Joshua Roberts/Bloomberg News
Meredith B. Cross, the S.E.C.'s corporation finance director, says the purpose behind offering waivers to Wall Street firms that had settled fraud or lesser charges is to protect investors.
By EDWARD WYATT
Published: February 3, 2012
WASHINGTON — Even as the Securities and Exchange Commissionhas 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.
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Times Topic: Securities and Exchange Commission
Chris Kleponis/Bloomberg News
David Ruder, a former S.E.C. chairman.
Readers’ Comments
Readers shared their thoughts on this article.
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 fund portfolios.
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 lawsuits.
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 2010. Different parts of the company — corporate officers versus a sales force, for example — are responsible for different types of statements, officials say.
“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 address, asked Congress last week for tougher laws 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.
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 — 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 problem.”
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.
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 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 S.E.C. 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.
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 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 charge.
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 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 payment. 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.
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 beholder.”
WASHINGTON — Even as the Securities and Exchange Commissionhas 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.
Multimedia
Related
Times Topic: Securities and Exchange Commission
Chris Kleponis/Bloomberg News
David Ruder, a former S.E.C. chairman.
Readers’ Comments
Readers shared their thoughts on this article.
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 fund portfolios.
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 lawsuits.
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 2010. Different parts of the company — corporate officers versus a sales force, for example — are responsible for different types of statements, officials say.
“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 address, asked Congress last week for tougher laws 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.
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 — 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 problem.”
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.
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 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 S.E.C. 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.
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 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 charge.
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 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 payment. 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.
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 beholder.”
It seems the Bernie Madoff will be the only one who will end up in jail over anything related to Wall Street greed.
Meanwhile, millions of people live in homes which are worth less than what they are paying for, millions of more people are out of work, millions more have fallen into poverty (1/6 of the country now).
And those who are seeking election? Deregulate Wall Street, cut taxes for the wealthy even further and the Keystone XL pipeline. Oh yeah, and let's start a new war in Iran and increase defense spending.
Ronald Chen says the financial regulatory apparatus has failed; I say the entire government has failed. The success is in the hands of the greedy and the rest of the nation is being told to eat cake.
This country is broken from the bottom right up to the Oval Office. This article exemplifies how horribly broken our government truly is and sends loud echoes of voting every incumbent out from dog catcher to President.
Has Mr Ruder ever considered the possibility that, given what these unethical behemoths did to this nation's economy, that they don't deserve to stay in business?
The Wall Street Banks, if they were guilty of fraud, should have been either nationalized or broken up and sold off piecemeal. And yes, individual executives need to be held accountable, with large fines and jail time where appropriate. Large majorities in America are sick and tired of the special treatment accorded these too big to fails. It's time that it ended.
The Dodd-Frank bill is a sham. The only teeth it might have is in regulatory rules that have been tied in knots while the financial lobbyists make sure nothing effective is done that could hurt the banksters interests. Congress could have, & should have, brought back the Glass-Steagall act that did a great job of controlling rampant speculation but both Chris Dodd & Barney Frank saw that it was time to leave and wrote a "reform" law that simply kicked the problems down the road and out of the spotlight.
Dodd is now a banking lobbyist & I will be surprised if Frank is far behind him. Both Political parties are incapable of the reforms that are needed. My only hope is that another party will emerge,win,& make real reforms.
These crimes are committing from savvy positions of privilege and responsibility, not desperation. Such crimes should be punished MORE severely than other non-violent crimes because those bankers violated the trust and responsibility society placed in them. In a democracy, supposedly governed by the rule of law, deterrence of criminal behavior at the highest levels should be the highest priority of law enforcement.
We are very, very far from being a democracy. Since 1980, the rate of incarceration in this country has more than tripled. More than 50% of black males without a high school diploma go to prison at some time in their lives. There are more people under correction supervision in the U.S. than were in Stalin's Gulag. We also just experienced 10 years of the most widespread, reckless criminal behavior at bank and non-bank financial institutions in history. But, in this country, companies and people in positions of power spend enormous amounts of money to buy off the people responsible for writing laws so that the crimes those companies and people INTEND TO COMMIT, will go unpunished. It's un-American.
The problem with even good regulations is that the first thing that the regulated do is buy the regulators.
"The ruling class never betrays its own."
Marx
The mega banks are the ultimate pushers of government debt, primary dealers who the government needs to keep floating its bogus paper.
