Lucas Jackson/ReutersRobert Khuzami, the S.E.C.’s enforcement director.One of the criticisms that has been leveled against the Securities and Exchange Commission is that even when it has pursued cases, it has not been tough enough in seeking sanctions for violations of the federal securities laws. Since the new year began, however, it seems that the agency has taken a couple of small steps to burnish its image as Wall Street’s top cop.
The question is whether these are merely cosmetic moves or a signal of a tougher enforcement stance.
The New York Times reported last week that the commission unanimously rejected a proposed settlement with the former enforcement chief of its Fort Worth regional office, Spencer C. Barasch, because he represented R. Allen Stanford’s firm shortly after leaving the agency. While working at the S.E.C., Mr. Barasch squelched efforts to investigate the firm, which was eventually accused of operating as a Ponzi scheme.
Mr. Barasch’s requests to represent Mr. Stanford’s firm, which he eventually did on one occasion, were described in a scathing report issued by the S.E.C. inspector general that raised questions about whether there was a violation of the conflict-of-interest restrictions on former government employees.
The Justice Department announced a settlement with Mr. Barasch that required him to pay a $50,000 civil penalty for violating 18 U.S.C. § 207. The statute prohibits a former employee from representing a party in any matter in which the person was “personally and substantially involved” while working for the government. Although a violation could be prosecuted criminally, the Justice Department opted for a civil case, most likely because it could not prove intent to knowingly violate the law.
Mr. Barasch denied that he had violated the conflict-of-interest provision by representing Mr. Stanford’s firm. According to his lawyer, he settled the case “to avoid the expense and uncertainty of protracted litigation,” and “at no time has he compromised his honor or ethics, and we vigorously dispute any suggestion to the contrary.”
The S.E.C. investigation of Mr. Barasch involves a different issue: whether he should be permitted to practice as a lawyer before the commission in future cases. In addition to its responsibilities to enforce the federal securities laws, the S.E.C. monitors the actions of lawyers and other professionals who deal with the agency on a regular basis in representing companies and individuals. Under a provision added by the Sarbanes-Oxley Act in 2002,15 U.S.C. § 78d-3, the S.E.C. can suspend or bar a lawyer found “to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct.”
This power is similar to that exercised by the state bar disciplinary authorities, and requires a finding that the person violated the professional responsibility rules governing lawyers.
The settlement rejected by the S.E.C. would have suspended Mr. Barasch from practicing before the agency for six months, and he would have been automatically reinstated after that without having to apply for reinstatement. The S.E.C. has not been shy about seeking significant sanctions against lawyers who it believes acted improperly. A recent decision by the United States Court of Appeals in Altman v. S.E.C. upheld a permanent bar against a lawyer, affirming the agency’s authority to determine how to best protect against professional misconduct.
The proposed six-month suspension was not a slap on the wrist, like a censure would have been, but it would not be viewed as a significant penalty. Whether a new settlement can be reached remains to be seen, and if so the terms will probably involve a longer suspension. And the S.E.C.’s policy on settlements prohibits a denial of the conduct prompting the sanction, so Mr. Barasch would not be able to assert that he did not act improperly even though there would be no admission of a violation.
The S.E.C. has also inched away from its long-standing policy that a settlement involves neither an admission nor denial of liability. Its director of enforcement, Robert Khuzami, announced on Jan. 5 that in cases in which a parallel criminal proceeding resulted in an admission of a violation of securities laws, the admission would be incorporated into the civil disposition.
The policy change comes at the same time the S.E.C. is appealing the rejection by Judge Jed S. Rakoff of the Federal District Court in Manhattan of the agency’s settlement with Citigroup because it did not contain an admission of any violation of the federal securities laws. Mr. Khuzami denied a connection between the new policy and the Citigroup case, saying that the change had been under consideration for “several months.” But the timing of his announcement shows that the S.E.C. is concerned with how its enforcement authority is perceived.
The new approach to settling parallel criminal and civil cases will have a limited impact because most S.E.C. actions do not involve any criminal prosecution, particularly those involving firms for their conduct during the financial crisis. The one area where the policy change may have an impact is in cases involving violations of the Foreign Corrupt Practices Act because the Justice Department and the S.E.C. share jurisdiction and frequently enter into global settlements to resolve both the criminal and civil investigations.
Even if it succeeds in appealing Judge Rakoff’s rejection of the Citigroup settlement, the S.E.C. may take a more aggressive stance in resolving cases in the future. The judge’s decision struck a chord with those who have been critical of how aggressively the S.E.C. has been in policing the securities markets, especially in cases arising from the financial crisis. It may seek to resolve cases in a manner similar to how it settled its lawsuit against Goldman Sachs, filed in 2010, when the firm admitted that it made “mistakes” in marketing a collateralized debt obligation tied to subprime mortgages. While not a significant admission of liability, it showed that the S.E.C. could wield its authority to extract at least a modest concession in a settlement.
Rejecting the proposed settlement with Mr. Barasch and requiring admissions in a small number of cases are certainly baby steps, and may be little more than aberrations. But they could indicate that the S.E.C. understands how important perceptions can be, and intends to take a tougher stance in resolving cases.