Dubious Study Defends SEC Revolving Door

Nothing like being reminded on a regular basis that you live in the best of all possible worlds.

The New York Times tells us a new study is being presented today at the American Accounting Association which defends the revolving door. I’m at a disadvantage at not having access to the actual report, but a summary at Accounting Today provides a bit more detail about the study methodology. This is the Times’ recap:

The revolving door has long been the focus of government watchdogs here, a symbolic portal that business executives and lawyers pass through on their way to government posts and back again to the private sector. There, the thinking goes, they use their influence with former colleagues to reap benefits for themselves and their companies…

Now, a group of accounting professors has produced a study showing that the revolving door actually toughens enforcement results at the Securities and Exchange Commission — the opposite of what government critics have long maintained.

Yves here. Given that the SEC only hands out parking tickets pursues insider trading with any vigor, the idea that you can use any variant of the word “tough” in connection with SEC enforcement is a stretch. Back to the article:

The study, by researchers at Emory University, Rutgers, the University of Washington and Nanyang Technological University in Singapore, found that S.E.C. enforcement lawyers who leave to join private law firms that specialize in commission matters actually produced tougher enforcement results than their peers while at the agency.

The study also found no evidence that law firms that have hired large numbers of S.E.C. alumni are able to extract more lenient enforcement outcomes from the agency.

Oooh, sounds convincing, right? Well, the big problem is that the study focuses on the wrong level of employee. The direction and tone of a government agency is set at the senior levels, such as the head of the SEC (Mary Shapiro) and its head of enforcement (Robert Khuzami). But the study looked at 336 lawyers who worked on civil litigations. That is pretty much certain to mean that it did not include attorneys who were working in a managerial capacity (almost certainly not the chief of enforcement). That is where the revolving door is most pernicious, for it is the folks at the top who determine what sorts of matters will be pursued and how vigorously. For instance, when I was a young person on Wall Street, people were afraid of the SEC because the head of enforcement in the 1970s, Stanley Sporkin, filed a lot of cases, was aggressive in pursuing them, and was not afraid of losing cases. By contrast, we’ve repeatedly criticized Khuzami, who was the general counsel of the Americas at Deutsche Bank from 2004 to 2009, for his failure to pursue CDO related fraud on anything other than a token basis. As we presented long-form in ECONNED, CDOs were central to the crisis, and turned what would otherwise have been a contained subprime bubble into a global financial crisis. We believe that the reason Khuzami has not given CDOs the attention they warrant is that any serious investigation would embroil Deutsche Bank, an early and aggressive participant and put him in the hot seat.

And by contrast, being tough minded in a senior role is not without consequences. Arthur Levitt, who was the head of the SEC under Clinton, was no doubt expected to be friendly to the industry, since he was the first appointee in decades who had not been an attorney and had been head of the American Stock Exchange. But Levitt was serious about consumer protection, and that put him in bad graces with Congress even though he was securities-firm friendly on other matters (for instance, not taking a tough stand on regulating derivatives, both in the wake of the 1994 blowups and more famously, teaming up with other regulators against Brooksley Born on credit default swaps). Former agency heads normally have no trouble getting on lots of industry boards. The only major company that would have Levitt on its board after his SEC stint was Bloomberg (although Levitt has more recently gotten some no doubt well remunerated “senior advisor” gigs and became a board member of RiskMetrics, which pedaled Value at Risk models).

So the study is already verging on “garbage in-garbage out” by focusing on too junior a level of staffer. But let’s just take what the Times wrote at face value:

In addition, revolving-door lawyers who specifically went on to law firms that specialized in S.E.C. matters produced, while at the agency, more aggressive enforcement outcomes, with higher penalties, a greater likelihood of criminal charges and a greater chance that a chief executive was named as a defendant in the S.E.C. action.

