Philip A. Loomis, Jr., Harold M. Williams, John R. Evans and Irving M. Pollack
The new Division flourished under Pollack and, after Pollack’s appointment to the Commission in early 1974, Sporkin, who soon became the public face of enforcement and indeed the Commission.(1) Some have described this as the Division’s “Golden Age,”(2) due not only to Sporkin but also to the extraordinary group of younger attorneys he drew to enforcement work. They seemed driven to show that the SEC was the finest agency in Washington. In some ways these enforcement lawyers differed from traditional prosecutors; according to one observer, “[t]hey enforced the law primarily from their offices, pouring over documents, scrutinizing stock data, negotiating on the telephone, writing memos, meeting constantly with coworkers and supervisors. . . . Their cramped offices and the hallways that surround them were piled high with boxes of subpoenaed documents and work papers.”(3) But in their dedication and zeal “[t]hey made the SEC exciting, energized, frenetic, and unique in a lethargic federal bureaucracy.”(4)
The Division’s challenges and successes during this period foreshadow major issues that would recur over the next four decades. Challenges included its small staff and budget. In 1974 the Division employed only 165 “attorneys, accountants, and analysts,” working with an “extremely lean” budget, to police the largest securities markets in the world and their thousands of participants.(5) To be effective, it had to convince market participants that there was always a real possibility it would uncover wrongdoing anywhere its remit reached, to promote at least the illusion that the SEC was omnipresent.(6) And it had to do so even as much of its time, then and since, was devoted to the workaday world of securities enforcement, as its attorneys pursued the small-scale accounting frauds, insider trading, offerings violations, and market manipulation endemic to the securities markets. Special effort, then, was directed towards a handful of major cases carefully chosen to make a larger point – as Casey put it, cases that would be a “great teacher” that would “remind those involved in the investment process of the standards to which they must adhere.”(7) The need to send a message also explains the pains the staff took to create publicity around some of its most significant cases and “programs” targeted at particularly troublesome areas through press releases and press conferences.(8)
The use of cases to send a message about expected conduct, however, would produce a backlash against what some called “regulation by enforcement,” in which cases were allegedly brought not to enforce already-established prohibitions but to penalize activity that had not previously been understood to violate the securities laws – in effect, laying down new rules by bringing enforcement actions, detouring around the rule-making process.(9) This was not completely new; in the early 1960s Manny Cohen had argued that, in some cases, adjudication was a preferable way to enunciate new policies, and during his chairmanship he instructed enforcement attorneys to “develop a series of enforcement actions in which the Commission and the Courts gradually espoused clear principles of laws.”(10) In the 1970s, however, as the Enforcement Division increasingly argued new and innovative legal theories in enforcement actions, the criticism would be heard more and more.
(1) David A. Vise and Steve Coll, Eagle on the Street 3 (1991).
(2) Theodore A. Levine and Daniel Hawke, Sarbanes-Oxley: Back to the Future, Chief Legal Exec. 14.
(3) Susan P. Shapiro, Wayward Capitalists: Targets of the Securities and Exchange Commission 141-142 (1987).
(4) Id.: 143.
(5) Felix Belair Jr., SEC at 40 Pushes Reform, NY Times June 30, 1974: 127.
(6) Harvey Pitt and Karen Shapiro, Securities Regulation by Enforcement: A Look Ahead at the Next Decade, 7 Yale J. on Reg. 149, 184 (1990).
(7) Casey, Ruminations and Action on Enforcement, Sept. 29, 1972: 5.
(9) Pitt and Shapiro, Securities Regulation by Enforcement.
(10) Seligman: 357 (Quoting Arthur Mathews).
(Courtesy of Gregory G. Faragasso)
Paul R. Berger was on the staff of the Securities and Exchange Commission for 14 years, from 1992 to 2006. He joined the Commission as a staff attorney in the Division of Enforcement and eventually become Associate Director in 2000. He helped establish and chaired the Commission’s Financial Fraud Task Force and played a leading role in the Commission’s focus on the Foreign Corrupt Practices Act. He was responsible for numerous cases in the areas of financial fraud, foreign payments (bribes), executive compensation, auditor independence, Regulation FD, broker-dealer matters and insider trading.