More From Ex-SEC Lawyer James Kidney on the Agency’s Failing

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.

James Kidney Retirement Remarks

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  1. diptherio

    Second, the president and Congress should consider finding people with more varied resumes to become commissioners at the SEC.

    Yeah, the Prez and Congress should consider a lot of things, and I’m sure they do…right before they chuckle to themselves and continue with business as usual.

    The problem here is the same problem with campaign finance reform or any other reform that would benefit the citizenry-at-large while reining in the elites: the people who would have to enact such reforms are being currently rewarded for NOT reforming. Which is to say that asking them to reform the system is asking them to go against their own interests, ignore their own incentives. Not. Gonna. Happen.

    I heard a lot of the same stuff from my pops when he worked for the DOT doing pipeline safety inspections. He was a hard-ass, and a stickler for the regs (as every good “civy” is), but the d-bags at the head of the agency made sure that violations he wrote up took years to be resolved and even when there was a disaster that people like him had warned about, that the companies involved got off all but scott-free. I think our regulatory agencies should be democratized (and de-politicized). We would do this by making agency heads elected by the rank and file, on-the-ground, regulators, rather than being appointed by some politician. Of course, this suggestion runs into the same problem mentioned above (i.e. Congress & the Prez would never go for it, since it would decrease their own power).

  2. Ulysses

    “I am not so cynical to believe there are no honest men and women in senior jobs in finance.” The problem here is that mere personal honesty, without the courage to demand fundamental change in a system rigged to favor the dishonest, achieves very little. Good and decent folks like Mr. Kidney toil away in Sisyphean fashion, never willing to admit that the hoped for opportunity to make the markets “fair” can never come. Why not? As brother diptherio rightly points out, such an outcome could only happen if people benefitting from the status quo suddenly began to “ignore their own incentives.”

    We can continue to write sternly worded letters, and wax nostalgic about less obscenely corrupt times, while the situation deteriorates into an openly fascist nightmare. Or, we can build a huge movement strong enough to seize power from the kleptocrats and restore some hope for humanity.

    In the spirit of From Mexico: El pueblo unido jamas sera vencido!!

  3. James Levy

    Pretty much an exercise in backtracking. Sounds like a dad whose kids overheard a conversation he didn’t want them to overhear trying to explain to them what he “really” meant. Alas, that’s how these officials view us outsiders–as children who need to be mollified even as we are being informed (and in this case, it is clear he didn’t want us dopey citizens to actually be a part of this conversation).

  4. JEHR

    That speech was a pleasure to read but I kept thinking that it must be hard to have known in 1986 that you would not be able to properly do the job you are given and yet decide to stay with it until 2014!!!??? I can’t decide if he is a hero or an idiot.

      1. NotTimothyGeithner

        Many families are hungry because of a guy like this, and he couldn’t have acquired a real estate license in the mean time? This isn’t a choice between meth, mines, and the military.

        1. Vatch

          I’m responding a little late, so few may see this, but I think Mr. Kidney deserves credit for publicly saying what few other SEC employees, retired or otherwise, have said. He has given us inside information about the rot at the SEC, and people like us can use that information to demand reform from our elected representatives. There are plenty of other people who are more deserving of blame for failing to get a real estate license.

          Morally, James Kidney stands head and shoulders above people like Robert Khuzami, the former Non-Enforcement Director of the SEC.

  5. allcoppedout

    Isn’t the history that City or Wall Street experience is exactly what needs to be a barrier to regulation jobs? In investigating groups of people it is an advantage to know how they cover-up. Yet the cop doesn’t learn what she needs to know on teeming and lading by doing the fraud. We have a problem with regulation across the board, James is right we are being treated as dopes. I know as an ex-cop the kind of lying depravity cops stoop to, but this generally pales against what I saw judges, lawyers and academics do. There is always some ‘noble cause’ or ‘dirty old world’ excuse. The situation is that, if I tell the truth I have rarely found situations in which the truth is the best policy, I lose “credibility”.

