Reforming the SEC: The Criminal Law Approach in Civil Action Clothing

One of the concerns about the reforms at the Division of Enforcement concerns what one might call the criminalization of the civil process.  Except on occasional mis-informed television shows, the Securities and Exchange Commission has no criminal jurisdiction.  There is no authority to prosecute the guilty for perjury or criminal violations of the securities laws.  All of that authority rests with the US Attorneys Office. 

As a result, some would say that the process of bringing a civil suit and the process of bringing a criminal suit are very different.  For one thing, the differences in the remedy are stark.  Sending someone to jail is not one of the options in an SEC Enforcement Action.  This is not to say, in an era of officer-director bars and triple penalties, the SEC has meek remedies.  The Agency can easily end careers and bankrupt scofflaws. 

With the change in the top at the Division of Enforcement, the administration comes mostly from the criminal side of enforcement.  Robert Khuzami and his deputy, Lorin Reisner, are from the criminal side.  So is George Canellos, head of what is probably the most important branch office of the Division at the Commission (second only to the home office in Washington, DC). 

So what might this mean in practice?  At the risk of grossly over generalizing, criminal investigations, compared with civil investigations, are probably less cooperative, less process oriented, and less subject to give and take negotiations.  The SEC process involves the use of Wells Submissions where targets are invited to give their side of things, something that can often involve a back and forth between counsel and staff.  The criminal process does not make use of these types of submissions and are not obligated to give putative defendants an opportunity to explain. They are also probably more secretive, with officials often less willing to share information acquired during an investigation.  This may in part be a result of the common presence of a grand jury and the restrictions of grand jury secrecy.

To the extent this is true and to the extent one could fairly characterize criminal techniques as more adversarial, it puts some of the current spate of reforms into a slightly different perspective.  Thus, the recent decision by the Commission to delegate formal order granting authority to the Division of Enforcement.  Formal orders provide staff with the authority to issue subpoenas.  It is Khuzami, not the Commission, who will, absent unusual circumstances, issue formal orders.  He plans to give the discretion to other "senior officials" in the Division, something that will presumably include Directors of the regional offices.

The decision has some merit.  Ask anyone from the Commission when was the last time the Commission rejected a formal order and the question draws a blank response.  For all intents and purposes, it never happens.  Given that this is the case, the delegation decision simply takes away from the Commission a rote assignment, allowing the body to deal with more important matters.  Moreover, it takes away some of the delay by eliminating some of the bureaucratic impediments to quick action by the Division. 

But in fact things are more complicated than that.  Formal orders, while never denied, are subject to Commission review and discussion.  There is, therefore, an opportunity to express concerns and define parameters, even if informal.  Anything that goes to the Commission is reviewed by the operating divisions and there is a chance to provide comment on the matter.  In short, the approval process involves the participation of the full agency, including application of the expertise of the operating divisions.

The new authority creates a process that gives the Division all but exclusive authority to decide the formal order question, without approval of the Commission or prior consultation with the operating divisions.  Admittedly, the Division is circulating to the Commission and operating divisions a list of the formal orders issued, so there is some opportunity for expressions of concern.  But as anyone who has worked at the Commission knows, a memo will receive far less attention (perhaps no attention) from the operating divisions in comparison with a matter going to the Commission.  The requirement of Commission approval, even for something as pro forma as a formal order, focuses the attention of the staff like nothing else.  Add in that presumably a rocket docket of some sort could have been put in place rather than a complete delegation of authority.

In his speech to the New York Bar, Khuzami stressed the almost punitive nature of the authority.  The formal order delegation, as he noted:  "[M]eans that if defense counsel resist the voluntary production of documents or witnesses, or fail to be complete and timely in responses or engage in dilatory tactics, there will very likely to be a subpoena on your desk the next morning."  In other words, the delegation wasn't about efficiency or bureaucratic reform but about coercion. 

Given the disaster of the Madoff investigation, the Commission may be in a position where displays of toughness are inevitable and, frankly, necessary in order to help project an on the job image.  Nonetheless, toughness and oversight are not antithetical terms.