WASHINGTON (Reuters) - 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.
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| A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters |
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.
"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.
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.
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)
