As the U.S. Securities and Exchange Commission seeks to become a more formidable force in the courtroom, a string of trial defeats in the past six months has exposed a weak spot: witness testimony.
In four of the five trials that the securities regulator recently lost, the jury or judge were not convinced by the witnesses brought in by SEC litigators, according to court transcripts, rulings and interviews with defense lawyers.
While there were also other factors influencing the verdicts, some legal experts said the issues with witness credibility were significant and reflect the need for SEC litigators to better vet and prepare their witnesses—or drop cases where they aren't strong enough.
One trial the SEC lost in December involved the chief financial officer of website management company NIC, who was accused of helping to hide $1.18 million in alleged personal expenses incurred by the CEO at the time.
The SEC summoned accountant Steven Henning as an expert witness and he testified that he had gone through NIC's records and found almost no receipts for more than 5,000 expenses logged by the CEO, ranging from flights to jewelry purchases to $5,250 worth of gift certificates from Kansas City Steak Co.
Defense lawyer Nicole Rabner, who represented NIC CFO Stephen Kovzan, poked holes in Henning's review by pointing to what appeared to be legitimate reasons for some of the items. Some of the flight bills, for instance, matched up with business trips. A company ledger confirmed the CEO had reimbursed NIC for a jewelry purchase. And a letter to the Kansas City Steak Company showed the gift certificates were meant as holiday gifts for employees, according to a trial transcript.
U.S. District Judge John Lungstrum said he was "a little troubled" by Henning's methodology and considered tossing out his testimony. An SEC lawyer defended Henning, telling the judge that he had "scoured the record in this case trying to find a business purpose" for the expenses.
(Read more: SEC warns on 'bright, shiny object' funds)
Lungstrum ultimately decided to let the testimony stand.
The jury cleared Kovzan of all charges. It is difficult to know for certain what factors determined the verdict, but Kovzan's defense team viewed Henning's cross-examination as one of the critical reasons.