Episode 92

Presumption of Innocence - Episode 92

Hosted by Matt Adams and John C. Coffee Jr.

“Government agencies say on balance this is right, but they don't tell you what they're balancing and who it affects. We're going to try to tell you what should've been balanced, what wasn't balanced, and what the outcome looks like.”

For 50 years, he's studied the people who watch the markets. Now that the watchers have stopped showing their work, he's assembled the nation's top securities scholars to do it for them as the Shadow SEC.

On this episode, host Matt Adams sits down with Columbia Law Professor John C. Coffee Jr. to discuss the work of the Shadow SEC, a self-funded, no-industry-money coalition monitoring the Securities and Exchange Commission in real time.

The conversation sheds light on what's actually happening inside the SEC: the elimination of 50 years of quarterly reporting requirements, a disclosure threshold shift that drops 85% of public issuers from the highest reporting tier, a proposed wholesale repeal of a decade's worth of climate change rules and a looming push to let companies force shareholders into private arbitration instead of securities class actions.

This deregulatory blitz isn't happening in a vacuum. Matt and Professor Coffee examine the larger crisis underneath it, which is the subject of his book, Corporate Crime and Punishment: The Crisis of Underenforcement. Professor Coffee discusses why enforcement resources have been redirected away from white-collar crime and why billion-dollar corporate penalties still don't deter. He also shares his provocative proposal to penalize corporations in their own stock so the hit lands on shareholders instead of wiping out workers and entire communities.

This episode is essential listening for anyone who touches the securities markets: defense attorneys, prosecutors, compliance officers, in-house counsel and investors alike.

The views expressed in this podcast are those of the participants and should not be considered the views of Fox Rothschild LLP or its attorneys. This podcast is for informational purposes only, is not legal advice, and does not create an attorney-client relationship.

The views expressed in this podcast are those of the participants and should not be considered the views of Fox Rothschild LLP or its attorneys.

This podcast is for informational purposes only, is not legal advice, and does not create an attorney-client relationship

Welcome back to "The Presumption of Innocence," a podcast brought to you by the White Collar Criminal Defense & Government Investigations Practice at Fox Rothschild.

Today, we have a really special treat in store as we cover two interrelated topics at the frontier of securities regulation and corporate criminal law.

Professor John C. Coffee Jr. holds the Adolf Berle Chair in Law at Columbia University Law School, where he also serves as the director of the Center of Corporate Governance.

He has been a visiting professor at some of the most prestigious academic institutes in the world, including Harvard, Stanford, Virginia, and Michigan, and before entering academia, he practiced in Big Law.

His scholarship has shaped our understanding of corporate accountability.

He's the author of major books, including his most recent, Gatekeepers: The Professions and Corporate Governance; Entrepreneurial Litigation: Its Rise, Fall, and Future; and Corporate Crime and Punishment: The Crisis of Underenforcement.

We'll also get into that book a little bit more in-depth today.

He is the senior author of leading casebooks in our country on securities regulation in corporations, and has served as a reporter to the American Law Institute for its Principles of Corporate Governance.

For over 30 years, Professor Coffee wrote a securities regulation column for the New York Law Journal.

He's the founder of the Columbia Blue Sky Law Blog, and in December of 2024, one of the other topics we want to talk about with him today, he co-founded the Shadow SEC, an independent, nonpartisan group leading securities law scholars that monitors and critiques SEC policy.

Professor Coffee, that is one heck of a resume.

Welcome to "The Presumption of Innocence."

Well, thank you, but I'm more modest than all that sounds.

And I think I know something about the field, and my group has some of the leading experts in the field.

This is the Shadow SEC, and we're basically a nonpartisan group that assembled itself rather informally because the SEC was suddenly embarking, without much warning, on a massive program of deregulation.

And they have come out with a, a large number of deregulatory proposals dismissing all climate change rules, changing the periodicity of regulatory filings.

And we are trying to just keep track of all this and do a careful, cautious assessment of what the costs and benefits are of these rules.

We're modeled on something that's existed for a long time that oversees the Federal Reserve's Open Market Committee, which is called the, the Shadow of Federal Reserve.

And we tend to say, "Here's how they analyzed it, but they didn't consider this or that." So that's what we've been doing recently.

Yeah.

And, and so let's step back for just a moment.

