Mary Jo White's past and the future of the SEC

A hard look at agency's likely new chairman

Feb 8, 2013 @ 8:53 am

SEC, regulation
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The sales pitch for President Barack Obama's nominee to run the Securities and Exchange Commission goes something like this:

Mary Jo White was a tough U.S. attorney for the Southern District of New York who prosecuted mobsters and terrorists. She spent the past 10 years representing Wall Street, so she knows something about the legerdemain of banksters. And -- insert violin solo here -- she is a patriot, willing to give up millions of dollars in income as chairman of the litigation department at Debevoise & Plimpton LLP for a lousy government salary. (Although, with a little luck, she will make up for that once she adds “former SEC chairman” to her resume.)

The arguments in support of White are as old and tired as the government-to-private-practice hustle that they endorse.

Her supporters say she has the integrity to shift from Wall Street defender to champion of securities laws. But it's hard to take seriously the notion that White will help crack complicated cases with her inside knowledge of how the bad guys work, an argument that often gets thrown around when Wall Street lawyers are tapped to be regulators. “People from the private sector know where the bodies are buried,” former SEC Chairman Mary Schapiro told the Washington Post after White's nomination last month.

Top Spots

Maybe so, but the SEC and Justice Department have had former defense lawyers checking in and out of top spots for years, and it hasn't led to any big-bank carnage among the people who orchestrated flakey derivatives, self-destructing collateralized-debt obligations or other outrages. When was the last time you saw anyone from a well-known bank doing a perp walk for his role in the financial crisis?

The Web pages of the best-known law firms give an idea of who the real winners are in the revolving door. Debevoise says it's “the only law firm to have former U.S. and U.K. attorneys general as well as a Queen's Counsel.” Cleary Gottlieb Stein & Hamilton LLP tallies 10 former federal prosecutors and three former SEC general counsels. At Covington & Burling LLP, they boast of having “convinced the SEC not to pursue an enforcement action” against one client, and that partner Bruce Baird, a former assistant U.S. attorney, persuaded regulators “not to proceed with cases on a significant number of occasions.”

It isn't often we get an inside look at how onetime regulators work their disappearing-case magic, but a celebrated example that wound up under a microscope involved none other than White. When Morgan Stanley was considering hiring John Mack to be its chief executive officer in 2005, the securities firm's board was concerned about an SEC investigation into possible insider trading involving Mack and Arthur Samberg, the former manager of the hedge fund Pequot Capital Management Inc.

The board retained White, who called SEC Enforcement Director Linda Thomsen on June 27, 2005, to get intelligence on Mack's legal exposure. Three days later, White told Morgan Stanley's board that she had seen “no evidence of any involvement by Mr. Mack in insider trading or other wrongdoing.”

Thomsen had let on to White that there was “smoke but not fire” in e-mails between Mack and Samberg, and privately worried that it could be disruptive to markets if Mack became CEO and then wound up as an SEC target. “It could have ripple effects that makes the markets go haywire,” Thomsen told a Senate committee -- an overblown fear if ever there was one.

Wrongful Firing

Mack was never accused of wrongdoing. Gary Aguirre, an SEC lawyer who had been pushing to question Mack, was fired a few months after White's call. He later won $775,000 from the SEC in a wrongful dismissal suit.

White declined to comment, said Debevoise spokeswoman Gabriella Schoff.

A revamp at the SEC that included improved policies for handling complaints and tips was supposed to boost morale. Yet the SEC's ranking in an annual employee survey of “Best Places to Work in the Federal Government” has dropped steadily since 2007, with the SEC placing 19th of 22 midsized federal agencies last year. SEC workers' view of the leadership of the most senior staff was worst among the categories they were asked about.

That makes sense considering some of the private conversations that became public about their bosses. The SEC's own general counsel (now at Cleary Gottlieb), David Becker, e- mailed former SEC Commissioner Annette Nazareth in 2009 after she had left for Davis Polk & Wardwell LLP and referred to “the inanity” of the idea of having an investor advocate at the agency, according to a Bloomberg News article last year.

It would be nice if White turned out to have what it takes to pump up morale and turn the SEC into a place where inspired investor advocates get the top jobs, but there are reasons to be doubtful. White is worried about being too hard on corporate criminals. She told the newsletter Corporate Crime Reporter in 2005 that prosecutors considering criminal charges should be “very concerned about the impact on the innocent employees or shareholders.”

White won't play a direct role in prosecuting companies at the SEC, of course. But given her views on indictments, it's hard to imagine she will encourage her staff to refer cases against companies to criminal authorities.

It's also a worry that she knows too much about the career perils of being aggressive as a regulator. In talking about one of Debevoise's hires from the SEC, she testified in a 2007 deposition that she needed to check whether the candidate had been so tough as a regulator that it would hurt his ability “to function well in the private sector.” Commitment to the job and mission is a good thing in government, she said, or at least it is “to a point.”

If we're lucky, White, 65, will decide that a do-gooder legacy is more important than the next multimillion-dollar job.

-- Bloomberg News --


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