P R
O C E E D I N G S
MR. RUDER: My name
is David Ruder. I am the Chairman of
the Securities and Exchange Commission's Historical Society. Welcome to members of the Society. We're very pleased to have you here.
Before
we begin, I'd like to ask us to join in a moment of silence for Alan Levenson,
one of the great securities lawyers and great members of the Securities and
Exchange Commission staff.
[Moment
of silence.]
MR. RUDER: Thank
you.
The
growth of the Historical Society has been, in my opinion, wonderful during the
last year. Our Virtual Museum, the
ability to share the history of the Society and Wall Street and the financial
community has been wonderful. Our
programs, including roundtables and oral histories, have been just very
progressive, and my thanks go to Ted Levine, our President, and to Carla
Rosati, our Executive Director, who has done such a wonderful job. And thanks--yes, thanks. How about--
[Applause.]
MR. RUDER: And I
want to thank our more than 500 current members and the many institutions that
have joined to support us in our work.
To
give you the commercial, we need money, and if you give it to us, our programs
will prosper. So thank you for that.
It's
now my pleasure to introduce to you William Donaldson, the Chairman of the
Securities and Exchange Commission, and to thank him for appearing here.
Bill
has had a distinguished career which I won't detail in any detail, but he was
certainly a wonderful government official, a wonderful Wall Street person in
his firm, but, most important to me as a professor, he was the Dean of the Yale
School of Management and a professor there.
So it's with great pleasure that I introduce Professor William
Donaldson.
[Applause.]
MR. DONALDSON: Thank
you, Dave. I was masquerading as a
professor.
You
know, it's a great pleasure for me and for all of us on active duty to welcome
you all back to the Commission. I
understand we're celebrating the 4th Annual Meeting, and we are commemorating
the 69th anniversary of the founding of the SEC. And although today's markets are really quite different from
those that existed 69 years ago, I think the regulatory principles that
prevailed back then are still with us.
They're constant. The markets
change, but the principles are constant:
the essence of full disclosure, just and equitable principles of trade,
markets that are fair and open and liquid and vigorous and fair, and evenhanded
law enforcement.
We
really do appreciate all that the Society has done and is doing to preserve
some of the history and background so that it can be passed on to people who
are serving today. I've been running
around the country talking in many fora about the DNA, if you will, of a
well-run corporation, the responsibility of the Board of Directors to infuse
the corporation with a philosophy and a DNA that goes on and on and on no
matter who's there. And I think this
organization reflects that in terms of the deep-seated history and motivation
of the people who have served here.
It's
interesting to note that back in the 1930s it was really a joint action between
state and federal authorities that brought the first major case. I say in sotto voce, that major case in 1938
resulted in the former chief executive of the New York Stock Exchange going to
jail.
[Laughter.]
MR. DONALDSON: But
that notwithstanding, it's interesting to see that once again we've had a
cooperation between state and federal authorities.
I
want to particularly welcome General Spitzer for being with us today. We're really honored.
The
basic thing that I would like to do, in addition to, I hope, sticking around
for the cake that I know is coming up--but I hope you'll save a piece of cake
for me because I do have to go don a tuxedo and go to some affair tonight. But I really want to recognize four SEC
staff members who have been honored in 2002 with a Distinguished Service
Award. And I hope that they are
here. I suspect they may be in the
front row. Regina A. Baker from the
Division of Corporate Finance. Come up
here, Regina.
[Applause.]
MR. DONALDSON:
Meredith Mitchell of the Office of the General Counsel. Meredith, where are you? She's hiding in the back of the room. Okay.
MR.
: Meredith is ill. She's not here today.
MR. DONALDSON:
Okay. Ida Mae Wilkins(ph) of the
Office of the Secretary. Ida Mae?
[Applause.]
MR. DONALDSON: And
Robert Burstin(ph) from our Midwest Regional Office, who cannot be with us
tonight.
Ladies,
congratulations.
[Applause.]
MR. DONALDSON: Thanks
very much, Dave.
MR. RUDER: Thank
you, Bill. We understand that you have
another meeting and that you're going to be leaving, so we will save some cake
for you.