The origins and formation, I, I buried the lead in my intro and, and mentioned to you that it was organized when you made the announcement via the Columbia Blue Sky Blog on December 16th of 2024.

Its six founding members are leading professors from across the country, including someone from Harvard, you from Columbia.

We've got Duke, Penn and Washington University represented in the founding membership.

But take us back to what really prompted the formation of this group at this moment?

You mention that it was driven by what you saw as a deregulatory push from the SEC, I think, if, if I'm paraphrasing your words correctly.

Oh, yeah.

That's accurate.

Yeah.

The SEC has embarked on the biggest program of deregulation in its history, and it's not doing this little piece by little piece.

It's just massively repealing rules, and we're trying to suggest what that means.

For example-

What was the straw that broke the proverbial camel's back?

Like, what regulatory deconstruction did you say that we have to do this right here, right now, this is the point in time where we can no longer see this happen?

Let's take some of the most controversial things that have been proposed.

These haven't yet been adopted, but they are coming because the current SEC only has three members, all Republicans, and you can guess that that will be a pretty assured vote to approve those proposed rules.

Now, one thing they did was end a 50-year tradition of quarterly filings.

That is, the US led the way on this, and other countries followed.

We said in addition to your annual filings, you have to file the first three quarters of each year and give us the results for that quarter.

That's a great increase in transparency.

We've had that for 50 years now.

And the proposal is to abolish that as a requirement.

If you want to, you can still do quarterly filings, but you don't have to, and you will save some money if you file only on a six-month basis, which is basically the proposal, to go from quarterly reporting to twice-a-year reporting.

And that is a major retreat from transparency.

It means companies will remain darker longer.

And if companies are remaining darker longer, there, there'll be more fraud.

There'll be more insider trading because the market will deviate from true value.

And we will probably see lots of companies become fairly disrespected because they report late.

On the other hand, I have to tell you, the best companies will probably continue to file quarterly reports even though they're not required to.

They don't want to fight with the securities analysts, and they want to give their investor shareholders what they want.

But the companies that are most likely to cease reporting quarterly are the smaller companies, and they are the one that are most characterized by fraud and financial irregularity.

Well, you mentioned that you, you modeled the program that you rolled out in December of 2024 on something called the Shadow Open Market Committee.

Right.

How does the Shadow Open Market Committee, as an experiment in academic oversight, inform what you're trying to do here with the securities regulation?

Walk our audience through why, why you would model your, your committee after that.

Well, the, the shadow is the term they used, meaning that we were trying to pretend we were sitting in the same position you were, assessing the same data and more data, and what analysis would we have produced and what decision would we have taken.

So we're looking at decisions they have just made or proposed and saying, "We don't think the data quite supports what they've done, and we think there'll be more harm than benefit." Sometimes we may say that we think the harm and benefit are about equally matched, so we don't have a strong view on this one.

And are those going to be published recommendations such that you can effectively shame the SEC into trying to change its ways?

Because really, the only lever you have is that sort of public scorn that you're offering them, right?

There's no compulsion to-

I wouldn't want to use the word shame or scorn, but it's an analysis, and it's an analysis by people who are showing what they're relying on and giving you more data and more candor than I think a government agency typically gives.

Government agencies say on balance this is right, but they don't tell you what they're balancing and who it affects.

We're going to try to tell you what should've been balanced, what wasn't balanced, and what the outcome looks like.

A checking force, if you will, then, I suppose.

The, the goal is greater accountability.

We can't stop them, but we may get Congress quite upset.

And remember, we're only at several months from the possibility of elections and a, a different population in the House of Representatives.

And if the SEC were to continue to offend the House based on critiques that we and others make, maybe Congress will fund less money to the SEC, and they'll have to begin to pay more attention to these criticisms if we're in a world, not the world we're in today, but in a world in which the houses of Congress are shared and split.

And at that point, the ability of the House to withhold funds has real clout.

Well, certainly a more diplomatic answer than what I characterize as public shaming.

Let me go into the structure a little bit of the Shadow SEC, if, if you will.

The group has committed itself to accepting no industry funding, and that's fairly striking.

How do you maintain independence other than agreeing not to take any financial services industry funding, and, and, and why is it so essential to your credibility?

I have to tell you that we've known each other in some cases for 50 years.

I've been a … I've been teaching securities law for over 50 years, and the person who put this together principally, who was the original organizer, Joel Seligman, served us 15 years as president of the University of Rochester, and before that, served as dean of two major law schools, Washington University in St.