They have the causality backwards. What this actually says is prospective employers are smart enough to recruit the best lawyers from the SEC’s enforcement division. Duh! And we are supposed to believe a plus for the SEC, that it’s real job is to serve a a cheap training ground for white shoe law firms? First, the study fails to consider the fact that this kind of poaching means that the SEC will have trouble developing skilled attorneys (it would have been instructive to know the seniority of the lawyers who left) if they can’t hang on to at least a decent portion of their best lawyers to develop the juniors (by contrast, my impression is the the US Attorney’s Office in the Southern District of New York, which is the kick ass grounds for developing prosecutors, is able to retain a significant portion of good lawyers well beyond their training years). Second, it takes the position, without noting that this is an assumption, that the reason these attorneys outperformed their peers is the prospect of private sector employment. From what I can tell from the summaries, they have no proof for this belief. If you go into any office environment, you’ll have better and weaker performers. You’d need to do more granular work to ascertain what role, if any, trying to groom oneself for an exit to the private sector had in performance while at the SEC. (And by contrast, note that Stanley Sporkin’s exit path was to become general counsel to the CIA and then a federal judge. Nothing private sector about that. So one might just as easily contend that the revolving door is the result of the lack of career paths in government service that are perceived to be attractive to ambitious young attorneys. Similarly, the FDIC requires a two year hiatus between when employees leave the agency and when they can work for regulated firms. If we were to believe the implicit logic of this analysis, the FDIC should be less effective by not having its staff motivated by a private sector carrot for its best staffers. Yet the FDIC is widely considered to be a far more effective regulator than the SEC).

Let’s go to the next part. The authors contend that law firms and private companies that hired SEC lawyers didn’t get more lenient treatment than ones that didn’t.

The study also contends that firms that were targets for litigation by the SEC got no better outcomes when they had either ex-SEC lawyers at their firm or well represented at the law firms they worked at that other companies did. Given the relatively small number of lawyers in question (the 98 who left the SEC between 1990 and 2007), I’m not sure this sample is big enough to reach firm conclusions. Moreover, the Times quoted a skeptic who had concerns similar to mine, that litigation was far from a complete picture of how ex SEC staffers could interact with the agency. It isn’t hard to imagine their highest and best use would be to settle matters quietly, meaning to forestall litigation being filed. Per the Times:

Michael Smallberg, an investigator at the project [Project on Government Oversight], said that while the new study was valuable, it looked only at S.E.C. lawyers who were involved in litigation against investment companies.

“We found interactions between current and former S.E.C. employees that occurred long before an investigation got to the litigation stage,” Mr. Smallberg said. “We don’t have any disagreements with” the accounting group’s findings, he added. “But I don’t think a single study could possibly track all the ways that the revolving door could affect the S.E.C.

But it is a no-brainer that the defenders of elite corruption the status quo will tout this study as proof that nothing needs to be done, that our clearly defective and captured regulatory apparatus is working just fine. And it is if you are on the other side of the table from a diminished, ineffective watchdog like the SEC.

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  1. psychohistorian

    You are not suppose to eviscerate propaganda like that, Yves. At some point the brainwashed masses may wake up from their programmed stupor.

    It would be interesting to have the background on how this study got funded and directed to produce the results given. What is the current cost for a puff propaganda piece like this?

  2. Paul Walker

    This Times article is beyond simply weak. The corrupted-quo must be supremely nervous, fearful even to put a trashy bit of this caliber out there. Almost as bad as the op-ed’s Shapiro and Holder did some time ago in the same publication touting their accomplishments with respect to tough enforcement. What a pukefest.

  3. Foppe

    although Levitt has more recently gotten some no doubt well remunerated “senior advisor” gigs

    Did he get those after Taibbi wrote his exposé on how, during his tenure at the SEC, he changed the information retention policies to ensure that the future would hold far fewer SEC enforcement actions?

  4. JGordon

    The SEC may not be very good at going after securities fraud because of revolving door corruption, but By God show them a computer with some porn on it and they’ll be all over it.

