The U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”), have found themselves fighting in the same arena this year as the DOJ aggressively tackled two high profile civil cases. The overlap has sparked speculation as to why the DOJ is poaching territory that is usually under the SEC’s purview.
Historically, the SEC and the DOJ have worked side by side, but in different arenas, with the SEC focusing on civil charges and the Justice Department tackling criminal ones. The Justice Department upset this balance by playing a larger role in civil cases when it sued Standard & Poor earlier this year, accusing the firm of issuing stellar ratings on not so stellar securities. The SEC absence in this case did not go unnoticed. Many securities experts began speculating why the SEC, who would have had the same evidence as the Justice Department, was beat to the punch. SEC spokesman, John Nester issued a statement that the agency was “closely consulting with the Justice Department during its investigation.” The Justice Department issued their own statements to reinforce the idea that they are working closely with the SEC and count the agency “as a partner.” These statements, signaling a departure from the normal relationship of the two organizations, did not soothe speculators.
To the contrary, speculation intensified when the Justice Department reached a $13 billion settlement with JPMorgan Chase to resolve allegations that the bank sold faulty mortgage securities. This was the largest settlement recorded against a single company, and again, the SEC was not part of the negotiation.
Is this a result of the SEC lacking enough evidence to make a case? Is the agency simply being cautious in light of the fallout from the financial crisis?
The answer may lie in a 1980s law, called the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), which only the Justice Department has authority to enforce. FIRREA has a lower burden of proof for securities fraud cases, which allows the Justice Department to bring a civil securities action with less evidence than the SEC would require, explaining why they have been first to the table in these actions.
The agency and the department working together on civil cases may not lessen the strength of the SEC as the primary regulator of the securities market. The SEC’s mission is to deter wrongdoing, while the Justice Department punishes misconduct. FIRREA may be the spark for a mutually beneficial relationship in which the organizations can both achieve their goals by working together as partners. In fact, the SEC and the Justice Department continue to work together on a variety of other cases. Most recently, the duo charged ATM manufacturer Diebold under the Foreign Corrupt Practices Act and investigated Morgan Stanley’s hiring practices in China.
At the end of the day, civil financial institutions should be more concerned with the rise in civil complaints as a result of FIRREA’s lessened standard of proof, rather than the prosecuting agency listed on the complaint.