An SEC Attorney Says the Agency Is Too 'Tentative,' and the Data Agree

Bernie Madoff, who the SEC repeatedly investigated and didn't catch. Bernie Madoff, who the SEC repeatedly investigated and didn't catch. Louis Lanzano/AP File Photo

During his farewell speech to coworkers at the Securities and Exchange Commission, trial attorney James Kidney criticized the agency for its failure to target high-level violations. The most recent data on financial institution fraud charges indicates that its hardly the only government agency that's timid about going after bad actors.

Kidney's language was unflinching. He said that the SEC "polices the broken windows on the street level and rarely goes to the penthouse floors," according to a copy his remarks obtained by Bloomberg. When penalties are levied, he said, they amount to "at most a tollbooth on the bankster turnpike." The burden of proof for an SEC fine is lower than for a criminal charge, he pointed out, saying that he didn't think "we did a very aggressive job with all the major players in the crash of ’08."

In 2011, the Transactional Records Access Clearinghouse at Syracuse University announced that the federal government was on pace for its lowest level of annual financial institution fraud prosecutions in over 10 years. "The fact that prosecutions go up or down is almost never an indication of whether that particular crime is going up or down," TRAC co-director David Burnham told the Huffington Post at the time.

TRAC's most recent data (paywalled) incorporates monthly prosecutions from 2004 to January of 2014, and the trend is clear: prosecutions continue to decline.

Even as the financial crisis unfolded and waned, fraud prosecutions on a month-by-month basis continued to drop. In January 2014, prosecutions were down 30.1 percent over January 2009. The most common charge filed last January was bank fraud, most commonly filed by the FBI.

One obvious reason for the decline in prosecutions has been the continued reduction in resources for enforcement agencies. The SEC saw a slight increase in its budget under the Ryan-Murray agreement in December — but it is still funded far below the level it saw before government sequestration kicked in.

What Kidney was talking about in his farewell speech (which, he says, didn't evoke an angry response from his peers) was the SEC's timidity in using its tools against bad actors in the financial industry. He could apparently have been talking about other agencies as well. His superiors "were more focused on getting high-paying jobs after their government service than on bringing difficult cases," in Bloomberg's summary of his remarks. And why not? Who wouldn't want a job where you're unlikely to face recriminations for bad behavior?

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