  5. YankeeFrank

    What a joke. Can anyone even think of a serious case the SEC has brought in the last decade against a defendant of any stature and power that wasn’t settled for a puny fine and no admission of wrong-doing? Maybe one… that Indian dude Raj whatever. How can they claim there are varying levels of “toughness” in investigations to even compare when there is NO toughness at any level, anywhere in the SEC?!?!?

    The very premise of the study is fatally flawed when, for all purposes, the SEC as a regulatory enforcer barely even exists in any meaningful way: oooh! Look! The SEC went after some due who lied on his mortgage loan application! Ooooh look! The SEC brought a lame-assed insider trading case on some small fry somewhere… and lost.

    The only reason that the SEC and its “lawyers” don’t dissolve into the ether utterly is that actual material substance and oxymoronic definition do not interact on any fundamental physical level. Oh how I wish they did.

  6. jake chase

    Since its inception, the only purpose of the SEC has been public relations. People forget that Wall Street was a cemetary for twenty years after the crash and only the id iot sons of the idle rich went there to eke out a living. Large corporations had become flush on the spoils of war and were largely self financing by 1950. When I worked at the SEC in 1968 (for seven months) the Agency was simply a joke. Nothing at all happened in my department (Corporation Finance). Enforcement focused on prosecution of tin horn bamboozlers in the boondocks.

    For some reason the SEC has always managed to sustain a reputation for ‘quality work’. It is the agency which those believing in government as the answer always point to as an example of what government can do when it puts its mind to it. The reputation is entirely bogus. It persuades the gullible that its savings are safe in the hands of Wall Street banks and brokers, whose personnel are roughly evenly divided between those who are larcenous and those who are merely incompetent. I don’t expect anyone to believe this, but I have been watching carefully for over forty years and have made an excellent living largely on the strength of this single perception. For all you investors out there who imagine otherwise: good luck suckers!

  7. Aaron Layman

    I think this one belongs in chapter 8, “The Ivory Tower”. Ferguson would have some fun debunking this load of crap. Jack Abramoff would likely have a few tidbits to offer as well, now that he’s talking about the revolving door. SEC’s silence on obvious illegal behavior is just another example that we have the best government money can buy.

    Sad that the NYT has devolved this far.

  8. sheenyglass

    Along the lines of talent retention difficulties, I suspect that aggressive and competent (and ambitious) prosecutors would be extremely demoralized by a leadership that would not let them take cases to trial or that would direct their focus to taking down small-fry while ignoring big fish.

    When faced with that kind of organizational disfunction, why not go to a place where your talent will be utilized? Oh, and it pays better too? What’s the downside? Even if you want to finish out your carrier in public service, you can just lateral back in. This time to a leadership position where you can finally direct the organization towards meaty enforcement matters. Of course, now you know all those names across the “v”, and they’re good guys–you’ve read all those emails to their kids during discovery for that one case–they probably just made a mistake. They don’t deserve to have their lives ruined for it.


  9. Thorstein

    iirc Arthur Levitt has been on Getco’s payroll for several years.

    “The only major company that would have Levitt on its board after his SEC stint was Bloomberg (although Levitt has more recently gotten some no doubt well remunerated ‘senior advisor’ gigs. . . .”

  10. Hugh

    It’s a GIGO study for the very simple reason that it begs the question. It assumes that the SEC is a well-run, effective regulator and then concludes that lawyers who go through the revolving door don’t get more lenient treatment for their new clients because the SEC is a well-run, effective regulator.

    I would like to say that I am surprised by this kind of academic propagandistic BS, but I am not. It’s really exactly what I have come to expect from them.

