Is the SEC Too Soft on Major Wall Street Firms?


Questions continue to arise regarding the too-cozy relationship between the SEC and Wall Street. Recent reports claim that the SEC, when settling with big Wall Street firms, has a practice of granting waivers that preserve special privileges enjoyed by those firms, and protect them from serious consequences that would otherwise result from their wrongdoing. For example, the waivers preserve fast-track offering privileges for “well-known seasoned issuers,” which allow big Wall Street firms to quickly raise capital in the securities markets. Other waivers permit the firms to continue managing mutual funds and engaging in certain market activities.

These waivers are a big deal. They amount to significant give-backs to big firms the SEC has repeatedly charged with significant wrongdoing, including fraud. “The ramifications of losing those exemptions are enormous to these firms,” David S. Ruder, a former S.E.C. chairman, was quoted as saying, adding that, 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.”

In addition to the granting of waivers, the SEC has been criticized by at least two federal judges for its tricky “no admissions” policy of allowing settling defendants to deny (in later proceeding brought by investors) the very findings of fact by the SEC that they “consented to” (without admitting to) in the settlements. The SEC also has a practice of repeatedly imposing as a “punishment” an order directing settling firms not to violate the securities laws in the future, often despite the fact that the firm has repeatedly violated those very injunctions in the past.

In response to critics who say the SEC is a captive agency that is too soft on Wall Street, the SEC rightly points out that Congress has denied its requests for the funding needed to take these cases to trial rather than settle them. “But the repeated granting of waivers suggests that the agency does in fact have tools it often does not use, critics say.” (“S.E.C. Is Avoiding Tough Sanctions for Large Banks,” New York Times).

Almost half of the settlement waivers granted by the SEC went to repeat offenders. The repeat offenders “read like a Wall Street who’s who: American International Group, Ameriprise, Bank of America, Bear Stearns, Columbia Management, Deutsche Asset Management, Credit Suisse, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Putnam Investments, Raymond James, RBC Dain Rauscher, UBS and Wells Fargo/Wachovia.” (“Promises Made, and Remade, by Firms in S.E.C. Fraud Cases,” New York Times).

How does the SEC justify it? The SEC says its policy is to grant waivers unless the firm’s fraud involved misleading investors about its own securities or its own business. In other words, if the firm merely lied about a product that it built to fail, sold to investors and bet against, the SEC would grant the waivers.

“That distinction doesn’t do it for me,” Richard W. Painter, a corporate law professor at the University of Minnesota and the co-author of a casebook on securities litigation and enforcement, was quoted as saying, adding: “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.”

JPMorgan Chase recently paid $228 million to settle civil and criminal charges that it overcharged cities and towns by rigging bids for investment services. In the settlement, JPMorgan reportedly received waivers to preserve privileges that it would otherwise have lost. JPMorgan has settled six fraud charges in 13 years, and has received 22 waivers since 2003, two or more waivers per case, according to the New York Times.

In another case, Bank of America settled SEC charges that it fraudulently obtained the approval of its shareholders to acquire troubled Merrill Lynch by not disclosing billions of dollars of bonuses paid to Merrill Lynch executives. According to the SEC’s Inspector General, H. David Kotz, who has written reports critical of the SEC, 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.” The alleged fraud by B of A involved its own securities and company, so it should not have been entitled to a waiver under the SEC’s policy. But the SEC decided not to charge B of A with fraud after all, and instead made lesser charges, which allowed B of A to keep its privileges.

Since 2005, the SEC has granted waivers to Wall Street firms in 49 cases versus 11 cases where waivers were not granted; since 2000, the SEC has granted 295 waivers (91 granting immunity from lawsuits and 204 allowing firms to continue certain market activities), according to the New York Times.

Senator Charles E. Grassley, Republican, Iowa, was quoted as saying: “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.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.