Why does the SEC prosecute companies instead of people?

When a judge rejected the proposed $33 million settlement between the SEC and Bank of America (BAC) last month—over the bank’s failure to disclose that it would pay $3.6 billion in bonuses upon acquiring Merrill Lynch—he faulted its lack of transparency. Vexed that the settlement penalized the corporation instead of individual executives, Jed Rakoff asked, “Was there some sort of ghost that performed those actions?” That’s a question Congress wants answered, too. On Friday, the House Committee on Oversight and Government Reform demanded an inquiry into the details surrounding the government-brokered sale of Merrill to BofA. In a separate investigation, New York Attorney General Andrew Cuomo is demanding that the bank names names on merger details, including the bonus disclosures.

The SEC has the authority to prosecute individuals, but lately it has often chosen to punish corporations instead. Why? It sounds counterintuitive: A company can’t commit fraud, although the people who work for it can. What’s more, fines paid by individuals come out of their personal bank accounts. Fines paid by companies come out of shareholders’ earnings. In the case of Bank of America, which received $45 billion in TARP funding, this penalty is being borne—albeit indirectly—by taxpayers, as well.

As deterrents go, this isn’t particularly spooky. A CEO toying with breaking the rules might stop if the prospects of losing a job, being fined up the wazoo, or going to jail were hanging in the balance. A corporate fine that might not even sting enough to generate shareholder calls for your ouster? Not so much.

So why did the SEC go after Bank of America as an entity when the malfeasance was obviously committed by individuals? In a word, speed. The SEC had egg on its face after whiffing a decade’s worth of tips about Bernie Madoff. It wanted to regain ground with a skeptical public and reclaim its “tough cop” status.

Chairwoman Mary Schapiro promised a “new SEC” when she was appointed. This isn’t the first time the agency has reinvented itself when it comes to enforcement protocol. For years, the SEC merely issued injunctions to firms found in violation of securities laws. Dubbed “sin no more” injunctions, they carried no penalty for past wrongdoings, only for continued lawbreaking. In the wake of the insider trading scandals of the late 1980s, public outrage led the SEC to start levying financial penalties for misdeeds. In the early part of this decade, when the crimes of execs at companies like Enron and Worldcom were so sweeping they effectively gutted the corporate coffers, the SEC turned to the individuals themselves to extract punishment.

But if the agency had gone after senior Bank of America or Merrill Lynch execs, the defendants would have lawyered up, and the case would have dragged on for months, if not years. Take a look at American International Group (AIG)’s embattled former CEO Maurice Greenberg: He was accused of wrongdoings dating back to 2000, and that case is just drawing to a close. Bringing a charge against and extracting a settlement out of a corporation is a much faster, tidier process with—generally—less chance of gaffes or embarrassment. The SEC has also been saying for years that it’s woefully understaffed; settlements let employees clear cases off their desk more quickly.