Louis and Arizona out in Phoenix.

Tucson, excuse me.

And I think that we have some reputations at stake here if we were shown to have a conflict of interest, and from our standpoint, because we make not a dollar out of this.

No one is funding this.

No one is paying for this.

But we are hoping that we publish our results and we get comments.

And I've noticed that we do publish these comments in a, a blog that I, I founded, called The Blue Sky Blog at Columbia.

And we get a higher than average level of attendance, and we get some correspondence.

Now, that's not perfect.

We don't have quite the means of our own podcast as you have, but we are getting some attention, and that-

Well, if we can give you some more attention today, that's really our goal, to shed some light on, on a very important topic.

I, I will say, I was struck by the fact that your founding statement that you published on the Blue Sky Law Blog congratulated then-nominee Paul Atkins, while reserving the right to disagree.

So in the same way as I tongue-in-cheek said that you just diplomatically handled my way of describing something as a sort of public shaming, you, you, you took the sort of high road in navigating that balance between institutional respect and what was going to come, which was a stated goal of providing substantive critiques on what the commission was doing.

Well, that's probably one of our bigger internal debates.

We don't want to engage in unnecessary name-calling or get into a food fight.

We just want to say, "Here's your point, but here's the counterpoint, and our counterpoint has this evidence, and you don't discuss the evidence behind your preferred view."

Yeah, and, and, and in this environment where our, our discourse has sort of cheapened down to name-calling, I, I, I think there's a lot of credibility that can be arrived at from, from, from taking such an approach.

The Shadow SEC has raised concerns about budget and staff reductions at the commission.

Can you explain why you believe those cuts would be harmful, particularly given your arguments?

Well, the cuts, the cuts were very large.

They were at least 20%, and that 20% probably were the people who were the, the more activists, the more liberals.

There are people at the SEC who might be called time servers.

They're career bureaucrats, and there are people who come in to pursue a particular mission, whether it's climate change or something else.

And I think the people who resigned and the people who were fired were those who had higher profiles and were more activist oriented.

You can't eliminate 20% of your bureaucracy and expect that it can function as well.

And what, that's just the level of personnel.

When you look at enforcement, the SEC has basically stopped bringing enforcement actions against large institutions, whether they're companies, brokerage funds, accounting firms, they aren't being sued.

It's the little guy who may have run a small Ponzi scheme, and they'll come down on him still like a ton of bricks, but that doesn't affect as many people as a giant corporation that is, you know, the Enron of the world or the WorldCom of the world, where major fraud is occurring.

And that's where you affect the most and that's where you're going to have less oversight when you vastly reduce your enforcement personnel.

And you know, this-- Also, let me add this.

This is not something occurring just within the SEC. In one of his first executive orders of his second administration, Donald Trump issued an executive order said, saying that he wants to decriminalize the regulatory process, and he doesn't want criminal prosecutions being used to enforce regulatory positions.

Now, regulatory positions like the SEC, they may involve insider trading or they may involve price-fixing conspiracies.

Well, those things deserve, in my humble judgment, criminal enforcement, because only that has real teeth.

Corporate officials who get sued in civil suits are likely to be indemnified for their expenses.

So the criminal sanction has real deterrent threat.

Yeah, and I, I've studied some of your scholarship, Professor, and you have often made the argument that the SEC generates more revenue than it actually costs to operate.

So when you take that and weigh it against the idea that that operation is being dismantled, the only logical conclusion you can draw from that, it's being not dismantled to save money, but it's being dismantled to curb-

Uh, the federal bureaucracy, this is the crown jewel in terms of making profits.

And you have substantially reduced the personnel and the mission that they're going to engage in at the agency that I think is one of our best federal agencies.

And also, let me raise the frame a little bit here.

You have to remember that the United States securities markets are the envy of the world.

Everyone else would like to duplicate them.

They give us stronger markets with greater efficiency, and they ultimately give us a lower cost of capital.

If American businesses can run at a lower cost of capital, they could be more profitable, they can increase their employment, and they can do everything else that you would like in an ideal world.

They can do that, but right now despite their success, the, this, what makes that market so efficient seems to be getting a, a cut from below by the current staff.

Here, I should explain what that, what I just said.

There is a body of research, recent research, which says over and over what gives you the strongest markets.

