More Leeway Won’t Help SEC Without Better Cases

Before gaining more legal firepower, the SEC needs to prove it can use what it has.

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More leeway in taking wrongdoers to court won’t help the Securities and Exchange Commission without better cases. The watchdog is asking the U.S. Supreme Court for additional time to sue investor Marc Gabelli over misdeeds a decade ago. Granting the request could make pursuing fraudsters easier. But effective enforcement requires filing solid cases against prominent perpetrators. The SEC too often falls short. 

The regulator hasn’t been shy about pushing legal boundaries. In separate appeals decided last month, it argued unsuccessfully for extending time limits on suits against corporate executives and for using unproven civil allegations as evidence in criminal trials. But last month it also won permission to grab wrongdoers’ salaries and greater freedom to sue individuals who merely help financial criminals. 

One of the biggest advocates for expanding the SEC’s power has been its supposed nemesis, U.S. District Judge Jed Rakoff. He’s known for rejecting the watchdog’s settlements with Bank of America and Citigroup. But he also wrote the opinions that eased cases against fraudsters’ helpers - and paved the way for the Gabelli suit. 

In his Gabelli opinion, Rakoff essentially said that the SEC deserved more time because it could not have reasonably discovered the charged misconduct before 2003, at least a year after the fund manager allegedly allowed a client to engage in dubious market-timing trades. The 2008 lawsuit was, therefore, filed within the five-year statute of limitations, explained Rakoff. The Supreme Court has agreed to hear Gabelli’s appeal. 

A victory at the high court would give the SEC invaluable extra time to investigate financial fraud cases, the complexity of which often makes them tough to ferret out. But that’s no guarantee of greater success. 

Even while interpreting the laws aggressively, the watchdog has brought too many weak or inconsequential cases. The Gabelli suit is Exhibit A. Pursuing decade-old behavior of questionable illegality doesn’t address the issues behind, say, the financial crisis. The failed lawsuit against middling Citigroup banker Brian Stoker and the upcoming trial of the defunct Reserve Primary Fund also seem poor uses of resources. 

Meanwhile, top executives have yet to answer for the Lehman Brothers meltdown and similar debacles. Before gaining more legal firepower, the SEC needs to prove it can use what it has.

Read more at Reuters Breakingviews.