This case is Exhibit A for why there should be limits on the revolving door between the regulators and firms they are charged with regulating. An inherent conflict of interest exists when a former regulator represents a firm being examined or investigated. The Project On Government Oversight (POGO) published a report in 2013 titled “Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture,” outlining the scope of the problem. At the very least, we would recommend a 12-month cooling-off period before a private firm could hire a former regulator and an outright ban if the firm is currently under investigation.
Although the SEC only has civil enforcement powers, it can (and will) bring in the Justice Department if you lie to SEC investigators. Better to take your civil medicine (fine or industry bar) than to wind up a guest of the state.
A private fund manager has pled guilty to obstruction of justice for misstatements made during an SEC administrative hearing. The SEC charges that the respondent misled investors about the use of funds and profitability of fund investments. During the ALJ hearing, the SEC alleges that the respondent lied under oath that he did not control a related company. The SEC asserts that the respondent set the company up in his son’s name because of the SEC investigation.
OUR TAKE: SEC investigations and hearings should not be taken lightly. Misstatements can lead to prison time.