And I'll quote from a study by two Chicago professors, "Firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement have a significantly lower cost to capital." That's an association, but it looks like a causal one.

And of course, what's the leading country with stronger enforcement and greater disclosure requirements?

It is the US, and it's worked sufficiently well that many foreign issuers come to the US to do their public offerings because having filed with the SEC, there's more credibility to their disclosure statements.

Let's unpack some of the things that are being dismantled.

You mentioned the proposed shift from quarterly to semi-annual reporting.

You've also talked about some reporting levels being made optional.

Generally, at a high, high level less reporting.

What is at stake specifically for

investors?

We have a scaled recording sy- reporting system.

The bigger you get, the more of a burden is imposed on you because you can bear it better.

And one of the things they did was move the level for the body that has to give the greatest and fullest disclosure from $700 million to $2 billion, and that basically reduced it by about half, so that half the companies that had to give the highest level of disclosure no longer will.

It'll only be companies above the $2 billion market capitalization.

That's an awful lot of companies, but we're talking about them being everyone else below that level, which is something like 85%, 81% of all the issuers on our exchanges will no longer be subject to the highest level of requirement.

And when you go through what that means, I have to give you a laundry list of 50 or so items, all of which are set forth in our blog pieces, which are publicly available.

But for example, the biggest companies have to give you three years financial statements.

Smaller companies in the middle have to give only two years, and the really small companies have to give very little.

They're subject to something called a special emerging company exemption.

I don't have a problem with there being some scaling and greater burden being posed on the larger companies, but I think this was a sweeping change without much analysis, and it didn't use very meaningful criteria.

We also let's-- I don't want to sound like I'm always putting things down.

Recognize that in just 2004, the stock market capitalization of American stock exchanges went up by $11 trillion.

That's before the Trump administration came in.

Went up.

It's continuing to go up, but we're doing something that most research suggests is somewhat based upon a strong disclosure system and true enforcement against the bad guys, and that makes investors more confident and more willing to invest in SEC-regulated companies.

Okay.

All of that is about to change, as we say, the vast majority of these companies are no longer in that group one that has to give the highest level of disclosures.

So we're downsizing disclosure, we're reducing enforcement, and we're cutting the staff drastically.

Those are not subtle changes.

And what does that do to market integrity?

Are we on the verge of economic consequences, in your opinion, because of it?

Well, you know, I don't… The one thing I've learned not to do is to predict where the market's going.

But the market primarily moves in terms of macroeconomic changes, and there are macroeconomic changes out there.

There are wars in Iran and Ukraine, which could have all kinds of developments which could destabilize the world.

We could have all kinds of destabilizing changes, which means you need a stronger SEC rather than a weaker one.

So where will it go?

We've had the world's most successful securities markets.

I think we will still lead the world, but we may not have the ability to convince investors that truth is coming out at a much greater rate than in other markets.

What are some other ways that the SEC is being somewhat dismantled or proposed to be dismantled that you see as having a similar deleterious impact on the stability of our financial markets?

Well, I mean, I think I'd break it into, what do you have to disclose?

What kind of enforcement is there?

And what is the independence level of the SEC?

What the statute that created the SEC back in 1934 said is that the SEC shall have five commissioners, and only three of them can belong to the same party as the president.

Okay?

Right now, the SEC doesn't have five commissioners, it has three.

All of them are Republicans, and all of them are fairly loyal to a relatively strong Republican president who is quite ready to intervene in agencies, and has won from the Supreme Court the right to fire any person at an agency that is unsatisfactory to him without having to show cause or some kind of misconduct.

So here you are with a, a group of other academics shining the light on what to you see as impending structural flaws at the SEC. How has the response been from policymakers, from the commission, from the academic community, from the president, the man at the top?

What kind of response are you seeing?

I don't think we're going to have any awareness on the part of the president.

He does have problems like Iran and Ukraine and the cost of living.

All of those things probably give him more concern than what's going on in the securities markets, which he sees as going up because of him.

But they were going up for the last two years, quite, quite rapidly, okay?

I, I don't say we have any response from the White House.

We have had some response, I would point out, although I can't say we caused it, that after we urged the SEC not to simply abolish quarterly reporting and make it impossible, but to m- just make it optional, the SEC has said that they will continue to permit companies to file quarterly reports, and I think that was a, a positive change on the SEC's part.

And it's also responsive to what's happened elsewhere.

