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Top Doc: The SEC, By Definition, Is a Piss-Poor Prosecutor, So Let DOJ Do It

By Ward Harkavy in Documents, Featured, Madoff, Regulation, SEC
Thursday, Sep. 17 2009 @ 2:20PM

Hot off the server from Wayne State University's law school is Peter Henning's "Should the SEC Spin Off the Enforcement Division?" Amid all the whining about the SEC, this is a question that has so far eluded most of the press — I mean, the question itself has, let alone any debate or discussion.

peter henning180.jpg
Law prof Henning, a white-collar-crime maven, raises the question about whether the Justice Department ought to take over the prosecutorial part of the SEC, its enforcement division — which, as we know, doesn't do that good a job enforcing.

I like the way the guy cuts through the bullshit swirling around the SEC to get to the point of how the SEC dropped the ball on the Madoff caper — and how that is a problem stemming from the very nature of the SEC and thus will happen again and again and again.

Henning writes:

While the Commission solicits the views of the firms it regulates, it also must enforce its rules in cases that can involve the proceedings against the firms led by the same people it looked to for counsel. Separating the two functions cannot be easy, and in the case of Madoff, his standing at the Commission undoubtedly gave him a veneer of propriety that easily could have discouraged staff members from asking the kind of hard questions that would have led to unraveling his massive Ponzi scheme.

This is timely because the Obama crew seems bent on making the SEC into some sort of super-duper prosecutor, which it can never be as long it has the primary duty of regulating Wall Street, because regulators of necessity work hand-in-hand on rules, etc., with the entities they regulate. You don't do well if you have to prosecute the entities that you regulate. Let a real prosecutor do that.

Don't be put off by the wonky title; Henning uses the word "mojo," which convinces me that he writes for the masses, not just the masses of lawyers. And he doesn't seem to be carrying water for either the SEC or the DOJ. In fact, he worked for both before becoming a law prof.

Henning's not naive enough to think that this idea of shifting enforcement to the DOJ would be judged solely on its merits:

[A]ny proposal to share the enforcement authority for securities fraud would likely draw bitter opposition from the [SEC]. Who wants to give up authority, especially when it can be used to generate nice headlines in the Wall Street Journal and New York Times?

The Obama administration will never go for this, but it's a good idea nevertheless.

(While I was checking out this Henning piece, I ran across a 2008 essay of his called "The DNA of White-Collar Crime." Forensics on that in a future post.)