Since the mid-1970s, the NCAA has imposed its harshest penalty (the so-called "death penalty") only four times. The recipients in those instances were the University of Louisiana at Lafayette's basketball program, Southern Methodist University's football program, Morehouse College's soccer program and MacMurray College's tennis program. Yet despite a repeating cycle of violation after violation and wrist-slap after wrist-slap, not once has the death penalty been levied on any of the high-profile sacred cash cow sports programs such as the University of Miami's football team, USC football or Oklahoma basketball.¹

Now, I'm not one for conspiracy theories. I think Lee Harvey Oswald killed JFK. I don't believe the Apollo moon landing was staged. And I'm pretty sure that Elvis isn't alive and well and living on a deserted island in anonymity (OK, maybe Jim Morrison is). But where there's smoke, there's often fire-and when it comes to the NCAA's enforcement division, clearly there's a double standard at play.

As we approach the four-year anniversary of the collapse of Lehman Brothers, it's hard to imagine the same dynamics are not at play with the SEC-and here I'm not talking about the college conference but the securities regulator.

The Silence is Deafening
By now, almost everybody is familiar with Lehman's ill-advised "Repo 105" practices, a type of balance sheet manipulation in which the company was able to shuttle $50 billion back and forth between the U.S. and the U.K. at the end of every quarter. If it was not outright fraud, it was certainly a case of gross misrepresentation of material facts and inadequate disclosure, the likes of which have never before been seen. As a result, $370 billion in claims ended up being settled for about 20 cents on the dollar. More important, however, the U.S. and world economies were brought to the precipice of collapse, causing irreparable harm to the savings and investments of millions of people.

Yet almost four years later, not a single charge of any kind has been brought by the SEC against the firm, its principals or its accounting firm Ernst & Young. There is no shortage of theories about this baffling inaction. The fact that SEC investigators were physically on site with access to Lehman's books and records while these transactions were occurring-and by many accounts knew Lehman was being "less than truthful"-was likely embarrassing enough to keep the regulator from going to court and putting itself under the harsh glare of cross-examination. But the fact remains, not one action has been taken by regulators.

Not An Isolated Case
Were Lehman an isolated case, perhaps one could understand. But as the past several years have shown, time and again the SEC seems to eschew major enforcement cases against large firms and instead goes after smaller ones. Take the recent action it brought against independent credit rating firm Egan-Jones for "material misrepresentations and omissions."

Egan-Jones was much faster than others in downgrading the debt of some developed countries after the recent global crisis. Unlike the large established credit rating agencies-Standard & Poor's, Moody's and Fitch-Egan-Jones is one of a handful of companies funded by clients rather than issuers, which allows it to avoid conflicts of interest.
And yet despite allegations that the established rating agencies have inflated structured debt and rated "junk" as "AAA," the SEC chose to bring action against a David rather than aggressively pursuing a Goliath.

A 2009 Harvard Law School study looked at the historical data on SEC enforcement actions to determine if there was a bias toward larger firms.² The answer was a resounding "yes." The study noticed three things:
1. Typically, SEC actions against larger firms are much more likely to be limited to corporate liability and not extend to individuals. The latter is much more commonly pursued in actions against smaller firms.
2. In actions against larger firms, the SEC has a much greater tendency to pursue only administrative proceedings. The incidence of court proceedings is markedly higher in actions against smaller firms.
3. In administrative proceedings, employees of larger firms tend to receive more lenient sanctions than employees of smaller firms who commit similar violations.

If Not the Behemoths, Then Whom?
Among SEC enforcement targets, registered investment advisors have become the new bull's-eye. Focusing on quantity over quality, the agency has touted a 30% increase in fiscal 2011 enforcement actions against RIAs over the previous year (146 separate actions in total). The regulator points to this as a sign of its renewed vigor in protecting the interests of investors.

What were these egregious violations, you ask? In the vast majority of cases, the offenses fell within the realm of "failing to have adequate written compliance policies and procedures," "failure to maintain adequate books and records," and "failure to adopt a written code of ethics." Infractions that, in a recent Rolling Stone political blog, author Matt Taibbi argued would warrant "the full Princess Bride torture machine treatment."

I am sure investors across the country will all sleep much better at night knowing that these Machiavellian independent advisor culprits are finally being brought to justice. I shudder to think what might have happened to Lehman principals if they had inadvertently kept only four years of archived e-mails rather than five! The mind reels at imagining the severity of sanctions they would now be facing had they mistakenly failed to disclose a product or service obtained through soft-dollar arrangements. Clearly a cell next to Bernie Madoff at the Butner Federal Correctional Complex would be in the offing. 

The absurdity of the SEC's selective pursuit of small independent firms as it seemingly turns a blind eye to the massive fraud being perpetrated by large global financial services firms is so blatant as to be laughable. Many have speculated about the reason for the double standard. It could be that enforcement officials see larger firms as places where they might work one day, so they tend to be more lenient. It's also probable that the SEC is outmatched by the big firms in resources and talent.

But I think the SEC's motives are much simpler, and that they have learned what Finra did some time ago: Smaller firms will settle quickly and not mount a significant defense. It's a case of style over substance; cranking out 10 actions in a month against a spate of small independent firms means multiple press releases, a steady stream of press coverage and an overall padding of enforcement statistics. Compare that to the months of effort necessary to unearth, track and unwind the devastating but vastly more complex infractions at large financial services firms, and it's no surprise why the small, independent practitioners now find themselves squarely in the SEC's crosshairs.

Brian Hamburger, JD, CRCP, AIFA, is the founder and managing director of MarketCounsel, the leading business and regulatory compliance consulting firm to the country's pre-eminent entrepreneurial investment advisors. He is also the founder and managing member of the Hamburger Law Firm.

1. Full disclosure: The author is an alumnus of the University of Miami. He did not,  however, receive any impermissible cash payments or other prohibited benefits during his time of matriculation. Nonetheless, as an avid UM football fan, he is not advocating for sanctions against their storied football program.
2. Source: The SEC and the Financial Industry: Evidence from Enforcement against Broker-Dealers, Stavros Gadinis, Harvard Law School, August 2009