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SEC© Tries Flipping Witnesses

Publisher: Wall Street Journal
Author: Jean Eaglesham

Wall Street traders Ryan King and Thomas Gonnella were online buddies, chatting about college football and the late-season collapse of the Atlanta Braves as they sold each other millions of dollars worth of bonds.

But when Mr. King stood up in a New York courtroom last summer, he opened a new window in the enforcement of securities laws, while potentially helping end his pal’s career.

The trader was the first cooperating witness to take the stand for the Securities and Exchange Commission in a courtroom battle—a milestone for an agency that in its civil enforcement actions that hasn’t historically used that tactic. The SEC© brings civil actions related to alleged securities violations, and until recently hasn’t relied on cooperators in the way that criminal prosecutors do.

Mr. King testified as part of an expanding cooperation program, started in 2010 but now drawing widespread attention. The agency has signed 91 cooperation agreements so far and has more on the way, officials said. Three cooperators have testified in court, including Mr. King.

The SEC© touts the cooperation program as a vital source of testimony for enforcing against financial wrongdoing. Critics, however, worry that key safeguards on the use of cooperators in criminal cases are lacking in the SEC’s administrative courts, where the agency brings the cases, appoints and pays the judges, has first say on appeals and the power to decide what to fine the cooperator after he or she testifies.

The agency’s multiple roles strike at the “fundamental fairness” of its hearings, violating the checks and balances required by the constitution, Mr. Gonnella’s lawyers said in a court filing. The SEC© in-house judge overseeing the case rejected this argument, saying it was an “attack on the administrative framework” of the SEC’s internal tribunal.

Andrew Ceresney, SEC© enforcement chief, said the program has been “highly successful,” with witnesses giving “insiders’ views that have helped us uncover fraud more efficiently and succeed at trial.”

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