The
Securities Committee of the Federal Bar Association has been a staunch
supporter of both the Society and the SEC since its--for many years. And for many years, the Securities Committee
has sponsored the Manuel F. Cohen Award given to the SEC staff member who best
epitomizes the qualities of Chairman Cohen.
Here
to recognize the 2002 award recipient is Tom Reisenberg(ph), Chair of the
Securities Committee. Tom?
[Applause.]
MR. REISENBERG: Thanks,
Dave.
As
Dave has noted, the FBA has been giving the Manny Cohen Award since 1979, which
is two years after former Chairman Cohen's death in 1977. it's given to a staff member who's been with
the Commission for less than four years.
For
those of you who don't know much about Manny Cohen, he was the SEC's Chairman
from 1964 through 1969. And in addition
to being a great Chairman, he's really quite unique among the Chairmen who've
served here at the SEC because he rose to that position after more than 20
years as a Commission staff member, which, of course, explains also why he was
a great Chairman.
[Laughter.]
MR. REISENBERG: It
should also be noted that after he left the SEC, he chaired the Independent
Commission on Auditors' Responsibility, which was set up by the American
Institute of Certified Public Accountants and which became known as the Cohen
Commission.
It
is, therefore, really quite fitting that our recipient of the award, of the
Manny Cohen Award this year, is Jeffrey Minton(ph), who is with the Division of
Corporation Finance. He spent much of
his time and his life last year as a member of the team in the CorpFin
responsible for drafting the Commission's rules and orders following the
indictment and the collapse of the Arthur Andersen accounting firm. And the efforts of Mr. Minton, who is a
special counsel in CorpFin, were really quite crucial to preventing disruptions
in the capital markets that could have resulted from the demise of one of the
Big Five firms.
As
an aside, I should just note that I'm an associate general counsel of one of
the remaining Big Four firms, and it's my fervent hope that we never have to
cite that rule for any precedent ever again, that it's going to be a long
forgotten rule.
Finally,
Mr. Minton has had a major role in drafting the Commission's rules on
accelerated filings of periodic reports, and he really has carried forward the
Commission's long tradition of being a dedicated, smart, talented, and fair
public servant, a tradition established by Manny Cohen many years ago.
Congratulations,
Jeffrey.
[Applause.]
MR. LEVINE: Thank
you, Tom, and I congratulate all the Distinguished Service Award winners and
the other honorees.
My
name is Ted Levine, and I am President of the Historical Society. And I would also like to welcome you to the
Annual Meeting of the Society on behalf of its Board of Trustees and the two
counsel which serve to advise the Board.
There's an Advisory Council of distinguished folks, and there is also a
Commissioner's Council. The latter is comprised
of former Chairmen and Commissioners of the SEC, and together, it's a rich
source of history and support for the Society's efforts. And we're very pleased by the large turnout
this evening. I want to take credit
that it's because of me, but I don't think so.
I
am particularly proud of the efforts of the Society over the past year. From our creation just four years ago, we're
a robust, active organization, and as Dave indicated, we're particularly proud
of the Virtual Museum, which is a unique way to preserve and share the history
of the Commission and the security markets.
And I urge everyone, if you haven't looked at it, to go to the website
and take a look at the Virtual Museum.
it's a collection of historical papers, photos, oral histories, and
links to other sites, all of which are designed to bring to you on your screen
the history of the Commission and security markets.
During
the next year, among other things, we're going to be launching fireside chats,
a series of live interactive interviews broadcast on our website on historical
investor education topics, another way of trying to bring the historical SEC
and security markets views to folks out in the United States.
But
what we're here tonight for, and it is my pleasure, is to introduce our
principal speakers. Although they need
no introduction, I should do it anyway.
I'm not going to give the backgrounds of all of them, but I will
introduce them by name just in case they get confused.
[Laughter.]
MR.
: You're being cruel to Steve.
MR. LEVINE: We have
with us and we're very pleased to have with us the Honorable Eliot Spitzer,
who's the Attorney General of the State of New York, and with him is Steve
Cutler, Director of the Commission's Division of Enforcement. I welcome both of you and thank you for
agreeing to participate at the Annual Meeting.
