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<div class="timestamp">February 3, 2012</div>
<h1>S.E.C. Is Avoiding Tough Sanctions for Large Banks</h1>
<span><h6 class="byline">By <a rel="author" href="http://topics.nytimes.com/top/reference/timestopics/people/w/edward_wyatt/index.html?inline=nyt-per" title="More Articles by Edward Wyatt" class="meta-per">EDWARD WYATT</a></h6>
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<p>
WASHINGTON — Even as the <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/s/securities_and_exchange_commission/index.html?inline=nyt-org" title="More articles about the U.S. Securities And Exchange Commission." class="meta-org">Securities and Exchange Commission</a>
has 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. </p>
<p>
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. </p>
<p>
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 <a href="http://topics.nytimes.com/your-money/investments/mutual-funds-and-etfs/index.html?inline=nyt-classifier" title="More articles about mutual funds and exchange-traded funds." class="meta-classifier">mutual fund</a> portfolios. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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 lawsuits. </p>
<p>
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. </p>
<p>
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. </p>
<p>
“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. </p>
<p>
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. </p>
<p>
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 <a title="Related article." href="http://www.nytimes.com/2010/07/16/business/16goldman.html?pagewanted=all">Goldman Sachs settled in 2010</a>.
Different parts of the company — corporate officers versus a sales
force, for example — are responsible for different types of statements,
officials say. </p>
<p>
“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.” </p>
<p>
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. </p>
<p>
President Obama, in his <a href="http://topics.nytimes.com/top/reference/timestopics/subjects/s/state_of_the_union_message_us/index.html?inline=nyt-classifier" title="More articles about the State of the Union address." class="meta-classifier">State of the Union address</a>, <a title="The article." href="http://www.nytimes.com/2012/01/25/business/obama-urges-tougher-laws-on-financial-fraud.html">asked Congress last week for tougher laws</a>
that 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. </p>
<p>
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. </p>
<p>
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 <a title="The article." href="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">repeat offenders</a>
— 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. </p>
<p>
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. </p>
<p>
“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
problem.” </p>
<p>
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.
</p>
<p>
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 <a title="The Web site." href="http://www.sec.gov/">its Web site</a>. </p>
<p>
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 <a title="The announcement." href="http://www.sec.gov/news/press/2011/2011-143.htm">to pay $228 million</a>
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. </p>
<p>
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. </p>
<p>
“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.” </p>
<p>
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 <a title="The letters." href="http://www.sec.gov/divisions/corpfin/cf-noaction/2011/jpmorgan071111-405.pdf">letters to the S.E.C.</a>
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. </p>
<p>
Citigroup is one of the rare Wall Street giants that has lost significant privileges recently. In October 2010, <a title="The announcement." href="http://www.sec.gov/news/press/2010/2010-136.htm"> the bank paid $75 million to settle charges</a>
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.
</p>
<p>
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. </p>
<p>
Citigroup declined to comment on whether the sanctions have had any effect on its business. </p>
<p>
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
charge. </p>
<p>
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. </p>
<p>
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. <a title="The report." href="http://www.sec.gov/foia/docs/oig-522.pdf">According to a report</a>
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.” </p>
<p>
Bank of America apparently won the argument but would not comment on it. It settled the case by <a title="The announcement." href="http://www.sec.gov/litigation/litreleases/2010/lr21407.htm">agreeing to a $150 million payment.</a>
The S.E.C., however, decided not to charge the bank with fraud, which
could 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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
“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 beholder.” </p>
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