The Decline in Criminal Prosecutions of Securities Fraud

The NYT reports, based upon a study out of Syracuse, that the number of prosecutions for securities fraud has declined precipitously in recent years.  According to the article:

• There were 133 prosecutions for securities fraud in the first 11 months of this fiscal year. That is down from 437 cases in 2000 and from a high of 513 cases in 2002, when Wall Street scandals from Enron to WorldCom led to a crackdown on corporate crime, the data showed.

The article is a confusing discussion since it attempts to blame the SEC for the decline.  The SEC, of course, has no criminal authority and can only bring civil suits.  Thus, it is a bit confusing to note that the SEC has been placing "increasing emphasis on using non-criminal means."  The article does reveal a decline in the number of referrals made by the SEC to criminal authorities.   But this overstates the importance of referrals and understates the interaction between the two agencies.  Often, the Justice Depatment doesn't need a referral from the SEC, having learned of the fraud the same way the SEC did (often through information that has found its way into the public domain).

Second, while the SEC has a formal referral system, there is plenty of opportunity to informally share information about cases, something more likely to occur when the relationship between the SEC and US Attorneys offices in the regions is strong.  Finally, even when referrals do not occur, the two agencies can share information and cooperate on cases.

The article points out that one reason for the shift in criminal cases is the Bush Administration's emphasis on terrorism after 9/11.  Obviously, as that recedes into the past and events like the Madoff Ponzi scheme surface, the emphasis will shift again. 

One thing ought to be very clear from the article.  The refrain is made constantly that private litigation in the securities area should be cut back and more reliance made on government enforcement (this was a big part of the argument in Stoneridge and one largely bought by Justice Kennedy in his opinion). 

In fact, this article reveals the absolute importance of a vigorous private enforcement mechanism.  And how is that mechanism doing?  While the Justice Department reduces its fraud prosecutions, the prviate sector, unaffected by a shift in resources after 9/11, has increased the number of fraud cases that it is bringing.