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This Is The Best Thing to Happen at the SEC - Ever

Oct 10th, 2013 | By Shah Gilani

On Monday, we talked about Tom Hayes.

That’s the former big-shot trader at UBS and Citigroup who’s accused of fraudulently manipulating interest rates to make millions for himself and his bank.

Now we’re hearing news he just lawyered up with a high-profile new firm in the U.K. According to the Wall Street Journal, his new lawyers have a “reputation for mounting aggressive defenses in financial-fraud cases.” This means there’s a good shot Hayes is going to plead not guilty. And there’s a very good shot he’s going to get away scot-free.

Here we go again!

We’ve all had enough of bad actors in the financial services arena getting away with nothing more than a wrist-slap. Many of you have written to me here to voice that outrage, and I’m with you.

These guys have stockholders pay their lawyers, settlement costs, and billions in fines, and then pimp and pander their way back on the gravy train to amp up their schemes and bonus pools. It happens almost every time.

It’s got to change. And – surprise – there just might be some hope on the horizon.

I just found a ray of sunshine, emanating from (out of all places) the Securities and Exchange Commission. They have a new leader and a new strategy that may finally pierce the black hearts of the vampires who suck the economic life out of all of us.

Please don’t miss this.

Mary Jo White, the new chairman of the SEC, addressed the Council of Institutional Investors at their fall conference in Chicago two weeks ago. Her message was clear as a bell and no doubt sent shivers down many a crooked spine.

Because most of us don’t understand why a lot of these bad actors aren’t behind bars, I’ve excerpted several passages from Mary Jo’s presentation that explains why not and – most importantly – what she’s doing to change that.

Here’s M.J. telling us what we don’t know and what we hoped we would hear one day.

When we resolve cases, we need to be certain our settlements have teeth, and send a strong message of deterrence. That is why in each case, I have encouraged our enforcement teams to think hard about whether the remedies they are seeking would sufficiently redress the wrongdoing and cause would-be future offenders to think twice.

We obviously cannot put offenders in jail like a U.S. Attorney can. And in many cases, the law limits the penalties the SEC may obtain to amounts that both we and the public think are too low. Under current law, we cannot assess a penalty based on investor losses, but are limited instead to the usually much lower figure based on the ill-gotten gains of a defendant.

That is why I support, as did my immediate predecessors, legislation introduced in Congress that would allow us to seek penalties based on either three times the ill-gotten gains or the amount of investor losses – whichever is greater. Among other things, the proposed legislation also would authorize us to seek additional penalties if the wrongdoer is a recidivist – a repeat offender who has been undeterred by prior enforcement actions. These would be very powerful, additional tools.

Demand Accountability

Another principle of an effective enforcement program is the recognition that there are some cases where monetary penalties and compliance enhancements are not enough. An added measure of public accountability is necessary, and in those cases we should demand it.

Until recently, the SEC – like most other federal agencies and regulators with civil enforcement powers – settled virtually all of its cases on a no-admit-no deny basis. Generally, a party would pay a hefty penalty and agree to an injunction against future misconduct, but neither admit nor deny the wrongdoing asserted by the SEC in a court complaint or set forth as findings in an order instituting administrative proceedings.

In most cases, that protocol makes very good sense. It makes sense because the SEC can get relief within the range of what we could reasonably expect to achieve after winning at trial. By settling, the agency is able to eliminate all litigation risk, resolve the case, return money to victims more quickly, and preserve our enforcement resources to redeploy to do other investigations – ordinarily, a significant win-win. But sometimes more may be required for a resolution to be, and to be viewed as, a sufficient punishment and strong deterrent message.

In 2012, the SEC changed the no-admit-no-deny language as it applied to settlements with parties that have pled guilty in a related criminal action. In these cases, we now explicitly reference these admissions in the SEC settlement. It was a first step towards greater accountability, and a good one.

But when I started at the SEC, I re-examined our approach and concluded that there are certain other cases not involving any parallel criminal case where there is a special need for public accountability and acceptance of responsibility.

As you might expect, much of my thinking on this issue was shaped by the time I spent in the criminal arena, where courts cannot accept a guilty plea without the defendant first admitting to the unlawful conduct. Anyone who has witnessed a guilty plea understands the power of such admissions – it creates an unambiguous record of the conduct and demonstrates unequivocally the defendant’s responsibility for his or her acts.

But what about resolutions that do not require a guilty plea?

In 1994, when I was a U.S. Attorney, I entered into the first-ever deferred prosecution agreement (DPA) with a company – a tool the Department of Justice frequently uses today. Essentially, a DPA is an agreement that the government will file a criminal charge, but defer its prosecution for a period of time during which the party must demonstrate good behavior and satisfy the other terms of the agreement. These terms can include very significant payments of money, enhanced compliance requirements, and sometimes an outside monitor.

Back in 1994, there was no template for those agreements. Nothing required an admission or confession of wrongdoing. But I decided in that particular case that a public admission of wrongdoing was required for the resolution to have sufficient teeth and public accountability. So considering this history, it should not be surprising that I would follow that same approach in my new role as Chair of the SEC.

Since laying out this new approach, the most frequent question we get is about the types of cases where admissions might be appropriate.

Candidates potentially requiring admissions include:

Cases where a large number of investors have been harmed or the conduct was otherwise egregious.

Cases where the conduct posed a significant risk to the market or investors.

Cases where admissions would aid investors deciding whether to deal with a particular party in the future.

Cases where reciting unambiguous facts would send an important message to the market about a particular case.

To reiterate, no-admit-no-deny settlements are a very important tool in our enforcement arsenal that we will continue to use when we believe it is in public interest to do so. In other cases, we will be requiring admissions. These decisions are for us to make within our discretion, not decisions for a court to make.

Pursue Individuals

Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible. That is something our enforcement division has always done and will continue to do. Companies, after all, act through their people. And when we can identify those people, settling only with the company may not be sufficient. Redress for wrongdoing must never be seen as “a cost of doing business” made good by cutting a corporate check.

Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules. When people fear for their own reputations, careers or pocketbooks, they tend to stay in line.

Of course, there will be cases in which it is not possible to charge an individual. But I have made it clear that the staff should look hard to see whether a case against individuals can be brought. I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in. It is a subtle shift, but one that could bring more individuals into enforcement cases.

When we do bring charges against individuals, we also need to consider all the possible remedies to prevent future wrongs. One of the most potent tools the SEC has is a court order imposing a bar on an individual – a bar from, for example, working in the securities industry or serving on the board of a public company. Such an order not only punishes past actions, but also can reduce the likelihood that the defendant can defraud and victimize the public again.

Thank you, M.J. For the first time in a long time, we have something to look forward to.

Leave your comments below.

Shah

Posted in Washington

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