You know, Europe and Britain did shift off of quarterly reporting, oh, about 10 years ago.

different dates, but 10 years ago.

And what did the companies do?

In Britain, only 10% of the companies that were permitted to opt out of quarterly reporting did so.

They continued to report because they wanted to please their institutional shareholders and their securities analysts, and so they continued to do it.

I think if we emphasize this strongly enough, and we've also urged that the SEC consider having some kind of shareholder vote or shareholder discussion before a decision is made, management shouldn't just decide what the reporting frequency period is.

It should discuss it with the shareholders, because it may lose a lot of shareholders and it may suffer a real stock price penalty if you shift something that institutions want.

And institutions basically are devoted to transparency above all.

They want regular reporting.

Okay, so what we would like to see is a greater shareholder role in this.

We haven't gotten that yet, and I'm not predicting it's going to come.

We do have the ability to make a decision at each company, and here I think the pressure from securities analysts and institutional investors will push very strongly to remain quarterly reporting.

I think the big companies will all, or pretty much all, stay quarterly.

It's the smaller companies that think there is some real financial benefit in shifting to a less frequent reporting.

Well, we've covered independence, cuts to staffing, reporting shifts at the SEC. Looking ahead, what does the Shadow SEC intend to prioritize shining that proverbial light on in the next 12 months?

Well, the last-

Where, what are the issues?

We have so far put out, I think 11 statements, or may- maybe it's 11 next week.

But the last one that came out publicly was the one on climate change, and the SEC, under multiple administrations, moved over a 10-year period to adopt very strong climate change proposals to our disclosure system.

That was done under President Biden, okay?

That was the culmination of 10 years of work.

What does the new SEC do?

It doesn't propose to modify or to change.

It throws them all out and repeals the whole lot of them, root and branch.

That's an all-or-nothing change that we like to say is too extreme, because we notice today that 80% of public corporations do publish climate change disclosures whether or not they're required to do so.

And I think we want to keep alive the incentive and keep companies focused on that as one of the important choices they make.

And I think the combination of shareholder pressure and pressure from securities analysts, even from the accountants, all of them want climate change disclosures because they think it reduces the risk of painful litigation, okay?

So that's a, that's a focal point, climate change.

Now, next, looking to the future.

There … I don't want to say this as if this is a conspiracy theory, but there seems to be a strong position taken by the SEC to allow companies to adopt bylaws or charter amendments that say, "You can no longer sue us under the federal securities laws.

You have to instead sue us before an arbitration panel." Arbitration panels are not nearly as effective as securities class actions, and I think you'll see that being a topic that'll be much debated over the next year.

Because if companies can move to adopt a prohibition on securities litigation and instead say, "If you're a shareholder in our company, you can only sue by means of an arbitration panel," some managers will adopt that because it protects them.

When you sue the company, you also likely sue the board of directors and senior management, and they would much prefer to be sued before an arbitration panel where everything is private and quiet and there's no publicity, and where you are unlikely to get significant damages.

And that, well, I think you'll find that uncontroversial, that most managements would say, "We don't like securities class actions.

We have to live with them, but if we could move to arbitration systems, we would, unless our shareholders revolt." And shareholders may revolt, particularly if they're aware of what the significance will be.

Well, I want to shift and pivot briefly off the Shadow SEC for, for a moment and, and to your latest book, Corporate Crime and Punishment: The Crisis of Underenforcement.

It's really a must-read for folks that like our podcast, who, who like to get into these topics and really take a deep dive.

And I see your book almost as-

And if people can't find a copy, call me and I'll try to send them one.

Yeah, you can get it on Amazon.

I just bought one the other day.

Okay.

So basically, it, it really builds on what…

We had Samuel Buell from the Enron Task Force on our program, Professor Samuel Buell, from Duke, not, not long ago.

And, you know, one of the most striking things that he said coming out of that episode was that in the aftermath of Enron, we really haven't seen any more large-scale corporate enforcement like we saw.

In fact, we haven't seen any of it.

There's a couple of ones and two individuals.

Well, think about FTX.

That was a huge billion-dollar scandal.

Right.

That's often, though, in the world of derivatives and cryptocurrencies, but that was a big scandal, too.

They, they happen.

But the, the central thesis of your book is that we have this crisis of underenforcement, arguing that the framework we currently operate in, it systematically fails to deter corporate wrongdoing.

