Archangel Problems : The SEC and Corporate Liability

Government regulation of the U.S. securities markets is imperfect, and it has only become more so in the wake of the 2008-2009 financial crisis. The purpose of this paper is threefold. First, I illustrate the increasingly problematic nature of securities regulation by the government by using the so-called London Whale case, in which the SEC and other regulators fined JPMorgan Chase in connection with a large trading loss that was caused by employees in JPMorgan's London office. Second, I locate this troubling enforcement pattern in the context of the changing dynamics of both the public and the private securities markets. Specifically, I suggest that inefficient government enforcement of the securities laws becomes more of a problem as the private securities markets become increasingly better substitutes for the public ones. Finally, I offer a solution to this problem -- which I have called an "archangel problem" -- in the context of the Securities Exchange Act's internal control liability provision. My position is that the SEC should be limited to imposing liability for violation of the internal control provision on individual's within company management and should be prohibited from holding the company liable as an entity