The SEC: This one is for you, Peter Oh.

Elizabeth Nowicki —  22 August 2006

My position in the areas of securities law and corporate law has consistently been that painful shareholder lawsuits are generally likely to be much more effective deterrents than toothless legislation (SOX?) or rulemaking by an agency ill-equipped or disinclined to ruthlessly enforce its rules.  I have taken this position in my writing with respect to investment banking research analysts, I have taken this position with respect to attorneys, and I have taken this position with respect to corporate directors.  (I am soon to re-articulate my position with respect to attorneys at an upcoming conference at Columbia – mark your calendar.)

In at least one of my articles, however, I cite (for purposes of disagreeing with) Peter Oh’s article titled “Gatekeeping,” in which he takes the position that the SEC is well-situated to be an effective gatekeeper.  Peter’s position is idealistic, in my view, and, having worked for the SEC and observing the agency over the past decade, I am of the option that the SEC is hamstrung by political pressure (see, e.g., resignations of Donaldson and  Pitt) and thin resources.  Mind you, the SEC is staffed with brilliant lawyers, accountants, and economists, and the SEC certainly can and should be an astoundingly effective gatekeeper, but sometimes reality gets in the way.

Exhibit A:  The WSJ had an article today about an SEC lawsuit against some scammers who appear to have duped 64 investors out of $1.6 million.  This suit is similar to many brought by the SEC – small-scale scammer, clearly scamming, as easy a target as fish in a barrel.  The SEC will likely take the scammers discussed in the article off the street, which will be a good thing, but I have to say that I’d much rather the SEC go after the bigger scammers who have impacted (negatively) more investors.  Granted, the SEC has relatively recently (past decade) snarked at a bunch of heavy hitters – Goldman and E&Y and Enron among them – but how much can the SEC really do with its (1) limited funding and (2) awkward political position (the way the Pitt/Donaldson terms ended sat very poorly with me)?

Mind you, I support the SEC fully, and I think we (corp. and secs. scholars) should be encouraging our students to consider working for the SEC (incredible experience and super, super mission).  I have nothing but the best things to say about the senior folks I was able to watch in action while at the SEC – Arthur Levitt, Harvey Goldschmid, David Becker, Dick Walker, Steve Culter, etc. – but I think that, as an “institutional” matter, the SEC is not going to soon be the knight in shining armor it could be.  There are just too many currents to swim against.  Or at least let me just say that I will not sleep better tonight knowing that the SEC is going after Dante Jarvis, in Hicksville, NY.

2 responses to The SEC: This one is for you, Peter Oh.


    If you read the SEC complaint, it becomes apparent that the corporate bank account was simply being looted by the principals.

    Since this fact pattern is consistent with money laundering, why should the bank not be liable in this particular case, to the investors. Ordinarily, the bank would not owe a duty of care to anyone except its client, but why shouldn’t we impose gatekeeping liability on the bank -in these rare circumstances?


    Elizabeth, this is a very interesting post. Joel Seligman’s history of the SEC asserts that the agency has been–unlike other federal units–largely immune from stain of politics. But in the 1990s, Congress certainly stepped on Levitt’s agenda, arguably setting the stage for later scandals. And you make the point that Pitt and Donaldson were subject to political pressures — albeit the winds were blowing in different directions for each of these former chairs.

    Is this political pressure something new, or was Seligman just too caught up in the SEC lore? If it is something new (and I think it might be), it is worth exploring in greater detail. bh.