Obama Picks Morgan Stanley's Lawyer to Lead SEC

By Jonathan Weil
January 24, 2013 12:40 PM EST

The Securities and Exchange Commission couldn't get Ken Lewis on any securities-law violations after he helped drive Bank of America Corp. into the ground as its chief executive officer. Now the SEC is poised to get his attorney as its new chairman -- and Morgan Stanley's, too.

Mary Jo White is set to become the next chairman of the Securities and Exchange Commission. President Barack Obama is scheduled to make the announcement this afternoon at the White House. Assuming she is confirmed by the Senate, the former U.S. attorney from Manhattan will take over an agency that is ridiculed more than feared.

The critical question is whether she can be as zealous in protecting the investing public's interests as she has been in defending her Wall Street clients as a litigator at the New York law firm Debevoise & Plimpton. The transition in mindset back to government service doesn't always come naturally for white-collar defense lawyers.

The SEC's penny-ante justice for Wall Street crooks, combined with the Justice Department's willful inability to find top executives who committed crimes at major banks, has left many Americans understandably cynical about the way law enforcement works in the U.S. Obama's first SEC chairman, Mary Schapiro, joined from Finra, an arm of the securities industry. Now he has tapped another defender of Wall Street (literally).

A recurring problem at the SEC has been the overly friendly relationships between its staff and the people the agency is supposed to be policing. A question for senators to ask White during her confirmation hearing is what she will do to change this culture of coziness, which she has used to her clients' advantage as a lawyer in private practice.

A case in point: An October 2008 report by the SEC's inspector general criticized the agency's enforcement chief at the time, Linda Thomsen, for providing "relevant information" to White in June 2005 about evidence the SEC had gathered as part of an insider-trading investigation involving John Mack, Morgan Stanley's CEO. White had been retained by Morgan Stanley's board to help vet Mack for the top job, which he got that year. Discussing e-mails supplied by Morgan Stanley, Thomsen told White the evidence showed there was "smoke there," but "surely no fire," according to the inspector general's report.

"Learning the extent of the information the commission had against a potential target could prove very useful in preparing a defense," the report said. "The information was provided specifically because John Mack was being considered for a high-level position in a large investment bank and would not be available to another potential target of lesser means or reputation."

The following year, the SEC fired the staff attorney who had been conducting the Mack investigation, Gary Aguirre. The agency in 2010 agreed to pay him $755,000 to settle a wrongful-termination lawsuit. Aguirre claimed the SEC retaliated against him after he complained that his superiors wouldn't let him interview Mack. (An SEC administrative-law judge in November 2008 rejected the inspector general's recommendation that the regulator consider disciplining Thomsen and two other SEC attorneys.)

There was never any suggestion that White did anything improper on behalf of Morgan Stanley. She was pursuing her client's interests and digging for information. Now that she's switching sides, we can only hope White will make clear that this sort of special treatment for a Wall Street bank won't be tolerated, no matter who its lawyers are.

For another perspective, I asked Dennis Kelleher, head of the Washington-based public-interest group Better Markets, for his take on White's nomination.

"I believe she is one of those people who will understand that her public role will be very, very different than her role as a defense lawyer," he said. "She is tough as nails and isn't going to accept an argument that she's soft on corporations or Wall Street or anyone else. I also don't think she'll stand for a double standard for the rule of law."

Kelleher added: "My one concern with prosecutors in non-prosecutor roles is that they too often either don't adjust or take too long to adjust to the lower standard for civil actions, i.e., the bar is not beyond a reasonable doubt. That sometimes causes problems, and I worry about that. But at this point I'm not overly worried that she's going to be soft on Wall Street."

The burden of proof will be on White to show she isn't. 

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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