[ by Howard Haykin ]

Private lawyers commonly represent Wall Street firms in legal forum, providing firms with viable and flexible legal expertise - particularly when firms seek to keep their staffs at minimum levels - variable costs are preferable to fixed personnel costs.  Private lawyers further benefit Wall Street firms with expertise in certain legal matters that the in-house lawyers may not possess.

Which Brings Us to the Securities and Exchange Commission.   Reynolds Holding, a columnist with Reuters BreakingViews, gets credit for promoting the concept covered in this posting -  that of enhancing SEC enforcement efforts - in his opinion piece published early January. 

The idea is not only timeless, but it's so very practical - in that it offers the SEC an effective budgetary tool.  For these reasons, C-I applauds Mr. Holding for raising the topic.

C-I reprints the text from the BreakingViews posting - without editting words or ideas expressed.  It's best that we let BreakingViews' own words speak for themselves. Links to the source story appear below. 

While SEC attorneys have scored some splashy settlements from Wall Street banks, shareholder lawsuits may do better.  Other government agencies find ways to co-opt private-sector legal talent.  Maybe the SEC should try it.

Though the likes of Goldman Sachs have forked over big bucks in recent years, overall the watchdog's settlements have declined in median value by nearly half - from $1.5 million in 2011 to $800,000 in the first half of 2012, according to NERA Economic Consulting. The SEC has also lost some high-profile trials, including on a rare occasion when it sued an employee of a major bank.

Shareholder class-action settlements, meanwhile, exceeded $11 million in median value last year, almost 50% more than in 2011, NERA says. Yet such cases often elicit criticism as nuisance suits that rarely deter wrongdoing because the companies and their insurers - not executives - foot the bills. At least the SEC can force individuals to pay and bar them from running public companies.

Group lawsuits filed by investors, however, may actually prove the stronger deterrent. They prompt more and bigger settlements from public companies - and the exit of more senior executives - than SEC investigations, researchers from NYU and Univ. of Michigan found. Markets also react more negatively to these suits.

There are caveats. The study compares cases involving either the SEC or shareholders but not both, and since the watchdog rarely sues alone, the approach might produce anomalies. And while looking at SEC investigations rather than only filed lawsuits makes technical sense, it's a controversial method.
Even so, the results should inspire the cash-strapped regulator to consider using private lawyers. The Federal Housing Finance Agency, for example, has enlisted a major firm to sue banks in the nation's largest mortgage-backed securities suit. The extra firepower also comes at a bargain price: attorneys get paid only from what they recover.

The strategy could encourage a flood of additional litigation, but that's sort of the point. With access to top legal eagles, the SEC might do a better job for investors.
 
CONTEXT NEWS

• U.S. shareholder class action lawsuits may be more effective than investigations by the SEC at deterring securities fraud, new research shows.

• A study by Stephen Choi and Adam Pritchard, law professors at NYU and U. of Michigan, respectively, found that the private lawsuits prompt more and bigger settlements from public companies, and more exits by top executives, than SEC probes do. The study also determined that investors and securities markets react more negatively to class actions than to the watchdog's investigations. 

 

For further details, go to:   [Reuters Breakingviews, 1/7/13].