New Investigation:

How Lax EPA Oversight Enabled Jackson's Water Crisis.

Exposing Corruption and Preventing Abuse of Power

SEC Taps Wall Street Lawyer to Police Wall Street

The Securities and Exchange Commission (SEC) announced Monday that it has tapped a Wall Street lawyer to police Wall Street.

The appointment comes as no surprise because the agency typically draws regulators from the ranks of the regulated. But it does illustrate a significant problem: by relying so heavily on people with industry connections, the SEC can tangle itself in conflicts of interest.

It’s more than just an ethical issue when regulators arrive at the SEC with such baggage. They may have to stay out of major agency decisions, limiting their ability to do their jobs.

The latest illustration: the SEC has named Andrew Ceresney, a partner at white-collar defense firm Debevoise & Plimpton, to serve as co-director of the agency’s enforcement division.

The high-level appointment was announced Monday, just a few weeks after another former Debevoise partner, Mary Jo White, was sworn in as SEC Chairman.

An SEC spokesperson wouldn’t tell the Project On Government Oversight which matters, if any, Ceresney would be recused from at the agency. Either he’ll be sidelined on major matters, or he’ll be participating in decisions that could affect former clients.

“With the head of the SEC and one of the co-directors of enforcement coming from the same firm, both might be recused from many cases involving that firm’s clients,” Senator Charles Grassley (R-Iowa) said in a statement on Monday.

“The SEC will have to ensure that cases don’t fall by the wayside because of potential conflicts of interest and recusals,” he added. “The commission can’t give any impression of favoritism toward former clients of the chairman and co-director of enforcement’s former law firm.”

Those former clients include Wall Street giants such as JPMorgan Chase, which Ceresney represented during a multi-agency investigation of the company’s mortgage servicing and foreclosure practices, according to his law firm bio. White also represented JPMorgan in financial crisis-related cases.

That means two of the SEC’s top officials have connections to one of the biggest financial firms the agency is responsible for overseeing.

For example, the SEC has recently been investigating JPMorgan in connection with another matter: the firm’s multi-billion dollar trading blunder, which was described in great detail in a recent report by the Senate Permanent Subcommittee on Investigations.

In a February ethics letter, White agreed to a “cooling off” period during which she will not work closely on SEC matters affecting Debevoise’s clients or her former clients. Ceresney may face similar restrictions under federal ethics rules.

And they’re not alone. Four of the SEC’s commissioners have been “barred from enforcement votes and certain other matters affecting more than 20 companies,” according to a recent analysis by The Wall Street Journal. “At least one commissioner didn’t vote in 59 of the agency’s 118 closed-door meetings” during a recent two-year period, the Journal reported.

Other senior SEC officials have also had to stay on the sidelines. Robert Khuzami, a former SEC enforcement chief, was recused from handling matters affecting his former employer, Deutsche Bank. A 2011 Senate investigative report said that, during Khuzami’s time at the company, Deutsche engaged in “a variety of troubling practices” involving “financial instruments that contributed to the financial crisis,” including exotic mortgage-related products. In response, a Deutsche spokesperson told The New York Times that Deutsche “endured significant losses” from its investments in the housing market.

Asked yesterday about the implications of the latest appointment, SEC spokesperson John Nester referred POGO to comments he made a few months ago. In his earlier comments, Nester said the SEC is not harmed by the need for senior officials to recuse themselves. The agency “is blessed with a deep pool of talented experts on just about any issue that comes up, so it really hasn’t been an issue,” he said in comments for POGO’s report, Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture.

“SEC employees and Commissioners recuse themselves on a case by case basis in accordance with government wide ethics law and regulation,” Nester said in his earlier comments. “Agency staff and Commissioners are required to undergo training concerning their recusal obligations, and the Ethics Office frequently consults with staff members and Commissioners individually about their recusal obligations.”

Also Monday, the SEC announced that George Canellos—who has served as acting director of enforcement since Khuzami stepped down—will serve as the division’s co-director. Unlike Ceresney, who is coming straight from a law firm, Canellos has been at the SEC since 2009. But before joining the SEC, Canellos was a partner at Milbank, Tweed, Hadley & McCloy—another white-collar defense firm. The SEC spokesperson wouldn’t say what matters, if any, Canellos has been recused from handling.

Canellos, Ceresney, and White have also worked as white-collar prosecutors in the U.S. Attorney’s Office for the Southern District of New York.

While at Debevoise, Ceresney often defended clients from SEC enforcement probes. His experience may make him a more knowledgeable SEC cop. At the same time, his movement through the revolving door shows how the lines can become blurred between a federal agency and the world it regulates.

In one case, Ceresney represented a “major financial institution in connection with DOJ Mortgage Fraud Task Force and SEC investigations of mortgage-backed securities,” according to his law firm bio.

While at Debevoise, Ceresney also represented a “national accounting firm in connection with US Attorney’s Office and SEC investigations relating to collateralized debt obligations,” his bio says. The SEC polices accounting fraud, including the work of the so-called “Big Four” global accounting firms.

In a separate matter, Ceresney represented John Michael Kelly, a former chief financial officer at AOL Time Warner. In 2008, the SEC charged Kelly and other former executives for their “roles in a fraudulent scheme that caused the company to overstate its advertising revenue by more than $1 billion.”

Among other things, the SEC sought to bar Kelly and other former executives from serving as officers or directors of publicly traded companies. In the end, Kelly only had to pay $260,000 to settle the SEC’s charges, without admitting or denying wrongdoing.