David Sirota at the International Business Times wrote up a study by Maria Correira of the London Business School that examined how often firms that corrected their financial statements from 1996 to 2006 were subject to SEC enforcement actions. It should come as no surprise that big political donors get off easy. From Sirota’s account:
If, as the saying goes, justice is blind, the data would show little correlation between firms’ political expenditures and their likelihood of being prosecuted. Instead, Correira found that “politically connected firms are on average less likely to be involved in an SEC enforcement action and face lower penalties if they are prosecuted by the SEC.” Specifically, Correira discovered that firms that increased their PAC contributions by $1 million over five years ended up halving their probability of being prosecuted.
Data from the Project on Government Oversight has documented that since 2001, more than 400 former SEC officials filed disclosure forms documenting their plans to represent firms before the SEC. Correira’s report shows that this revolving door also influences financial prosecutions, as companies that employ lobbyists who once worked for the SEC “experience a larger reduction in the probability of enforcement and in penalties than those that do not.”
Correira theorizes that the correlation between campaign contributions and a lack of prosecution has to do with the SEC’s perception of political consequences for itself and its budget in choosing targets. As the theory goes, the more political donations a particular firm makes to key lawmakers and the higher profile a firm’s relationship is with those lawmakers, the more likely it may be that those lawmakers pressure the SEC to avoid prosecuting those firms — and the more likely those lawmakers are to try to reduce the SEC’s budget if a prosecution goes forward.
One thing readers may not recognize is that the SEC, which was once a feared and respected agency, has become the least effective financial regulator. That is in no small measure due to the fact that it (along with the Commodities Futures Trading Commission) are subject to Congressional appropriations. By contrast, the Fed, OCC, and FDIC get to live off the various fees they collect from the firms they supervise.
For instance, as we’ve described in past posts, former SEC Chairman Arthur Levitt, in his memoir Take on the Street, made it clear that he was regularly roughed up by angry Congressmen, particularly Joe Lieberman, the Senator from Hedgistan, over his enforcement efforts. In the wake of the crisis, the SEC tried to get permission to self-fund, like the other bank regulators, but its request predictably went nowhere. And mind you, not only would self-funding have freed the SEC from Congressional meddling, but it would have produced a significant increase in its budget. From a 2009 post:
The SEC desire to self-fund, revealed in an interview of SEC chairman Mary Shaprio in an interview with the Financial Times, is a far bigger deal than it might appear. One of the reasons for the agency’s less than impressive performance in pursuing fraud is that Congress kept it starved. For instance, Arthur Levitt, SEC chairman from 1993 to 2001, has been criticized, correctly, for having been far too friendly to the industry as far as derivatives regulation was concerned. And that was not simply his joining in hte assault against Brooksley Born’s efforts to regulate credit default swaps. Frank Partnoy tells in gory detail in Infectious Greed that Levitt also fought reform measures in 1995, when a wave of widespread derivatives losses (of which Orange County was on of many examples). Yet in his memoir, Take On the Street, Levitt describes how he was beaten back aggressively by members of Congress, particularly Joe Lieberman, on efforts to improve the transparency of accounting and analyst objectivity. Their weapon of choice? Cutting his budget.
Given the SEC’s de facto politicized role, it has to pursue cases that fit within an enforcement budget that is smaller than it should or could be, given the fees the SEC collects, and also forces it to justify the expenditures it does make. That means the SEC winds up pursuing cases that are easy to prosecute and have high headline value.
So the SEC’s timidity and deference to big political donors is no accident. Corrupt outcomes are a feature, not a bug. The fact that SEC employees like recent retiree James Kidney still pushed for stricter enforcement shows that these agencies could be far more effective if they were given the chance. But absent a rash of news stories that put pressure on the SEC to act, the odds don’t favor that happening.