Corporate Governance

Communicating with the Division of Enforcement (Part 3)

By J. Robert Brown

The Inspector General's Report contained a section that discussed Morgan Stanley's access to the top levels of the Division of Enforcement. 

Some officials noted that "this practice is not actually that uncommon."  Indeed, Mary Jo White noted that it was "known to the securities bar" that "if you've got an issue and you do not think you are getting a fair hearing on something . . . pick up the phone, you know, we have an open-door policy."  Others in the Division raised concern about the practice, according to the Report, labeling it as something that would "undercut" the staff attorney on the case and that it was a "cheap trick" that irked the investigators on the case.

The Inspector General's Report questioned the practice.

• In addition, there are some questions about the appropriateness of the current common practice in Enforcement that allow (and even encourage) outside counsel the opportunity to contact those above the line attorney level on behalf of their clients when they have issues or disagreements with the line attorneys. . . . This practice could also result in greater access by former Commission lawyers who had established relationships with high-level Enforcement officials prior to going into private practice. Greater access could lead to better results, or at least the appearance thereof.

On this one, the Inspector General is wrong.  First, the issue is not truly raised by the discussion in the Report.  Most of the communication above the "line attorney" level were not designed to influence the direction of the investigation but were mostly attempting to elicit information about the possible status of one individual involved. 

Second, while the cases are mostly run by staff attorneys (with tight supervision by branch chiefs), cases can sometimes run amuck.  Lawyers know that they can go over the staff attorney's head to complain but they do so at great peril.  For one thing, the staff attorney won't like it and he or she still has the authority to make thousands of small decisions that can make a potential defendant's life miserable.  For another, the culture within the Division is to back up the line attorneys almost always in the case of an appeal, even when they are wrong.  Any other practice would undercut the role of the staff attorney and encourage a constant stream of appeals to supervisors.  In other words, aside from the inexperienced lawyer, most attorneys representing persons subject to investigation would not take the risk of going over the staff attorney's head. 

There is, therefore, adequate checks on the practice.  At the same time, the ability to sometimes appeal upwards in the hierarchy is a necessary safety valve.  Not only does it provide an opportunity to correct something egregious, all staff attorneys know that if they exceed SEC imposed boundaries in the investigatory process (say through excessively broad and expensive subpoenas), the mistake may well come to the attention of their supervisors.  

The Division of Enforcement is right to let the bar know the avenue is available and the Inspector General has raised nothing in his report that suggests the practice ought to be curtailed.

A redacted version of the Report is posted.

Full post as published by The Race to the Bottom on November 04, 2008 (boomark / email).