Key Republican Slams Obama Era "Broken Windows" Securities Policy - The Industry Spread

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

SEC

Key Republican Slams Obama Era “Broken Windows” Securities Policy

May 18, 2018
Bill Huizenga, Republican from the State of Michigan
Bill Huizenga, Republican from the State of Michigan

A key Republican on the House Financial Services Committee took a shot at the Obama era securities regulation approach.

Bill Huizenga is a Republican from the State of Michigan and he chairs the Capital Markets, Securities and Investments sub-committee of the House Financial Services Committee.

In opening remarks of a hearing he chaired, Huizenga slammed the securities enforcement policy of former SEC Chair Mary Jo White, who chaired the SEC from April 2013 through the end of Obama’s term.

He referred to her policy as the broken windows approach, which focuses on low level crimes along with more significant crimes.

A Market Watch profile of White at the end of her term noted: “Under her watch, the agency adopted a ‘broken windows’ enforcement policy, punishing minor as well as major breaches of the securities laws. The 868 enforcement actions filed in 2016 is a record, at least as it counts these things. During her tenure, the agency filed cases against Wall Street luminaries like Leon Cooperman (alleging insider trading) and high-profile financiers such as Lynn Tilton (accused of overbilling investors) as well as against the usual crowd of boiler-room types and dodgy brokers.

“It also announced a commitment to moving away from “neither admit nor deny” settlements. That commitment has been enforced more in the breach then in the observance, but it marks a real change in the way that the prosecutorial calculus must be done when considering any resolution of any case.”

But Huizenga didn’t see it that way.

“I’m pleased to see the enforcement division under Chairman Clayton’s leadership has redirected its focus away from the broken windows enforcement philosophy- i.e. targeting a large number of minor infractions in order to discourage larger securities violations- which was championed by then Chair Mary Jo White. In a 2013 speech, then Chair White characterizes this approach as quote, ‘the theory is that when a window is broken, and someone fixes it it’s a signal that disorder will not be tolerated but when a broken window is not fixed it’s a signal that no one cares and so breaking more windows costs nothing. The same theory can be applied to our securities markets. Minor violations that are overlooked or ignored can feed bigger ones and perhaps, more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.’ Close quote.”

“In a speech last week, the SEC Commissioner Hester Peirce stated that by quote ‘following the broken windows approach perhaps the SEC should have changed its name to the Sanctions and Exchange Commission because it acted like a branch of the US Attorney’s Office of the Southern District of New York.’ Close quote.

“I couldn’t agree more with Commissioner Peirce. In my mind, I believe that this misguided approach to enforcement appears to have only been successful in boosting statistics versus meaningfully improving investor protections.”

Violations of securities laws can be both civil and criminal violations.

SEC often refers investigations to the US Attorney’s Office for criminal prosecution because the SEC only has civil enforcement power.

Rudy Giuliani
Rudy Giuliani

Interestingly, it was then Republican New York Mayor, Rudy Giuliani, who also took the so-called broken windows philosophy to the New York City Police Department and he’s generally been credited with reducing crime.

Guliani was mayor of New York City from 1993-2001.

But in this case, it is the Republican, Bill Huizenga, attacking the same idea in securities law.

The US Attorney’s Office for the Southern District of New York is a sort of regional office for the US Department of Justice and the location covers Wall Street and where most trading occurs.

The job of the US Attorney’s Office for the Southern District of New York is to prosecute all federal crimes in that area.

Notorious insider trader Ivan Boesky, Ponzi schemer Bernie Madoff and junk bond king Michael Milken were all convicted by that office.

The World Trade Center also lies in the Southern District so many cases- like that of the so-called blind Sheik and the mastermind of the original 1994 World Trade Center attack- involving terrorism also are prosecuted out of that office.

Coincidentally or not, White headed that very office from 1993-2002, and indeed, so did Giuliani, from 1983-1989.

Giuliani’s prosecution of the heads of the so-called Five Families- the five Mafia families in New York- was a springboard to his run for Mayor.

Giuliani also prosecuted then junk bond king Michael Milken under the same law as he prosecuted the head of the five families, Racketeer Influenced Corrupt Organization Act, a bill which provided enhanced tools for attacking a criminal enterprise.

With Milken’s Drexel Burnham, the US Attorney’s Office argued that there was so much fraud and other criminality involved in fixing the prices that the company effectively became a criminal enterprise.

Milken was initially himself investigated by the SEC, starting in 1979. Those investigations then brought in the Federal Bureau of Investigation and the US Attorney’s Office when a criminal indictment was ready.

In 2009, the New York Times said of the person holding the post of US Attorney for the Southern District of New York: “Dozens of former assistant U.S. Attorneys who worked there go on to prominent careers both in private practice and at the federal level. Because of the office’s resources, pursuit of high-profile cases, independence from presidential administrations and transitions, and tenacity, it is sometimes referred to as the “Sovereign District of New York.”

While feeding a bunch of very winnable cases to a rising star prosecutor and his staff, probably helps advance all those careers, Peirce does not believe it advances higher interests.

 Peirce noted in her speech that pressure at the SEC for maximum numbers during White’sterm only provided many easily prosecutable cases for the US Attorney’s Office but for small violations while attention is not paid to significant and market moving frauds.

Carolyn Maloney
Carolyn Maloney

Interestingly, Carolyn Maloney, a Democrat from the State of New York and the ranking member- the leader of the minority- on the sub-committee, did not defend White’s broken windows philosophy while noting: “there is simply no way that the enforcement division can catch and punish every single violation of securities law.”

Maloney noted that the enforcement division is the biggest in the SEC with a staff of approximately 1,200, but that it is charged with overseeing 8,000 publicly traded companies and 26,000 investment professionals, including investment advisors and broker/dealers.

Maloney argued that the best way to address securities law violators is to have an aggressive civil lawsuit regime: “That’s why Congress gave investors the right to sue companies that they invest in for violations. This private right of action allows investors who have been harmed to recover their losses without relying on the SEC enforcement division to do all their work. This is one of the reasons why investors have so much confidence in US markets. They know they can hold companies they invest in accountable when they violate the law, even when the enforcement division doesn’t have the time or the resources.”

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