Reforming the SEC: The Unnecessary Emphasis on Stats

Robert Khuzami, the Director of the Division of Enforcement, has proposed a number of reforms connected to the investigative process.  The effectiveness of the reforms will depend upon implementation.  In that regard, only time will tell.  There is, however, at least one significant concern looming on the horizon.

In his speech before the New York City Bar Khuzami poured out a paragraph of statistics.  As he noted in the remarks:  

• Comparing the period from late January to the present to roughly the same period in 2008, the Division has opened 10% more investigations (approximately 525, compared to 475); has been granted 118% more formal orders (which grants us subpoena power) (275, compared to 126); has filed 147% more TROs (52, compared to 21); and has filed nearly 30% more actions (397, compared to 306).

Similarly, Chairwoman Schapiro marshalled similar statistics for the benefit of Congress when testifying back in July.

• We have filed actions seeking at least 42 emergency temporary restraining orders. During roughly the same period last year, we filed 16.
• We have opened more than 439 investigations. During roughly the same period last year, we opened 395.
• As noted above, the Commission has issued at least 224 formal orders. During roughly the same period last year, the Commission issued 93.

Testimony of Chairwoman Schaprio, before the United States House of Representatives Committee on Financial Services, Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, July 14, 2009.

The emphasis on stats is understandable.  Its easy to make the case for improved efficiency or additional appropriations by showing that the numbers are going up.  But this is a culture that predates the current Commission and needs to stop.  It is an emphasis on quantity not quality.  Even a modest perusal of the Madoff report shows that the problem was not quantity.  Madoff was subject to two enforcement investigations and three examinations.  It was a qualitative failing.  Once inside, investigators and examiners missed opportunities to uncover the fraud.  Indeed, the report gives the impression that sometimes matters were wrapped up quickly so that staff could move on to the next matter, the next statistic.

As we will discuss in a later post, the future of Enforcement needs to come from the ability to look around the corner and become more proactive.  But proactive investigations mean that sometimes the staff will be wrong.  In short, a drop in the stats may be the best indication that permanent and positive change is underway inside the Division of Enforcement.