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The Big Bank Backlash Begins

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From left: Robert Khuzami, Obama’s first enforcement director; Linda Chatman Thomsen, who served at the George W. Bush-era S.E.C.; and George Canellos, who just left the Obama S.E.C. (Andrew Harrer/Bloomberg via Getty Images, Chip Somodevilla/Getty Images, Brendan McDermid/Reuters /Landov)

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Last week, I visited an alternate universe. The real world sees a pandemic of bank misconduct, but to the white-collar defense lawyers of Washington, the banks are the victims as they bow beneath the weight of regulators' remarkably harsh punishments.

I was attending the Securities Enforcement Forum, a gathering of top regulators and white-collar defense worthies. The marquee section was a panel that included Andrew Ceresney, the current S.E.C. enforcement director, and five of his predecessors. Four of those former S.E.C. officials represent corporations at prominent white-collar law firms: Robert S. Khuzami, President Obama's first enforcement director who now plies his trade at Kirkland & Ellis; Linda Chatman Thomsen, who served at the George W. Bush-era S.E.C. and now works for Davis Polk & Wardwell; William R. McLucas, the longest-serving agency enforcement director who is now at WilmerHale; and George S. Canellos, who just left the Obama S.E.C. to work for Milbank Tweed. (The well-known Stanley Sporkin, who served in the agency in the 1970s, rounded the panel out.)

The conference turned into a free-for-all of high-powered and influential white-collar defense lawyers hammering regulators on how unfair they have been to their clients, some of America's largest financial companies.

The critics have multiple complaints about the S.E.C.

Mr. McLucas and Ms. Thomsen assailed the S.E.C. for applying the "broken windows" theory to corporate crime. Indeed, in a nice bit of message-discipline, one of the Republican commissioners of the agency attacked the practice in a speech at the conference earlier in the morning. This theory, borrowed from the urban policing tactic, argues that crime is deterred when law enforcement agencies arrest people for minor infractions, like riding public transportation without paying the fare. The lawyers argued that the commission has focused too much on smaller infractions, like minor misrepresentations in corporate filings. The lonely Mr. Ceresney explained patiently that the agency was only going to go after patterns of real violations, even if they were small. Not allowing small violations to slide puts companies on notice that the S.E.C. is vigilant, he argued.

Mr. Khuzami and Ms. Thomsen raised questions about whether it was fair for the agency to use administrative proceedings to push its cases. Administrative hearings happen before a specialized court without the usual rules and checks of a true proceeding in the courts. The critics liken it to getting a hometown judge instead of putting the cases up to the test of judges and juries. Banks send their disputes to arbitration rather than the courts. When the government does it, they scream foul.

"What you are hearing is a reaction to the fact that we have been quite aggressive with financial institutions and others," Mr. Ceresney told me, assuring that the pressure "has zero impact" on S.E.C. enforcement.

In a subsequent panel, Brad S. Karp, the chairman of the powerhouse law firm Paul, Weiss, laid into the agency about how onerous the punishments have been.

There is a "profound sense in defense circles," he said, that there is a scrum of various regulators and enforcement bodies: the S.E.C., the Justice Department, state attorneys general, the New York State financial regulator and so on. Mr. Karp said these enforcers had become increasingly politicized and were trying to one-up each other. They "cannot be too tough," "penalties cannot be too large" and there was a "tremendous push toward increasing all of the sanctions," he said, complaining that there was "no consistency other than that penalties and sanctions are much more draconian."

As the government representative on the panel, Scott W. Friestad, the No. 2 enforcement officer at the S.E.C., was the target of Mr. Karp's ire. In response, he fixed Mr. Karp with a steely glare and said slowly: "Wait just a minute. Bank fines have been so high because bank behavior has been so egregious. Banks sold hundreds of billions of misleading mortgages. They manipulated the global interest rate index and the world's currencies. They laundered money for terrorists and drug dealers. They have helped the wealthy avoid paying their taxes. Big crimes require big punishments."

Actually, he didn't say any of that.

Instead, what Mr. Friestad said was that he was proud that the S.E.C. wasn't as politicized as other offices and bodies. He noted the S.E.C. didn't do things like hold news conferences when it issued subpoenas, a dig at state officials.

"Not to say you don't have a valid point," he said, adding, "It's very tough for a company to navigate those waters." In comments the next day, he explained further his concerns that regulators around the world were piling onto the banks.

O.K., so Mr. Friestad wasn't literally sympathizing with corporate wrongdoers. He was reacting to the notion that corporations may face multiple regulators, all conducting investigations, all demanding documents, all insisting their requests should come first. It surely is a time-consuming and expensive process. In fairness, there are instances in which regulators could have done a better job coordinating their work.

And yes, politicized law enforcement is dangerous. Politicians can grandstand their way to higher office, justice be damned. (Though sometimes, politicians can do good while also doing something popular.) It's true that prosecutorial power is an awesome and terrible thing in the wrong hands.

But it's more common for corporations to play regulators off each other to blunt enforcement and regulation. In recent cases, state-level enforcers, like Benjamin M. Lawsky in New York, have justifiably pushed federal officials to be tougher.

It is worth pausing for a moment to consider whether banks have truly suffered excessive punishments.

Sure, fines have been high in recent cases. On other fronts, however, the defense bar is still rolling. Indeed, Mr. Karp implicitly conceded that the punishments had been soft when he laid out for the audience how he defended clients when enforcement agencies came knocking.

First, he pushes to move the charges to a subsidiary from the parent. Second, he tries to lower the charge. Third, he said, he focuses "on the powerful individuals in organization," meaning that lawyers need to put top management first as they prepare a defense.

These strategies have been employed to glittering success. The guilty pleas and admissions have been largely by subsidiaries or been rendered toothless. Entities have admitted to charges that were narrow or unspecific and did not open up them up to further private litigation. And, of course, no powerful individuals at any of the large, fine-paying companies — Credit Suisse, BNP Paribas, the banks in the rate-manipulation investigations, HSBC, Toyota, General Motors, BP — have been criminally charged. (And we aren't even talking about financial crisis-related malfeasance.)

This is how power and influence work in Washington. Former top officials, whose portraits mount the walls, weigh in on matters of enforcement. Now working for the private sector, they assail the regulatory "overreach." Sincerely held or self-serving, these views carry weight in Washington's clubby legal milieu.

Financial firms led the fight against Eliot Spitzer, the hard-charging former New York attorney general. When the Bush administration issued a set of guidelines for prosecuting corporations that included some relatively tough procedures, the United States Chamber of Commerce and the white-collar bar revolted.

And now, just when corporate punishments are starting to prick the skin, the backlash is in full cry. Former regulators are the mouthpieces. And given what they say in public, one can only imagine what is happening behind closed doors.

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)