Last April, as a follow-up to revelations that Wal-Mart had allegedly covered up bribes paid by its Mexican subsidiary, the great Corporate Counsel reporter Sue Reisinger ran a very surprising piece. Despite the scandal engulfing Wal-Mart, defense lawyers told Reisinger that the company may have made a strategically smart decision not to disclose the matter to the government. Smart? Really? Would Wal-Mart’s alleged bribery have blown up into a public relations fiasco that cried out for governmental consequences if the company had quietly admitted the facts to the Securities and Exchange Commission or the Justice Department?
For good or ill, one of my themes over the last 18 months has been frustration with the Securities and Exchange Commission’s enforcement efforts. And according to a recently published study by Berkeley Law professor Stavros Gadinis, I’m not alone. Gadinis’s paper, posted Wednesday at the Harvard Law School Forum on Corporate Governance, said that it’s been three decades since any academic analysis of SEC enforcement actions against broker-dealers. In that time, Gadinis wrote, the information vacuum has been filled with complaints about the commission’s perceived foot-dragging and questions about the so-called revolving door between the SEC and private law firms. To add some substance to the discussion, Gadinis undertook what he said was the first systematic examination of SEC enforcement actions against broker-dealers — a category that includes major financial institutions — in 30 years, analyzing more than 400 cases finalized in 1998 and 2005-2007. (Gadinis added 1998 to the study so it would include cases brought in a Democratic administration.) His overall conclusion: Size matters, at least when you’re a broker-dealer facing off against the SEC. According to the prof’s data, firms with more than 1,000 employees fared much better than their smaller counterparts in terms of whether cases are brought against individual defendants; whether the SEC brought cases as administrative proceedings; and what kind of sanctions the SEC extracted.
My hat is off to the four authors of a new study called “Does the Revolving Door Affect the SEC’s Enforcement Outcomes?” which was to be presented Monday at the American Accounting Association. As the New York Times was the first to report, researchers from Emory, Rutgers, the University of Washington and Singapore’s Nanyang Technological University set out to reach a quantitative answer to a question everyone thinks they already know the answer to. Instead, the study found that there’s no measurable impact on enforcement from lawyers moving in and out of the SEC.
If you’re the Securities and Exchange Commission, it’s tough to find a silver lining in Tuesday’s jury verdict for Brian Stoker, a onetime midlevel banker at Citigroup. Not only did the eight jurors in federal court in Manhattan determine that Stoker was not liable for misleading investors in a $1 billion collateralized debt obligation, they also offered a backhanded slap at the SEC. “This verdict should not deter the SEC from continuing to investigate the financial industry, to review current regulations, and modify existing regulations as necessary,” the jury said in a highly unusual note accompanying the verdict. For the SEC, which has been roundly criticized for its failure to bring civil charges against executives implicated in the financial crisis, the jury’s note has to read like one more reminder that the public is still waiting for corporate accountability.
More than four years after the Financial Accounting Standards Board first proposed a stringent new standard for corporate disclosure of litigation loss contingencies, it voted Monday to drop the effort, citing increased scrutiny of litigation exposure by the Securities and Exchange Commission and the Public Company Accounting Oversight Board. The accounting rulemaker’s decision has to be considered a relief for public corporations, many of which have bitterly opposed the FASB’s litigation disclosure proposals as a gift to plaintiffs’ lawyers.
If you haven’t already, read Jesse Eisinger’s piece for ProPublica and the New York Times on the Securities and Exchange Commission’s case against the upstart credit-rating agency Egan-Jones. The SEC sued Egan-Jones – which challenged the traditional business model for rating agencies by charging users, not issuers, to opine on the riskiness of securities – for exaggerating its bona fides in a 2008 filing. Eisinger questioned the wisdom of sending Egan-Jones “to the guillotine” while letting bigger players, with business models that are susceptible to corruption, off the hook for their patently ridiculous ratings of toxic mortgage-backed securities. “This is your S.E.C., folks,” Eisinger wrote. “It courageously assails tiny firms, and at the pace of a three-toed sloth. And when it goes after its prey, it’s because it has found a box unchecked, rather than any kind of deep, systemic rot.”
There’s a very good chance that former Securities and Exchange Commission general counsel David Becker owes absolutely nothing to the folks who lost money in Bernard Madoff’s Ponzi scheme. Nevertheless, on Monday, Becker and his two brothers agreed to turn over every penny of the proceeds they received from their mother’s long-ago Madoff investment account, a total of $556,017. Becker, a partner at Cleary Gottlieb Steen & Hamilton, didn’t return my call seeking comment. But he is doubtless hoping that the $556,017 settlement with Madoff bankruptcy trustee Irving Picard of Baker & Hostetler puts an end to the ugliest chapter in his career.
If the Securities and Exchange Commission were an ordinary investor, it would already be too late in trying to sue the banks that issued (allegedly) deficient mortgage-backed securities.
Late Friday the Securities and Exchange Commission confirmed in a statement what the New York Times first reported Friday morning: it has changed its policy on the boilerplate “neither admit nor deny” language in most SEC settlement agreements. But don’t get too excited. The change will affect only cases in which the defendant has admitted guilt or been convicted in a related criminal action. In settlements with those criminal defendants, the SEC will delete “inconsistent” concessions and instead “recite the fact and nature of the criminal conviction or criminal [admission] in the settlement documents.”
For the last three years, since the housing bubble burst, the Securities and Exchange Commission has been investigating the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac). Fannie and Freddie, after all, were the biggest players in the mortgage lending and securitization business, and there’s a lot of sentiment that they deserve a hefty share of blame for encouraging the financial industry’s voracious appetite for mortgage loans, no matter how deficiently underwritten. The problem for regulators hoping to hold Fannie and Freddie accountable, though, is that the previously quasi-private agencies went into public receivership conservatorship in 2008. Any SEC suit against Fannie and Freddie would essentially be one wing of the U.S. government seeking damages against another.