Why an SEC Victory Counts More Than an SEC Loss

Since the SEC won a jury verdict against former Goldman Sachs VP Fabrice Tourre last week, the financial press has published semi-snarky commentary about how the SEC has lost more financial crisis cases than it has won.  This game of statistics misses an essential point.  Wall Streeters, corporate executives and directors, and their attorneys are cautious folk.  You might not think so from some of the inexplicably risky things they occasionally do, but on the whole they are more concerned about downside risk than upside potential.  (Even good hedge fund traders look first at how much they can lose before they focus on how much they might make.)

A high profile SEC win, like the Tourre case, makes the risk averse pause and reflect all the more so before taking the plunge.  It's better to settle and hide behind your PR person who repeatedly declines to comment to press inquiries than to be photographed outside a federal courthouse wearing a nice suit and a gloomy expression.  People will remember that expression for a long time.  Tourre didn't have to do a perp walk, but there's nobody--absolutely nobody--on Wall Street, Main Street or anywhere else in the corporate world who wants to wear his suit. 

When the SEC loses in court, the defendants have a day in the sunshine.  But then their cases are largely forgotten.  Major SEC victories are remembered.  The SEC's cases against notorious insider trader Ivan Boesky and junk bond king Michael Milken still receive public mention, even after 25 or so years.  Who remembers the cases the SEC lost in the 1980's?

In the plush conference rooms and offices where corporate lawyers and their clients under SEC investigation discuss the risks of settling versus litigating, you can be sure that the SEC victory in the Tourre case is getting a lot of attention.  The SEC's losses are probably mentioned as well.  But no good attorney wants to be caught making, or even implying, a promise s/he can't keep, and the story of Fabrice Tourre is likely being presented as a cautionary tale.  People with a lot more to lose from an SEC victory than they have to win from an SEC loss may well see the merit of capping their downside risks.