My last post briefly addressed the miniscule number of trials the SEC has conducted in the past few years. In this post, I will discuss whether the SEC Home Office should continue to separate its trial attorneys from its investigative attorneys. As discussed below, I believe that the obvious answer is no.
By way of background, for some time the SEC Enforcement Division in the National Office (the Home Office) has had two separate groups of attorneys. The primary responsibility of the first attorney group (the investigative unit) is to conduct investigations, while the second group (the trial unit) is responsible for reviewing (sometime preparing) litigation papers and then litigating if a case goes to trial. Attorneys from the investigative group almost always draft the initial litigation papers and are frequently involved in the trial work.
Based on their defined roles, trial attorneys in the Home Office usually get their first look at a case only when it seems the matter will litigate, often some time after investigative steps have been completed. Because of this, attorneys from the trial unit generally do not take witness testimony; they learn about a case solely by reading staff memos, defense submissions, and testimony transcripts. In a complex matter, this tedious effort may take months of concerted effort to get up to speed (some trial attorneys try to be more efficient by initially reading just the defense submissions). In many situations, the sheer volume of investigative material to digest makes it difficult for a trial attorney to be well-steeped in the facts uncovered in the investigation.
Perhaps, as a result of this dynamic, a number of trial attorneys have a propensity to exaggerate the litigation risks associated with a particular case. Moreover, because trials require enormous time and energy, a trial unit attorney not involved in an investigation from the start or not intimately familiar with its details is more likely to think he has discovered flaws with a case and be less interested in taking a case to trial, not having a vested interest in the outcome. This is not ideal. I can tell you from first-hand experience that nothing is more maddening than working long and hard on an investigation and then having a trial unit attorney muck up the case by conjuring up cockamamie farfetched litigation risks or misstating the evidence in meetings with outside counsel or senior officers of the Commission.
Similarly, the separation of investigative and litigation functions likely causes investigative attorneys to inadequately consider the litigation risks associated with a proposed Enforcement action. While conducting an investigation, an attorney may not be naturally attuned to the litigation issues, since an investigative attorney’s primary role is trying to figure out the facts, not how to present the facts in a courtroom. Moreover, an investigative attorney is not likely to objectively confront the litigation risks of a case, thinking he will not have to play a significant role in litigating the matter. Having put forth an extensive investigative effort and uncovered bad behavior, the staff attorney’s goal is to try to figure out how to bring the most meaningful charges possible rather than to close the case without action or take a settlement that seems insufficient.
Of course, a natural byproduct of all this is a fair amount of friction between the two groups of attorneys. While historically there were always disagreements between the two groups of attorneys, the attitudes and personalities of the recent trial chiefs exacerbated the mistrust and disrespect between the two groups. Some embarrassing trial losses further frayed relations. As a result, Home Office trial unit attorneys now are instinctively skeptical toward any case assigned to them before even looking at the evidence, and investigative attorneys often believe most Home Office trial attorneys to be risk averse and ineffective. It doesn’t help that the two groups have different supervisory chains.
While the current Home Office setup for enforcement attorneys may suffice for a simple insider trading case, it is widely understood that it does not work well for a case of any complexity (which now comprise a large number of enforcement actions). So, the current Enforcement Directors have a choice. They can take the easy way and simply maintain the status quo, or they can modify the existing setup and have both sets of attorneys subject to the control and direction of the same supervisors. Restructuring the Home Office Enforcement groups that way could result in more trials and would likely meet resistance by attorneys in both groups (and defense counsel, who rightly believe they can work the existing system to their advantage). It would require fortitude and commitment but would be well worth the effort, almost certainly leading to a more productive and efficient enforcement program. The change would not be a total cure but it would be a significant improvement.
So, there you have it. What are the chances of this sensible and useful idea being implemented? Virtually zero.
The SEC in Action 