Full Version: A Fear That the Market’s Watchdog Is Losing Its Bite

A Fear That the Market’s Watchdog Is Losing Its Bite

Not long ago the market police at the Securities and Exchange Commission gave [url=http://topics.nytimes.com/top/news/business/companies/morgan_j_p_chase_and_company/index.html?inline=nyt-org]JPMorgan Chase[/url] the Wall Street equivalent of a traffic ticket. The penalty: $25 million.
      But the agency’s commissioners overruled their Wall Street enforcers,calling the judgment too harsh. The agency recently lowered the bank’sbill to $2 million — less than one-tenth the amount that theenforcement staff initially recommended.
To some inside andoutside the S.E.C., the case, and others like it, underscores aworrying development: The nation’s market watchdog, its critics say, islosing its bite.
Wall Street and the broader business communityhave pushed aggressively in recent years to roll back regulation,arguing the United States is losing its competitive edge. But with therecent financial crisis, which many call the worst since theDepression, critics wonder whether the S.E.C. has given in to the pushto lighten up.
“There has been less emphasis on investor protection and more on this issue of the competitiveness of markets,” said Senator [url=http://topics.nytimes.com/top/reference/timestopics/people/r/jack_reed/index.html?inline=nyt-per]Jack Reed[/url], Democrat of Rhode Island.
In March, Senator Reed and Senator [url=http://topics.nytimes.com/top/reference/timestopics/people/d/christopher_j_dodd/index.html?inline=nyt-per]Christopher J. Dodd[/url], Democrat of Connecticut, asked the [url=http://topics.nytimes.com/top/reference/timestopics/organizations/g/government_accountability_office/index.html?inline=nyt-org]Government Accountability Office[/url]to look into the penalties that the S.E.C. has been levying lately.Penalties, together with the return of ill-gotten gains, fell by halfin the 2007 fiscal year, to $1.6 billion.
Staff lawyers in theS.E.C. enforcement division say high turnover, tight budgets and a new,looser attitude toward corporate wrongdoing are sapping morale. Thestaffing and budget of the S.E.C. have lagged far behind the explosivegrowth of the markets the commission must police.
The Bushadministration has left the S.E.C., normally headed by its chairman andfour other presidentially appointed commissioners, firmly in the handsof Republicans with the departure of one Democrat last fall and anotherin January. Nominations for both positions have been submitted.
Turnoveris high. The percentage of employees who leave annually rose to 8.6percent in 2007, the highest level in five years, from 7.5 percent in2005, when Mr. Cox arrived (turnover in the late 1990s was much higher,and generally surges in bull markets, said John Nester an S.E.C.spokesman). Staff levels are down and falling. The S.E.C. budgeted for1,093 enforcement jobs in 2009, down from 1,232 full- time enforcementemployees in 2005.
“The slight decrease in personnel, despiterecord spending on enforcement, is directly attributable to the overallhigher salaries paid to enforcement personnel consistent with theS.E.C.’s priority of attracting and retaining the highest caliberstaff,” Mr. Nester said.
But since [url=http://topics.nytimes.com/top/reference/timestopics/people/c/christopher_cox/index.html?inline=nyt-per]Christopher Cox[/url],a former Republican congressman from California, took over as chairmanin 2005, spending on enforcement has fallen from $316.3 million to $298million in 2007.
“What Cox has done to this agency is to pullstate patrolmen off the highways and shackle them in one way or anotherin a parking lot,” said Lynn E. Turner, who served as the S.E.C.’schief accountant from 1998 to 2001.
But to many on Wall Street, Mr. Cox has struck the right balance for the times.
“Firstand foremost the S.E.C. is a law enforcement agency, and Chris Cox hascontinued that longstanding tradition,” said Ira D. Hammerman, seniormanaging director for the Securities Industry and Financial MarketsAssociation, the industry’s main trade group.
Mr. Cox succeeded [url=http://topics.nytimes.com/top/reference/timestopics/people/d/william_h_donaldson/index.html?inline=nyt-per]William H. Donaldson[/url],another Republican, who moved aggressively to punish mutual fundsengaged in market timing, regulate hedge funds and give shareholders amore powerful vote in corporate matters. Mr. Donaldson infuriated thebusiness community, and his five-member commission was often divided.
Mr. Cox, by contrast, has made consensus among his commissioners a priority.
“He was more moderate in his approach on many issues at the start of his chairmanship,” said Joel Seligman, president of the [url=http://topics.nytimes.com/top/reference/timestopics/organizations/u/university_of_rochester/index.html?inline=nyt-org]University of Rochester[/url]and author of a book on the history of the S.E.C. “He worked very hardto build consensus to an extent that many people thought wasappropriate and wise.”
Mr. Cox has tried to clarify thecommission’s policy toward penalties with guidelines released inJanuary 2006. He has said the S.E.C. generally wants to avoid punishingone set of shareholders for corporate wrongdoing that benefited anothergroup of shareholders.
But enforcement staff have argued thatother policies have hampered their ability to bring tough cases.Previously, for example, staff lawyers negotiated settlements and thenbrought them to the commissioners for approval. Now, under a pilotprogram, the commission requires a majority of the commissioners toapprove a range for settlements. Some staff members complain that thismakes them feel as if they must get permission to do their jobs.
Butthe commission has argued this change gives its lawyers more leverage.When they negotiate, companies know any settlement cannot be voted downby the commission later.

Whatever the case, total disgorgements and penalties, which are subject to business cycles and individual factors affecting cases, have fallen recently. The penalties portion — the punishment that a company faces, excluding any return of ill-gotten gains — fell from $977 million in 2006 to $505 million in 2007. But accompanying that decrease is a decline in disgorgement, suggesting that companies and officers are engaged in less wrongdoing than that the S.E.C. staff is bringing fewer cases. Return of ill-gotten gains fell to $1.1 billion in 2007 from $2.4 billion in 2006.

Mr. Cox responded to Senator Dodd’s inquiry on April 1, pointing out that in the fiscal year ended 2007, the S.E.C. brought the largest number of corporate penalty cases in its history. Since 2006, the S.E.C. has settled some high-dollar cases, including a penalty for Fannie Mae that totaled $400 million. Yet the JPMorgan case, in which the S.E.C. said the bank failed to detect wrongdoing at a client for which it was a trustee, is not the only recent case in which the commissioners have reduced bills for companies. (JPMorgan, as is usual in S.E.C. settlements, neither admitted nor denied wrongdoing.)

On March 5, in a particularly high-profile case, the agency accused Fidelity Investments and 13 former and current employees of accepting more than $1.6 million in improper gifts, entertainment and travel paid by brokers doing business with the fund company.

Among those charged was Peter Lynch, vice chairman and former portfolio manager for the Magellan Fund. He struck a deal with the S.E.C. to pay almost $30,000 in disgorgement, but the commission, excluding Mr. Cox who was recused, later reduced that to about $16,000, saying gifts should be valued at retail prices, as they are for federal employees.

A spokesman for Mr. Lynch declined to comment.

Arthur Levitt, who served as S.E.C. chairman under President Clinton, is critical that the agency is not as active as it should be. When the Treasury Department proposed a blueprint that would have stripped the S.E.C.’s powers, Mr. Cox did not condemn it.

“Together with other actions taken and some not taken with respect to a number of issues important to investors, it is unlikely that this commission will be known as an activist one,” Mr. Levitt said.