That is a hypothesis that is seldomly expressed on this, program when we're talking largely about the rights of the accused.

So let's dig into it just for a second.

In a sentence or two, what is underenforcement, and how the heck does it persist in this country where we have also, on the flip side of that paradigm, things like wrongfully convicted people that are sentenced to death and exonerated only because of DNA evidence?

How do we also, at the same time as we have a crisis of overenforcement, also have a crisis of underenforcement?

It's because what the incentives are.

If the administration doesn't want its prosecutors focusing on white-collar misbehavior, and instead wants them to focus on violent crime, they can redirect and redeploy them.

You're well aware that prosecutorial discretion is a matter of executive power, and there is no judicial review.

No court can order you to sue the bad guys.

That's a prosecutorial decision that goes up within the executive branch to, ultimately, the president as the chief executive.

And the Supreme Court has said that over and over.

So that it's quite possible that if one administration comes in and has very different priorities, they can put all the emphasis on immigration enforcement, and that's what they've done.

I understand that the country voted and wants to restrict massive wholesale immigration, and I wouldn't suggest either that we want a million people marching over the Rio Grande river.

I do think the country benefits from the right kinds of immigration, people who have skills and assets.

But what we have done over the last year is redeploy our resources.

Our, in effect, our enforcers are out chasing illegal immigrants rather than inside traders, or rather than the possibility of overstatement of financial statements.

Now, the market has been on a bull run, and that is somewhat self-fulfilling, and it's this prospect of tremendous gains from artificial intelligence that's moving the market.

How long that will persist, I cannot predict, but I will predict that it won't last forever, and there will be ups and downs again.

Does that strike you as controversial?

No.

But let me ask you this.

Individual accountability has been the central focus of Department of Justice policy for the better part of the last two decades across multiple administrations-

I think that's-

Democrats-

… John Coffee: good policy.

Democrats, Republicans.

Why, why does it remain so elusive in corporate prosecutions?

Is it a resource problem, a legal complexity problem, or is it something deeper?

Well, you know, Donald Trump has not been quiet or neutral.

I told you that in his first weeks in office, he issued an executive order that said we have to stop over-criminalizing federal regulation of business.

And he thinks that efforts to use criminal penalties by federal agencies against large businesses is improper.

I do believe, as you do, I think, that individual accountability is the key.

Just suing a large corporation doesn't have that much impact.

The total penalties levied against large corporations are rarely more than one, two, or 3% of their stock market capitalization.

That's not going to have quite the same impact as threatening somebody who engages in price fixing with a 10-year sentence.

That does have impact.

Well, you propose several structural reforms in the book, and once again, it's called Corporate Crime and Punishment: The Crisis of Underenforcement.

I'd encourage our audience to take a read.

But you propose these structural reforms.

I don't want to give away the book, but what's the single most significant reform that you believe would meaningfully change this corporate enforcement calculus that you describe as a, quote-unquote, "crisis of under-enforcement"?

Well, I, let me give you a partial answer.

The reform least likely to be adopted.

And I think the problem with punishing the corporation, which we have to punish, too, we can't totally ignore the corporation, but it's often impossible to make a case against individuals.

It's just it's too difficult to prove, particularly in a large, complicated bureaucracy.

I think if you try, if you threaten a corporation with a $5 billion penalty, which quite well might deter it, they will say, "If you do that, we'll have to lay off 20% of our workforce. Don't do that." And very few judges are going to impose a penalty that he is told will result in layoffs to 20% of the workforce.

So instead, we can avoid all that if we impose very large penalties when they need to, need to be imposed against large corporations in the corporation's own stock.

What that does is give you a penalty that dilutes the stock, hurts the shareholders, but doesn't result in any employees getting fired, any creditors getting prejudiced, or anyone who is innocent of the crime.

The corporate management, to varying degrees, may have some level of responsibility and culpability, not enough to prove a case, but at least you can impose penalties on the corporation that dilute their shares, and they also suffer a secondary impact.

So I could say that focusing very large penalties, not in cash but in stock, would probably have the impact of, of being more deterrence for the corporation without the penalty overflowing on workers, creditors, and surrounding communities.

If you really hit a corporation with a huge penalty, it may shut down the entire town because they have 50% of the tax revenues in their home headquarters.

I'm trying to minimize the overspill of corporate penalties while still having strong penalties.

