Wednesday, January 16, 2013
In a post a few days ago, I reviewed the debate between Professor John Coffee and the SEC Enforcement Directors about the effectiveness of the agency's enforcement efforts. Directors Khuzami and Canellos took issue with Professor Coffee's numbers. Today Professor Coffee responds, with additional data about the median value of SEC settlements, and attaches the Power Point slides from his recent address on SEC Enforcement. (Coffee, SEC Enforcement:Rhetoric and Reality) He also reiterates:
The most important claim I make is that the nature of corporate litigation has changed, partly as a result of “ediscovery” and the often millions of emails and related documents in the typical large case. It is no longer feasible for a handful of SEC attorneys (even if all are diligent and able) to litigate effectively against the squadrons of associates that a large firm can throw at a complex case. The result is a mismatch. Hence, when facing a major financial institution, the SEC tends out of necessity to settle cheaply or not sue at all (as in Lehman). My proposed answer to this problem is that the SEC should do what other financial regulators are already doing (including the FDIC): namely, hiring independent counsel on a negotiated contingent fee basis. Khuzami and Canellos object that I would cause the SEC to abandon prosecutorial discretion. Nonsense! The SEC would conduct the initial investigation and decide whether a suit was justified. But, it would now hold increased leverage in negotiations because it could credibly threaten suit by independent counsel (who would only take the case only if they judged it to be promising). SEC discretion would remain because the case would go forward only if the SEC’s staff decided that it had merit. Such an approach would go far towards solving the SEC’s budgetary crisis, because attorneys’ fees would be earned only if a recovery was obtained and only out of the recovery (thus not depleting the SEC’s budget).