Susan Beck at American Lawyer got a trove of documents as a result of a FOIA on an SEC inspector general report on whether the agency’s suit against Goldman over an Abacus CDO was politically motivated. Beck identified one attorney who was critical of how timid the investigation was, by virtue of failing to pursue more senior executives, as James Kidney, and examined how Kidney was effectively sidelined during case development. A Bloomberg story wrote up Kidney’s recent retirement speech, which was blunt about his disappointments in the SEC. We’ve embedded a copy of his speech at the end of this post. What is sad is to see that he recognized that the agency was in decline by the time he joined, in 1986. When I started at Goldman in 1981, the SEC was still feared and respected, due to the effectiveness of Stanley Sporkin, its enforcement chief.
Beck wrote a follow-up story on Kidney (hat tip Abigail Field). Key sections:
The American Lawyer: Why did you decide to be so critical of the SEC in your retirement speech?
James Kidney: I have been outspoken about these issues in a casual way internally for years. If I had simply delivered the usual retirement speech, it would have been out of character… Had I known the speech would be public, I am sure I would have written it differently.
The SEC has many fine, dedicated employees. Although the Bloomberg News report was a fair summary, the Internet has taken my remarks irresponsibly in some cases as a reason to trash the entire agency. Former management of the Division of Enforcement and perhaps the commissioners themselves have not, in my view, been as forceful as they should have been, but the rank-and-file at the SEC are mostly very dedicated and talented.
Current enforcement division management shows at least a little promise of improving the situation, such as by reducing use of “neither admit nor deny” settlements in some cases. But there is no sign that insignificant cases will not be pursued beyond reason. There is still a long way to go, in my view, but the line staff is capable of delivering meaningful enforcement if aggressively led.
TAL: Are there many others at the agency who feel the same way?
JK: Certainly there are. Many enforcement division staffers are frustrated by the emphasis on bringing lots of cases because it encourages—or at least does not discourage—management from pursuing small matters. Most staff members did not expect to toil on such matters when they signed on, especially since now one can be fairly sure there are larger offenses to be found and investigated.
TAL: You criticized the revolving door in your speech. Can anything be done about it?
JK: Yes, but it isn’t likely. The positions I am talking about—just below those of the political appointees—are filled by the SEC chairman. Greater effort could be made to find candidates inside the commission, possibly skipping down an organizational level or two.
The commission does need expertise from Wall Street. But the practice of putting lawyers who previously spent years defending Wall Street banks in positions of executive authority over enforcement has, I believe, contributed to the current distrust of the SEC. No one can shed their last 15 or 20 years of experience like a snake sheds its skin. It is not necessarily that these outsiders intend to go easy on large-scale violators. It is that the culture can’t be shaken off so easily.
To the degree that unusual issues arise due to Wall Street operations, experts can be hired or consulted, as is done even now. It is not even at all clear that Wall Street defense lawyers have any more “expertise” on unusual or complex trading practices than do career enforcement attorneys, the Office of Market Regulation and Corporation Finance…
TAL: What other concrete steps could the SEC take to better accomplish its mission?
JK: First, the SEC needs to change the formulas it uses to set settlement penalties. It now extracts the same sanctions from the truly culpable, such as a CEO who trades on inside information, as it does from a guy who acts on an inside stock tip from a golfing buddy. In both cases, the penalty is based on the amount of unlawful profit. The outsider should be treated more leniently because he didn’t violate any genuine duty to anyone. The commissioners should grant the enforcement division more leeway to recommend settlements at various levels based on the facts.
Second, the president and Congress should consider finding people with more varied resumes to become commissioners at the SEC. Right now, there are only two commissioners with even slight experience working in the securities business other than as outside counsel to Wall Street banks. A bad trend has continued of senators of both parties naming staff from their own committees to the commission. There are two now on the commission. These may be perfectly good people, but they have highly limited experience. Lawmakers should have greater respect for the SEC than as a reward for their own loyal staff.
Appointees should also be considered from major financial centers other than New York. Last I looked, San Francisco, Chicago, Dallas, Atlanta and Philadelphia had large brokerage and financial institutions.
It is not inconsistent to be suspicious of the revolving door at senior staff levels but wish for deeper Wall Street experience among the commissioners. I am not so cynical to believe there are no honest men and women in senior jobs in finance, especially if the resumes are not all from New York. Deep experience will give comfort to the industry and possibly to the public if performance is justified. Also, the SEC is a fairly large business. A senior officer from a large financial firm will have experience running a business, which is also important for a chairman running the SEC.