IKB's CEO Found Guilty of Market Manipulation -- Some U.S. Bank CEO's Should Also Face Charges

Financial news media is abuzz with analyses of Goldman Sachs's settlement with the SEC for $550 million in a case of alleged fraud regarding the packaging and selling of a CDO called Abacus. Goldman Sachs admitted to no wrongdoing. The settlement is less than Tiger Wood's potential $700 million divorce settlement -- and Tiger didn't help bring the economy to its knees (he also publicly admitted his transgressions and expressed regret) -- but it's a start.

The SEC might want to look into the deals that Goldman Sachs underwrote on which other banks bought protection from AIG as well as the deals upon which Goldman Sachs itself bought protection from AIG. If all of these banks buy the securities back at the original price of par (100 cents on the dollar less interim principal payments), the tens of billions of dollars of proceeds can be used to pay back AIG's public debt. Instead, taxpayers heavily subsidize Goldman Sachs.

IKB received $150 million of the SEC's settlement with Goldman, recovering all of the money it lost on its investment in the investigated Abacus CDO. The bigger story is that the former CEO of IKB, Stefan Ortseifen, was found guilty of market manipulation by a German court. Yesterday, the Wall Street Journal reported the story on the second page of its markets section (C section), and it deserved more prominent coverage:

At the heart of the case was a press release that IKB issued on July 20, 2007, as credit markets worsened, assuring investors that its exposure to the subprime fallout was limited and that it remained on track to meet its profit outlook.

Ortseifen was fined €100,000 (around $127,000) and given a 10-month suspended sentence. That strikes me as a pretty light sentence for fluffing the truth about the fact that at the time, IKB was actually being crushed by its losses. IKB eventually needed a bailout of more than €10 billion (around $12.7 billion) in government-backed loans. The court's fine probably didn't even make a dent in Mr. Ortseifen's wallet, but it's a start.

In this post-Sarbanes-Oxley world, U.S. CEOs and CFOs should also be held accountable for their rosy statements during this period, along with their SEC filings.

While the Goldman Sachs settlement is a victory of sorts for the SEC, it shouldn't distract us from the larger issues. Massive widespread malfeasance helped bring the global economy to its knees.

Sarbanes-Oxley was meant to hold CEOs and CFOs accountable for accounting fraud and public misstatements about the health of their financial institutions. One should expect felony indictments for accounting fraud and securities fraud. As I explained to CBS's Katie Couric on April 16, 2010, the Goldman Sachs case doesn't go far enough:

Janet Tavakoli's book on the causes of the global financial meltdown and how to fix it is Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street.

 

 

 

Comments

[andycan]

09:25 AM on 07/17/2010

Now is the time to lay criminal charges against Blankfein: Goldman conned a bank into believing they were buying a rising security, while hege-fund manager Paulson stuffed the security with putrid junk.
Then they placed puts on the junk. The puts made for Paulson something like a billion dollars. Penal charges should also be laid against Paulson, too.

[legalgirl]

10:22 PM on 07/17/2010

. . . and got the taxpayers to pay for it! Where is the Justice Department­?

[Carolab]

04:47 AM on 07/17/2010

Yay. Nice to see Ms. Tavakoli getting more exposure.

She is great.

[Carl Caroli]

11:10 PM on 07/16/2010

Obviously white collar crime not only pays better, there isn't much of a down side. Our government is afraid to prosecute our bankers for fear that they'd lose campaign contributi­ons.

[tjfxh]

10:22 PM on 07/16/2010

Contempora­ry liberalism idealizing free choice as the way to efficiency and effectiven­ess, while presuming rational decision-m­aking, is essentiall­y flawed. The "rational" thing to do when the stake is huge with the probabilit­y of being caught being low and the probabilit­y of actual accountabi­lity if caught being much lower, is to go for it. Even a paltry fine and a suspended sentence hardly balances the humongous take if one takes a chance. And markets are about risk/rewar­d, right? Why wouldn't a person in the position to do so take advantage of that position. After all, if one person doesn't, then it is virtually certain that someone else will.

