Firms regularly defended by ex-SEC staff face 15.9 percent higher damages.
Former lawyers for the SEC who are hired by private firms to defend against SEC-related cases are more likely to suffer stricter enforcement of regulations than lawyers with no SEC experience, according to a new study. The study, conducted by researchers at Rutgers, the University of Washington, Emory University and Nanyang Technological University in Singapore, also finds firms that hire large numbers of former SEC lawyers receive no advantages when dealing with matters related to SEC enforcement.
‘The intensity of enforcement efforts, proxied by the fraction of losses collected as damages, the likelihood of criminal proceedings and the likelihood of naming the CEO as a defendant, are higher when the SEC lawyer leaves to join law firms that defend clients charged by the SEC,’ the study states. ‘Our evidence is thus inconsistent with popular concerns that revolving doors undermine the SEC’s enforcement efforts.’ The study follows the trajectory of 336 SEC lawyers and 284 enforcement actions for fraudulent financial reporting from 1990 to 2007.
By the end of the study period, 58 percent of the lawyers were still with the SEC, 11 percent went to work for companies that don’t practice law, and 31 percent were so-called revolvers: people who went to work for private law firms. The revolver lawyers, when working for private law firms that specialize in areas of interest to the SEC and frequently defend clients against the commission, experience 15.9 percent higher damages, a 4.2 percent greater likelihood of criminal prosecution and a 4.2 percent greater chance of having the CEO of their new firm named as a defendant in their cases.
The study authors find no evidence to support the notion that firms that hire multiple former SEC lawyers are able in any way to experience milder enforcement measures. They also find no evidence that younger, more career-ambitious SEC lawyers are tougher or milder in their enforcement than older SEC lawyers. But the study does find ‘some support’ for the idea that SEC lawyers may be less strict in the last year of their employment at the commission before leaving for private practice. ‘These results alleviate concerns expressed by the press, policy makers and Congress that revolving doors are detrimental to the SEC’s regulatory efforts, at least, on average,’ the study concludes. ‘The results can also potentially inform discussions on the effect of revolving doors for other regulatory agencies.’
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