Eliot
and Steve will address several important issues concerning regulation and
enforcement, and the format is going to be one where there are some opening
statements by each, and then a series of questions that I will pose and
interaction. So it will not be a speech
but, rather, a dialogue, we hope. And I
think we're ready to begin, so maybe--have you chosen who will go first?
MR.
: No.
MR. LEVINE: All
right. I'll pick Steve.
[Laughter.]
MR. LEVINE: I'll
just say one thing. It's an incredible
pleasure for me to be on this side of the table, having spent almost a year on
the other side of the table with both Steve and Eliot. It's a lot more comforting to be here than
the other side.
[Laughter.]
MR.
: Just wait.
MR. LEVINE: So,
Steve?
MR. CUTLER: Thank
you, Ted. It's nice to be here. I'm particularly happy to share the stage or
podium with Eliot. He's one of the
hardest-working, smartest people I think you'll see anywhere in
government. He's a great friend of the
investing public, and I'm proud to say he's a good friend of mine.
There's
been some speculation over the last several months about my relationship with
Eliot, and specifically--
[Laughter.]
MR. CUTLER:
--whether we consider ourselves to be partners or adversaries. But let me say that there has never been any
competitive tension or one-upmanship between us. And I don't believe there will be in the future. I do, however, want to announce today my
candidacy for the governorship of New York.
[Laughter.]
MR. CUTLER: In
2006.
MR.
: I'll just call you Andrew.
MR. CUTLER: I
thought it was only appropriate in connection with a case about e-mails to tell
some of the story using some e-mails that I've dug up from my archives. A lot of people are curious about how the
analyst investigation started. The
truth is that this is something that was kicked around at the highest levels of
this agency sometime ago. Date,
November 16, 2000, from Arthur Levitt to Dick Walker and Steve Cutler.
"Dear
Steve and Dick: I grow increasingly
concerned about the improper relationships between Wall Street analysts and
their employers' investment banking business.
I'd like to focus on this, but I would also like to keep it under the
radar. Why don't you give it to the
states to look at?"
[Laughter.]
MR. CUTLER:
"They don't seem to be so busy these days. Could you give Eliot Spitzer a call and ask
him to look into this matter quietly?
He is a master of working unobtrusively behind the scenes."
[Laughter.]
MR. CUTLER: Indeed,
the New York Attorney General's Office worked tirelessly to investigate the
analyst case, so much, in fact, that I started getting some e-mails from some
of Eliot's constituents. Date,
September 15, 2002, from Walter Krupnick(ph), Saratoga Springs, New York.
"Dear
Mr. Cutler: I have information
concerning illegal bid rigging on a New York Thruway construction deal."
[Laughter.]
MR. CUTLER:
"Do you have anyone that could look into this? I called the New York Attorney General's
Office, but they hung up when I told them it didn't have to do with something
called the '34 Act."
[Laughter.]
MR. CUTLER: Eliot
and I have stayed in touch on a daily basis.
In fact, we chat about the issues of the day, pending legislation,
whatever. I recently sent him a gift,
as I detail in this e-mail. Date, April
20, 2002, from me to Eliot.
"Dear
Eliot: How about that legislation in
Congress that would preempt regulation of the securities laws by the
states? I'm sending you for no
particular reason a copy of the Federalist Papers."
[Laughter.]
MR. CUTLER: This
was supposed to be a serious thing, wasn't it?
MR. LEVINE: No, no.
[Laughter.]
MR. LEVINE: But,
remember, you went first. That gives
Eliot a chance to go second.
MR. CUTLER:
Yeah. You know, I never cease to
be amazed by Eliot's tenacity and the range of interests that he has. Eliot's been nice enough to cc me on a
number of his e-mails to others in this regard, and I thought I'd share a few
with you. Date, May 28, 2003, from
Eliot to the FCC.
"Dear
Chairman Powell: I believe the FCC's
sweeping overhaul of bandwidth ownership is not being handled properly. Our interpretation of the Stamp Act of
1785"--
[Laughter.]
