SEC staff colleagues and supervisors of trial lawyer James Kidney were in for a stark surprise when he gave his departing retirement speech and blasted the agency’s “timid” approach to prosecuting Wall Street’s “penthouse” offenders.  In other words, speaking the obvious truth caused shock.

SEC

Target is lack of accountability for most powerful Wall Street players

“For the powerful, we are at most a tollbooth on the bankster turnpike. We are a cost, not a serious expense,” Kidney blasted in his remarks, noting that the SEC should focus on quality cases that matter, not going after low level cases that do nothing but bolster the agency’s statistics. “They see an agency that polices the broken windows on the street level and rarely goes to the penthouse floors. On the rare occasions when Enforcement does go to the penthouse, good manners are paramount. Tough enforcement – risky enforcement – is subject to extensive negotiation and weakening.”

Focus on statistical quantity — not cases that matter — at issue

The problem is the SEC is focused on gross statistics and piles on to easy cases that don’t matter but up the agency’s statistical girth, a beauty pageant component that the SEC’s upper level executives proudly parade in front of the media and Congress.  “I knew from the start about how the SEC staff went about meeting its stat quotas,” Kidney observed, calling the gross number of cases the commission brought a “cancer” and that the agency should focus on cases that have real impact on investor security. “We all see cases frequently to which we offer a head scratching response. Really? The SEC spent time and money on that? These cases have no significant impact and the conduct is of minimal or no harm to the investing public. Bringing the case is a stat!”

The issue was first brought to light in a Bloomberg article on the topic where Kidney gave an interview.  “I don’t think we did a very aggressive job with all the major players in the crash of ’08,” he was quoted as saying in the report, while pointing out the SEC does not need to prove its cases beyond a reasonable doubt like the Justice Department does. “The SEC has a lower burden of proof and we should be pushing the envelope a bit.”

Problem is revolving door and SEC officials looking to get their “ticket punched”

Why doesn’t the SEC go after big fish?  “The revolving door is a very serious problem. I have had bosses, and bosses of my bosses, whose names we all know, who made little secret that they were here to punch their ticket,” he said in a moment of candor that has been expressed by a number of regulators. “They mouthed serious regard for the mission of the Commission, but their actions were tentative and fearful in many instances. You can get back to Wall Street by acting tough, by using the SEC publicity apparatus to promote yourself as tough, and maybe even on a few occasions being tough, if you pick your targets carefully.”

Small group of principled regulators isn’t given a voice

Addressing the career risk potential for trial attorneys who go after high profile targets, the system fosters fear.  When going after major Wall Street players, Kidney issued sage advice for success at the regulator. “Don’t appear to fail. Don’t take risks where risk would count. That is not the intended message from the ticket punchers, of course, but it is the one I got on the occasions when I was involved in a high profile case or two.”

There are known to be a brave if increasingly scarce group of regulators who are still committed to financial reform.  The cost of being an employee at a regulator who stands up to Wall Street is significant and well known. Promotions in the agency are rare and after the Wall Street lobby blacklists a regulator their employment prospects after service at the regulator are dim.  Kidney never received a promotion at the SEC and initially was not given an office, having to work off a document cart to prosecute high level Wall Street cases.  “There are true believers that the SEC can be a strong public protector in the securities market, and that one can work for the Commission one’s entire career proud of your own work, if not always of the Commission itself.”

Kidney’s comments have caused quite a stir in Washington DC, according to a report in the New York Times.