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The SEC's Mark Sanchez Problems

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In the January 21, 2013 edition of The New Yorker, James Surowiecki wrote about the problem of sunk-costs in the context of the Jet’s Sanchez and their guarantee to pay him $8.25 next year, whether he plays or not. “That Sunk-Cost Feeling” http://www.newyorker.com/talk/financial/2013/01/21/130121ta_talk_surowiecki. The analysis is relevant to SEC enforcement cases.

The most significant factor in determining the effectiveness of the commission’s enforcement program is its effective use of staff time. Staff resources are limited and have to be spread across all of the priorities of the enforcement agenda: investment offerings, financial reporting, investment professionals, insider trading and the rest of the responsibilities dictated by Congress. So the critical decisions of what new matters to investigate and how to staff the investigations play a crucial role in determining the effectiveness of the enforcement program from the very beginning of a case. Pick the wrong case, staff it weakly or just fail to find what was initially expected and the SEC ends up with a sunk-cost looking for redemption.

Imagine the lot of an enforcement line supervisor. She doesn’t have a quota but she knows that her reputation, bonus and future depend on meeting the production goals of her supervisors. Does she cut her losses and move to another matter when a promising investigation yields much weaker evidence than expected? Or does he avoid admitting he made a mistake and charge someone with something, whether or not the final case would have made the cut for an investigation if the outcome had been anticipated initially?

The sunk-cost effect appears in many of the cases the SEC files. Sunk-costs encourage a “stay of course” mentality. Sue someone, no matter whether the conduct charged would have justified an investigation initially. Charge something, no matter how carefully the charges must be parsed. And settle cheaply when the case appears headed for a train-wreck. It’s hell to have to admit you were wrong. The investing public would be better and more fairly protected if some internal ombudsman reviewed enforcement recommendations with fresh eyes to make sure justice was being done.

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