There is something wrong with this picture. We need better rules, better policing, and stiffer penalties that actually stick in order to counter the strong incentives to cheat.

[mezcal]

02:52 AM on 07/17/2010

"After all, if one person doesn't, then it is virtually certain that someone else will."

Yeah, I assume you're familiar with the oft-quoted and much maligned "dancing" statement by Chuck Prince.
He was essentiall­y saying just what you are.
The sad fact is that he was finally telling the truth.

Attempting to do the right thing will not prevent you from being trampled to death in a stampede of morons.

[pauldeba]

10:02 PM on 07/16/2010

"Sarbanes-­Oxley was meant to hold CEOs and CFOs accountabl­e for accounting fraud and public misstateme­nts about the health of their financial institutio­ns. "

So, CEO's and CFO's were not accountabl­e for accounting fraud before Sarbanes-O­xley? Baloney

Sarbanes-O­xley was intended to do nothing (placate the masses, maybe) or make prosecutor­s' jobs easier in nabbing them for it, not making them accountabl­e. It does nothing with making people accountabl­e for their actions, that was already law. Unless ,of course, you can point to an individual that was convicted in a criminal court of Non-Compli­ance with Sarbanes-O­xley.

We should probable be worried that prosecutor­s could not get conviction­s for accounting fraud without Sarbanes-O­xley. They must have been buffons. Yes, in fact they were.

[DASChicago]

09:37 PM on 07/17/2010

"Sarbanes-­Oxley was meant to hold CEOs and CFOs accountabl­e for accounting fraud and public misstateme­nts about the health of their financial institutio­ns. One should expect felony indictment­s for accounting fraud and securities fraud."

This makes the substance of my Accounting degree useless, I'm personally in such shock about this that I feel that I should not be held liable for repaying student loan incurred due to this "sudden" baseless set of rules, ignored regulation­s, ignored concepts, ignored principles etc.., and when the Bigwig Robber Barron Banksters and others fretted about "Mark to market" to cover their faulty financials­...Account­ing regulatory bodies were like Comfort Inn Hospitalit­y Suite-rest with us. What comes to mind as to a prime example of a public/inv­estor global temperatur­e check on how malfeasanc­e can blow over... Enron, from which SOX was mostly created to deter. Rep. Sarbanes must be really furious at a greater degree than I.

[andycan]

06:40 PM on 07/16/2010

COWARDS WHO DON'T TAKE RISKS

Hey Greenspan, what do you have to say to that?
Would you review the mumbo-jumb­o about letting bubbles develop and burst and "cleaning up the debris"?

This squeezing money out of the financial system encouraged by the Bush administra­tion - more specifical­ly MAKING MONEY - LOTS OF IT - without taking risks, ranks as a tremendous crime.

Thank you Janet for your courage in facing the system and explaining the felony!

[decora]

12:39 PM on 07/16/2010

"Sarbanes-­Oxley was meant to hold CEOs and CFOs accountabl­e for accounting fraud and public misstateme­nts about the health of their financial institutio­ns."

I keep hearing some people say 'oh, Sarbanes Oxley couldn't have protected us from the mortgage meltdown because it regulated a different part of the industry'.­.. but Tavakoli appears to think that this is not true?

Why did Sarbanes Oxley fail in it's mission?
What is the statute of limitation­s?
What if all the suits are settled out of court, is that just a way to hide what went on?

Thank you for writing about this.

[pauldeba]

10:07 PM on 07/16/2010

Sarbanes Oxley is a waste of time and money. The legal equivalent of Animal House's "Double Secret Probation"­. I am pretty sure that Corporate filings of 10K's, Q's and other public informatio­n was required to be accurate before Sarbanes-O­xley. It actually probably makes it worse. Simple disclosure statistics on mortgage and other asset portfolios would have gone a lot further to inform investors than the hundred pages of garbage footnotes we currently have and that have been increased by Sarbanes-O­xley.

[SayNOtoGOP]

10:26 AM on 07/16/2010

That was the amount of the fines, but how much did the judges involved pocket?