Oct. 20 (Bloomberg) -- The Securities and Exchange Commission’s Big Bust on Friday is an example of everything that’s right, and everything wrong, with the agency that’s been bungling its job of keeping the financial markets safe.

Working with federal prosecutors in New York, the SEC charged hedge fund operator Raj Rajaratnam, whose net worth of $1.5 billion placed him at No. 236 on Forbes magazine’s 400 Richest Americans list, with insider trading. Rajaratnam’s lawyer, James Walden, says his client is innocent and that “we intend to vigorously defend him in court.”

With its simultaneous charges against a network of other alleged cheaters on Wall Street and in the C-suite, the SEC’s case was enough to bring tears to the eyes of Wall Street nostalgia buffs.

The SEC always did have a knack for insider-trading cases, notwithstanding its recent back-and-forth with charges that haven’t stuck against billionaire Mark Cuban. The agency sent Wall Street into a collective cold sweat in the 1980s, when the Nov. 14, 1986, news that Ivan Boesky had agreed to pay $100 million for insider trading sent a signal that the jig was up for lawbreakers who swapped illegal inside-information.

The agency was a regulatory mensch back then, working with prosecutors to do the spadework that helped send Boesky, Kidder, Peabody & Co.’s Martin Siegel, and Drexel Burnham Lambert’s Dennis Levine and Michael Milken to the slammer. If you can imagine it, Wall Street was actually afraid of the SEC after the Boesky bust.

Image Building

Today, the only people getting captured are SEC lawyers who are hot for big paychecks at the brokerage firms they’re supposed to be regulating.

After getting skewered in the September report “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme” by SEC Inspector General David Kotz, the agency has been trying to polish its image. It’s no surprise that the agency’s big splash with Rajaratnam and friends came in an area where it tends to excel.

But what gives that it went from superstar work in the 1980s to two declining decades since then?

Thomas Gorman, chairman of the securities litigation group in the Washington office of the law firm Porter Wright Morris & Arthur, says that when he worked at the SEC in the 1970s and 1980s, “they were really the market leaders,” taking on issues like insider trading and illegal payments to foreign governments and making sure the regulated paid attention.

Vision Loss

Today, the SEC is a reactive institution, going after “the flavor of the month” as determined by cases initiated by U.S. attorneys or investigative reports in prominent business publications, Gorman says. In the 1980s, though, “they had a vision” of what was important to pursue, and, particularly with insider trading, pushed to make their legal cases stick.

Indeed, only 4 percent of new cases initiated at the agency involved insider trading in 1984, but then-chairman John Shad made it his pet project, warning lawbreakers that he would come down on them “with hobnail boots” should they violate insider- trading laws. Try to find fighting words like that from any recent SEC leaders.

Shad testified before lawmakers in support of the Insider Trading Sanctions Act of 1984, which made insider trading more expensive for cheaters: get caught, and you’d be subject to fines of as much as three times your profits, plus pricey sanctions for any criminal penalties.

After the act was passed, insider-trading cases took an ever-larger portion of new cases opened each year, peaking at 13 percent of the SEC’s new caseload in 1989. Since 1998, it has made up between 7 percent and 11 percent of new cases the agency takes on in a given year.

Chasing Big Shots

It’s worth mentioning that the same SEC that today chases scandals it reads about in the papers once had the courage to pursue big shot financiers who were venerated by slobbering financial journalists. BusinessWeek magazine once compared Michael Milken to J.P. Morgan Sr. Institutional Investor magazine called him “Milken the Magnificent.”

In those days, top guys complained that they were picked on because they were powerful. These days, the power of someone like Bernie Madoff helps him escape scrutiny. Imagine if Boesky or Milken had been asked to sit on an SEC advisory committee like Bernie was.

Given the agency’s expertise in insider trading, Rajaratnam and his band of alleged illegal traders are no doubt wishing they’d been dabbling in one of the multitudinous areas where the SEC is wanting. I mean hey, where are the longstanding experts on dark pools? Or credit default swaps? Or any of those products and practices that less than 1 percent of the population really understands? Or even Ponzi schemes, which we all understand, but we don’t seem to be able to stop.

Good for the SEC that it’s drawing on its experience in insider trader to bring new cases. But there are a lot of new games in town, too. I’m waiting for the hobnail boots to come crashing down on a dark pool and a credit default swapper or two.

(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)

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To contact the writer of this column: Susan Antilla in New York at santilla@bloomberg.net

Last Updated: October 19, 2009 21:00 EDT