Mary Jo White, the first former prosecutor to serve as chairman of the U.S. Securities and Exchange Commission, has pledged to run a “bold and unrelenting” enforcement program at the agency charged with regulating Wall Street.
With financial crisis cases mostly done and some of the biggest insider-trading cases in history closed, White will have to chart a course into new areas to keep that pledge.
White, who was sworn in last week, has already provided a few signals about what that might be. During her Senate confirmation hearing, she said she intends to focus on high-frequency and automated trading. She has also raised questions about a drop in the number of accounting fraud cases the agency has brought in recent years.
One of her first steps, said four people familiar with her plans, will be to put the mission in the hands of a trusted lieutenant, long-time protégé Andrew Ceresney.
“There isn’t the same obvious focus like we had following the financial crisis,” said Thomas Sporkin, a former SEC enforcement lawyer who is now a partner at law firm BuckleySandler LLP. “It will be a challenge for him to define his legacy.”
Ceresney, who was a prosecutor under White when she served as U.S. Attorney for the Southern District of New York, will inherit an enforcement division that has spent the past four years largely focused on misconduct linked to the collapse of housing prices and ensuing financial market turmoil of 2008.
He doesn’t have any experience working inside the SEC and will probably share the top role with George Canellos, the current acting chief of enforcement who joined the SEC in 2009 as head of the agency’s regional office in New York, the people said.
The period after the credit crisis included nine-figure settlements with Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp., and Citigroup Inc. The agency also brought historic insider trading cases against Raj Rajaratnam and units of Steven A. Cohen’s SAC Capital Advisors LP.
To be sure, the SEC hasn’t completely finished its probe of misconduct tied to the financial crisis. Investigators have signed so-called tolling agreements with executives and banks to extend the five-year statute of limitations on those cases. Also, the SEC has said its investigation into insider trading at hedge funds is continuing.
All the same, the number of such cases still in the pipeline has dwindled, and in recent months, the enforcement staff has formed teams to reevaluate how they are organized and what kinds of misconduct are most ripe for investigation. One consideration is whether to dismantle or reorient some of the specialized units that were formed three years ago by Robert Khuzami, who stepped down as enforcement director this year, the people said.
“To the extent you make structural changes, you have to ask yourself how much disruption and distraction it will cause,” said Steve Crimmins, a former SEC attorney who is now a partner at law firm K&L Gates in Washington. “He has to find ways to stoke the fire and keep the staff motivated.”
Canellos said in February that investigators are looking into new ways of detecting accounting fraud, an area that has seen fewer enforcement actions in recent years. James Cox, a securities law professor at Duke University, said scrutiny of auditors and accountants is overdue.
“We have only seen the SEC be active against accountants with the Chinese reverse merger cases,” said Cox, referring to cases involving China-based companies that bought public shell companies in the U.S. and reported false financial results. Inspections of auditors “repeatedly show an amazing lack of professional skepticism by accountants who repeatedly defer to very questionable applications” of the industry’s accepted accounting principles, he said.
The SEC has also struggled in recent years to show it has a grasp on increasingly fragmented markets dominated by electronic trading. While the agency has an investigative unit devoted to market abuse that recently brought novel cases involving exchanges and trading platforms, the area is still relatively unexplored, Sporkin said.
“Market structure is the clear future focus of the agency,” he said. “The investigations and resolutions of market structure issues today, such as high-frequency trading, the effect of dark pools on price discovery, and data latency, will help guide the new commission in formulating policies and writing rules.”
Ceresney, 41, graduated from Columbia University in 1993 and also completed a law degree in 1996 at Yale Law School, where he was essays editor of the Yale Law Journal. He was a law clerk for Michael Mukasey at the U.S. District Court for the Southern District of New York from 1997 to 1998 and then for Dennis Jacobs at the U.S. Court of Appeals for the Second Circuit the following year.
He served as a member of the securities and commodity fraud task force and major crimes unit in the Southern District of New York when White was U.S. Attorney, and then followed her in 2003 to Debevoise & Plimpton LLP, where she was a partner.
After taking office, Ceresney and White will both be expected to recuse themselves in cases involving many of Wall Street’s biggest players, since those firms were often clients at Debevoise. Sharing the top enforcement role with acting chief Canellos would help mitigate any issues arising from Ceresney’s recusals, the people familiar with the matter said.
“It’s hard to decide when you start your tenure in a job like that, how to set your priorities, because it’s not easy to predict what’s going to come your way,” said David Kornblau, a former SEC enforcement attorney who is now a partner at law firm Covington & Burling LLP. Enforcement, he said, is “fundamentally reactive.”
When Khuzami joined the agency in 2009, the SEC was being pilloried for failing to stem practices that contributed to the financial crisis and for missing Bernard Madoff’s multibillion dollar fraud. Within a year, he eliminated a layer of management, created specialized units and set up a system to triage and vet the scores of tips coming into the agency.
Since then, the agency has touted record numbers of enforcement actions as evidence that Khuzami’s overhaul made division more efficient and productive.
Those gains, however, came mainly from a jump in routine administrative proceedings against people who had already been found guilty of fraud and delisting of delinquent companies -- actions that require minimal investigation compared to original cases. Excluding those cases, the number of new actions in 2011 and 2012 trailed output in 2009, the year before the division was restructured.
Ceresney faces the challenge of appearing aggressive even as the pipeline of cases slows. For the first half of this fiscal year, the number of cases is about 23 percent lower than last year.
“When Khuzami took over, the SEC was in a different place,” said Crimmins. “It’s a challenging period, but it’s not the crisis.”