Wall Street's top securities watchdog has made a big show of finally forcing wrongdoers to admit wrongdoing when settling fraud charges. But so far that's all the change looks to be: for show.
The Securities and Exchange Commission will take extra care, and its own sweet time, implementing the new policy, according to a report by The Wall Street Journal's Jean Eaglesham (subscription required). Though the SEC claims to be pulling together a "hit list" for its "landmark change" that "could start to bite within weeks," it also seems to be limiting its application of the new policy to small, nearly bankrupt firms that have little reason to fight back, the WSJ suggests.
The SEC also "hopes the first deal to include an admission of wrongdoing could come before Labor Day," Eaglesham writes. Here's hoping! But, hey, no rush.
It has only been SEC policy for several decades now that banks, hedge funds and other bad actors running afoul of securities regulations are allowed to settle charges against them without admitting or denying wrongdoing. The idea is that these perps would rather fight the agency in court for years than admit to evil deeds and open themselves up to criminal charges or private lawsuits. By letting them off the hook, the SEC avoids blowing its meager resources in court and gets money back to investors more quickly.
But the practice has created thunderheads of criticism and cognitive dissonance in recent years, with the too-big-to-fail set able to tiptoe away from the financial crisis with relatively small fines and no blemishes on its permanent record. In perhaps the most infamous case, Goldman Sachs admitted no wrongdoing in 2010 when it settled claims that it misled investors in building mortgage securities full of toxic junk hand-picked by hedge funds betting against the investors.
Citigroup cut a similar deal over toxic securities in 2011, but that was finally a settlement too far: It was brutally rejected by U.S. District Judge Jed Rakoff, who wrote, "An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous."
The SEC's new policy, announced last week by new SEC chief Mary Jo White, is designed to quiet the critics who warn the agency is creating moral hazard by letting banks get away with financial murder with only minor fines.
But given all the constraints the SEC is reportedly putting on this new policy, that is all the shift seems designed to do: Quiet critics. It does not seem designed to actually address the problem of creating moral hazard. The biggest banks and hedge funds, which have too much to lose if they admit wrongdoing, will not just roll over as long as they know they can crush the SEC beneath the weight of their well-paid lawyers.
The SEC appears to know this, too. White has admitted already that her awesome new policy will be used sparingly, in only a few cases. Legal experts tell the WSJ that these cases will include only the most flagrant lawbreakers, along with companies that have one foot in bankruptcy already and don't much care who sues them. From this pool will likely come some handy scapegoats, but it looks like the status quo will not be disturbed.