    Finance is built on some very deep lies of the religious kind it is heresy to expose. Your independent financial advisor isn’t kind of thing. Alpha is so smart it equals the toss of a coin. Who in the City or Wall Street hasn’t been telling the unspoken lies of the game? I’d urge those in the other half of USUK to come look at British regulators. A benchmarking kinda thingy. We really know how to appoint the limp-wristed here. We don’t stop there either. Libel law and contempt of court make public scrutiny further impossible and our presstitutes … argh! The banality of this shiny smiling brotherhood can only be exposed by investigating juries of dopes, the outsiders.

  6. gepay

    We all know the problem. We get these kind of speeches as the somewhat decent people retire. Say Eisenhower’s speech warning of the military-industrial complex – given as he left office. If you give other kinds of speeches, “For in the final analysis, our most basic common link is that we all inhabit this small planet. We all breath the same air. We all cherish our children’s future. And we are all mortal.” — President Kennedy, Commencement Address at American University in Washington, June 10, 1963. and make the military-industrial complex think you might end the cold war with the help of Krushchev, they kill you.
    If James Kidney had made a big fuss, he just would have been fired or placed in the equivalent of the Post Office dead letter department.
    The system is broken as far as functioning in a rational manner. There are no wise men or woman at the top. Even rational adults (say Elizabeth Warren) are hard to find. Everyone here at NC knows they created tens of trillions of dollars to keep deflation and a ’30s situation from developing. It is only a matter of time before a worse crisis than 2006-8 happens. Or a war. Or a real crisis – not the phony global warming – that actually needs intelligent decision making to prevent breakdown. Look at how poorly real crises like Fukushima or the Gulf- Horizon – oil disaster have been handled.

    1. different clue

      Do you have evidence that the global isn’t warming? If it is warming, do you have evidence that it has nothing to do with manmade carbon skydumping?

      1. gepay

        I left out ‘man made’ before the words global warming. And now I remember it’s been changed from Anthropogenic Global Warming to man made CO2 inducing climate change because the global average temperature (as now measured) hasn’t warmed in over 15 years. Oh right, that’s just the surface temperature because the ocean has ate my homework, I mean the excess heat. But it used to be just the surface temperature when they were rising (there really haven’t been any good studies that show these temperature data weren’t affected by the Urban Heat Island effect although I do think the weather as far as I could observe was warmer in the 80s and 90s in a not unusual warming period). Just like it was tree rings for Michael Mann until tree rings showed a decline so he began using actual temperature measurements of various places around the world in the same graph (you couldn’t do that – change how you made the measurements in the same graph – in a high school science class) so he could make his hockey stick.
        Over 50% of meteorologists are man made climate change skeptics probably because they know from almost daily experience how poorly computer models are at predicting weather more than a day away. Climate modelers are predicting decades and decades away. Freeman Dyson related the physicist Neumann said, “with a model using 4 variable parameters I can put an elephant in the room. Give me 5 and I can make him trumpet.”
        The science used for the warming effect of CO2 (do you even know what wavelengths of light CO2 preferentially absorbs?) says a doubling of CO2 will raise the temperature 1 degree C. Because the function is logarithmic it will take another doubling to raise it another degree. It hasn’t even doubled once. So the alarmist warnings are from computer models using poorly understood feedback mechanisms in the chaotic climate system to raise the average temperature further. Everyone agrees that water vapor is the main misnamed global greenhouse gas (misnamed in the sense that a greenhouse uses a different mechanism for making a greenhouse warmer than do these heat absorbing gases).
        Unfortunately it not now known what effect a rising temperature will have on water vapor and clouds so the computer models can’t make good predictions. Only now are they changing their natural variation parameters (which somehow before only made the feedback positive for rising temperatures).
        This is not to mention variables in the Sun’s activity and changes in the Earth’s orbit, and the many decadal ocean cycles (and there’s more) which weren’t done very well because they started from weather models of the atmosphere which are complicated enough.
        I mean we don’t even know enough to predict what the jet streams might do from year to year. Can you say Polar Vortex
        I can go on but…

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