Almost everyone has an opinion about securities enforcement. Many are disappointed (and even angry) that “few high level executives” have been prosecuted (criminally or even civilly) in connection with the 2008 financial crisis.1 Deep in their bunker, the SEC still has some diehards who maintain that fraud has been fully prosecuted, but, even there, attitudes are changing. The shift is much clearer at the Department of Justice (DOJ), which has just settled with JPMorgan for $13 billion and may be in hot pursuit of still unnamed defendants.2 Even if the SEC is presenting itself as a more aggressive enforcer under its new chair, questions remain about whether its behavior has truly changed.

Although there is a surplus today of opinions about how enforcement should change, there is a paucity of facts. Why is it that enforcers have underperformed? What practical steps are possible? Provocative new proposals are being made, but they too need to be informed by better factual evidence as to how regulators actually behave. Last week, speaking before the New York City Bar’s Second Annual Institute on Securities Litigation and Enforcement as its keynote speaker, U.S. District Judge Jed Rakoff of the Southern District of New York offered a bold proposal and a critique. After rejecting some frequently invoked explanations for prosecutorial inaction (such as the “revolving door” theory), he presented an alternative theory: namely, that federal prosecutors have relied too much on deferred prosecution agreements under which they permit independent counsel to conduct internal corporate investigations to establish the basic facts.3 These investigations, often headed up by a former U.S. attorney or other eminent person, tend predictably not to find that senior executives behaved culpably. In the judge’s view, this delegation of fact-finding to internal investigators has resulted in a loss of general deterrence that “far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window dressing.”4 Although the judge carefully took no position on whether fraud was at the heart of the financial crisis, he concluded that, to the extent it may have been, “the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.”5