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Grading Schapiro's Term as SEC Chairman

Bruce Carton | December 11, 2012

The Securities and Exchange Commission recently announced that SEC Chairman Mary Schapiro would step down this month, after serving nearly four years as the first female chairman in the history of the agency.

The assessments of Schapiro's performance running the SEC over that time have varied wildly. Harry Markopolos, who bashed the SEC ruthlessly for its failings in the Bernard Madoff matter that preceded Schapiro's term as chairman, had nothing but praise for her leadership. She led a “total sea change at the agency. They are aggressive. There are no more free passes on Wall Street. They eagerly seek out big cases,” said Markopolos, an independent financial fraud investigator best known for his unheeded warnings about the Madoff Ponzi scheme. “They used to be industry's lapdog and now they're actually an investor's watchdog,” he continued. A recent profile in The New York Times agreed that Schapiro “leaves behind a stronger SEC, an overhaul characterized by her attention to detail and meticulous preparation,” and lauded her “steady hand during periods of tumult, like the May 2010 stock market flash crash.”

Others, however, see Schapiro's term quite differently. Bloomberg columnist William Cohan, for example, believes that Schapiro did a “lousy job” as head of the SEC because she was a “toothless enforcer.”  Cohan says that Schapiro and the Enforcement Director she selected, Robert Khuzami, were beholden to Wall Street and “have done close to nothing to hold Wall Street bankers, traders, and executives accountable for causing the financial crisis.”

There are several developments that occurred on Schapiro's watch that her detractors routinely cite as evidence of her supposed failings as chairman. At the top of that list is an Inspector General report that 33 SEC employees had been found to have viewed pornography on their work computers over a five-year period. The news produced a predictable media firestorm and an ongoing talking point for SEC-bashers, who like to claim that the SEC didn't catch a particular fraud because "all they do there is watch porn!” Then there was the discovery that the SEC had a long-standing policy of discarding the files of closed-out preliminary investigations, known as matters under inquiry (MUIs). This led a surprising number of critics to see a conspiracy where Schapiro's SEC was intentionally “whitewashing the files of some of the nation's worst financial criminals.”

Another rough spot for Schapiro included a bungled lease in 2010 for 900,000 square feet of office space based on the erroneous belief that the SEC's budget would increase dramatically in the wake of the Dodd-Frank Act, and its massive new mandates. The budget didn't increase, and the SEC was sued for $94 million in damages by the landlord after the agency backed out of part of the deal. 

Schapiro's SEC also experienced an unfortunate “appearance of conflict” situation that followed the revelation that the agency's former general counsel, who had advised the SEC on the position it should take on certain Madoff victim issues, had himself inherited a stake in a Madoff account. None of these various developments proved to be terribly damaging by themselves, but each landed Schapiro either in front of Congress to testify about what had happened or on the pages of The Washington Post in a negative light.

Up From the Ruins

Despite these criticisms, Schapiro leaves the SEC with an Enforcement Division that is clearly in far better shape than the tattered state it was in when she arrived. Indeed, Schapiro took over at a time when its enforcement program was arguably at its all-time lowest point. In December 2008, just weeks before Schapiro was sworn in, the Madoff scandal broke and then-SEC Chairman Christopher Cox issued a stunning admission that the SEC had repeatedly received “credible and specific allegations regarding Madoff's financial wrongdoing, going back to at least 1999,” but had failed to take any action. Coming right on the heels of the financial crisis, the SEC's admitted failings in the Madoff case caused public outrage, and many in the media and those in Congress began to  grumble loudly that that the SEC was a failed institution that needed to be merged out of existence or eliminated altogether.  The mood within the agency itself was reportedly one of “complete panic.” Welcome aboard, Ms. Schapiro!

I believe that Schapiro's enforcement legacy should be as the person who helped a dazed and demoralized Enforcement Division regain its footing and its fighting spirit at perhaps the most critical time in the agency's history.

