Quelle Surprise! SEC Fails to Sanction Big Banks for Fraud

Ed Wyatt of the New York Times has released an important story tonight on how the SEC goes easy on big banks by giving them exemptions to laws meant to stop securities fraud. This report stands in stark contrast to a Reuters story which repeats the favorite Administration mantra: it’s really hard to prosecute financial-related cases. It sure is when you don’t chose to use the powers you have.

The gist of the Times piece is that the SEC gives the biggest banks like JP Morgan and Goldman waivers so that they can continue to have ready access to the financial markets without a lot of hassle. The overview:

An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.

JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.” Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers.

Only about a dozen companies — Dell, General Electric and United Rentals among them — have felt the full force of the law after issuing misleading information about their businesses. Citigroup was the only major Wall Street bank among them. In 11 years, it settled six fraud cases and received 25 waivers before it lost most of its privileges in 2010.

What the article does not make quite clear is the SEC rationale for this double standard. I’d hazard that it’s that big financial players are often in the market raising funds, and restricting their access is, well, just a bit too mean since they are money junkies. Just look how hard it was for Citi when it fell out of the SEC’s most favored nations status and lost its ability to use so-called “shelf registrations” to sell stock and bonds:

And the companies continue to use rules that let them instantly raise money publicly, without waiting weeks for government approvals. Without the waivers, the companies could not move as quickly as rivals that had not settled fraud charges to sell stocks or bonds when market conditions were most favorable.

OMG, if you break the law, you might be put at a competitive disadvantage! Can’t have that, now can we? Specifically:

Citigroup is one of the rare Wall Street giants that has lost significant privileges recently…

Because those accusations involved Citigroup’s statements about its own financial well-being, the company lost for three years the ability to insulate itself from lawsuits over mistaken predictions about its business. It also lost, for the same three years, the exemption for “well-known seasoned issuers,” which allowed it to quickly raise capital in the securities markets. As a result, Citigroup has had to file thousands of pages of new documents with the S.E.C. and wait weeks for the agency’s approvals to make itself eligible to sell stocks, bonds and other securities to the public.

Now you might think that the SEC is drawing the line at misrepresenting your own financial health. But that doesn’t even seem to be the standard. Remember when Bank of America failed to tell investors in its merger proxy of the size bonus payouts to Merrill staffers? The SEC didn’t rough it up the way it did Citi. Citi, as an official sick man of the crisis, seemed to get the regulatory version of halo effect treatment.

Similarly, JP Morgan, the bank that among other things, bankrupted Jefferson County, gets off easy:

JPMorganChase is among the big Wall Street firms that have been granted multiple waivers with nearly every settlement of S.E.C. fraud charges. Last July, it agreed to pay $228 million to settle civil and criminal charges that it cheated cities and towns by rigging bids with other Wall Street firms to invest the money raised by several municipalities for capital projects.

JPMorgan received three waivers related to that case for privileges that it otherwise would have lost. But the S.E.C. said the company’s fraudulent actions didn’t involve misleading investors about JPMorgan’s business.

“That distinction doesn’t do it for me,” said Richard W. Painter, a corporate law professor at the University of Minnesota and the co-author of a casebook on securities litigation and enforcement. “If a company has trouble telling the truth to investors in one batch of securities it is underwriting, I would not have confidence that it would tell the truth to investors about its own securities.”

Despite six securities fraud settlements in 13 years, JPMorgan rarely if ever lost any special privileges. It has been awarded at least 22 waivers since 2003, with most of its S.E.C. settlements generating two or more. In seeking the reprieves, lawyers for JPMorgan stated in letters to the S.E.C. that it should grant a waiver because the company has “a strong record of compliance with the securities laws.” The company declined to comment for this article.

It is hard to overstate the importance of this story. As we have said, one of basic rules of regulating is to make sure the regulated know you are not cowed by them. When I was a young person working on Wall Street, investment banks were afraid of the SEC. By contrast, this article reveals, as many have suspected, that regulators have plenty of tools to bring banks to heel. They choose not to use them.

The SEC does have a defense of sorts, which is (as we have recounted) that Congress has cut off funding when it merely tried to be tough in defending retail investors from abuses under Arthur Levitt in the 1990s. The passivity of the SEC is a symptom of elite corruption. A reform-minded President could choose to cross swords with Congress and defend the agency against harassment for tough minded enforcement. But that would be in a parallel universe where the banks were not in charge.

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  1. sleeper

    Just more evidence of equal justice for all with some being more equal than others.

    Federal regulators of all stripes are for the most part totally captured by system of crony capitalism. Whether it be the SEC, DOJ, FERC, FDA, or other regulators there is a de facto agreement not to investigate or prosecute.

    And folks hold on to your hats it ain’t going to get better soon.

    1. enouf


      Why wouldn’t People, of all shapes and sizes, ever think that the pseudonym known as “Trickle Down Economics” isn’t known as its true moniker: “Bribe Up Economics”.

      “You be a good doggie, you get a Treat”!

      Gee.. maybe it’s about time we start paying attention to the teachings of our multi-millenia-old elders’ teachings, hrm?

  2. Woodrow Wilson

    “The passivity of the SEC is a symptom of elite corruption.” –

    At what point will people realize TPTB don’t care what The People, OWS, writers or bloggers say? We are living in a real-time era of a completely corrupt Plutocracy/Banana Republic. More harsh language does absolutely nothing to a conglomerate (CONgress, Bankers, Corps) of narcissistic sociopaths.

    1. enouf

      Indeed! (but i think a great many of us *do*, just that many of us feel impotent–especially as individuals)

      Action is needed …and fast. Peaceful and Sincere, …and an All-Encompassing Education campaign needs to be en-force–this is what all the ‘outlets of information’ we non-nutters, and non-MSM people need/use to affect such ‘possible’ (read; Yeah, Right!) real change.

      But without real and fervent HOPE in our hearts, we haven’t a chance.


  3. Norman

    Just as the modern human replaced the Neanderthal, perhaps it’s time that modern humans be replaced with a new form of human intellect? One thing seems evident, the greedy side has really taken hold. It would seem that the main objective of the elites, is to replace any intellectuals, with that of a dumbed down population, of which they have a good head start here. As to how long before the present regime crumbles, well, what took many years to pass before the truth became known, only takes perhaps a year today.

    1. psychohistorian

      So, we have been waiting since September of 2008 and it ain’t crashed yet.

      I can’t hold my breath much longer……

      1. skippy

        Electrons are bubblicious, do you see, the earthly physical friction has been negated.

        Skippy… But… strange quarks are still a possibility. Finance is now a subset of quantum mechanics application.

        PS. some fear LHC… hahahahahah!

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