- March 26, 2014
- Labaton Sucharow
One of the most vexing questions in securities enforcement – and in life more generally – is “why do otherwise good people end up doing bad things?”. Why do once promising professionals risk their careers, integrity and freedom for a few more dollars, or to shore up their company’s stock price?
These questions were recently the subject of an excellent and thought-provoking speech by Andrew Barton, Director of the SEC’s Office of Compliance Inspections and Examinations – the division charged with administering the SEC’s national examination program. The speech, aptly entitled “People Handling Other People’s Money,” sought to distill the “root causes of harm to investors and our markets,” based on Barton’s decades of experience and his review of past SEC examinations and enforcement actions in the investment advisor space.
In Barton’s view, the majority of securities violations uncovered by the SEC are caused by three types of problems. First, and most obviously, some people simply “lie, cheat and steal.” These are the bad apples who purposely, and sometimes even gleefully, victimize others for their own gain.
The other two categories of problems, however, are both less obvious and more interesting, as well as almost certainly more common in the financial services industry. The second problem identified by Barton is “people who behave recklessly.” These people may not start out with a specific intention to harm investors, but they disregard red flags, take unacceptable risks, and fail to establish adequate internal controls to protect investors. As Barton noted, such reckless behavior is especially likely to occur when an individual or a business feels pressure to keep up with industry changes, new technologies or new client demands, and reacts without fully and carefully considering the possible consequences of their conduct. Such pressure, while sometimes understandable, does not excuse an individual or an entity from civil liability for securities violations undertaken recklessly, as explained in our Securities Law Primer.
Finally, Barton identifies the third problem as “conflicts of interest,” which often blind well-meaning people to the fact they are causing, or threatening to cause, harm to their clients. In Barton’s words, “[c]onflicts are also interesting and insidious, because we see them at an individual, firm and industry level. One person, a close group of people, or seemingly everyone in the entire system, can incrementally, over time, through the accretion of justifications, customs and excuses convince themselves that they are entitled to money and opportunities that fairly belong to their clients.” This observation certainly holds true in my experience as a whistleblower lawyer, where I see again and again that a conflict of interest creates a chain reaction of bad decisions, which ultimately results in one or more securities violations.
The good news is that these three root causes of securities fraud can be, and are being, addressed. While Barton’s focus is on strengthening the SEC’s examination program and on helping compliance professionals prevent fraud, I believe that the SEC Whistleblower Program will also be an important tool in combatting each of these three problems. First, any individual who might think about lying, cheating, stealing or even acting recklessly will know that other employees can and might blow the whistle to the SEC, significantly increasing the probability of detection and creating a crucial deterrent effect. Likewise, employees who find that their company, or even their entire industry, has fallen prey to conflicts of interest now have extra incentives to report, and hopefully eliminate, those conflicts due to the enhanced employment protections, anonymous reporting option, and potential monetary awards provided under the SEC Whistleblower Programs. As Barton recognizes, it is possible for both individuals and companies to maintain ethics and integrity even in a highly competitive and ever-changing financial services industry, and the SEC Whistleblower Program is another valuable step in that direction.
