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New York Times Article Finds Hundreds of Instances When the SEC Waives Certain Sanctions For Big Wall Street Institutions

Posted in SEC Enforcement Cases, SEC News, SEC Settlements: Policy, Issues and Disputes, Trends

An article in today’s New York Times reports that over the last decade a number of large Wall Street companies, including JPMorganChase, Goldman Sachs and Bank of America, have avoided certain punishments specifically aimed at fraud cases and continued to have certain advantages reserved for the most dependable companies. According to Edward Wyatt’s article, there have been "nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions."

The article described how, in resolving investigations, the SEC waived certain sanctions which has allowed these financial giants to:

• continue to use rules that let them instantly raise money publicly, without waiting weeks for government approvals;

• remain protected under the Private Securities Litigation Reform Act of 1995, which makes it easier to avoid class-action shareholder lawsuits; and

• continue managing mutual funds and help small, private companies raise money from investors — two types of business from which they otherwise would be excluded.

The article stated that there 49 times when waivers were granted that allowed companies to maintain the fast-track privilege for stock or bond offerings since 2005. Similarly, there were 91 waivers providing immunity from lawsuits and 204 waivers related to raising money for small companies and managing mutual funds.

According to the Times, "SEC 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 … ."

The article compared times when the SEC did impose a particular sanction with the times when the agency did not. For example since 2005, there were only 11 occasions when companies lost the fast-track privilege for stock or bond offerings, compared to the 49 times when waivers were granted. With respect to individual institutions, JPMorganChase settled six fraud cases in 13 years, but obtained 22 waivers. Bank of America and Merrill Lynch (now merged) settled 15 cases, but received 39 waivers. Before losing certain privileges in 2010, Citigroup settled six fraud cases and received 25 waivers over an eleven-year period.

Judge Jed Rakoff raised a similar concern in the SEC v. Global Markets, Inc. case, focusing on the fact that a number of the companies appear to be repeat offenders and asking in his October 27, 2011 Order:

The proposed judgment imposes injunctive relief against future violations. What does the SEC do to maintain compliance? How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?

When the SEC responded on November 7, 2011, it acknowledged that it does not frequently pursue civil contempt proceedings (and has not done so against a large financial entity in the last ten years).

According to the New York Times article, Senator Chuck Grassley (R. Iowa) of the Senate’s Committee on the Judiciary said: "It’s really hard to see why the SEC isn’t using all of its weapons to deter fraud. 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."