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S.E.C. Accuses Volkswagen of Fraud in Diesel Scandal

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S.E.C. Blocks Chinese Takeover of Chicago Stock Exchange Advertisement A federal securities regulator on Thursday struck down the proposed $ 20 million acquisition of a Chicago-based trading hub, the Chicago Stock Exchange, by a Chinese-owned company. The Securities and Exchan... NYT > Business Day

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S.E.C. Says It Was a Victim of a Computer Hack Last Year

HONG KONG — The top securities regulator in the United States said Wednesday night that its computer system had been hacked last year, giving the attackers private information that could have been exploited for … NYT > Business Day

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In S.E.C.’s Streamlined Court, Penalty Exerts a Lasting Grip

If you were an S.E.C. executive, would you allocate resources to spend three years investigating the owner of an investment management firm for what turns out to be 15 improper trades resulting in $2,270 in ill-gotten gains, or direct those resources to bigger cases? Why? What are the ethics underlying your decision?

On its face, it seemed like a simple case. Eric D. Wanger, according to regulators, had done things a money manager shouldn’t do.

Over nearly three years, they said, Mr. Wanger made 15 improper trades for a fund he oversaw at his Chicago firm, Wanger Investment Management. The trades, in a handful of small, illiquid stocks, were said to have inflated the fund’s performance and generated extra fees for Mr. Wanger.

The supposedly ill-gotten gains were computed to be less than $2,270. The cost to Mr. Wanger has been much higher. He had to close both his investment management firm and a family office that advised dozens of clients, with $300 million in assets, a company he had borrowed against his home to set up. Nearly five years later, he is still barred from the business.

His penalty — part of a settlement that he thought would allow him to quickly resume his practice — was exacted by the Securities and Exchange Commission, after his case was brought in a court system operated by the commission itself.

The S.E.C. is not the only federal agency that uses internal courts to adjudicate enforcement matters. Some 30 others, including the National Transportation Safety Board and the Social Security Administration, also do it. The idea behind these systems is that judges who have deep expertise in their fields will oversee cases more efficiently than those in federal courts. Limiting discovery and other procedural actions is also intended to streamline the process.

Among cases that go to a hearing, the S.E.C. prevails more often than it does when it litigates matters in federal courts. To critics, this indicates that the S.E.C.’s system is stacked in its favor. The commission says the system is not only expedient but also fair and just.

Mr. Wanger’s case is just one of dozens pending before the commission’s judges. But in the aftermath of the 2008 economic crisis, when few high-level executives of major banks faced S.E.C. action, the pursuit of Mr. Wanger for the financial equivalent of a foot fault in tennis is noteworthy.

“I appreciate the fact that people wanted scapegoats after the great recession,” Mr. Wanger, 54, said in a recent interview. “I’m never going to get my business back, but I want my reputation back. I want the same right as everyone else in the United States to go out and make a living.”

It is only right, of course, that violators of securities laws bear the consequences of their infractions. But had Mr. Wanger been able to battle the S.E.C. in federal court, he would have been better able to defend himself, his lawyer said. The commission’s internal judges have greater sway in their courtrooms than judges overseeing proceedings that adhere to the rules of due process.

S.E.C. judges can disallow the introduction of expert witness testimony on behalf of defendants, and reject requests for information about government witnesses from the other side. Taking depositions and conducting discovery as part of a defense are also limited in these courts.

Critics of this system say it stacks the deck against those who may not have the means to defend themselves aggressively. And while rich and influential firms that get into regulatory scrapes can bill their legal costs to shareholders and return quickly to business, individuals often can’t.

Mr. Wanger, who believes the case against him was brought at the urging of a rival in a corporate power struggle, ultimately settled the case without admitting or denying the allegations. He paid a penalty of $75,000 as well as the amount of the management fees in question, with interest. He estimates that he has paid $1 million or more in legal fees.

Crucially, the settlement barred him from the securities industry, with the right to reapply after a year. But his attempts at readmission have been rejected. In February, an S.E.C. enforcement official told Mr. Wanger’s lawyer that his unit was going to recommend to the commission that Mr. Wanger remain barred. The reason: he had not demonstrated that it would be in the public interest for him to rejoin the industry.

The S.E.C. declined to comment on Mr. Wanger’s case.

Mr. Wanger is not alone in questioning the commission’s actions against him. Joseph A. Grundfest, a former S.E.C. commissioner who is now a professor of law and business at Stanford Law School, does as well.

Mr. Grundfest, an acquaintance of Mr. Wanger, tried to provide expert testimony, pro bono, to the S.E.C. on his behalf. In Mr. Grundfest’s view, Mr. Wanger received no material financial benefit from the actions the commission attributed to him, and no reasonable investor would have considered the alleged improprieties to be material.

In an interview, Mr. Grundfest said he had begun with the assumption that Mr. Wanger improperly executed the trades at the heart of the case, even though that was only an allegation.

Still, he finds the case puzzling. Given the scarcity of the regulators’ resources, the decision to spend almost three years investigating what turned out to be 15 improper trades is remarkable.

“The S.E.C. spends how many hundreds of thousands of dollars pursuing this guy for alleged violations that would have moved his portfolio by 85 one-hundredths of one percent?” Mr. Grundfest said. “I know the S.E.C.’s response is ‘We go after violations where we find them.’ But, really? How smart is that? Why are so few senior executives prosecuted and meanwhile Eric Wanger’s career is destroyed?”

‘A Facade of Justice’

The number of cases that go through the S.E.C.’s internal court has increased in recent years, at the direction of Congress in the Dodd-Frank financial reform act, which authorizes the commission to bring almost any case before its own judges rather than those in federal courts. Some 84 matters were pending before commission judges in the fiscal year that ended last September, up from 33 pending matters in fiscal 2009.

The S.E.C. employs five judges, who hold public hearings, issue decisions and impose sanctions, including monetary penalties. They can also revoke securities licenses, as the judge in the Wanger case did. Most matters are settled before they are concluded.

For the five years ending in 2016, the agency said it had won an average of 89 percent of the time in matters heard in its internal courts, versus 76 percent of the time in trials in district courts.

The agency argues that those who are unhappy with the in-house court rulings are free to appeal them. But initial appeals must go before the full commission itself; to prevail there is unlikely, as it would require the S.E.C. to overrule its own enforcement division and internal judges.

If unsuccessful in appealing to the commission, a respondent can go before a circuit court of appeals. But these courts are typically hesitant to question the findings of administrative law judges, who are considered experts in their fields.

Mounting such appeals also requires the financial means, something individuals often do not have.

In any case, successful appeals have been rare.

“The S.E.C. creates a facade of justice while unfairly prejudicing respondents, particularly individuals who often barely have the resources for an effective defense,” said Lewis D. Lowenfels, a securities lawyer in New York and an adjunct professor at Seton Hall University School of Law. “Never mind the additional resources required to pursue the narrow avenues of court review, which the S.E.C. contends makes the entire process legal.”

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