Judicial Hobbling of the SEC: Gupta v. SEC (Part 1)
J Robert Brown Jr. | Thursday, July 14, 2011 at 06:00AM One can only imagine the morale of the staff at the SEC these days, particularly in Washington.
The Agency traditionally had been built around hard working and generally underpaid staff who believed in their mission, particularly ensuring the integrity of the securities markets and the protection of investors. Moreover, a stint at the SEC could be used to obtain a position in the private sector. Look at the number of prominent securities attorneys who started in the SEC. The turnover also benefited the Agency by providing constant room for new energy and invigoration.
These days, though, a position outside the Agency can get you subjected to a congressional request for an investigation by the Office of the Inspector General. Bring a big case like the one against Goldman (which settled for $550 million) and you get investigated to see if the matter was timed to coincide with financial reform (charges eventually found to be baseless). Whenever anyone wants to criticize the staff (say Congress at budget hearings), they need only trot out Madoff and the lease on the Constitution Center, ignoring all of the other work performed by the Agency (not the least was the SEC's participation in the conviction in Galleon).
In all of this, it seems as if the courts have also increasingly played a role in hobbling the SEC. The DC Circuit has taken an activist role in striking down SEC rules, with shareholder access another potential candidate. Law from the US Supreme Court has contributed. When the staff members get criticized for not bringing actions against individuals in securities fraud cases, they will have Janus Capital as an explanation, a case that has the potential to sharply curtail the individuals under the federal securities laws.
An example of this approach occurred in Gupta v. SEC. The case involves a challenge to the SEC's decision to bring an action against Rajat Gupta as an administrative rather than an injunctive proceeding in federal district court. Broadly speaking, the case seeks to explore the staff's motive for the choice of forum. Allowing the case to go forward has the capacity to disrupt the enforcement process, subject staff members to depositions and other litigation risk every time they select a forum for bringing a case, and cost the SEC considerable resources in defending cases everytime a well funded defendant wants to challenge the choice of forum.
We will look at the case over the next few posts. Primary materials in this case, including the court's opinion, can be found at the DU Corporate Governance web site.
Reader Comments (3)
Sorry for the pendantry but I couldn't resist.
Having been the subject of a settlement with the SEC over market timing of mutual funds while Bernie Madoof was stealing billions under the agency's nose, i think the MORAL of your story is the the MORALE of the staff deserves to be where it is.
at least acknowledge that i beat you to it, except that i was being a pedant and you are falsely claiming to be an expert in hanging neck jewelry.
Fred