Bill Black: Not with a Bang but a Whimper – the SEC Enforcement Team’s Propaganda Campaign

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posed from New Economic Perspectives

The New York Times has one of those “inside” stories that unintentionally demonstrate the collapse of justice and financial reporting. This genre involves the media reporting gravely (and uncritically) the administration’s claims that its failure to prosecute any elite for the largest and most destructive financial frauds in history actually demonstrates the exceptional ethical rectitude of the non-prosecutors and non-enforcers. Journalists, unlike alchemists, can transmute dross into gold. In the NYT’s account a pathetic failure of competence, integrity, and courage at the SEC is reimagined as a fantastic triumph of vigor and ethics on the part of the SEC enforcement attorney who refused to seek to hold Lehman’s senior officers accountable for their violations but otherwise became the scourge of elite frauds. In the end, he is promoted for his dedication to “justice” and is now the anti-enforcement leader of the SEC’s enforcement group.

“Justice” became an oxymoron in the Bush and Obama administration. It now means that the elite frauds that became wealthy through their crimes that drove our financial crisis should enjoy de facto immunity from prosecution. The NYT, however, pictures the SEC as an ultra-aggressive enforcer that virtually never fails to take on the elite CEOs leading the control frauds. The entire piece is one extended leak by the SEC’s enforcement leadership which has been severely criticized for its failure to recover the fraudulent profits that elite Wall Street bankers obtained by running the control frauds. The puff piece, with no critical examination, presents these key statements.

The S.E.C. … has brought civil cases against 66 senior officers in cases linked to the financial crisis. The agency also extracted nine-figure settlements from banks like Goldman Sachs. According to new research by Stanford University’s Securities Litigation Analytics, the S.E.C. has declined to charge individual employees in only 7 percent of its securities fraud cases.

My article is the first installment of a three-part series of articles correcting the NYT propaganda. This installment deals with these three sentences quoted above. Someone carefully constructed them to maximize the misleading nature of the statements. The “66 senior officers in cases linked to the financial crisis” is a phantom number without a source or useful definitions that falls apart as soon one looks at the SEC’s claims.

Here is the SEC source for the claim (note that it is posted on the SEC’s home page as part of the propaganda campaign that enlisted the NYT reporters’ aid).

How many C-suite officers of Wall Street firms were individually sued by the SEC? The SEC says it took action against the following elite financial institutions:

Bank of America: No officers sued

Bear Stearns: No senior officers sued

Citigroup: No officers sued

Countrywide: CEO sued, settled for “record $22.5 million penalty and permanent officer and director bar. (10/15/10)” [WKB: most, perhaps all, of the penalty was paid by Countrywide’s acquirer and insurer. According to the SEC’s complaint, the penalty represents a small percentage of the CEO’s fraudulent gains. The CEO was already retired by the time the SEC sued.]

“Credit Suisse bankers – SEC charged four former veteran investment bankers and traders for their roles in fraudulently overstating subprime bond prices in a complex scheme driven in part by their desire for lavish year-end bonuses. (2/1/12)” [WKB: None of the officers sued was close to being C-suite level.]

Fannie Mae and Freddie Mac: “SEC charged six former top executives of Fannie Mae and Freddie Mac with securities fraud for misleading investors about the extent of each company’s holdings of higher-risk mortgage loans, including subprime loans” [WKB: all six executives are C-suite or very senior.]

Goldman Sachs: No senior officers sued

IndyMac: “SEC charged three executives with misleading investors about the mortgage lender’s deteriorating financial condition. (2/11/11) – IndyMac’s former CEO and chairman of the board Michael Perry agreed to pay an $80,000 penalty.” [WKB: The penalty figure is not a misprint. IndyMac made hundreds of thousands of fraudulent “liar’s” loans and sold them to the secondary market through fraudulent “reps and warranties.” It was the largest “vector” spreading mortgage fraud through the system. The three executives sued were C-suite level.]

J.P. Morgan Securities: No officers sued

UBS Securities: No officers sued

Wachovia Capital Markets: No officers sued

Wells Fargo: No senior officers sued

The SEC has brought suits against only a dozen of the elite firms whose frauds drove the crisis. In five of the cases it sued no individuals. In four of the cases it sued no C-suite officers. In nine of the twelve cases (I follow the SEC’s practice of counting Fannie and Freddie as one case) involving elite financial institutions it sued no senior officers. The Stanford study of all closed SEC actions filed since 2000 that the reporters cite indicates that only 7% of overall SEC cases failed to sue an individual, but for the elite banks that the SEC says contributed to the crisis that percentage is 42 percent – six times the normal rate. The Stanford study also reported that “the SEC has targeted solely lower level executives in only 7% of its cases.” In the case of the elite banks that proportion rose to 33 percent – well over four times the normal rate. In sum, the SEC data prove the opposite of what the SEC propagandists and their allied reporters sought to convey. The pattern of SEC action with regard to elite banks and elite fraudulent bankers demonstrates that they are treated far differently than smaller, non-financial corporations. (Note that this ignores the most important differences – the elite banksters’ frauds are far less likely to be investigated or sued by the SEC and enjoy de facto immunity from prosecution.) The Stanford study does not include cases that the SEC failed to investigate or bring.)

The controlling officers of firms, not the corporation, make decisions. They are happy to trade off penalties that will be paid by the firm. Those penalties sound large but they merely represent the modest cost of doing fraudulent business to ensure that the controlling officers escape individual accountability. The SEC can only achieve deterrence and take the profit out of elite fraud by making the criminal referrals and conducting the investigations that convict senior officers of felonies for their frauds and by recovering all of the officers’ fraudulent proceeds.

