Exposing Corruption and Preventing Abuse of Power

Retiring SEC Lawyer: Revolving Door Causes Weak Enforcement

A longtime lawyer at the Securities and Exchange Commission (SEC) says that senior agency officials have been more interested in advancing their careers in the corporate world than in policing it aggressively, according to remarks prepared for the lawyer’s recent retirement party.

The SEC “polices the broken windows on the street level and rarely goes to the penthouse floors,” James Kidney, who joined the SEC in 1986 and spent most of his career there, said in the prepared remarks.

“On the rare occasions when Enforcement does go to the penthouse, good manners are paramount,” he said. “Tough enforcement – risky enforcement – is subject to extensive negotiation and weakening.”

Kidney’s farewell speech to SEC colleagues, posted on the website of a union for SEC employees, was spotlighted this week by Bloomberg and The American Lawyer. Outside observers have leveled similar criticisms; what made Kidney’s remarks extraordinary was that they were delivered so bluntly by a veteran of the agency’s Enforcement Division.

“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,” Kidney said. “They mouthed serious regard for the mission of the Commission, but their actions were tentative and fearful in many instances.”

Kidney, 66, described SEC enforcement as floundering and ineffectual. He placed much of the blame on the revolving door between the SEC and the corporate world, which he called “a very serious problem.”

Because ticket-punching managers set such a damaging tone, “it is no surprise that we lose our best and brightest as they see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or corporate job punched,” Kidney said.

Although the SEC touts its record in probes tied to the 2008 financial crisis—a record that includes charges brought against more than 160 firms and individuals—Kidney skewered the agency’s approach to enforcement.

The SEC is overly concerned with the number of cases it brings, he said, even when those cases “have no significant impact and the conduct is of minimal or no harm to the investing public.” This metric is “built into the soul” of the Enforcement Division and “has to be removed root and branch,” he said.

While the SEC pursues easy targets to boost its enforcement stats—“picking on the little guys”—officials have balked at bringing riskier cases against deep-pocketed defendants, Kidney said. “For the powerful, we are at most a tollbooth on the bankster turnpike. We are a cost, not a serious expense.”

Kidney told the Project On Government Oversight on Wednesday that the remarks he gave at the retirement party closely tracked his prepared text, but he declined to elaborate on them. The SEC declined to comment.

This isn’t the first time Kidney has protested the SEC’s outlook on enforcement.

In 2010, he told the SEC Inspector General (IG) he was bothered by his boss’s reluctance to interview a managing director at Goldman Sachs in a case tied to the 2008 financial crisis, according to IG records obtained by The American Lawyer. “It just seems to me this was the first time in my whole career here that we were not following the string,” he reportedly told the IG. “I mean the smallest stock manipulation case, the smallest insider trading case, the smallest almost anything would go at least a little way up the supervisory chain.”

Similar disputes have erupted within the Enforcement Division when officials decided not to bring charges against executives at Lehman Brothers and other companies that played a prominent role in the financial crisis. Kidney said the revolving door encourages weak enforcement.

“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,” Kidney said in his prepared remarks. “But don’t appear to fail. Don’t take risks where risk would count.”

An academic study released in 2012 concluded that the revolving door has often incentivized SEC lawyers to bring tougher enforcement actions. But POGO found that the study was deeply flawed.

Kidney’s comments drew immediate praise from many SEC critics, including Jonathan Weil of Bloomberg View, who put forth a novel suggestion: “Here’s a thought: How about making Jim Kidney an SEC commissioner the next time a seat comes open?”