Friday was a big day for the Securities and Exchange Commission. First, the securities regulator finally managed to name Steven Cohen, the owner of the legendary SAC. hedge fund adviser, in an enforcement action related to alleged trading on leaked inside information. Second, the SEC suffered an information leak of its own when details regarding the Commission's deliberation about, and rejection of, a proposed settlement with Philip Falcone's Harbinger Capital made their way into press reports. The two enforcement cases should cause the SEC to rethink some of its policies.
The Cohen case suggests it is time for the SEC to set logically-grounded boundaries around insider trading, rather than stumbling awkwardly from case to case without a clear articulation of the type of behavior it is trying to stop. As a staff speech highlighted on the SEC's insider trading webpage explains, "the development of insider trading law has not progressed with logical precision." The SEC's case against Mr. Cohen seems to suggest that even facts that can't be fit into this illogical progression will nevertheless be pursued. As has been widely reported, the SEC didn't make the case that Mr. Cohen's own trades were unlawful, but alleges only that Mr. Cohen failed adequately to supervise his employees in order to prevent their unlawful insider trading. Failure to supervise charges certainly have their place, but shouldn't be used as a substitute charge when the SEC can't prove its insider trading case.
The Harbinger case suggests it is time for the SEC to reinstate the practice of having the Commission give guidance to its enforcement staff before the staff embarks on settlement negotiations. That practice most recently employed under Chairman Cox enabled commissioners to help shape settlements involving corporate penalties before they were finalized. Had that happened in the Harbinger case, the SEC could have saved itself and Harbinger a lot of time and effort. Harbinger, a public company, had previously disclosed the settlement it had worked out with the staff, albeit with the caveat that "[t]here can be no assurance that the Commissioners or the court will approve the settlement on the terms described." A policy that allows the SEC commissioners to express their concerns before settlement talks begin in earnest would smooth the process of negotiating settlements and reporting them to the public.