We are discussing the Report issued by the Inspector General at the SEC on the decision by the Miami Office to drop a case involving Bear Stearns. A copy can be found at the Miami Herald web site.
With a $500,000 settlement against Bear Stearns in hand, why did the Enforcement Division decide to terminate the case? The two reasons given the Report were litigation risk and delay. (The Report also contained hints of favoritism among attorneys on both sides who knew each other but we view the "hints" as spurious).
Whatever the precise answer, the Division emphasizes that the closing had to be approved not only by the Miami Office but also the Home Office in Washington. Indeed, the Division criticizes the report for not giving sufficient weight to the case closing process that requires officials in the Home Office to sign off on the decision. Moreover, it is standard practice for the staff to write a memorandum when the case is closed. The Division further criticizes the Report for failing to attach "the staff’s written closing recommendation which was approved by senior officers in headquarters."
In other words, the decision had to be approved by the Miami Office and approved by the Home Office in Washington. This presumably suggests that there had to be broad concurrence on the reasons for terminating the case, providing support for the contention that there was a good faith belief that the litigation risk/delay justified terminating the case.
What of the justifications? A regional office and the home office both want to avoid losing cases. The loss can involve litigation risk. A loss can create a bad precedent that makes future litigation difficult and can result in a black eye for the relevant regional office within the SEC.
But another way to "lose" a case is to have the full Commission reject the staff's recommendation. This presumably doesn't happen very often. Nonetheless, it can. Could that have been the Miami and Home Office's main concern? To even speculate, we need to go back to August 2007 when the case was terminated. During August, the Commission had its entire complement of commissioners (Cox, Atkins, Casey, Nazareth and Campos). Campos had, however, announced his resignation meaning that by the time any Enforcement recommendation hit the Commission, there would only be four members. Two of them, Atkins and Casey, had a reputation for being hard on Enforcement, particularly when imposing penalties on corporations. Two negative votes would have stopped the case.
Add in that in August 2007, Bear Stearns was already in trouble. It was during that summer that two hedge funds had collapsed, casualties of the sub prime crisis, and the firm was already locked in a struggle to convince the Street that the worst was behind it. In this environment, an enforcement proceeding against Bear Stearns involving a $500,000 fine would likely have been given particularly close scrutiny, particularly by Atkins and Casey. Add in that the alleged misbehavior was almost four years old.
Perhaps the real reason the case was terminated was staff concern about the reaction by the Commission. Given the Commission in place in the summer of 2007, it was probably a valid concern.