MR. CUTLER:
--"allows us to tax all products that flow through New York, which
obviously includes bandwidth. Please
call for my ideas.
"P.S.: Please tell your Dad that some staff in the
AG's Office is trying to track down weapons of mass destruction in
Baghdad."
[Laughter.]
MR. CUTLER: Date,
May 29, 2003, from Eliot to the Vatican.
[Laughter.]
MR. CUTLER: I don't
know if I can do this one.
MR.
: You may harm your
gubernatorial run.
MR. CUTLER:
"Dear Pontiff: I
have"--I'm sorry. "I have
some comments on recent papal edicts.
While you are and should be the primary regulator of Catholicism, I
believe you may be asleep at the switch on this whole business of
transubstantiation."
[Laughter.]
MR. CUTLER:
"As I read the Stamp Act of 1785, I have the authority to tax and
regulate all items passing through New York, which we believe includes
Catholicism."
[Laughter.]
MR. CUTLER:
"Please call me for ideas."
And
then, finally, June 3, just this week, from Eliot to Heaven.
"Dear
God: It's my understanding that you are
everywhere, including, apparently, the State of New York."
[Laughter.]
MR. CUTLER:
"As I read the Stamp Act of 1785, you are subject to regulation and
taxation by the State of New York.
While you are and should be the primary regulator of humanity, I have
some ideas I'd like to share with you."
[Laughter.]
MR. CUTLER: All
right. It's your turn.
[Laughter/applause.]
MR. SPITZER: Well, I
can safely tell you, this is the first time Steve has been unfair to me. And the reason--
[Laughter.]
MR. SPITZER: The
reason is we do--we do chat with great regularity, and we were chatting the
other day, and Ted had been sending us with increasing frequency e-mails about
this evening's event, trying to spark some sign of preparation. And so I called Steve the other day, and I
said, "I got Ted's e-mail. It
looks fine with me." I hadn't read
it yet. But I said, "It looks fine
with me. We'll figure this out when we
get there." And Steve said,
"Yeah, yeah, yeah, I'm not going to prepare either."
[Laughter.]
MR. SPITZER: I
remember in law school there were students like that.
[Laughter.]
MR. SPITZER: You
went to Yale, right? That's the
difference between Yale and Harvard.
They work, we don't.
Anyway,
let me say this: I actually--I spent
two minutes preparing on the way in from the airport.
MR. CUTLER: That's
more than you ever did during the 12 months we worked together.
MR. SPITZER: Here
are some true statements.
Ted
called in the middle of our negotiations last year, and it was at one of those
probably many points where they felt we were being intensely unfair, and we
felt they were being intensely unreasonable.
And he said, "I have a personal request. Would you and Steve participate in the SEC Historical Society
event down in--next June?" And it
was impossible to say no.
But
what I really said to myself was, "We'll get something back in
return."
[Laughter.]
MR. SPITZER:
Everything is a negotiation. So
I said yes immediately. Ted, I don't
think we ever got anything back.
MR.
: Oh, my God.
MR. SPITZER: And so
you still owe us something, and we're going to--we're going to approach you for
it.
Since
Steve raised the e-mail issue, I do want to repeat for you what in the entire
18 months or so that this has been going on--and it actually was private for
some period of time before--before we acceded to your request that we publicize
it, Steve.
MR. CUTLER: Oh, I
see.
[Laughter.]
MR. SPITZER: And
reveal those e-mails about the 92nd Street
(?) . But that was--my favorite
moment was when I was invited to give a dinner talk at the Institutional
Investor Awards dinner. This was
September or October of last year, and it was absolutely mystifying to me why
of all the people in the world, when they are handing out their first place
awards for analytical work in various sectors, they would invite me to be the
dinner speaker. In fact, it was so odd
that I believed it was a hoax.
And
so I called around to various friends to say, "Did you send this hoping I
would show up and thoroughly embarrass myself?"
Well,
it turned out it actually was a genuine invitation, and, parenthetically, it's
the only time--I mentioned to my wife ahead of time where I was going to be
that evening, talking to a dinner audience.