  11. Capo Regime

    Ah indeed Ives–if they release the thing widely we can see its a rather Panglossian thing am sure. In these types of “studies” which are really reports the definition of evidence is the problem. Yes there are no hard documents linking the former agency employees now white shoe lawyers using their influence but there are plenty of benefits in terms of soft aspects–getting calls returned, knowing what rule to use and what type of case a regulatory agency will not pursue, what the week areas in the agency are and so forth. Not hard evidence stuff but rather human nature and use of inside baseball.

  12. Martskers

    Yves: I was an SEC enforcement attrorney during the generally-regarded halcyon days of the Sporkin era, and I can tell you, we kicked ass and took names. I myself was involved in many cases involving some of the biggest names on Wall Street, and was instrumental in several cases that eventually resulted in the enactment of the Foreign Corrupt Practices Act. We had a trial unit back then that was quite busy actually trying, and, more often than not, winning cases. We referred many cases for criminal prosecution (including for perjury), not having prosecutorial authority ourselves.

    Back then, the industry quaked in its boots when we came calling. The only partially apocryphal story about Stanley is that, during an investigation he was leading (before he became the head of enforcement), he had a group of witnesses waiting to give on-the-record testimony. When the witness he had been deposing had a heart attack during the deposition (a not-infrequent occurrence), the ambulance attendants wheeled the stricken witness out of Stan’s office on a gurney, with Stan close behind, announcing to the waiting group of witnesses, “alright, who’s next.”

    We also had a contingent of commissioners at least some of whom weren’t Wall STreet toadies, like the current chair is. Did I see some people switch sides? Of course, but it was very much a rarity back then, with many enforcement lawyers staying 5, 10 years or longer. I had the privilege of serving with some of the Commission’s legendary enforcement attorneys, gunslingers and sharpshooters par excellence.

    Even back then, we fought a constant battle for our budget, in spie of the fact that, as has always been true, the fees public companies paid yielded more revenue than our operations cost. If anything, we had to fight even harder because of how many toes we were stepping on.

    It pains me greatly to see how low the Commission has fallen, and I make no excuse for the ineptitude, and yes, even corruption, it has fallen victim to in the years since I left it. Nor am I optimistic that will change any time soon, given the way the industry has co-opted our entire government.

      1. Martskers

        Jake: Citibank, Drexel Burnham, Merrill Lynch, Ivan Boesky, Michael Milken, among others.

        I trace the beginning of the end of the SEC’s effectiveness to its increased politicization. That started with the appointment of Christopher Cox, who was obviously sent to the Commission with a political/ideological agenda, which he successfully carried out.

        Most recently, the appointment of Mary Schapiro to the chairmanship has continued the Commission’s downfall. Appointing someone who was an industry captive at the helm of the bogus self regulatory organization, FINRA, was a HUGE mistake. Remember, this was the woman who was bosom buddies with Bernie Madoff and his family, and was as responsible as anyone for looking the other way when that whole situation was percolating.

        As the whistleblower, Harry Markopoulos said, when asked why he didn’t go to the NASD with his information about Madoff, paraphrasing, the SEC may be incompetent, but FINRA is corrupt. Obama put the fox in charge of the henhouse.

        1. jake chase


          I think you have to leave Boesky and Milken and Drexel to one side, for the reason that all those prosecutions were slam dunks which resulted from Dennis Levine getting caught with a shopping bag full of money and dropping a dime on everybody in his rolodex. I seem to recall that Guiliani grabbed the credit for all those and I think he was the US Attorney for the SDNY, so what did the SEC add? Moreover, some of those insider trading prosecutions were horseshit, particularly that of Robert Freeman at Goldman Sachs, who was the closest thing to an honest man then working on Wall Street. Of course his job in arbitrage was to sniff out deals, and in sniffing you talk to people who know things, and he talked to one too many creeps once too often, but nobody ever suggested he took any money or bought any stock for his own account, so Guiliani sent him to jail for doing his job, because the whole thing was politics from beginning to end, and Guiliani was the biggest creep of all, now lining his pockets by pretending to be some kind of security consultant and parading around like he is some kind of hero.

