If the dozen bank and mortgage executives most responsible for nearly killing the American economy were making license plates inside a federal prison right now, one judge's recent attempt to force the Securities and Exchange Commission to take a tougher stand against the banks would probably have attracted much less attention.
But now more than three years after Lehman Brothers collapsed, the Justice Department, which has the power to bring criminal cases, has brought just one such high-profile case, which it lost. For its part, the SEC has brought dozens of civil cases related to the financial crisis, yet faces persistent criticism that it isn't doing enough to hold executives at the biggest firms accountable for fraud that happened on its watch. Some former high-ranking enforcement division lawyers say they wonder if it is even possible for the SEC to be the kind of Wall Street cop that they say the public wants.
The agency's enforcement director Robert Khuzami forcefully defended the SEC's track record for financial-crisis-related cases in a phone interview with The Huffington Post. "Our record in financial crisis cases is characterized by aggressive and broad-based enforcement activity" against companies and individuals who hid their exposure to bad mortgage loans from investors, he said.
The agency's success is reflected in the numbers, Khuzami said. Since 2008, the SEC has filed 38 financial-crisis-related cases and won nearly $2 billion in penalties, including a record $67.5 million from Angelo Mozilo, the former head of mortgage giant Countrywide. More broadly, Khuzami points to the record-breaking amount of fines the SEC collected in 2011: $2.8 billion in penalties and disgorgements for harmed investors.
But money doesn't necessarily equal justice, critics are quick to point out. "What we've seen for some time going back 20-plus years, is that the SEC has figured out that you can get a lot of settlements and a lot of money as long as the settlements are paid by the company and not the officers who authorized or carried out the misconduct," said James Cox, a corporate and securities law professor at Duke University.
These days the agency's antagonist-in-chief is Jed Rakoff, a New York federal district judge who has presided over three of the SEC's biggest cases. Rakoff has excoriated the agency for an enforcement strategy that he says doesn't do enough to punish banks for bad practices. Most recently, he spiked a $285 million settlement with Citigroup over charges that it sold risky mortgage-backed securities without telling investors that it was also betting against the debt. Rakoff said he couldn't tell if the deal, which included boilerplate "neither admit nor deny" language, was in the public interest. Rakoff said the deal would allow Citigroup to settle a four-year investigation at only a very minimal cost to the financial institution and without agreeing to the facts alleged by the SEC.
The SEC has appealed the decision.
Views on Rakoff among former SEC lawyers are mixed, but even some of those who think his legal standing to reject the Citi deal is shaky say that the agency needs a course correction. The SEC's filing more cases against banks' top executives would send a much stronger message that the agency is tough on financial crime than the current approach, these SEC experts say.
In recent high-profile cases brought by the SEC against Bank of America, Goldman Sachs and Citi, the agency sued the banks (and two mid-level employees, at Citi and at Goldman) but not their top executives. The SEC has crafted settlements that require those companies to pay fines that are almost meaningless for a multibillion dollar entity, say former SEC lawyers and other securities law experts.
Still, suing more executives isn't simple. Government lawyers at the Justice Department and the SEC have struggled to tie Wall Street practices, however odious, to crimes that can be pinned on individuals. "It can be very difficult to prove intent to defraud on the part of a senior executive especially when a product or a transaction has been reviewed by internal and external advisers," said Bruce Yannett, a white-collar crime attorney at Debevoise & Plimpton.
The SEC says it has charged more than 80 individuals with wrongdoing in connection with the financial crisis, including pending cases against five former executives of Colonial Bank and Taylor, Bean & Whitaker for allegedly fabricating mortgage loans, and suits against six former Fannie Mae and Freddie Mac executives on charges of securities fraud and misleading investors.
“We are keenly focused on pursuing individuals for financial crisis misconduct; in fact, we have charged individuals in 34 of the 38 financial crisis cases we have filed,” Khuzami said. “And where we have not charged individuals, it is simply because the evidence is not there.”
It is also tougher to resolve cases against high-ranking banking individuals as they are less likely to settle and more likely to insist on a trial, he said.
And while the SEC says it is ready to take every case to trial, sometimes things works out differently. The SEC's trial division handles only a tiny share of the cases the agency brings. In 2011, it tried 19 cases, winning 14. Taking on more trials would gobble up more SEC resources, which are already stretched. Currently, the agency receives 30,000 tips and complaints a year, not counting referrals from other agencies and its own investigations.
And there are other challenges that enforcement staff can do little to control. The SEC faces increasing challenges in policing the world's most complex financial markets even as it is caught in a tug-of-war between anti- and pro-regulation forces in Washington.
Congress approved a hike in funding for the SEC in 2012, to $1.32 billion, but much of that increase is expected to pay for the cost of implementing more than 100 new rules required under the Dodd-Frank reform law.
The agency also struggles against a legacy of its recent past. Bernard Madoff's admission that he masterminded a huge Ponzi scheme right under the SEC's nose nearly destroyed the agency. "Madoff was an embarrassment like hell," said Herbert Milstein, a plaintiffs lawyer that specializes in securities cases.
Multiple staffers at the SEC were later found to have repeatedly ignored bright flashing warning signs that the money manager was a crook. (How bright and flashing? Boston investment manager Harry Markopolis sent the agency a 21-page memo titled, "The World's Largest Hedge Fund is a Fraud.") In the aftermath, some members Congress even called for the agency to be dissolved.
Khuzami, previously a federal prosecutor and a former top lawyer at Deutsche Bank, took over as enforcement director in 2009. Current and former SEC staff credit him with improving morale in the wake of the Madoff case and making needed structural reforms, such as assigning staff to divisions charged with developing expertise in a specific financial area.
"He's made extraordinarily thoughtful and wise changes and deserves a lot of credit," said William McLucas, who ran the enforcement division for eight years and is now a partner at law firm WilmerHale.
McLucas said, however, that the public should temper its expectations. "We need to be realistic about the reach this agency can have with its budget, the expansion of financial markets and the increased responsibility under Dodd-Frank," he said. "It is not possible for the agency to do all the things it is supposed to do."