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SEC Targeting Low-Level Bankers Instead Of Their Supervisors, Analysis Finds

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(Aruna Viswanatha) - The U.S. government is not taking advantage of an enforcement tool that could potentially hold top Wall Street figures accountable for their role in the recent financial crisis, despite its prior success.

Broker-dealers, investment advisers, and others regulated by the Securities and Exchange Commission are required to supervise their representatives. If a trader engages in misconduct, the SEC can sue the management with "failure to supervise."

But in some of the biggest cases the SEC has brought in recent months -- against units of JPMorgan, Goldman Sachs, and Citigroup -- the agency has sued only low-level bankers.

Public anger following the U.S. government bailout of major banks in 2008 is fueling such disparate movements as Occupy Wall Street and the Tea Party, but government lawyers say they are bringing cases based on the evidence they have. Some experts argue the agency could be doing more.

"There is an affirmative obligation of supervisors to supervise their subordinates, but not a hint of that here," Duke University law professor James Cox said, referring to the SEC's recent cases against broker-dealer units of the top banks.

"What I see as a method of operation is big entity fines, but not holding any responsible person responsible, thereby robbing enforcement of substantial deterrent effects," he said.

An SEC spokesman declined to comment on its enforcement strategy.

The banks in question have paid between $153 million (JP Morgan) and $550 million (Goldman) since last summer to settle charges that they misled investors on complicated mortgage bond deals. Citigroup agreed to pay $285 million last month to settle similar allegations.

Bankers at the three institutions, the SEC said, hid the fact that they structured the deal to bet against it themselves or on behalf of clients who planned to do so.

A failure-to-supervise claim may have been challenging to bring in these mortgage cases. If the manager's actions, for example, didn't violate any of the firm's policies, it could be a tough case to make. In some of the deals at issue, it was the policies themselves that were at fault.

But the SEC has used the tool in the past to go after some of the most iconic figures on Wall Street.

When the SEC sued Salomon Brothers in 1992 over illegal bidding in Treasury auctions, for example, it didn't stop with the trader, Paul Mozer.

It charged three members of the firm's top management with "failure to supervise" the trader: Salomon's chief executive, John Gutfreund, a vice-chairman and a president.

The SEC extracted from Gutfreund an agreement never to run a securities firm again, while the others agreed to brief suspensions from Wall Street. All paid fines of $50,000 to $100,000.

Such sanctions could be more difficult today, when companies often demand implicit agreement from the SEC to leave senior management alone in exchange for settling.

"Generally, I think there is a desire by most companies to try to not have their employees be on the firing line," said former Republican SEC commissioner Paul Atkins.

Companies also seek to settle, while individuals will fight back, making the cases more difficult and time-consuming to bring.

The SEC brought its case against Gutfreund for knowing about the misconduct but failing to alert authorities. Whether higher-ups knew about the conduct at issue in the mortgage cases is unclear.

Defenders of the SEC say the agency is sensitive to public pressure to hold Wall Street responsible and is doing everything it can to bring those cases.

If the actions against JP Morgan and Citigroup had been brought several years ago, the SEC likely wouldn't have charged any individuals, even lower-level ones, said one securities lawyer, who declined to be named.

"They are looking for these cases, they are just not finding the evidence to support them," the lawyer said.

But other securities experts say failure-to-supervise cases are important to pursue due to the reputational impact they have, and the related deterrent effect.

"Maybe the facts weren't there, but I find that hard to believe," Duke's Cox said.

(Reporting by Aruna Viswanatha; Editing by Gary Hill)

Copyright 2011 Thomson Reuters. Click for Restrictions.

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