LOOKING FOR THE DOG THAT DIDN’T BARK: DO INCREASED SEC BUDGETS REDUCE RATES OF SECURITIES FRAUD?

After the 2007-2008 financial crisis, the American public demanded that bankers be held responsible for their crimes. One byproduct of this widespread furor was a much-enhanced budget for the Securities and Exchange Commission (SEC), the federal agency responsible for investigating and enforcing securities law violations. Over five years later, many commentators—both within and beyond Wall Street—maintain that the newly beefedup SEC is no better at deterring or detecting securities fraud. This may be because the SEC is “in the pocket of” big banks or because the financial incentives for bankers to break the law are simply too high. Despite hundreds of millions of additional dollars spent, no systematic evidence exists on whether marginal increases in SEC budgets decrease rates of securities fraud—a stunning omission given the amount of money at stake. This Article fills this crucial gap by pulling together and reviewing the disparate evidence of whether increased SEC budgets actually decrease rates of securities fraud, or whether enhancing the SEC’s budget is a costly sideshow. ABSTRACT ................................................................................................. 209 INTRODUCTION .......................................................................................... 210 I. RESEARCH METHODS ............................................................................. 215 II. DO INCREASED SEC BUDGETS PROMOTE MARKET DEVELOPMENT AND ECONOMIC GROWTH? ......................................... 217 A. Summary .......................................................................................... 217 B. Direct Evidence ................................................................................ 217 C. Indirect Evidence ............................................................................. 220 D. Outcome and Further Considerations .............................................. 224 III. DO INCREASED SEC BUDGETS REDUCE ILLEGALITY IN THE MARKETS? ................................................................................ 224 A. Summary .......................................................................................... 224................................................................................................ 209 INTRODUCTION .......................................................................................... 210 I. RESEARCH METHODS ............................................................................. 215 II. DO INCREASED SEC BUDGETS PROMOTE MARKET DEVELOPMENT AND ECONOMIC GROWTH? ......................................... 217 A. Summary .......................................................................................... 217 B. Direct Evidence ................................................................................ 217 C. Indirect Evidence ............................................................................. 220 D. Outcome and Further Considerations .............................................. 224 III. DO INCREASED SEC BUDGETS REDUCE ILLEGALITY IN THE MARKETS? ................................................................................ 224 A. Summary .......................................................................................... 224 * Attorney, Choate Hall & Stewart LLP. Yale Law School, J.D. (2015), University of Oxford, Oriel College, M.Sc., Economic History (2012), University of Richmond, B.A., Philosophy (2009). † The author thanks Professor Jonathan Macey for his invaluable supervision of this project. The author also thanks the editorial staff at the Vermont Law Review for their careful and thoughtful editing. 210 Vermont Law Review [Vol. 41:209 B. Theoretical Evidence ....................................................................... 225 C. Limits of the Empirical Evidence .................................................... 229 D. Indirect Empirical Evidence ............................................................ 232 E. Outcome and Further Considerations ............................................... 234 CONCLUSION ............................................................................................. 235