Wall Street Takes Over Its Regulator

“Former employees of the SEC routinely help corporations try to influence SEC rulemaking, counter the agency’s investigations of suspected wrongdoing, soften the blow of SEC enforcement actions, block shareholder proposals, and win exemptions from federal law,” laments the author of “Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture,” a report by the Project on Government Oversight (POGO).

At fault: the revolving door at the Securities and Exchange Commission. In September 2012, hedge fund group Alternative Investment Management Association picked a new Chairman: Kathleen Casey, who’d been a commissioner at the SEC from 2006 to 2011. AIMA said in its press release that she’d be involved in “regulatory dialogues,” including “so-called ‘shadow banking.’”

Big Four accounting firm Deloitte hired James Kroeker as deputy managing partner, effective January 7, 2013. The press release raved about his “unique perspective” and “experience as a regulator.” He’d been at the SEC since 2007, and Chief Accountant since 2009. Before his stint at the SEC? Partner at Deloitte. Maybe the in-and-out had been planned.

Then there’s Mary Jo White, President Obama’s nominee for SEC chairman. As US Attorney for the Southern District of New York from 1993 to 2002, she’d prosecuted white-collar criminals and terrorists alike. But then she switched sides, namely to Debevoise & Plimpton, to defend, among others, JPMorgan which had been charged by the SEC with misleading mortgage investors. Now she’d head the SEC.

And so on. In reviewing the disclosures that SEC employees filed between 2001 and 2010, POGO found nearly 2,000 (!) forms where ex-employees indicated that they’d represent an employer or client before the SEC. But this was “just the tip of the iceberg” as former employees have to file these forms only for two years after leaving the agency. Beyond that, no one knows. It gets even murkier: “the SEC has shielded some former employees from public scrutiny by blacking out their names.”

SEC employees face a tangle of rules when they’re whizzing through the revolving door, a bureaucratic effort to tamp down on influence-peddling. Senior employees, for example, have to wait a year, in theory, after leaving before they can contact the SEC on behalf of a client. In theory, because the SEC often exempted them from this “cooling off period.”

As people rotate in and out of the SEC, the lines begin to blur between it and the companies it regulates until it is essentially controlled by the culture and insiders of the industry. The same principle applies to other agencies. A condition called, “regulatory capture.”

The potential stakes of regulatory capture are particularly far-reaching at the SEC because the agency is responsible for regulating a vast swath of American business, including the investment and brokerage industries, stock markets, accounting firms that audit public companies, and information that publicly traded corporations disclose to investors. It’s the agency’s job to protect investors.

To fend off accusations of regulatory capture, the SEC waves its list of enforcement actions, of which even the largest settlements were but a slap on the wrist. And often not even that….

One of the punishments meted out to established companies that have committed securities fraud is that they lose their special status as “well-known seasoned issuer” of securities. That WKSI status allows them to sell additional stock or other securities without a review by the SEC. But fraudsters can get a waiver that allows them to hang on to their WKSI privileges—and former SEC employees play a key role.

An investigation by the New York Times found 350 cases since 2001 in which the SEC issued WKSI waivers and other relief to Wall Street firms caught up in securities fraud—nearly half of them repeat offenders.

Among them: UBS. A subsidiary got nailed in 2008 for violating an anti-fraud provision of the federal securities laws with one of its products, auction rate securities. UBS settled the charges without admitting or denying the allegations and obtained a waiver that allowed it to hang on to its WKSI privileges. The attorney representing UBS before the SEC? Kenneth Berman of Debevoise & Plimpton, the same law firm where SEC chairman nominee Mary Jo White worked. And Berman used to be Associate Director of the SEC’s Investment Management Division.

In 2011, the SEC nailed UBS again, this time for “fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states.” UBS settled without admitting or denying anything—and once again obtained a WKSI waver, well-represented by Berman.

In 2012, the SEC nailed UBS again. The subsidiary in Puerto Rico, charged with “making misleading statements to investors” and “concealing a liquidity crisis,” settled the case without admitting or denying the allegations. This time, it was Colleen Mahoney, a partner at Skadden, Arps, Slate, Meagher & Flom, who obtained the WKSI waiver. She’d spent 15 years at the SEC.

The report found that of the 64 posted WKSI waivers between 2006 and 2012, “at least 35 of them” were requested by former SEC employees.

“The SEC’s willingness to spare big companies the potential consequences of enforcement actions—even when those companies are cited as repeat offenders—has fueled concern in some quarters that the agency is too sympathetic to powerful firms,” the report said. It has parallels all around the government. At the Justice Department, for example, regulatory capture has spawned a new scourge, “too big to jail.”

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