And she said, "Are you taking security with you?" It's the only time she's ever been concerned
about my actually surviving the evening.
So
I got there and I had actually, unlike tonight, prepared some comments, and we
had crunched the numbers to prove that really the analytical work product
wasn't so hot. They were in the 40th
percentile. But before I could actually
deliver this very turgid number-crunching-based speech, I looked out at the
audience, and I said, "It is nice to put faces to the e-mails."
[Laughter.]
MR. SPITZER: And
there was a momentary spasm of agony, after which everybody literally looked
right down at their plates. I didn't--I
did not see another pair of eyes the entire evening--which may be a comfortable
way to deliver a speech, actually, but such is what happened that night.
I
do want to make two substantive points, unlike Steve who only made one.
[Laughter.]
MR. SPITZER: But it
registered. And I will be reasonably
brief because I think it will be more interesting to try to dance around Ted's
questions or your questions. But here
are the points.
First,
when it comes to the larger decline in ethical behavior at the board level that
we have seen in the private sector, I think we make a serious mistake when we
think about the problem and confine it to the private sector. What we have seen is endemic through every
sector in our society. It is in our
government, both elective and appointive.
It is in our not-for-profit sector.
It is in our religious institutions.
It is in our media. It is in the
private sector.
And
when we step back and try to critique and figure out what went wrong,
therefore, I think we are deluding ourselves a little bit if we think that it
is exclusively a matter of greed and money, because money is not the sole
motivating factor in several of those other sectors. And, therefore, I think we have a more complicated textured
problem to deal with than simply analysts could make more money by putting a
buy on a stock that was being underwritten by the company. That is, you know, a critique that fit that
one little paradigm, but it does not answer the much more difficult question
about what happened in all of these other sectors.
The
only thoughtful answer that I have seen to this problem was crafted by somebody
who I think is one of the most brilliant elected officials we ever had, and he
died, unfortunately, not long ago, and that's Pat Moynihan.
Pat
Moynihan, in a very different context, wrote about defining deviancy down. When he was talking about criminal justice
and street crime, he said that over a period of years we lost the will to
prosecute and pursue small violations.
Whether it was graffiti, pickpocketing, whatever it may have been, we
lost the will to pursue that.
And
what happened over time was that there was a dissipation in standards, a
dissipation in our expectation with respect to the behavior that people had to
live up to. And that permeated our
society and crime exploded.
Now,
then from that sort of intellectual nugget, what evolved was the broken window
school of prosecution, which went after small crimes to re-establish our basic
moral principles. And over time we have
beaten back the issue of street crime to a great extent. We have some problems here and there,
certainly, but we have made enormous progress.
I
think the same thing happened with respect to our governing structures. Small violations that may have been akin to
a barnacle on the bottom of a boat, that did not appear to be material, one-off
balance sheet partnership, one small indiscretion, began to grow during a
decade when things were so good that we lost the will to challenge small
violations. And over time it led to a
larger dissipation.
And
as a result, we woke up a year or two ago when things crashed for a number of
other reasons, and because a rising tide washes away a lot of sins, we suddenly
had to see what wreckage was there. And
it was a consequence of a growing complacency that calls out in many sectors for
all of us--and I think that's why--and I hate to pontificate, to use a word
derivative of one you just used. But I
think all of us who are in positions where we have fiduciary duties have to
re-examine how we fulfill them. Because
I think it is everybody in every position of some power or governing
responsibility who has to examine what happened and why. And I think we all have to sort of pull
ourselves up by the bootstraps and think of this in a much larger context.
The
second issue I want to address very quickly is: Do they get it? And this
emerged, I suppose, very--with some significance on the day we announced the
global settlement, and there were some responses from CEOs in various companies
that challenged people's judgment about do the CEOs in the investment banking
community get it.
But
the "they" that I'm referring to right now is not the
"they" in the investment banking community. I think they do get it. I
really do. And I'm--you have to be an
optimist in the business that we're in, and maybe this is a self-delusion and
five years from now we'll wake up and say, no, they simply didn't. But I do think they get it, and not
necessarily because of the new rules or the new regs, but for a different
reason that maybe I'll touch on.
