[Vision2020] Enough to piss off a locksmith

Art Deco art.deco.studios at gmail.com
Fri Feb 3 07:37:48 PST 2012

  [image: The New York Times] <http://www.nytimes.com/>

February 3, 2012
S.E.C. Is Avoiding Tough Sanctions for Large Banks By EDWARD

WASHINGTON — Even as the Securities and Exchange
stepped up its investigations of Wall Street in the last decade, the
agency has repeatedly allowed the biggest firms to avoid punishments
specifically meant to apply to fraud cases.

By granting exemptions to laws and regulations that act as a deterrent to
securities fraud, the S.E.C. has let financial giants like JPMorganChase,
Goldman Sachs and Bank of America continue to have advantages reserved for
the most dependable companies, making it easier for them to raise money
from investors, for example, and to avoid liability from lawsuits if their
financial forecasts turn out to be wrong.

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

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.

By granting those waivers, the S.E.C. allowed Wall Street firms to have
powerful advantages, securities experts and former regulators say. The
institutions remained protected under the Private Securities Litigation
Reform Act of 1995, which makes it easier to avoid class-action shareholder

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.

Other waivers allowed Wall Street firms that had settled fraud or lesser
charges to continue managing mutual funds and to help small, private
companies raise money from investors — two types of business from which
they otherwise would be excluded.

“The ramifications of losing those exemptions are enormous to these firms,”
David S. Ruder, a former S.E.C. chairman, said in an interview. Without the
waivers, agreeing to settle charges of securities fraud “might have vast
repercussions affecting the ability of a firm to continue to stay in
business,” he said.

S.E.C. officials say that they grant the waivers to keep stock and bond
markets open to companies with legitimate capital-raising needs. Ensuring
such access is as important to its mission as protecting investors,
regulators said.

The agency usually revokes the privileges when a case involves false or
misleading statements about a company’s own business. It does not do so
when the commission has charged a Wall Street firm with lying about, say, a
specific mortgage security that it created and is selling to investors, a
charge Goldman Sachs settled in
Different parts of the company — corporate officers versus a sales force,
for example — are responsible for different types of statements, officials

“The purpose of taking away this simplified path to capital is to protect
investors, not to punish a company,” said Meredith B. Cross, the S.E.C.’s
corporation finance director, referring to the fast-track offering
privilege. “You’re not seeing the times that waivers aren’t being granted,
because the companies don’t ask when they know the answer will be no.”

Others, however, argue that the pattern is another example of the
government being too soft on Wall Street as it has become a much larger
part of the economy in recent decades.

President Obama, in his State of the Union
asked Congress last week for tougher
make “the penalties for fraud count.” Federal judges in New York and
Wisconsin recently criticized the S.E.C. for its habit of settling cases by
allowing companies to promise not to violate the law in the future.

The commission has frequently turned the other cheek when the companies
again settle similar fraud cases. S.E.C. officials have defended that
practice by saying they do not have the resources to take cases to court
rather than settle. They recently asked Congress to toughen laws and to
raise financial penalties for fraud violations.

But the repeated granting of waivers suggests that the agency does in fact
have tools it often does not use, critics say. Close to half of the waivers
went to repeat offenders<http://www.nytimes.com/2011/11/08/business/in-sec-fraud-cases-banks-make-and-break-promises.html?scp=6&sq=ed%20wyatt&st=Search>—
Wall Street firms that had settled previous fraud charges by agreeing
never again to violate the very laws that the S.E.C. was now saying that
they had broken.

Senator Charles E. Grassley, an Iowa Republican who serves on committees
that oversee the S.E.C., said he was baffled that the agency had recently
asked Congress for more enforcement powers when it had ceded much of the
power it already had.

“It’s really hard to see why the S.E.C. isn’t using all of its weapons to
deter fraud,” he said. “It makes already weak punishment even weaker by
waiving the regulations that impose significant consequences on the
companies that settle fraud charges. No wonder recidivism is such a

The Times analysis found 11 instances where companies that had settled
fraud cases had actually lost the special privilege for fast-track stock or
bond offerings, versus 49 times that the S.E.C. granted waivers from the
punishment to Wall Street firms since 2005. The analysis counted 91 waivers
since 2000 granting immunity from lawsuits, and 204 waivers related to
raising money for small companies and managing mutual funds.

The S.E.C. does not maintain a central database of how many companies lose
special status or are denied waivers. Its records of granted waivers are
scattered across several databases on its Web site <http://www.sec.gov/>.

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<http://www.sec.gov/news/press/2011/2011-143.htm>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
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.

Citigroup is one of the rare Wall Street giants that has lost significant
privileges recently. In October 2010, the bank paid $75 million to settle
charges <http://www.sec.gov/news/press/2010/2010-136.htm> that it misled
investors in 2007 about the size of its holdings of assets backed by
subprime mortgages. The company told investors that it had about $13
billion of those risky investments on its balance sheet, when it really had
more than $50 billion, according to the S.E.C.

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.

Citigroup declined to comment on whether the sanctions have had any effect
on its business.

Wrangling over waivers is an important part of the negotiations when
companies accused of fraud discuss a settlement with the S.E.C., and
sometimes it can involve a form of corporate plea bargaining to a lesser

In 2009, the S.E.C. was negotiating with Bank of America over charges that
it had failed to disclose to shareholders that billions of dollars in
bonuses were being paid to Merrill Lynch executives just as Bank of America
was bailing out the firm.

Because the S.E.C. charges involved fraudulent statements by both Bank of
America and Merrill Lynch about their financial status, the merged company
was in danger of losing its special privileges for both offerings and
forecasts. According to a report
<http://www.sec.gov/foia/docs/oig-522.pdf>by the then-S.E.C. inspector
general, H. David Kotz, the waiver issue “was
of such importance to B. of A. that the settlement became contingent on B.
of A.’s receipt of the waiver.”

Bank of America apparently won the argument but would not comment on it. It
settled the case by agreeing to a $150 million
S.E.C., however, decided not to charge the bank with fraud, which
have endangered the bank’s special status. Instead, the S.E.C. charged Bank
of America with violating disclosure rules for shareholder materials and
proxies, and Bank of America kept its privileges.

S.E.C. officials said they would not discuss how they arrived at specific
settlements and declined to comment on the Citigroup, JP Morgan or Bank of
America settlements.

Thomas Lee Hazen, a securities law professor at the University of North
Carolina at Chapel Hill, said that it is understandable that the S.E.C.
might relax some potential sanctions on Wall Street firms — where it
appears that lessons have been learned, or when a fine is thought to be
sufficient punishment.

“The ripple effect of having a sanction that could shut them down or could
seriously impede a company’s operations would seriously affect a lot of
innocent customers,” he said. “It’s a very fine balance. That’s not to say
that the S.E.C. is striking the balance properly. That is in the eye of the

  [image: DCSIMG]

Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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