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Law expert shows famed 'revolving door' between SEC, private firms not as wide as thought

Monday, November 02, 2020

LAWRENCE — Legal experts have long warned about the “revolving door” between the Securities and Exchange Commission and the financial industry it regulates. Such warnings include concerns that SEC attorneys may go easy on parties accused of wrongdoing in hopes of securing a high-paid position after leaving the agency and that attorneys who joined the SEC from the industry could pursue industry priorities instead of the public interest.

A University of Kansas law professor has written a new study identifying a different professional “door” available to SEC attorneys — one that does not revolve at all.

Responsibility for policing corporate fraud in the U.S. is split between government agencies, such as the SEC, and private lawyers who pursue class action lawsuits against corporate wrongdoers. But while many high-profile cases have been reported of SEC attorneys moving to the defense side, there is no similar movement of personnel from the agency to the plaintiffs’ law firms. Alexander Platt, associate professor of law at KU, has published a study that documents the lack of exchange and argues that it signals a problem for the federal agency’s mission and effectiveness. The study is forthcoming in the Journal of Corporation Law and is available on SSRN.

Moving to a plaintiff’s law firm would seem like a natural and appealing option for an SEC attorney. The SEC and plaintiffs’ bar each describe their mission in similar terms. They also enforce some of the same statutes and rules. Further, Platt’s original empirical analysis of the revenues per lawyer at one leading plaintiffs' firm makes clear that plaintiffs' attorneys stand to earn very competitive compensation. And, in other areas of overlapping public and private enforcement authority, such as civil rights and environmental law, it is common to see attorneys moving back and forth between government agencies and plaintiffs’-side positions.

Given all of this, you might expect to see attorneys moving back and forth between the SEC and the plaintiffs’ bar. Platt’s study shows that, in fact, they do not. Specifically, he shows:

  • None of the 10 leading plaintiffs’-side firms employ anyone with recent SEC experience
  • None of the enforcement attorneys he identified as working for the SEC in 2015 left to work for plaintiffs’-side litigation
  • None of the current upper and middle managers in SEC enforcement division have prior plaintiffs’-side experience
  • Only five of the enforcement attorneys identified as working for the agency in 2019 had prior plaintiffs’-side experience

“We know the SEC has this very active revolving door to the defense side, but what about to the plaintiffs’ side? There are good reasons to expect that there’d be a lot of overlap between the two sets of attorneys,” Platt said. “But it turns out that there’s basically none at all.”

Platt’s novel finding that the “door” between the SEC and the plaintiff’s bar does not revolve points toward the possibility of “cultural capture,” he said. Attorneys at the SEC may steer clear of taking on private plaintiffs’-side work because they have embraced the defense bar’s skepticism of private securities litigation. They may view plaintiffs’-side work and class action work as wasteful, not really doing much to protect investors and merely chasing a paycheck.

“The idea of ‘cultural capture’ is that SEC attorneys might come to think of the world in the same way as their nominal adversaries on the defense side,” Platt said.

A systemic bias among SEC attorneys against private securities litigation helps to explain some recent patterns in the agency’s enforcement priorities. As Platt showed in an earlier paper, SEC enforcement attorneys wield tremendous discretion not only over their own enforcement actions, but also regarding the flow of private litigation, and, in recent years, the SEC has consistently wielded this discretion in a manner that minimizes (rather than catalyzes) private litigation. For instance, by allowing targets to settle enforcement actions without admitting wrongdoing, the agency deprives private plaintiffs of potentially valuable evidence and makes it more difficult for these plaintiffs to prevail in litigation against the same target.

“Given the overlap in legal regimes, skills and missions of the two fields of practice, the compensation available to plaintiffs’-side attorneys, the flow of federal enforcers to private enforcement in other areas and the strong rhetoric supporting the social value of private securities litigation from SEC leaders, one would expect SEC attorneys to regularly make their way over to the plaintiffs’ bar,” Platt wrote. “The fact that this is not happening raises various implications about the institutions of public and private securities enforcement in the U.S., including the prospect that SEC attorneys may have adopted a much more skeptical and hostile view regarding the merits of private securities class actions that is common among defense-side attorneys. As commentators and scholars continue to study the SEC’s revolving door, they should not overlook the non-revolving one.”

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