The SEC data demonstrate its epic failure in preventing the current crisis (the SEC was useless) and deterring future crises (the SEC leaves the fraudulent wealthy officers immensely wealthy). The SEC has tried to bring enforcement actions against the senior officers of only three of the elite financial institutions (banks). It has sued twelve senior officers of those three banks (or four if we depart from the SEC’s practice and call Fannie and Freddie different cases). It’s biggest “success” left the former CEO of Countrywide with virtually all of the vast wealth that the SEC claims to be the product of fraud. It obtained $80,000 (also almost certainly paid by an insurer) from the CEO of IndyMac, the largest fraudulent seller of fraudulent mortgage loans. That is it for the senior officers of the elite banks whose frauds the SEC says drove the financial crisis.

The SEC, as always, focuses its enforcement on non-elite corporations where it is far easier for its enforcers to rack up higher numbers of “successes.” The “66 senior” individual defendants were overwhelmingly employed by non-elite banks. The SEC’s own data demonstrate that it is a paper tiger when it comes to the elite banksters who grew wealthy by leading the frauds that caused the mortgage fraud crisis.

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  1. tulsatime

    The ministry of truth shall rule….we make our own reality…the truth is what we say it is….. And the more things change, the more they stay the same.

    Just wait til next time

  2. s spade

    Great piece. The SEC has been a public relations con since 1935, when Roosevelt put pool operator Joe Kennedy in charge. In the Agency’s entire history it can point to one significant enforcement figure, Stanley Sporkin, and his achievements have been grossly exaggerated.

  3. SubjectivObject

    Some poster on ZeroHedge points out the the correct reference to “them” is “elitist”, rather than “elite”. The titular “elite” simply reinforces a perception that “they” are in some fundamental respect elevated above the observer, when in fact “they” are a parasitic stratum that through fraud is feeding on real production, savings, and trust of the host population. “They” are elitist fraudsters who think the are better than, well, everybody else, and as a selfish corollary deserve every unethical/immoral opportunity presented to them. Replace “elite” with “elitist” in the arcticle to get a feel for the perceptual implications of the unregenerate conceit that saturates, motivates, the bankster stratum.

      1. Procopius

        Agreed. “Elite” doesn’t mean “morally superior,” it means being on top. Just as Europe’s feudal nobility got there through fraud and (mostly) force, our “elite” got there because they are better than at average at creating protective networks and persuading people to defer to them. They are, basically, super used-car salesmen. Oh, yeah, and John D. Rockefeller showed that the judicious application of high explosives is helpful.

  4. Synopticist

    Jeez that’s so depressing. As a Brit, there were two things I always thought the US did so much better than the UK, pre-crisis.

    The first was in having a standard of journalistic ethics. It always seemed to me that that notion genuinely meant something over there, that reporting was a vocation, that most US journalist actually cared about holding a mirror up to power and getting the truth out. In the UK that isn’t even an ideal, and if it ever existed (which I don’t think it ever did) it’s so old it’s beneath the ground slowly turning into coal.

    The second was in locking up rich, corrupt people. I knew full well we’d never have any British bankers in jail after 2008, you’ve always been able to avoid justice here if you spend enough on lawyers, but America seemed different. That harsh system of elected prosecutors, the ideology of submission before sherrifs and judges, the strictness and occasional brutality of the Justice system, I believed it would guarantee prosecutions for fraud by criminal bankers and the elite.
    I knew we were in a changed world when Corzine wasn’t arrested and questioned within days of MF Global going down.

    But both American journalism, and American justice, have failed in the face of the banking bubble control fraud. There’s been a handful of great journalists and writers, like Greg pallast, matt Taibi and our own Yves smith, but none of them are mainstream figures.

    Likewise, Conrad black and maddoff went to jail, but only because Black hadn’t paid his oligarch fees to Washington, and maddoff stole from rich people.

    1. JEHR

      I never thought about Conrad Black in those terms. If you have Netflix, watch “Payback” ( ) where the producer gives Black a major speaking role. He talks about people in power who have superior gifts and therefore should not take advantage of weaker people and he doesn’t even blush while saying it. Black was a bit shifty from the very beginning of his career: “accusations [were made] that Black had taken advantage of the widows of Ravelston Directors McDougald and Eric Phillips, though these accusations were never proven.”


  5. Trisectangle

    The difference in prosecutions between this and the S&L Crisis is still something I find striking and a demonstration of how much the regulatory environment has deteriorated.

    In any case, I don’t think that given the current setup and the power these executives have over the companies (including ensuring that the insurance payments to cover possible fines continue getting disbursed) we can meaningfully hit them in their pockets. Jail time is something they can’t pawn off on a different party and hence something that will hit them personally. Given the damage they have dealt to society I do think that jail time is more than justified. Espcially when considering the kid gloves treatment they get compared to other criminals.

    Anyway, this clip about the differing treatment of differing criminals is still excellent:

  6. Susan the other

    This is why we need to change the system. We need a regime change in finance. Not just spanking a few CEOs. No more privateers with public money and at the expense of public interests. We will handle our own money, thanks anyway all you soon-to-be unemployed financiers. Because, inevitably, capitalist financiers follow their own interests. It’s human nature and it is the very way their system was designed. We really shouldn’t kid ourselves. The SEC is a joke; so is the entire FIRE segment of the “economy;” so are all the congressmen and women they own, and the newspapers; and so are we.

    1. s spade

      Yes, the camel’s nose under the tent was the pension fund, which diverted wages to the control of institutions “managed” by bunco artists. The first one was created by GM in 1950. These pension funds drove up the prices of stocks, which produced the mutual funds, which fleeced more individuals and produced more stunning rakeoffs. Then David Rockefeller created Opec to energize new looting opportunities, Nixon slammed the gold window and the value of money disappeared.

      If you have money today what can you do with it except watch it evaporate or gamble it away?

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