Via an e-mail from someone who has worked at the SEC. Note that the reason for the mention of the Department of Justice is that the SEC cannot bring criminal cases on its own, but has to secure the cooperation of the DoJ.
The SEC-DoJ relationship is not entirely functional, but I suspect that the hangup is likely to be on the SEC Enforcement side. Enforcement only takes a limited number of cases due to limited resources, and as such tends to favor cases that are relatively clear-cut, where it has a good chance of winning. Enforcement may shy away from difficult cases (or settle quickly out of court), unless the Commission makes a specific issue a priority.
But difficulty is not the only factor; another major consideration is whether a similar case has been pursued in the past. Novel cases are considered to be more high-risk, and Enforcement will generally be less likely to take them up unless they are very solid cases, or, again, a high priority from the Commission level.
When Compliance works on referrals to Enforcement, it typically tries to make the case as clearly and as strongly as it can; and ideally, refer to another (successful) case where there are common aspects. When Enforcement receives a referral from Compliance that deals with a range of novel issues, they may be interested in taking the case, but may press Compliance re: what the specific violations are, what evidence it has for them, etc. Similarly, for outside tips and complaints, the issue may be passed off to Compliance to gather further information before Enforcement picks it up and presses charges.
As for Lehman, it is relevant that it would theoretically be a different kind of case than many that have been brought in the past. Especially for criminal convictions, the issue is putting together a case that will convince a jury, which for complex financial issues is a high bar to get over (they were able to do it with Enron, but there were charges–which may have some merit–that it had been “tried in the media” before it ever hit the courtroom.)
Yves here. Note how perverse this is. Sarbanes-Oxley was created to prevent a repeat of Enron abuses and other big corporate accounting frauds that were appallingly common in the dot-bomb era. But the SEC is loath to prosecute….because no criminal cases have yet been brought under Sarbox. So what good is passing new laws if the enforcers are unwilling to use them?
It would seem that the only way to get what would seem to be a straightforward case brought, give the extent of discovery already done by Valukas, is to bring pressure on the SEC and the Obama administration generally. Given the amount of press on the Lehman report, that might not be much of a stretch.
“…It would seem that the only way to get what would seem to be a straightforward case brought, give the extent of discovery already done by Valukas, is to bring pressure on the SEC and the Obama administration generally…”
Absolutely agree!!! Unfortunately the rest of the article calls into question the viability of the SEC as an effective enforcement agency in dealing with the current crisis.
The SEC has been pretty damned useless for a *long* time. This doesn’t really change much.
Off topic, I wonder how GE managed to avoid so much of the bad press that Goldman attracted.
You are technically correct, but the tendency is to blame the SEC, when the SEC has been hamstrung and kept starved of resources by Congress. This dates back at least to the Clinton era. So if you are understaffed, you are going to pursue the highest bang for the buck cases. Those tend to be insider trading.
And the point re complex criminal fraud is not to be ignored. Remember, the burden of proof on the prosecution is “beyond a reasonable doubt.” Juries in the US are not very sophisticated financially. A clever defense attorney can muddy the waters. A confused jury will not convict.
“A clever defense attorney can muddy the waters.”
It does not take the attorney to do so.
WSJ:”So if Lehman stepped over the accounting line, where might that have happened? Lehman, like many other banks, often engaged in repo, or repurchase, transactions, exchanging securities for cash for days or weeks. These are usually accounted for as a financing arrangement akin to a loan. The accounting rules allow in limited circumstances for a repo to be treated as a sale of securities.”
If the relationship between the SEC-DOJ is anything like that of the EPA-DOJ, then public citizens can sue if the SEC-DOJ decide not to bring a case. It happens all the time with environmental enforcement; EPA doesn’t bring a case, so NRDC sues. But I don’t know who the citizens’s organization is with respect to SEC…
The “citizens” in this case would be former Lehman shareholders or debtors, to whom Lehman had a responsibility to be honest in its reporting.
And to Yves’ original point, there is no indication that the SEC is *not* going to bring a case. I have no idea whether they are or not, but it merits mention that the BofA-Merrill case was brought by them after considerable attention in the press.
There was a law passed back in 1995–PSLRA–that made 105-b actions a whole hell of a lot more difficult to pursue.
“Enforcement will generally be less likely to take them up unless they are very solid cases, or, again, a high priority from the Commission level.”
How much worse does this have to be before it’s considered a high priority???!?
Some evidence that the DOJ’s criminal division may be looking to do more Securities Fraud cases – http://www.securitiesdocket.com/2010/03/11/dojs-criminal-fraud-section-promotes-two-to-deputy-chief/
And technically DOJ doesn’t need the SEC, they have the FBI if they want to go that route. It’s better when the SEC participates, but if DOJ decides to be aggressive it doesn’t necessarily have to wait for the SEC.
“Yves here. Note how perverse this is. Sarbanes-Oxley was created to prevent a repeat of Enron abuses and other big corporate accounting frauds that were appallingly common in the dot-bomb era. But the SEC is loath to prosecute….because no criminal cases have yet been brought under Sarbox. So what good is passing new laws if the enforcers are unwilling to use them?”
Its good for the wealthy ruling elite. It makes the suckers believe that positive changes have been made, and it keeps the suckers in the crooked game. The same suckers that vote and legitimize the crooked game. Rinse and repeat the process and pile it on scamerica’s Hypocrisy Mountain which is now three times taller than mount Everest.
Deception is the strongest political force on the planet.
“Sarbanes-Oxley was created to prevent a repeat of Enron abuses and other big corporate accounting frauds”
Yes it was, but Lehman is a very different case then Enron due to existence of GS and other “big to fail” players which can be affected. The reluctance to open criminal cases again key players in Lehman might be connected with the understanding that successful prosecution might air too much dirty laundry and open direct path to charging GS executives.