Since those institutions that are fined simply add the fine to the cost of doing business We the customers of the offending finantial Institutions are really paying the fines ourselves. The Federal Government keeps the money, on our behalf of course, and business on Wall St. goes on as usual. Given this history why would the S.E.C. wish new and even stricter rules? The anwser is simple to make it easer to sell even more "Indulgences" to Wall St. and raise even more money as the Folks in Washington are a "little short" these days.
A fine on these folks is just a tax on all of us including the poor among us "by other means". The fines, large though they might seem, are not large enough to correct the behavior of Wall St. As the record shows. Where is Martin Luther when you need him? Definitely not in Washington D.C. Today!
Mind you I am not some wild eyed radical, I am a middle class 60 who has had enough of crony capitalism.
Shame on the SEC, shame on President Obama, and shame on all of us for allowing our country to degenerate into a lawless state, ruled by the "New Mafia", the financial industry.
Wow. And we actually sentence drug users to long prison terms for smoking pot or crack. In fact, they can get life sentences if they are caught doing this more than once. But it's okay to rip off an entire country, throw millions of people out of work so they can't pay their bills, foreclose on them and evict them. We wouldn't want to punish these criminals because it would damage their ability to function, it would be their long term well being in jeopardy.
Who are these people, the SEC? Who are they taking orders from? Did they not listen to President Obama's recent speeches? Why is their this conflict between the president's apparent viewpoint and that of the SEC?
If I robbed a bank -- not once but two or three times-- would I get off by promising never to do it again?
This is a perfect example of what David Stockman has called "Crony Capitalism". The SEC claimed it was protecting the stockholders, but what about protecting the American people? As Ronald Cohen points out in his comment, the regulators are indistinguishable from the regulated.
If waivers were were specifically prohibited by the SEC's enabling legislation or limited by standards and a required publication and public comment period, the results would be far different!
The foxes are running the henhouses and being regulated by other foxes.
The fines these institutions pay are less than the bonus's they take home. The idea of allowing banks to be investors was the worst decision ever made and that should be changed immediately. But our politicians who are in these institutions pockets will never do anything. I am so fed up with what has happened to this country the past 10 years that I am not longer proud to be an American. I have studied every candidate and voted every election but this year, with the misery coming from our so called "leaders" at this time will probably be the first time I don't vote. They are all the same, greedy, liars that look out only for themselves. Don't believe anything any of them say.
If we formed a commission of lay people and economy teachers it might actually get something done. Congress can pass all kinds of straight forward legislation that would make many practices illegal. We have to remember that our Congressmen are the stockholdes,land owners and most are far more wealthy than the common man can comprehend. Get the banks out of our Federal Reserve. Get the lobbies right off the hill and start a publicly funded election fund with no private entity allowed to give money or benefits to any candidate.
No commission formed by the very miscrerants that let this happen is going to be effective against their masters. Congress won't take on proper reforms, pay and benefit cuts and doing their sworn duties. The States of this union must take up the battle. Thecright to a referendum on all issues that our Congress can't sort out themselves. More de-cetralization of Government as well as accountability and transparency of all public funds and agencies.In other words get back to ,"We The People" in charge!
Until then, we will live with a bribed President and Congess who just don't care about us.
And then there is the financial community to be regulated. That too, when compared with the fiduciary role that bankers should--and in the past, did--follow, is an abomination. Recidivism should never be permitted, but rather clamped down on hard with major criminal penalties. These bankers have spearheaded the financialization of the American economy, to the detriment of a balanced system which includes manufacturing and a general dispersal of wealth. The banking community, along with a sympathetic, compliant government, is responsible for the present crisis. Yet, crime after crime--for what is FRAUD but criminal--continues. Tragic.
He picked tax cheat Geithner who was chairman of the NY Fed during the meltdown as his treasury secretary. "Heckuva Job, Brownie" pales into insignificance besides that.
He renominated Bernanke who printed money (8 trillion according to the Fed Governor who taught me a money and banking class) to bailout these same banks.
His justice department under that politician Holder is refusing to bring a single criminal action against one single wall street banker. So why should the SEC even bring civil charges?
He let Chris "I want AIG to get bonuses" Dodd write the Financial "Reform" bill and cheerfully signed it. Now Geithner can give any amount of money to bankers without needing to have congress vote on it. Now, too big to fail has official recognition in the law.
The problem is the crook Obama, The SEC is merely a symptom.
politicians. We suspected all along that Wall Street owns the government. Little people are punished for non compliance.
All equal under the law is a lie.