Beyond the revolving door: misalignment of interests in enforcement decisions

A recent study  shows that – contrary to what might be called popular suspicion –  lawyers with the Securities and Exchange Commission do not seem to try to curry favor by making lax enforcement decisions when dealing  with law firms that might offer future employment prospects. Rather, the study found evidence to support a “human capital” hypothesis that SEC lawyers interested in future private sector employment would use such encounters to showcase their skills, and be “tough.”

Perhaps because they are somewhat surprising, the study’s results have not been universally accepted.  The author of this piece, for instance, argues that it seeks to “measure the unmeasurable,” and she points to another recent study showing that “that SEC alums may exert a much more subtle influence at their old agency when they begin to represent clients in private practice.”

Having been a white collar defense lawyer in a prior life, I was not especially surprised by the results (although I also agree that some of what the study is looking at is immeasurable).  If anything, what I saw of former enforcement personnel who became defense lawyers is that many of them still viewed the world through a prosecutorial lens, i.e., a reverse revolving door.

But I do believe that there two dysfunctions in the enforcement realm which, if not constituting true COIs, come from the same neck of the woods, meaning they reflect the operation of forces that lead to enforcement decisions that are not well aligned with the public’s interests.

The first is that prosecutors seem too easy to accept resolutions of investigations where the company (meaning its shareholders) pay a heavy price but the guilty executives go free. As described last week in a NY Times story : “The ballooning settlements are for civil charges of fraud against the government, criminal charges often related to the same conduct and, in the case of health care companies, recovery of money for states for Medicaid fraud.  But while the collections are a boon to the government and taxpayers, they are resurrecting questions about the relative lack of charges against executives at the companies that are getting the stiffest penalties.”  The misalignment of interests here is that while prosecutors can claim credit for record settlements in charges against companies, the outcomes do little to protect the public from future crimes, since it is executives – much more than shareholders – who are in a position to engage in or prevent wrongdoing.  (Of course, to the extent that a company pays extra to allow an executive to go free,  the shareholders, as well as the public, are being ill served.)

The second (and related) misalignment of interests is that prosecutors are often rewarded (in terms of enhanced future job prospects) for the large settlements that they win in cases but, to my knowledge, none has ever been recognized for the crimes that they prevented, meaning for their work in promoting compliance programs.  One can readily see what would be wrong with a health care system that measures success only by the number of surgeries conducted – not the health of the patients it serves, and indeed this criticism has been directed against aspects of the current health care regime.  But when it comes to embracing prevention, medicine is light years ahead of law enforcement.  (For more on how the legal system does too little to promote compliance programs, see this piece.) Aligning the interests of individual prosecutors with society’s interest in preventing crimes as well as punishing them is key to a more overall effective approach to promoting law abidance by businesses than we have now.