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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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