In the wake of the 2008 financial crisis and the Bernard Madoff scandal, there was no shortage of commentators suggesting that the SEC’s “revolving door” had contributed to both situations. The idea was that SEC staff had gone soft on major players in the financial industry with the hope that lucrative employment by those players would be more likely within a few years. Potential violations were glossed over or missed entirely, and the staff walked out the door shortly afterward with jobs in hand from appreciative investment banks and hedge funds. Many, many people subscribed to this view.
I never bought it. It always seemed to me that financial industry defendants would respect (and be inclined to hire) staff who were smart and tough in their work, instead of unethical patsies who were willing to look the other way in exchange for a favor. And it stands to reason. An NBA team would not be interested in trading for an opposing point guard who shaved points (allegedly). The team would be much more interested in a point guard who torched it for 30 points and 12 assists to knock it out of the playoffs. Feel free to choose your own analogy. But organizations will always want to have effective players or lawyers or whatever on their side. They can’t afford to harbor unethical mopes.
A study to be presented at the American Accounting Association later this month now confirms this view. The paper – written by professors and doctoral students at Emory University, Rutgers University, the University of Washington, and Nanyang Technological University in Singapore –is somewhat narrow. It focuses on the SEC’s litigation efforts from 1990 to 2007 and not the pre-litigation enforcement process, which is quite extensive but generally much less public than litigation is. But for what they studied, the authors found evidence consistent with what it calls the “human capital hypothesis.” That is, “future job opportunities make SEC lawyers exert more enforcement effort to showcase their expertise.” In particular, “the intensity of enforcement efforts . . . are higher when the SEC lawyer leaves to join law firms that defend clients charged by the SEC.”
The paper is full of tables and sources that support the authors’ thesis. It is gratifying, if rare, to find empirical data that shows I am right. This may be one of those glorious instances. The New York Times has more.