This begs the question then – – if it’s THIS difficult to bring charges even for something this obvious, how many other publicly-traded companies do you think are engaging in similar Enron-style accounting shenanigans X 10 or 20? Let’s face it – the whole system is a sham. The Feds know that if they start peeling the onion, the whole thing will eventually be exposed, so they’re going to keep the charade going for as long as possible.
The financial media (and specifically non-accounting media) are missing the point. Lehman is not another Enron. Enron occurred in a vacuum of fraud, for Lehman those tactics were the rule of the day. They are, likely, no more or less guilty than anyone else, were they “saved” by Mother Bernanke and the Dalai Paulson, we would not be discussing Repo 105 now nor would be working ourselves into a lather demanding their heads on a stick.
It’s not Lehman’s autopsy I would like to see, I want to see the PHYSICALS of the banks that DID survive.
Every altar needs a bloody lamb I suppose.
Oh and yes, the SEC is impotent. But we knew that BEFORE Lehman.
That’s exactly the point. Lehman’s done. We still need the protection that SOX was meant to provide. If its a toothless law that won’t be enforced, lets get it over with now and acknowledge that the SEC has no will to enforce the law.
It’s less important that the SEC/DOJ win the LEH case. What’s important is that they try to make a case in a situation that looks so flagrantly fraudulent.
If SOX really is just a cynical joke then abolish it. Otherwise use it.
Consider; The SEC and DOJ are wringing their hands debating whether they can outmaneuver the lawyers hired by a team of people who forced the gov’ts hand to bail out an entire financial system while we sit patiently on the sidelines debating amoungst ourselves about the likelihood of conviction.
Wake up, We’re not the bureaucrats charged with making that calculation. Why are we reasoning like bureaucrats and lending credibility to their timid argument?
Hank Paulson decided “no more Lehmans”. Let’s see the SEC adopt the same policy and do its part.
Enforcement at the SEC need not wait on the work that should have been, buit was not, done earlier by OCIE, which, along with Trading and Markets, missed the boat. That is, simply investigate if more is needed to establish crimninal intent and then, if the staff is satisfied in that regard, go to the Commission with a recommendation to refer the case to DOJ. I wouldn’t let the grass grow under my feet doing it either. There is no reason to think that the case against Lehman and its responsible officers has to be brought under Sarbanes-Oxley. Rule 10b-5 under the Exchange Act ought to do quite nicely, given the materially misleading financials resulting from these transactions, so long as the circumstances show that Lehman and the the several officers involved acted with scienter — that is, an intent to deceive. Lehman quite clearly entered into its balance sheet-disguising trades with that very purpose in mind. (What other purpose might there have been for entering into them?) This result was hardly an unforseen side effect of what might have been legitimate the usual defence advanced, all too often successfully, to avoid charges of manipulative trading. The facts shown by the Examiner, in my view, all by themselves are sufficient to show this, and no doubt there is still more to be learned. Additional charges surely will occur to Enforcment along the way. It should be easy to obtain indictments and that alone would be a good start. Yes, it is necessary to overcome the “reasonable doubt” standard at trial in a criminal case, but that’s not an impossible thing to do here. After all, one would not think that a jury — and it is the jury that must reach the necessary factual conclusions — will look on these prospective defendants as a sympathetic, uninformed bunch of boobs. Sometimes, and this is such a case, all stops have to be pulled out to show that ruinous conduct of the kind at issue here, having caused such havoc and harm to others, results in criminal prosecution. An object lesson for the industry is sorely needed. (Think back to how the Sparticus slave rebellion was dealt with, for instance — another thing no one at the time wanted to see repeated.) It is not and should not become a political thing. And, if all else fails, there’s still civil liability to consider, of course.
The DoJ should proceed with subpoenas and the FBI. The participation of the SEC is not needed. The necessary primary information is available in the Lehman Bankruptcy Report. Target letters should be issued and the FBI should go calling.
What impedes prosecution is the possibility that the breadth of malfeaseance is wide spread. There is also the fact that the Financial Crisis Inquiry Commission is in session and is far from completing its hearings and investigations.
Not subpoenas, search warrants. Subpoenas get you what the company thinks is responsive, warrants get you whatever you think is responsive.
But that requires political will – funding for the SEC at reasonable levels (their staffing is very low) and making the FBI put a lot of resources into it, along with DOJ prosecutors (more needed, with white collar experience). Without that, there isn’t the capacity to deal with fraud on the scale we’ve seen.
I have a very easy solution:
FIRE MARY SCHAPIRO AND REPLACE HER WITH HARRY MARKOPOLOS!
Harry would fire all the SEC attorneys and replace them with REAL REGULATORS!
The SEC/DOJ has been terribly slow and terribly chicken-livered.
In particular with regard to bring cases against the auditors, they take too long, lose deterrent value and they are now loathe to indict the audit firm. There is an unspoken agreement that there are too few audit firms to precipitate another failure via indictment. We will have to depend on the plaintiff’s lawyers to bring timely and significant justice.
It would seem that shareholder suits will precede any criminal indictments. First, the burden of proof is less – a preponderance of evidence, not beyond a reasonable doubt. Second, shareholders are motivated – they lost money. Once the civil suits have found a winning strategy, prosecutors with political ambitions may come around. In general, where prosecutions are clearly difficult, momentum must build, records must be created, before indictment and criminal prosecution. But please note, Andrew Cuomo is politically ambitious. If a case is to be brought, I would expect NY to bring it, and not based on federal statute but state law. Dick Fuld should have a well-developed bug-out plan if he doesn’t want to end up like his pal Bernie.
The SEC-DoJ relationship is not entirely functional…
I thought I said that?
Great post many thanks