One month later, Schapiro was sworn in and quickly began taking steps to convey the message that a far greater sense of urgency was now required. She circulated emotional letters from Madoff's victims to her staff and issued a jarring warning that “everyone needs to work harder or this agency could become extinct.” Thomas Sporkin, a former SEC official who had been with the agency for over 15 years when Schapiro arrived, recalled that “we had never been spoken to like that before, and it was exactly what we needed.”

Within two weeks of joining the SEC, Schapiro announced several new initiatives designed to jumpstart the Enforcement Division, including ending Chairman Cox's "penalty pilot" experiment that discouraged the staff from seeking civil penalties by requiring a special set of approvals from the Commission. She also introduced a new system that permitted more rapid approval of formal orders of investigation. "I like to tell the staff we are going to act like our hair is on fire," she said at the time.

Schapiro and Khuzami then began to steadily roll out the most dramatic set of structural changes in the history of the Enforcement Division. In many ways, this restructuring was designed to make it function more like a U.S. Attorney's Office, which was Khuzami's background. One of the most significant changes introduced by Schapiro and Khuzami was the creation of specialized enforcement units staffed with lawyers and professionals focused on many of the agency's highest-priority areas: structured and new products, market abuse, municipal securities and public pensions, asset management and the Foreign Corrupt Practices Act.

The specialized units presented a stark departure from the “generalist model” that had existed for decades, and have reportedly succeeded in allowing the staff to better understand the products, markets, transactions, and trends that are unique to their units. A March 2012 report by the SEC to Congress found that the creation of the five specialized units had improved the division's performance, and noted that the hiring of industry experts to work in the units had enabled the SEC to bring better cases.

Another critical initiative under Schapiro was the move to establish a new Office of Market Intelligence within the Enforcement Division. OMI is now responsible for the collection, analysis, risk-weighing, triage, referral, and monitoring of the hundreds of thousands of tips, complaints, and referrals that the agency receives each year. This office was formally launched in January 2010, and by 2012 had succeeded in becoming the “central intelligence office” for the entire agency. With a staff of more than 40 former traders, exchange experts, accountants, and securities lawyers, OMI now reviews roughly 200 "pieces of intelligence" each day—including over 3,000 tips in 2012 from the new Whistleblower Office created during Schapiro's term—and prepares a daily “intelligence report” for the agency on  the hottest tips.

The SEC credits changes such as the specialized units and OMI for the increased number of enforcement actions it has brought in 2011 and 2012. In fiscal year 2011, the agency brought 735 enforcement actions—the most in its history. In fiscal year 2012, it essentially matched that figure with 734 enforcement actions. Schapiro's critics complain bitterly that those figures include very few actions related to the financial crisis—a complaint that has also been directed at the Department of Justice and U.S. Attorneys, such as the Sothern District of New York's Preet Bharara. The Justice Department and the SEC contend that they are doing everything possible to pursue financial crisis cases, but that it is extremely difficult to prove intent or fraudulent conduct in such cases. The SEC also points out that it has, in fact, filed actions against 129 individuals and institutions stemming from the financial crisis, including more than 50 CEOs, CFOs, and other senior officers.

Schapiro's reinvigoration of the SEC's Enforcement Division is well underway as she prepares to depart, but it is by no means complete. Among other things, the number of accounting fraud and disclosure cases—a critical area that does not have its own specialized unit—continues to shrivel. In the record years of 2011 and 2012, just 89 and 79 such cases were filed, respectively, the lowest figures in a decade. The SEC contends that it is bringing fewer accounting and disclosure fraud cases because there is less accounting and disclosure fraud, but some people, such as Francine McKenna who writes the accounting blog “re: The Auditors” believe that these dwindling numbers may simply be the cost of the SEC “specializing” in and prioritizing other areas.

Schapiro certainly has her critics as she enters her last days as chairman, and there are some valid bones to pick. In the big picture, however, I believe that Schapiro's enforcement legacy should be as the person who helped a dazed and demoralized Enforcement Division regain its footing and its fighting spirit at perhaps the most critical time in the agency's history.