But
the "they" that I'm asking about now is Congress. And I think there's a large question about
whether Congress, which ultimately enacts the laws that will define the
boundaries of financial regulation, whether they have properly understood that
after a spasm of deregulation that maybe in certain instances was important and
right and necessary, nonetheless, there are problems that have emerged and
tensions that have emerged that have not been properly mediated.
And
I would give you two examples of ongoing legislative potential enactments that
I think suggest to me that perhaps Congress needs to step back and re-examine
its role. And those two are: one, the definition of "disinterested
party" in the bankruptcy statute in terms of who can give advice in the
bankruptcy context, where their--what passed the House would permit the very
investment banks that did the underwriting to step back in and garner fees from
the very wreckage that they helped create, a change in a statute that for 70
years had served us very well, an issue that passed the House with hardly an
inquiry of relevant parties, no inquiry as far as I know to the SEC, and
recently when we were up at the Senate Banking Committee, Chairman Donaldson, I
was thrilled to see, opposed this move.
But the House passed it without that inquiry.
The
second measure that they're about to enact or the House passed it--it is before
the Senate, I understand--relates to industrial banks where there is about to
be created an entire--a possibility for an entire secondary banking system
outside the regulatory structure of the Fed.
Chairman Greenspan has opposed this, and yet in dark of night,
basically, this measure as well has passed.
And
so what we are still seeing on the Hill is a willingness to break down those
rules and divides and barriers that were, to a great extent, important
protectors of investors, depositors, and had some meaning, even though it was
very easy for a number of years to malign them and say deregulation is the cure
for all.
And
I think if you look at the sectors where we have gone through this deregulatory
spasm, we now should know there is, in fact, no cure-all called
deregulation. So I think that we need
to ask do they get it, not just of the investment banks but of our
congressional leadership that, through its behavior, may not be serving us
terribly well.
Now,
I know Ted has a lot of questions, as do you, I hope. Let me just make two very quick final observations.
One
is what will ultimately drive this. It
is not laws. It is not even
necessarily--it is enforcement actions, but in a derivative sort of way. Shame is the greatest public motivator. And I think what has changed out there in
the past two years is that individuals who were inviolate, individuals who
believed they were beyond reproach, so-called masters of the universe, have now
found out that that is a very transitory phase.
And
I will leave you with two really final brief thoughts. One is the advice that I have given to many
folks, which is, if you want to learn the lesson the real way, get
"Bonfire of the Vanities" and read it. It is that book more than anything else that shows you how
somebody who--Sherman McCoy was the master of the universe. One wrong turn off the Deegan(ph) into the
South Bronx, game over. And suddenly
your life changes. And I grew up in the
Bronx. I can say this. So he did not understand where--what the
boundaries were of his power.
And
the second thought is that--it was emblazoned on a T-shirt that a friend of
mine gave to me that captured up--captured much of this, and it said across the
front, "Hubris Is Terminal."
And that I think is what befell not only the investment banking sector
but also other sectors where we now have seen this governing crisis, where
people did feel they were beyond reproach, and hopefully the renewed attention
to this will resuscitate feelings of shame, to a lesser extent an obligation
that is captured by our notions of fiduciary duty, and population will begin to
live up to the mandate that we have invested in them.
If
that happens, this entire spasm will have been enormously worthwhile and
productive, and at the end of the day will have served investors and the public
at large very, very well. Whether that
will happen, we won't know for five years, but let's hope so.
Anyway,
thank you for the invitation to be here, Ted.
But as I said, we still will get back from you something for our being
here.
[Applause.]
MR. LEVINE: Thank
you, Eliot and Steve.
I'm
moved to maybe end it right now because I don't think we can top that, but I
think we'll go on.
You
know, the context of what they were supposed to speak to, both Steve and Eliot,
was--
[Laughter.]
MR. LEVINE: --does the integrated broker-dealer model still work? And what's the appropriate regulatory
response?
MR. SPITZER: Who
cares?
[Laughter.]