Now, that's a radical idea that isn't about to get adopted, but it's not something that is socialist or anything like that.

It is merely an attempt to see how can we focus the penalty on who we really want to deter.

Well, I want to head into a bit of a lightning round of questions with you here in this waning moments together.

Would you agree with me, Professor, yes or no, that we are experiencing both a simultaneous retreat on both the regulatory and the criminal enforcement fronts, at least as it relates to enforcement of so-called white-collar offenses?

Well, yes, with the white collar, if you add that, I mean, obviously ICE is not, not retreating at all.

ICE is going out conquering the world.

But I think agencies like the SEC and the FTC now know that everyone on their staff can be fired by the president tomorrow without cause.

That's going to chill them, and they also are aware that the president has said, "I don't want you using the criminal sanction for regulatory enforcement."

Is there a historical analogy for what we see right now, or is that uncharted territory?

And what we see with respect to that simultaneous retreat-

Well, it depends on which, which historical analogy you have in mind.

Some people would look back to the robber baron era of the 1880s and 1890s.

It's not my area of expertise.

I'm just pointing to it as something that's an example that matches what happened, you know, when the mergers… You know, we had the Sherman Antitrust Act come in in the 1870s, and what that did was force companies to stop conspiring over prices and instead merge in order to fix prices with greater market share.

We're seeing something like that today also.

Now, maybe you have a different historical analogy in mind.

Yeah, I- I- I think that was the precise historical analogy that I was thinking about, was that robber baron era.

And, and it's something that I've talked with colleagues about quite extensively as we sort of shift and have to reinvent ourselves as white collar practitioners in amidst this shifting landscape of enforcement.

And in sort of a, a, a way that my listeners have become accustomed to, I want to ask you a bit of a crystal ball question to project yourself into the business future.

Let me pull my crystal ball out.

It's been turned off.

Yeah.

Dust that one off, professor.

We, you know, we have a lot of practitioners listening, defense attorneys, prosecutors, compliance officers, in-house counsel.

What should they take away from your analysis, both in terms of what you're doing with the Shadow SEC and your most recent hypothesis of the crisis of underenforcement.

What should they take away about where we are headed?

I am staying within a group of five people who know each other very well and agree.

We're trying to avoid saying anything too inflammatory.

But we are saying that you went too quick and too fast with this radical deregulation, and it's going to significantly injure the SEC. It's not yet affecting the stock market.

But remember, when we carry on this analogy, when you get real regulatory reform, it is usually after a crash.

We had a crash, a moderate crash when Enron and WorldCom failed, and we got both Sarbanes-Oxley and the Dodd-Frank Act, both of which were important pieces of legislation, much of which has now been effectively outflanked or outridden by changes in regulatory policy.

If we had a stock market crash, and as someone who's on the edge of retirement age, I don't want that in my retirement.

But if we had that, I think that changes and gives you a very politically different constituency in Congress.

They want reform, and they'll insist on reform.

And you will see greater demands for use of the criminal penalty.

And remember, it only takes one house of Congress to have a majority of the opposite party, and we're going to have a deadlock, and there have to be compromises that recently haven't had to be struck.

Donald Trump could ignore the Democrats in Congress for the most part until now it's only a few votes away, and we'll see what happens in November.

I'm making no predictions.

I'm just saying that if you want my sense of when there could be a major political change, it would require not only Democratic victories, it would require the kind of crash that makes people angry, upset, and want something done to get their own kind of revenge.

Well, Professor John Coffee, I cannot thank you enough for sharing, and generously at that, in your time and expertise.

I think really two critical takeaways for our audience today are that the independent academic oversight of regulatory policymakers, especially when that regulatory apparatus is under systematic pressure from within, is a positive thing, and the under-enforcement of corporate crime is not inevitable.

It's really a policy choice that just like dismantling of the SEC can be reversed with structural reform, and it'll take some meaningful considerations at the political level in our country for those two things to happen.

For our listeners, you can follow the Shadow SEC's commentary on the Columbia Law School Blue Sky Blog, and you can also revisit episode 84 of this very program, "From Enron to Today," with Professor Samuel Buell as a companion to today's conversation with Professor Coffee.

Professor, thank you so much for joining us on "The Presumption of Innocence." It's been a pleasure to have you here.

Until next time, I'm Matt Adams.

We'll see you then.

Take care.

And thank you.

Thanks, Professor.