Does SEC Enforcement Treat Bigger Companies Differently?
I’m stealing the title of this post from Broc Romanek, who asked this question on January 2nd. He was responding to a study authored by Jonas Heese, an assistant professor at Harvard Business School, entitled Government Preferences and SEC Enforcement. Here’s part of Heese’s abstract:
I examine whether political pressure by the government as a response to voters’ general interest in protecting employment is reflected in the enforcement actions by the SEC. Using labor intensity as a measure for a firm’s contribution to employment, I find that labor-intensive firms[1] are less likely to be subject to an SEC enforcement action. Next, I show that labor-intensive firms are less likely to face an SEC enforcement action in presidential election years if they are located in politically important states. I also find evidence of a lower likelihood of SEC enforcement for labor-intensive firms that are headquartered in districts of senior congressmen that serve on committees that oversee the SEC.
Broc doesn’t buy Heese’s study. As he says, “If anything, higher profile companies would have bigger targets on their backs as the agency hopes to send messages to the market in general with its cases. And individual Staffers are hoping to make a name for themselves by catching big fish in the act…” I have two thoughts about Heese’s claims. As Vincent Vega once said, “That’s a bold statement.”
The facts are the facts, and if the SEC is less likely to beat up on labor-intensive firms, that tendency must be attributable to something. But we are extremely skeptical that it is related to presidential election years or the locations of corporate headquarters relative to the districts of senior congressmen. Believe me, Senators and Members of Congress who serve on the SEC’s oversight committees can be quite overbearing and can distract from the Enforcement Division’s mission. But the vast majority of those distractions come in the form of low-value information requests that are tedious and hard to respond to. As for outside pressure not to investigate a particular person or company, though, while the SEC’s record isn’t perfect, our experience was that the Commission was pretty insulated.
But . . . investigating cases and seeing them through to the end is hard. And if the SEC is looking at a particular set of facts that requires the agency to rely on strained interpretations of the laws and regulations under its jurisdiction, it’s easier to bring those cases against defendants who are not as well funded and less likely to mount serious defenses. If a large hedge fund and a smaller defendant are engaged in similar conduct the SEC finds questionable, that smaller defendant is a softer target. I honestly hate to say it. And I never write publicly about the matters in which I serve as defense counsel. But I have seen – and am currently seeing – intense focus by the Enforcement Division in areas where the SEC’s authority is quite weak, but the costs of litigating are financially and emotionally prohibitive. This is obviously a purely anecdotal “analysis”, but it’s not nothing either. I suspect Heese is actually onto something with his facts but has latched onto simplistic causes that may not match up.
[1] I.e., companies with many employees relative to their capital.