MR. LEVINE: Somehow
I didn't get there, but--and I think this is going to be a moment that we'll
remember for a long time.
However,
there are several questions that I would like to raise and--
MR. CUTLER: Before
you do that?
MR. LEVINE: Yes?
MR. CUTLER: Because
I love interrupting you. Actually, I
want to address something Eliot talked about, which is sort of the Moynihan
notion that the will was lost, because I actually see it a little bit
differently. And I just--I thought I
would say how I see it.
MR. LEVINE: Good.
MR. CUTLER: Which
is not that the will was lost, but maybe the vision was lost or the eyesight
was lost. I don't know--I'm reaching
for the right metaphor. But the way I
really picture this now in my own mind, in trying to sort of understand the
cataclysm that we've been through, both on Wall Street and in the markets
generally, is that, you know, essentially, you know, we had a--we had a bright
line. Maybe it wasn't so bright, but we
had a legal line and with--you know, if you go back 10, 15, 20 years, with
conduct that was on the right side of it.
And slowly and in creeping fashion, and maybe one by one and maybe
taking comfort in what someone else was doing and then what maybe everyone was
doing, people seemed to move closer and closer and closer to that legal line
and then crossed it. And we don't even
have to call it a legal line. We can
call it an ethical line.
And
one day--and you said, you know, we may wake up five years from now and decide
that firms didn't get it, CEOs didn't get it.
I think what may have happened here is that, you know, as this sort of
creeping was going on, everyone was creeping along with those who were involved
in the activities. That is, it became
harder in the same way that I think, you know, when you're living every day
with a person, you don't see that they're beginning to lose hair or getting
gray hair or getting older.
MR. SPITZER: My wife
does.
MR. CUTLER: Yeah.
[Laughter.]
MR. CUTLER: But,
you know, if you haven't seen them for three, four, five years, gee, you notice
they have changed a lot.
And
I think one of the lessons of the last--the last five years or so is that we
don't want to wake up five years from now and that we have to find a way of,
you'll excuse the expression, taking a fresh look on a more regular basis and
figuring out--you know, trying to step back and not saying to ourselves and
industry people not saying to themselves this is the way everyone's doing
it. Right? Because that doesn't make it right.
One
of the firms--one of the senior managers of one of the firms that we sued has
actually told me--I assume he's told you the same thing, Eliot--that, you know,
they used to consider themselves better than others. And now when they look back on it, they think of themselves as
having been the tallest among Pygmies.
And we've got to figure out whether, you know, we're Pygmies or
not. And that's a hard thing to do.
MR. SPITZER: I agree
100 percent with what you've just said, and I think it actually captures a
different way of saying the notion of defining deviancy down. It is that notion of declining standards
over time, stretching the envelope, and waiting until it snaps, and it snaps
not because of those inside the envelope recognize it has but because somebody
outside takes a completely dispassionate look.
And I think one of the phenomenons that we observed was that those who
came in early on to discuss with us what we diagnosed to them as being a
fundamental problem didn't disagree with our factual recitation, but they
responded just as Steve just said, "Everybody's doing it," as though
that somehow became a defense. And they
said not only is everybody doing it, everybody knows everybody's doing it.
Therefore,
how do you--and it was the enforcement action was wrong from their perspective
because it lacked horizontal equity to single them out, which is, as I perhaps
too pointedly reminded them, wasn't a defense when we were going after bank
robbers and, therefore, wasn't going to be a defense in a different context
with certainly greater subtlety, but, nonetheless, the lack of horizontal
equity doesn't defend against improper activity.
But
I agree with you. It was this
overarching decline and dissipation that we have to worry about, which makes me
wonder--and one of the sort of takeaway thoughts that I've had that has been
very troubling to me is that because of this internalization of the wrong
values over time, self-regulation didn't necessarily work. And the question I have is, with all the
compliance officers out there, compliance personnel who outnumber our combined
staffs by several multiples, why wasn't there any greater internal pushback
against this behavior? And I think it's
because when you're inside you can't see it.
