Thursday, Dec 08, 2016
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More firms, execs going to trial to defend against SEC

WASHINGTON -- The Securities and Exchange Commission, long known for settling enforcement actions without having to prove its case in court, is struggling to cope with a surge in the number of executives and firms willing to go to trial to defend themselves.

The SEC's office in Washington is actively litigating about 90 cases, up more than 50 percent in the past year, according to Matthew Martens, the SEC's chief litigation counsel. Meanwhile, his trial-unit staff has stayed relatively flat at about 36. He recently added three more lawyers to his group and is looking to hire more.

It's critical that his unit present a credible threat, he said. "At the end of the day, if we can't win cases, then people don't settle. That's the reality."

The wave of litigation has two main sources: more complex cases stemming from the 2008 financial crisis and a related rise in suits filed against individual executives.

The collapse of the housing market and resulting financial turmoil involved complex securities for which there was little legal precedent. In addition, the agency has brought more financial crisis lawsuits against executives -- more than 50 so far -- and individuals are often inclined to fight claims that could damage or end their careers.

Those cases, which have required years of investigation, are central to the agency's effort to restore its reputation after being battered for more than three years by lawmakers, judges, and investors who claimed it hasn't been tough enough in holding Wall Street to account.

Prolonged courtroom battles could sap resources from the SEC, which has said funding gaps have already diminished its ability to regulate securities markets.

The SEC is litigating at least four cases related to complex financial products linked to residential mortgages. While firms including Goldman Sachs, Citigroup, and JPMorgan Chase & Co. have settled the SEC's claims, executives named in the suits are fighting them in court.

"It doesn't take many cases to eat up limited resources," said Mark Schonfeld, former head of the SEC's regional office in New York who is now a partner at law firm Gibson Dunn & Crutcher. "These cases go on for years."

The SEC has become increasingly vocal in recent months about the resource drain of prolonged litigation after U.S. District Judge Jed Rakoff rejected a $285 million settlement with Citigroup. He criticized the agency for settling cases without requiring an admission of wrongdoing.

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