Sunday, November 8, 2009

When Will The S.E.C. Admit They Made A Mistake?

November 5, 2009, 7:00 am
When Will the S.E.C. Ever Admit They Made a Mistake?
By Joe Nocera
That was the headline — in ALL CAPS — of a e-mail message I received recently from a lawyer named Robert W. Pearce. Mr. Pearce’s client, Steven J. Wilson, was one of the two men I wrote about in late June who had been accused by the Securities and Exchange Commission of taking part in a small-time stock-manipulation scheme — and who, after five years of investigation and various legal proceedings, had been found not guilty in trials that lasted literally days.

One point I made in that column is that when people who aren’t rich get sucked into the vortex of a lengthy government investigation, they often wind up broke — and broken, even if they are innocent. Mr. Wilson — and his co-defendant, Richard Kwak — were no exceptions. In the column, I focused mainly on Mr. Kwak, who lost his job as a broker at Morgan Stanley, but Mr. Wilson’s plight was no different.

When the investigation began, Mr. Wilson was working for a small investment boutique called Noble Financial Group. Not surprisingly, he lost that job once the S.E.C. decided to come after him. “The really terrible thing is that clients you’ve had for years, companies you’ve done I.P.O.’s for, they won’t even talk to you when they learn you are being investigated by the S.E.C.,” Mr. Wilson told me when I spoke to him several months after his acquittal. And he was unable to find another job. “Personally, I’m pretty broke,” he said. “They decimated me.” At the time I spoke to him, Mr. Wilson, now 63, was trying to make ends meet as an oil filter salesman.

A month after my column was published, Judge Janet C. Hall of United States District Court ordered the S.E.C. to pay Mr. Wilson $481,844.09 in legal fees. (You can read her order here.) This would hardly end all of Mr. Wilson’s financial woes, but it would at least relieve him of some of the debt he piled up as a result of his ordeal. (Mr. Kwak is currently struggling to get Morgan Stanley to pay some of his legal fees.) Under the law, the government loses its immunity from recovery of lawyers’ fees if the action brought by the prosecution was either frivolous or in bad faith. On that argument, the judge sided with the S.E.C., ruling that bringing the case against the alleged stock manipulators was justified. (After all, she wrote, five of the seven defendants copped pleas. As I note in my column, I don’t think those pleas necessarily show there was a stock-manipulation scheme, only that pressure from the government is more than most people can withstand. But that’s a story for another day.)

But then she went on to say that the evidence against Mr. Wilson was so slim that the S.E.C. had no business making him part of the case — and bringing him into the case was frivolous. (“As thin as the S.E.C.’s evidence against Wilson on the marking the close and aiding and abetting claims was, its evidence on the matched trades claim was even thinner.”) Hence the awarding of $480,000-plus in legal fees.

How did the S.E.C. respond? You guessed it: it recently filed notice that it will appeal Judge Hall’s ruling. In doing so, of course, the S.E.C. is prolonging Mr. Wilson’s ordeal, which the agency itself caused, thus compounding the original injustice. My attempt to get the agency to explain itself went nowhere — all I got was an official “decline to comment.”

The S.E.C. has long since acknowledged its mistakes in missing the Bernard Madoff fraud for so many years. Now it ought to acknowledge that it sometimes — maybe more than sometimes — makes the opposite mistake: it relentlessly pursues people, usually small fry with limited resources, who are not guilty of anything except being in the wrong place at the wrong time. Paying Mr. Wilson’s legal bills would be a good place to start.

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