WaPo Circles Back on Cox’s SEC

I criticized the press last month for burying a blistering General Accountability Office report on the incompetence of Christopher Cox’s SEC—a report covered best by my friend Moe Tkacik over at Talking Points Memo.

So I’d like to tip my hat to the Washington Post for coming back around to this one. It’s better late than never, especially since its story fills in some background on the agency’s head-in-the-sand years. The press too often lets stories go if they’re not “new” enough. But there’s important spadework to be done on our recent history that helps us understand what’s going on now.

The Post story puts the page-one spotlight back on Christopher Cox, who headed the SEC during Bush’s second term, when enforcement penalties plunged 84 percent.

That happened because Cox was, to put it euphemistically, corporate-friendly, as was Commissioner Paul Atkins, according to the Post. Reporter Zachary Goldfarb interviewed nineteen current and former officials to get an idea how this played out on the inside. For example, from the lede:

The five enforcement officials caught a morning Acela train bound for Washington. Based at the New York office of the Securities and Exchange Commission, the team was seeking agency approval to impose tens of millions of dollars in fines on a drug company, Biovail, which had allegedly used the crash of a truck hauling depression medicine to cover up financial losses.

But when the group arrived at SEC headquarters on that winter day early last year, it was barred from the room where the commission was meeting, according to a person familiar with the case. Chairman Christopher Cox and his colleagues reviewed the case inside. When the doors opened, the enforcement officials learned the commission had knocked down the penalty to a small fraction of what they had sought.

The outcome, though discouraging to the team, was not a complete surprise, sources said. After Cox became SEC chairman in mid-2005, he adopted practices that undermined the enforcement division’s efforts to investigate cases of corporate wrongdoing and punish those involved, according to interviews with 19 current and former SEC officials.

Cox concentrated the power of the bureaucracy at the top, in the commission itself. That had the effect of delaying cases significantly and effectively discouraging investigators from bringing them.

During Cox’s tenure, investigators who wanted to subpoena documents or compel interviews faced an increasingly cumbersome process to win the commission’s approval for each case, according to current and former agency officials.

Cox also required enforcement officials to see the commissioners before approaching a company about a civil settlement. In several high-profile cases, when SEC lawyers were ready to ask the commission to authorize lawsuits or approve settlements, Cox postponed the decisions at the last minute, leaving cases unresolved for months, the sources said. At times, as in the Biovail case, the commission eventually weakened the sanctions sought by the enforcement division.

The Washington Post calls it like it is here:

This is the legacy Mary Schapiro inherited when she replaced Cox as chairman this year. Among her first acts, Schapiro freed enforcement officials from getting commission approval before negotiating settlements with companies and established an accelerated process for authorizing subpoenas and depositions. She speaks frequently of taking the “handcuffs” off of the enforcement division.

It goes onto detail how the delays and delegitimization of the SEC’s investigators played out:

On many occasions, former enforcement lawyers said, Cox removed cases from the agenda because of Atkins’s concerns. Often, the enforcement team had already reached a settlement with a company. The practice made it more difficult for enforcement lawyers to negotiate credibly, the attorneys said.

“Cases would sit and linger for months while you waited to get a response… . There was often a question as to what authority the staff had,” said Thomas O. Gorman, a defense lawyer at Porter Wright Morris & Arthur in Washington who specializes in SEC cases.

The Post focuses on Cox’s tenure here, which is perfectly fine. But I’ll point out that the GAO report had damning details about the infrastructure and organization of the agency itself—problems that presumably predate Cox or even the Bush Administration. Like this, which Tkacik found diving into the report a few weeks ago:

Investigative attorneys with whom we spoke concurred that having little or no administrative or paralegal support causes them to spend considerable time on non-legal duties such as copying, filing, document-scanning, preparing exhibits, making travel arrangements, soliciting bids for court reporters, and logging and processing documents submitted by respondents. For example, one attorney told us such duties can take 2 to 3 hours daily. Another, who joined the agency from private practice, said that investigative attorneys can spend up to half their time on tasks handled by support staff in their previous position. One attorney told us of plans to spend a day assembling document storage boxes. Because there is insufficient in-house copying capability, confidential documents sometimes are sent to non-secure outside copy shops. Frequent equipment breakdowns mean attorneys must search for working copiers and scanners, a number of attorneys told us…
Once all those internal memos are completed, they have almost no value internally because the system is run on a proprietary case tracking system called CATS that is incompatible with all their other computer systems (which are all incompatible with one another) and which no one bothers to update or fix when it’s broken, both because their old information technology contractors no longer work there and because it is, in the staffers’ own words, “severely limited and virtually unusable.”
While downloading of information from computer hard drives has become a basic evidentiary technique, some investigative attorneys told us there can be lengthy delays for information technology support staff to retrieve the contents from hard drives obtained during an investigation. For example, one attorney told us about a case in active litigation in which Enforcement had to seek an extension of time for discovery because after 6 months, only two of a number of hard drives had been downloaded…

Some investigative attorneys suggested that Enforcement would benefit from a divisionwide system for sharing information, such as litigation documents or legal analyses…

Several attorneys said that another significant shortcoming is that the investigative staff does not have access to real-time trading information… Currently, when attorneys need such information, they manually query hundreds of broker-dealers, a process that initially produces only incomplete records.

These show an institutional culture of failure. There’s much more for the press to dig up yet on the SEC.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.