William Breit & Kenneth G. Elzinga, Antitrust Penalties and Attitudes Toward Risk: An Economic Analysis, 86 Harv. L. Rev. 693 (1973).