Sunday, October 29, 2006
The Government Accountability Office will take a look at the SEC's enforcement program in response to a letter from Senator Charles Grassley regarding how the Commission is pursuing insider trading and other types of securities fraud cases. A Bloomberg story (here) discusses the Senator's request. The letter came as a result of charges leveled by former Enforcement Division attorney Gary Aguirre, who claimed that an insider trading investigation of hedge fund firm Pequot Capital Management and Morgan Stanley CEO John Mack was snuffed out due to outside pressure that prevented him from taking testimony from Mack. After a Senate Judiciary Committee hearing on regulation of hedge funds that included Aguirre as a witness, the Commission subsequently went through with the deposition of Mack in August 2005. Shortly thereafter, the staff determined that it would not recommend that civil charges be filed (see earlier post here).
The GAO audit will no doubt increase the pressure on the SEC to process its cases more quickly and perhaps cut down a bit on the bureaucracy that builds up in any agency over time. A Wall Street Journal story (here) notes that the number of enforcement actions has dropped since its peak in 2003, and likely will be below 600 for the 2006 fiscal year that ended on September 30. Whenever the numbers fall, there are questions raised about the agency's effectiveness, and those issues become more troublesome after the SEC had its budget increased in order to police the markets more closely.
Simply counting the number of cases filed may not be the best way to measure an agency's effectiveness, and I suspect one result of the GAO (and congressional) scrutiny will be to push cases through to show a quick response to any potential weaknesses in the Enforcement Division's management. The Commission has investigations of over 100 companies for options back-dating, and while a few of those will produce criminal charges, a number will likely result in administrative actions at a minimum because of the false financial statements, and perhaps could even lead to civil enforcement actions for securities fraud. That probably means there will be a cascade of cases over the next year, especially to pump up the numbers for FY2007 to have the groundwork ready for when the GAO issues its report. There is no better way to respond to criticism than to point to current numbers and note an increase in the number of cases, just like corporations do when reporting their quarterly financials. Unfortunately, when the heat is on to generate "stats" for Congress, the quality of the cases may not mean as much as getting a quick settlement. Like all types of law enforcement, there is an ebb and flow to the cases, and look for the flow to be heavier over the next twelve months . . . almost like channel-stuffing. (ph)