Illusory Victories?: Do SEC Settlements Deter?

Few topics can produce as robust a debate among securities lawyers as the claim that the SEC has regained its former position as the “tough cop of Wall Street.” Many argue that under its new director of enforcement, Robert Khuzami, the SEC’s enforcement staff has been reorganized into a flatter, less bureaucratic structure and can now devote more resources to actual litigation. This columnist shares that view, but many still reply that the SEC characteristically pulls its punches whenever there is a chance that it might lose, either settling cheaply or allowing the settlement to be indemnified in a manner that produces a hollow, bloodless victory. Both sides agree that, after Bernie Madoff, Allen Stanford and the 2008 meltdown, the SEC urgently needs to win some significant victories to restore its tarnished reputation. But the critics claim that this need drives the SEC to structure settlements that are more cosmetic than deterrent.

This debate flared after the SEC’s controversial settlements with Bank of America and Goldman Sachs, and it has been reopened more recently with the commission’s settlement last month with Angelo Mozilo, the former CEO of Countrywide Financial. This topic is currently ripe for discussion again because rumors are circulating that serious settlement negotiations are underway between the SEC and the former senior executives of Lehman. True or not, such rumors frame the issue of what such a settlement should look like. Should the SEC be content, once more, with a settlement largely based on insurance proceeds and indemnification payments?