          I don’t recall anyone at Citibank or Merrill Lynch going to prison in those days. Who were the biggest fish in the net?

          1. Epstein's Mother

            You realize that the SEC doesn’t have the legal authority to send someone to jail, right? It’s a civil law enforcement agency, like the Fed, the CFTC, the FTC, etc. That’s why Guiliani, et al., get pulled in on these types of cases. Only they have the power to pile on with a prison term.

  13. Warren Celli

    They are not revolving doors, they are very commonplace payola-go-rounds in the circus of Xtrevilism…

    “Two years after directing the Academy Award-winning documentary, “Inside Job,” filmmaker Charles Ferguson returns with a new book, “Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America.” Ferguson explores why no top financial executives have been jailed for their role in the nation’s worst economic crisis since the Great Depression. We also discuss Larry Summers and the revolving door between academia and Wall Street, as well as the key role Democrats have played in deregulating the financial industry.”


    The New York Slimes — yuk!

    Deception is the strongest political force on the planet.

  14. citalopram

    It’s almost as if the Powers That Be are daring We The People to do something about their brazen criminality.

  15. gaddeswarup

    There is a puzzling passage in a paper by Ben Olken and Rohini Pande on corruption (pages 10 and 11)
    “The Fisman market approach is replicable in any case where one has data on firms’ connections to prominent politicians and when the politician experiences health shocks. For
    example, Fisman et al (2006) has replicated the same approach for the United States, looking at the value of connections to former U.S. Vice President Dick Cheney, using shocks while he was a candidate and while he was in office. In a marked contrast with the Soeharto paper, he finds zero effect of Cheney’s heart attacks on the value of Cheney-connected stocks”
    Does it mean that USA has more stable revolving door system?

  16. Peter Pinguin Society

    The SEC’s job is to defend the 0.01 percent by pretending to enforce the rule of law on Wall Street. The way they do this is by never enforcing the rule of law because the rule of law does not apply to Wall Street or the 0.01 percent.

    And so the SEC’s real job consists of watching porn all day, and they’re very good at this, averaging between six and ten porn films per day per SEC employee.

    Obviously the SEC and their defenders such as Adam Davidson cannot tell the 99.9 percent schmucks that their real job consists of watching porn. Adam Davidson’s job consists of spending one hour each day convincing progressives and 99.9 schmucks that the SEC is doing a great job enforcing the rule of law on Wall Street, then he spends the rest of his time watching porn films with Ezra Klein and the SEC.

    Here at the Peter Pinguin Society, we think that the SEC, Adam Davidson, and Ezra Klein are all doing a great job of hoodwinking the 99.9 percent.

    We are the Peter Pinguin Society, we are the 0.01 percent.

    1. Hiram Bilgewater

      Adam Davidson is a classic case of an upwardly mobile ass-munch bidness presstitute. His daily bread and butter rely on a fundamental misunderstanding of what he is supposed to understand and to dress up that misunderstanding and relay it back to the public. He gets warmed over, selective misreading of Adam Smith/neoliberal macroeconomics, perhaps over over a port with one of his friends at the University of Chicago, his undergrad alma mater. For this, he is given a hefty platform at NPR and NYTimes from which to release his noxious bilgewater to the Volvo-driving wishy-washy sushi set, because they have been told a million times that the PC way to be of people of their tax bracket is to be socially liberal and fiscally conservative, goshdarnit. http://shameproject.com/profile/adam-davidson/

  17. Epstein's Mother

    Actually, it is not the people at the top who set the tone of enforcement at an agency like the SEC or DOJ, but the folks 2 and 3 levels below that. The dept. heads tend to be in the job a relatively short time, so real policy is left to deputies, associates and assistant directors. Also, you underestimate how much leeway assistant directors and branch chiefs have when pursuing a case. Just read the SEC’s inspector general’s report on the Madoff matter to see how it really works.

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