Why Isn’t the SEC Committed to a Just and Fair Enforcement Process?

What Should Matter to SEC Enforcers: Victory at All Costs or Achieving a Just and Fair Result?

I’ve given some thought to my inaugural effort on the Securities Diary blog.  My inclination was to wait until the Supreme Court decided the Halliburton case, because the Court’s latest venture into creating – or revising its creation of – private federal securities fraud claims under section 10(b)/Rule 10b-5 likely will provide considerable fodder for thought and criticism.  But the recent focus on shortcomings in SEC enforcement actions, and the SEC’s approach to enforcement litigation, have pressed me into service.

On April 3, 2014, the Wall Street Journal published an op-ed piece co-authored by Mark Cuban and Thomas Melsheimer entitled “How the Feds Rig Their Prosecutions.”  Although the title was broad, the point of the article was narrower, focusing on the SEC’s policy to refuse in its enforcement actions to comply with the criminal law Brady rule requiring the prosecution to disclose to the accused in advance of trial all exculpatory evidence in the prosecutors’ possession.  In the Cuban/Melsheimer view, the SEC’s policy of maintaining secrecy over evidence that could bear on a just and fair resolution of the charges is inconsistent with a desire – hopefully endorsed by the SEC – that “justice be done” in its cases.

They are surely correct, and it is shameful that the SEC’s Enforcement Division, with the acquiescence, if not endorsement, of the Commission itself, elevates “winning” above a genuine effort to foster a fair resolution of disputed factual and legal issues.  The goals and duties of government lawyers enforcing the law have long been understood to go beyond “winning” for their government clients.  In the criminal context, there is a well-recognized duty to seek justice, not just victory:

The United States Attorney is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done. As such, he is in a peculiar and very definite sense the servant of the law, the twofold aim of which is that guilt shall not escape or innocence suffer. He may prosecute with earnestness and vigor—indeed, he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones. It is as much his duty to refrain from improper methods calculated to produce a wrongful conviction as it is to use every legitimate means to bring about a just one.

 Berger v. United States, 295 U.S. 78, 88 (1935).

Law enforcement officers have the obligation to convict the guilty and to make sure they do not convict the innocent. They must be dedicated to making the criminal trial a procedure for the ascertainment of the true facts surrounding the commission of the crime. To this extent, our so-called adversary system is not adversary at all; nor should it be.

United States v. Wade, 388 U.S. 218, 256 (1967) (White, conc.)

 The responsibility of a public prosecutor differs from that of the usual advocate; it is to seek justice, not merely to convict. This special duty exists because: (1) the prosecutor represents the sovereign and therefore should use restraint in the discretionary exercise of governmental powers, such as in the selection of cases to prosecute; (2) during trial the prosecutor is not only an advocate but also may make decisions normally made by an individual client, and those affecting the public interest should be fair to all; and (3) in our system of criminal justice the accused is to be given the benefit of all reasonable doubts.

New York Lawyer’s Code of Professional Responsibility, Ethical Consideration 7-13.

 A public prosecutor or other government lawyer in criminal litigation shall make timely disclosure to counsel for the defendant, or to a defendant who has no counsel, of the existence of evidence, known to the prosecutor or other government lawyer, that tends to negate the guilt of the accused, mitigate the degree of the offense or reduce the punishment.

New York Lawyer’s Code of Professional Responsibility, Disciplinary Rule 7-103[B].

One of the unfortunate ways the SEC’s enforcement program has changed over the years is that the Division of Enforcement has become increasingly focused on generating statistics and “victories” without a lot of regard for achieving what should be the SEC’s actual enforcement goal: to protect the integrity and efficiency of the U.S. securities markets, and to make securities investors (especially unsophisticated securities investors) more secure in their interactions with securities professionals.  Ask pretty much any long-standing securities enforcement lawyer (in a context in which he or she feels free to speak the truth), and you will hear that the “glory days” of the SEC’s Enforcement Division were when there were no press releases or leaks to the press, no ginned-up reports for Congress, and instead a group of law enforcers largely focused on trying to protect shareholders by getting to a just and fair result.

The Enforcement Division also needs to be forward-looking and proactive.  Imposing penalties and so-called disgorgement on market participants can play a role in achieving the above goals, but often the SEC’s after-the-fact enforcement actions do little to achieve any lasting goal, and are designed more to populate press releases and periodic SEC reports that are the regulatory equivalent of Potemkin villages, or to try to prove that the SEC can extort a higher settlement payment from financial institutions than ambitious, vote-seeking State Attorneys General who find smacking down securities businesses a convenient way to pretend to be populists.  (Instead of competing with these self-anointed regulators, the SEC should be pressing to remove them from the business of national securities regulation.)

A nice start for the Division of Enforcement to return to the “glory days” would be the unabashed rejection of victory for victory’s sake, re-dedication of SEC enforcement lawyers to the credo of public prosecutors reflected in the Berger decision, and adoption of internal management tools designed to achieve that end.

Straight Arrow

April 29, 2014

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4 thoughts on “Why Isn’t the SEC Committed to a Just and Fair Enforcement Process?

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