SEC: Second Fiddle, Out of Tune

When Noreen Harrington -- the former hedge fund executive whose willingness to drop a dime helped ignite the mutual fund trading investigation -- wanted to tell her story, her first call was to New York Attorney General Eliot Spitzer. She didn't even bother with the Securities and Exchange Commission.

Spitzer's reputation for results has lately made him the cop of first resort when it comes to financial scandal, so much so that the SEC -- once the only regulator that mattered on Wall Street -- now must defend itself from critics who say it has become irrelevant.

The rationale behind Harrington's decision was simple: She was sure the SEC wouldn't follow up on her information. Such a concern isn't new to the agency, which has historically chosen its battles carefully. It's just that with the advent of Spitzer, there's now an alternative.

"Spitzer has created the impression that he is the safest place to go with a tip," said Donald Langevoort, a securities law professor at Georgetown University Law School and a former SEC attorney. "It is hard for the SEC to change that perception."

SEC officials can fret all they want about Spitzer's motivations -- the politically ambitious prosecutor is likely to use his elevated public profile to run for governor. But Spitzer has displayed a nose for scandal, and an ability to quickly respond, two skills the SEC's top brass seem to lack.

Spitzer's technique is simple and -- to the securities industry -- frighteningly effective. His venue of choice is the court of public opinion, his favorite weapons the press release and leak, and his preferred mode of resolution the collective settlement. All were deployed to near-perfect effect in last year's $1.4 billion settlement of Wall Street's scandal of tainted research.

The SEC, by contrast, seems ponderous and flat-footed. As Spitzer's second campaign unfolded this year in the $7 trillion mutual fund industry, the SEC -- needing more than ever to react nimbly -- again came across like a lumbering bureaucracy.