SEC Crackdown Continues

2011 was a good year for the Securities and Exchange Commission (SEC).

It brought a record number of enforcement actions against Wall Street firms and dispelled some of the doubt many have had about the organization’s fitness to regulate the financial industry.  The SEC has come under fire in recent years for several major gaffes, including its failure to detect Bernie Madoff’s Ponzi scheme, its destruction of documents, and a leasing scandal that cost taxpayers $550 million.  Since the appointment of [former] SEC Inspector General H. David Kotz, the organization has been more stringent in regulating the practices of Wall Street, making changes to its management structure, the way it pursues prosecutions, and the way it handles tips and complaints.  The numbers are on the SEC’s side for 2011, showing an increase in total enforcement actions, up to 735 last year from 677 in 2010.

One area in which the SEC made significant strides in 2011 was in bringing cases against unscrupulous financial advisors.  Before the 2008 financial crisis, the SEC investigated an average of about 80 financial advisors each year.  Since Kotz’s appointment that number has gone up, with 112 advisors being investigated in 2010, and 146 in 2011.  Are SEC regulators finally getting the message that Americans are fed up with lax regulation of big financial firms?  With numbers like this, it certainly seems so.  “We continue to build an unmatched record of holding wrongdoers accountable and returning money to harmed investors,” said Mary Schapiro, chairman of the SEC, “I am proud of our Enforcement Division’s many talented professionals and their efforts that resulted in a broad array of significant enforcement actions, including those related to the financial crisis and its aftermath.”

Of course, the Commission has a long way to go in polishing its tarnished image in the wake of numerous scandals, and will have to work on the way it prosecutes those who have committed crimes.  Of the investigations in which the SEC has found wrongdoing, few have resulted in criminal charges being brought against individuals or corporations.  In most recent cases, a fine was issued (usually a small one, by Wall Street standards) and those involved were allowed to walk away without ever having to admit they did anything wrong.  This has become the standard settlement for Wall Street criminals which, as Federal Judge Jed Rakoff pointed out with his ruling in a fraud case against Citigroup, needs to change.

In a deal in which investors lost an estimated $700 million, Citigroup was fined $285 million and was allowed to neither admit nor deny any wrongdoing, a settlement which Judge Rakoff felt was, “neither fair, nor reasonable, nor adequate, nor in the public interest.” Rakoff refused to sign off on the settlement and Citigroup has since appealed his decision.  The SEC feels that without using the current language of its settlements, it would forever be tied up in protracted legal battles.

Whether Rakoff is vindicated remains to be seen, but he brings up an excellent point.  Although the SEC crackdown has brought a record number of enforcement actions, those being investigated are not being held accountable.  Each time a firm like Goldman Sachs or Citigroup pays its fines, it is allowed to go back to work defrauding investors as if nothing ever happened (and somehow always manages to profit from its crimes).  Should Wall Street be able to make money using deception and fraud?  No.  Does it happen?  Yes.  The SEC’s recent crackdown is a good start, but it still has a long way to go in earning the trust of the American people again.