Reuters reports that at yesterday's Reuters Corporate Reform Summit, former SEC Chairman Harvey Pitt stated that the SEC's efforts to ferret out financial fraud usually come after the fact and, at best, in the "midstream" of illegal activity. Discussing the SEC's enforcement program, Pitt reportedly stated that "the government is so far behind.... The most effective thing the SEC can do is stop a fraud in midstream, or God willing, before it even gets started, but that is very hard to do."

Is this really a surprise to anyone? The mission of the SEC's Enforcement Division is to investigate possible violations of securities laws by gathering facts about what occurred, determining whether the law was violated, and taking enforcement action where appropriate to punish wrongdoers. By definition, this is a backward-looking exercise that punishes fraud that has already occurred or, best case, is still "midstream."

By aggressively pursuing its enforcement program, however, the SEC likely does deter some fraud before it ever happens. As discussed in this article back in November, the SEC has done a good job lately of appearing to be "everywhere" at once, aggressively going after securities fraud with near "zero-tolerance" zeal. A person reaching for the phone to place a trade based on inside information, for example, may think better of that idea if he or she is aware that the SEC has not hesitated to sue insider traders who made less than a thousand dollars. And the fact that the number of officer and director bars imposed by the SEC has more than tripled since 2001 may result in some would-be fraudsters never even having the chance to commit fraud at a public company.

As a general matter, however, the Enforcement Division can't be expected to stop securities fraud before it happens any more than a police force can be expected to stop the public from running red lights. Of course, this hasn't stopped the SEC from announcing the formation of an Office of Risk Assessment, with the daunting mission of allowing the SEC to not just react to fraudulent or illegal activity, but also to anticipate such conduct and "head off major problems before they occur."