SEC Refuses to Take Action Against Senior Executives in Structured Product Cases


SEC Enforcement Chief Robert Khuzami recently stated that the SEC’s decision not to charge top executives of Wall Street banks with wrongdoing in cases involving structured products was appropriate, according to Suzanne Barlyn’s Wall Street Journal article entitled “SEC: Structured-Product Cases Haven’t Reached Top Bank Officers.” According to Mr. Khuzami, top executives were not involved in, and did not know about, the key decisions relating to structured product problems.

An example of an SEC enforcement action in which no top executive was named is the recent case involving a “built to fail” CDO named Squared. J.P. Morgan Chase marketed Squared without informing investors that a hedge fund, Magnetar Capital LLC, helped select the subprime assets in the CDO portfolio and had a short position in more than half of those assets The SEC recently announced a $154 million settlement with J.P. Morgan Chase in that case. That settlement was similar to the $550 million settlement reached with Goldman Sachs last year. No top executives were named in that case either.

Mr. Khuzami reportedly said that structured products cases are unlike some past cases involving accounting shenanigans where there was involvement by top executives. He also said that the employees selling structured products were several levels below the top executives, according to the article. The top executives “weren’t aware of the practices and shouldn’t have been aware,” Khuzami was quoted as saying.

Investor attorney J. Boyd Page, the senor partner of Atlanta-based Page Perry, said: “If Mr. Khuzami really made those statements, I am surprised. It makes me wonder whether the SEC read the firms’ internal emails. In our subprime related cases, the email trails revealed that the fingerprints of senior management were all over the improprieties. I think that Wall Street has a history of making lower level employees scapegoats; it’s unfortunate that the primary regulator of the securities industry buys into this charade. “