So
then people say, well, what's the response, what is the alternative to
self-regulation? I throw up my hands
and say, "I don't know," because I'm not sure there is one that can
really fill that enormous void where we have to presume on the ethics and
propriety of those we're after.
MR. CUTLER: I guess
from my perspective, I'm not ready to throw out self-regulation yet.
MR. SPITZER: I'm not
throwing it out. But I'm saying we have
to somehow reconstruct it so it works.
MR. CUTLER: Well,
then there are lots of benefits to it, of course, and, you know, I think when
it was conceived back--Harvey, you'll tell me when. Was it in the '30s? It
was in '34, really.
MR.
: '37.
MR. CUTLER: '37,
'38?
MR.
: Yeah.
MR. SPITZER: I
thought it was in '21 in the Martin Act.
[Laughter.]
MR. CUTLER:
Everything is--
MR. SPITZER: Not the
Stamp Act but the Martin Act.
MR. CUTLER: You
know, the rationale was, you know, let's put people in place that understand
what's a very complicated set of processes better than someone sitting in
Washington or even someone sitting in Albany or Manhattan would. And, you know, I think that has great merit,
but I think you've got to balance that with this phenomenon, that it is--you
know, the closer you are to a problem--and we've all read about it in law
school, right? The administrative
process itself is subject to that. You
know, the more susceptible you are to being drawn into something that isn't
right and that you can't see isn't right.
And
I think that's the challenge of self-regulation, is to--
MR. LEVINE: Could
I--
MR. CUTLER: Yeah,
go ahead.
MR. LEVINE: I worry
about--
MR. SPITZER: We
never let Ted interrupt us when we're negotiating.
MR. LEVINE: That's
true. Why don't you go ahead?
[Laughter.]
MR. LEVINE: No, I
was just going to say two things. The
theory of self-regulation, when the Chairman, Chairman Douglas, espoused it in
'37, was you would regulate yourself, but you'd have vigorous enforcement by
the government, particularly in the circumstance where the self-regulation
broke down, the point that you're both making.
But the theory that you should be able to move faster as a
self-regulator, because after all--well, I shouldn't say this, but after all,
the government is bound by due process concerns--is something which sometimes
limits them, but--not in all cases, I might add.
MR. SPITZER:
Sometimes.
MR. LEVINE: But so
the theory was you should have a strong enforcement effort.
One
thing I would ask your view on, though, is I think you're absolutely right in the
sense of the breakdown. It's a
complicated reason for it. I think the
disciplines among the lawyers, the accountants, the world broke down--Eliot's
point--and the government. But to the
extent you don't have the pressure from a regulatory point of view, people tend
to look to a slippery slope. It's the
way people work.
But
I also think in part--and one of the problems that we've had is that the line
also moved in the course of the response.
And that's--part of it is what people thought was okay behavior, not
where we clearly agree was not, has now become possibly not okay behavior. And the problem people are having is unless
there are clear lines with the obligation to have them, then you end up in a
circumstance where it's very hard to do business because people, particularly
with strong enforcement, tend to run away from the line as far as they can go
because they don't want to get caught up in it.
And
so I guess one of the things that that raises--and maybe I can segue into a
question--is how do you draw a balance between using enforcement actions or
rulemaking to effectuate change in terms of prescriptive relief. Essentially where is the balance? When do you--do you redo an industry through
rulemaking with all the benefits of that, or do you use an enforcement process
to change behavior? And when is it
appropriate to do either?
MR. SPITZER: Let me
take a shot at it because I think it's probably a harder question for me. Steve has the capacity to issue rules, we
don't, even though that may surprise people.
We know we don't and, therefore, we are only left with the option of
sort of crafting changes in the form of injunctive relief in the form of
settlements. And we've thought about
this. And when is it proper to impose
change out of an isolated enforcement action?
But I sort of analogize this to the tension between common law evolution and statutory evolution. There are a series of statutes out there, both federal and state, which don't have that much ambiguity. They use words like "fraud" that are always somewhat elusive, necessarily, but it's clear what the statutes mean. But we lend meaning and texture to those words through individual enforcement actions, and those enforcement actions, to the extent they do anything more