Catching bad guys: Tough times at SEC
The government's securities regulator has been under fire for some high-profile misses. Catching high-profile insider traders may help the agency gain public favor again.
NEW YORK (CNNMoney.com) -- The SEC could use more days like this.
The Securities and Exchange Commission, the government's regulator of the financial markets, made headlines Thursday, a day after it filed a case against an insider trader that looted $8.6 million illicitly from the high-profile, $3.9 billion Dell (DELL, Fortune 500) and Perot Systems (PER) deal. The SEC caught the culprit quickly, too -- the crime went down just three days ago.
But days like this haven't come often enough in the past year for the 75-year old regulator. Most headlines about the SEC have focused on how it missed Bernie Madoff's $50 billion Ponzi scheme and let Bank of America (BAC, Fortune 500) off too easily.
As a result, lawmakers have become skeptical of the SEC's ability to do its job. Congress recently left it off a list of proposed recipients for funding to enhance regulatory reform. And earlier this year, some legislators suggested that the SEC be merged with the Commodity Futures Trading Commission.
But don't expect the SEC to go down without a fight.
"Lately, the public and Congress have raised questions about the effectiveness of the SEC," said Mike Perlis, partner at Stroock, Stroock & Lavan in Los Angeles and former assistant director at the SEC. "It's important to the SEC to be perceived as a vigorous enforcement agency, so we'll start to see an increase in activity from them."
In a speech last month in New York, Robert Khuzami, the SEC's director of enforcement, said it is responding to criticism by enhancing its efforts to catch criminals and protect consumers. He said that in the first eight months of 2009, compared to the same period a year ago, the SEC has opened 10% more investigations, issued 118% more subpoenas and filed 30% more enforcement actions.
"We listened to the criticism and used it as a learning opportunity," said Khuzami. "We are aggressively pursuing long-term improvements in our structure and processes, while at the same time working hard to continue our vigorous enforcement efforts."
Insiders get more headlines: The SEC is talking a good talk, but experts say the regulator may need to go a step further to gain favor with angry lawmakers.
Perlis said the SEC's efforts will be shifted toward more insider trading enforcement similar to the kind of charges the regulator filed Wednesday. He argued that insider trading cases will help the commission curry favor with lawmakers and with the public, because they are high profile, quick, easy to investigate and don't require complex actions such as tracing asset flows.
Experts noted that the SEC will have its hands full in the coming months: With a growing number of deals expected to be done as the recovery sets in, that means more crooks will attempt insider trading schemes.
"The SEC is in an odd place, still wounded from all of the past year's activity on Wall Street," said Michael Williams, dean of Touro College Graduate School of Business in New York. "With M&A coming out of shadow land, the SEC will position itself to be at the table in these deals, actively involved, so it can resurrect itself and avoid a departmental overhaul."
Focus needed: But not everyone thinks that's such a great thing. Insider trading is harmful to investors, but the more difficult-to-catch problems such as Ponzi schemes and corporate misinformation are usually much more destructive.
"I hope the SEC doesn't take that route," said Ellen Podgor, a law professor at Stetson University College of Law in Florida. "When it comes down to what's important, like making sure another Madoff doesn't happen, then they'll have to take the time in their investigations instead of the easy way out."
To prevent another Madoff-sized scheme from falling through the cracks, the SEC may be better off focusing on the effectiveness of their efforts rather than on the public attention that they get, some argue.
"The SEC's problem is that these things are hard to find," said Randall Filer, professor of economics at Hunter College in New York. "To do a better job, they'll have to become more efficient. Given the political mood, that idea will gain traction ... and the government will spend the resources for more regulation."
Funding: The SEC has already begun its push for more funds. Job cuts have coincided with rising rate of securities violations and trades to regulate.
"We are hopeful that Congress will increase our resources," said Khuzami in his speech. "We have had an approximately 11% reduction in force since 2005. With greater resources we can do even more."
Some in Congress think the SEC needs more help. Earlier this month, Sen. Charles Schumer, D-N.Y., said he plans to introduce a bill that would allow the SEC to keep all of the fees it collects from its cases, so it can better afford to recruit and maintain personnel.
"The SEC's failure to catch Bernie Madoff shows a level of incompetence unseen since FEMA's handling of Hurricane Katrina," Schumer said. "Under the current system, the agency's rank-and-file personnel are struggling to keep up with the more sophisticated actors in the market. We cannot keep starving the SEC's budget." 
