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Official Study: The SEC and Quid Pro Quo

Posted by Larry Doyle on August 15, 2014 9:44 AM |

“The findings of this study suggest that the SEC is influenced by considerations other than the merits of the case and raise questions regarding the effectiveness with which the agency plays its deterrence and compensation roles.”

Maria M. Correia
London Business School

The phrase “quid pro quo” is universally understood as something that is given or taken in return for something else. The actions involved are not necessarily always illegal or unethical but very often the connotation of the phrase especially when used in a political context expressly implies a form of corruption.

“On the federal level, the Hobbs Act makes it a felony for a public official to extort property under color of office. Trading campaign contributions for promises of official actions or inactions are also prohibited under the act.”

I think most people in our nation today would accept the premise that Washington politicians actively engage in practices that would fall under the heading of quid pro quo. How do they often play this game? Let’s navigate as Ms. Correia hits the Washington establishment and the SEC hard:

I find that politically connected firms on average are less likely to be involved in SEC enforcement actions and face lower penalties if they are prosecuted by the SEC. Contributions to politicians in a strong position to put pressure on the SEC are more effective than others at reducing the probability of enforcement and penalties imposed by an enforcement action. Moreover, the amounts paid to lobbyists with prior employment links to the SEC (LD’s edit: here’s the revolving door, folks!!) and the amounts spent on lobbying the SEC directly, are more effective than other lobbying expenditures at reducing enforcement costs faced by firms.

These findings are consistent with firms using long-term political contributions in exchange for regulatory favors.

I find that continued contributions to high ranking politicians from the majority party are more strongly associated with a reduction in enforcement costs. Contributions to politicians sitting on committees involved in setting the SEC’s budget or overseeing the agency and, in particular, to their chairmen are also associated with a stronger reduction in the probability of
enforcement and penalties.

While Correia lays out in methodical fashion just how the SEC is influenced “by considerations other than the merits of the case”, a recent commentary in the International Business Times  reminds us that — all assertions to the contrary — the Department of Justice has also fallen under a similar influence. Can we ever forget the following:

In a 2012 speech then-Assistant Attorney General Lanny Breuer said that the larger economic consequences of sanctioning Wall Street banks should be a factor in whether or not the government moves ahead with a prosecution.

Those engaged in the quid pro quo may like to dismiss the overwhelming stench associated with these corruptible practices as simply how our political system and financial regulatory oversight work these days.

Those outside the Washington beltway have a keener sense of smell and know that the very real corruption involved in these practices is eroding the rule of law in our nation and with it the very foundation of our democracy. Why do you think whistleblowers so often are strung along and/or silenced?

While the cronies play these games and make/take their payments, the American dream for more and more of our fellow citizens is subsequently fading in the rear view mirror.

Some folks, including those at the SEC and atop Capitol Hill, may think there is nothing new here.

I challenge them to read and respond to Ms. Correia’s study.

Navigate accordingly.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

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  • The Chin

    Isn’t this very similar to how those involved in “organized” activities do business?

    It’s called “buying protection.”

  • Michael Hobbs

    This was a really interesting read for me, mainly because naturally we all grow up hearing and eventually understanding, that there has always been some degree of corruption in politics and finance but what I didn’t know was that quid pro quo, is actually meant to ban some of these practices in the political landscape. While there are a lot of things that are clear violations, I had always thought that one of the big reasons that people get involved in politics in the first place, had to do with making many of those same deals that are actually banned by the hobbs act. I’m definitely going to have to read up more on the Hobbs Act this week because as you said, I have seen numerous incidences in which things should have been put to a stop, as a result of it, though you do hear the occasional news story about some politician being caught up.
    An interesting aspect of the SEC to me lately, has been the manner in which they’ve been coming down on the lower tiered markets lately, with respect to financial crimes. There was this story I saw posted within the past few months; I can’t find the direct link but it was on, Penny Stock Dream, and detailed a long string of small firms and organizations that were being systematically shut down by the SEC for practices that had long been considered norms within the market and were just now finally being fully punished. Being that before this happened there were of course the occasional outliers that would get caught up, it would be interesting to see if the situations between the markets themselves and politicians, manage to match up and we eventually begin to see the same crackdown within the political spectrum.
    The only thing is that the coming down of the SEC on the smaller end of the spectrum, kind of makes me think of the broken windows policy that law enforcement follows when it comes to crime. Going after the little guys, in hopes that they don’t do the big things, when really it’s the big guys causing the most trouble.

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