Why Is a Wall Street Regulator Embracing “Broken Windows” Theory?


If you look at the Securities and Exchange Commission’s (SEC) list of recent enforcement actions, it reads like a laundry list of small-time offenders. From penny stock promoters, to “pump and dump” schemers, to an unregistered broker in Tampa, everyone seems to be targeted by the SEC. Everyone, that is, except executives.

That’s because, under the leadership of Mary Jo White, the SEC has adopted a controversial enforcement strategy known as “broken windows.” The theory argues that if one broken window goes unrepaired, soon all windows will be broken, because letting petty crimes go unpunished will evidence that the community doesn’t care about disorder. But the strategy — traditionally employed in the policing of street crime — has shown itself over the years to be incredibly controversial.

White took over the SEC in April 2013, entering the agency at a time when many had lost confidence in their capacity and will to pursue financial crisis-era violations. In fact, given her background as a prosecutor, many held out hope that White’s tenure would usher in a new era where the agency would be tough-on-crime, with the incoming Chair promising Senators a “bold and unrelenting” focus on enforcement, should she be confirmed.

In the intervening time, White appears to have fulfilled her “bold and unrelenting” promise in a peculiar way: instead of prosecuting widespread, systemic frauds at the nation’s largest financial institutions, the SEC has instead embraced a persistent focus on low-level offenders. Given how harshly the SEC has been criticized for their failure to hold elites accountable, why would the agency use a failed and racially coded approach to securities law enforcement?


Mary Jo White’s Embrace of a Racially Tone-Deaf Policy

SEC Chair Mary Jo White

Chair White first announced the SEC would use the broken windows approach in a 2013 speech.

In the speech, White looks nostalgically back at her time as the U.S. Attorney for the Southern District of New York in the early nineties, when New York City’s Mayor was Rudy Giuliani, and its Police Commissioner was Bill Bratton. She describes broken windows this way:

“no infraction was too small to be uncovered and punished…from street corner squeegee men to graffiti artists to subway turnstile jumpers to the biggest crimes in the city. [1] The strategy was simple. They wanted to avoid an environment of disorder that would encourage more serious crimes to flourish. They wanted to send a message of law and order.”

Chair White was obviously impressed enough by broken windows to bring it to the SEC. But White seems utterly blind to the racially loaded nature of the legacy she’s invoking. As Daniel Brook wrote for the Boston Globe in 2006:

“Many on the academic and political left accused Giuliani, who was running against an African-American incumbent, of using racial code words. (Virtually all squeegee men in the city were black.)

Professor George L. Kelling, one of the co-architects of the theory, told the NYTimes how effective Bratton’s implementation of the policy was…at eliminating said (black) squeegee men:

“a clear warning followed by aggressive enforcement eliminated the squeegee menace in a matter of weeks, he recalled.”
But is that really the role of the SEC? To eliminate the securities world equivalent of “the squeegee menace?”

The financial crisis devastated Black America. And blacks and Latinos were disproportionately targeted for predatory loans, even when they qualified for prime loans. The SEC could try and restore confidence among hard-hit communities if they prosecuted fraud on the securities that were made up of these predatory loans. Instead, as Felix Salmon pointed out previously, the SEC chose to cut a back-room deal with Goldman Sachs, and prosecute one headline-grabbing case of securities fraud while agreeing to ignore 11 other cases — all while essentially lying to the public about it.

The SEC is turning a blind eye to the systemic fraud that pillaged black and Latino wealth, while also embracing the rhetoric of a policy used to marginalize and criminalize people of color. It’s a bad look.

Broken Windows is a Failed Policy

It’s also perplexing that the SEC would adopt the broken windows approach when the policy remains so controversial and so unsupported by hard evidence. For context, the theory emerged as the result of a single essay, rather than an evidence-based approach. And since its emergence, the theory has never been empirically verified, something legal scholar Bernard Harcourt pointed out in his book, Illusion of Order: The False Promise of Broken Windows Policing.

Further, Alex Vitale, a professor of sociology at Brooklyn College, has criticized the policy’s cost, saying that the pursuit by cops of minor offenses is “too expensive.” Others point to the ways broken windows is actively harmful. The New York-based Communities United for Police Reform has said the policy makes communities less safe, because they create “an atmosphere of fear of the police, instead of trust.”

Even the co-author of the original broken windows essay has admitted that there was no evidence that the strategy actually works. James Q. Wilson told an interviewer in 2004,“I still to this day do not know if improving order will or will not reduce crime” and that the entire policy “was a speculation.”

It seems that SEC’s broken windows approach is doomed to be an equally failed policy in the securities world. Chair White believes that targeting pump-and-dump stock schemes and insider trading will make a meaningful difference for investors of all kinds. But investor confidence is still below pre-2008 averages. And why wouldn’t it be? How can investors have confidence when there have been no meaningful accountability for the systemic crimes that caused the crisis?

A Ploy to Beef up Enforcement Statistics?

The SEC’s use of broken windows also misdiagnoses the problem. No one looks at the devastation wrought by the financial crisis and asks, “why didn’t the SEC go after more low-level employees, or small-time bad actors, and make an example out of them?” Instead, the majority of Americans believe the government has failed to sufficiently prosecute major Wall Street bankers for their role in the financial crisis. The public isn’t alone in this sentiment. Former SEC enforcement attorney James Kidney has said his former agency “rarely goes to the penthouse floors.”

It would be easy to explain away both the allure of broken windows for the SEC, and the problems Kidney identifies, by pointing to regulatory capture. But there is another explanation, and one provided by no less than a judge serving the Southern District of New York, Jed Rakoff. In a piece that seeks to explain why no high-level executives have been prosecuted, Judge Rakoff outlines the pressures on the SEC’s budget, and the desire for a good-looking record.

Rakoff writes (emphasis mine):

“[A]s Professor John Coffee of Columbia Law School has repeatedly documented, Ponzi schemes and misallocation-of-asset cases have been the primary focus of the SEC since 2009, while cases involving fraud in the sale of mortgage-backed securities have been much less frequent. More recently, moreover, the SEC has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led the SEC enforcement staff to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.”

Juicing the numbers to make you look better? That’s a strategy used by another broken windows advocate, Michael Bloomberg. Under his and former Police Commissioner Ray Kelly’s tenure, multiple NYPD officers testified that they were pressured to fill arrest and stop-and-frisk quotas, and were threatened with disciplinary actions if they didn’t. As Ingrid Burrington has pointed out, the broken windows approach often comes down to just “seeking better numbers, not better neighborhoods.” This is hardly a model the SEC should want to emulate.


Based on a screengrab from Chair White’s 2013 broken windows speech.

If you look carefully at Chair White’s 2013 speech, you’ll find a footnote that links to two news articles on broken windows. The first link makes sense: it’s a 1996 NYTimes piece on Bratton’s legacy. But the second link is curious: it’s a 2006 Los Angeles Times oped by aforementioned skeptic Harcourt, and it’s focused on the failings of the broken windows strategy.

I’ve tried to outline several reasons why the SEC’s broken windows approach is wrong: it’s racially tone-deaf, it’s a failed policy, and it’s probably just a ploy to make the SEC’s enforcement record look good. But perhaps this list isn’t needed at all. Maybe all that’s needed for a shift away from broken windows is for Chair White to read all of the links in the footnotes of her own speeches.