On the surface, the year 2011 was one of ramped-up securities regulation and scary times for financial scammers, with enforcement cases soaring at the U.S. Securities and Exchange Commission and coverage galore about the humbling of inside traders and municipal-bond riggers.
Along with the sexy headlines about felled lawbreakers, though, there were also troubling free passes and favors granted to the accused and the privileged.
Laws that were set up to punish bad guys got waived within days of the press releases announcing that the offenders had been brought down. Well-connected lawyers in the employ of investment firms got express-lane access to regulatory brass. Among the C-suite set, there was even one big name who left the securities industry for a few years and returned to face the humiliation of retaking the licensing tests. Of course, as it should be for the privileged, he got a waiver from the requirements that lesser mortals on Wall Street must meet.
In November, the said big-shot wound up resigning from his gig at MF Global Holdings Ltd. after the firm filed for bankruptcy, but we’ll get to that later.
The good news is that the most compromising free pass of all, the ability of alleged financial cheats to dispose of SEC lawsuits by saying they “neither admit nor deny” what they’ve been accused of, is under fire and inspiring calls for congressional hearings. Just how odious these deals have become was exemplified in a spat late last month between U.S. District Court Judge Jed Rakoff and settlement partners Citigroup Inc. and the SEC.
Rakoff said in November that he wouldn’t sign off on the SEC’s $285 million settlement with Citigroup, which had been accused of misleading investors in a $1 billion financial product tied to risky mortgages. Dissatisfied with Rakoff’s decision, Citi and the SEC went to the appeals court on Dec. 27 seeking a stay, even talking on the phone with Rakoff later in the day about procedural matters without mentioning a word about their new motion. “Misleading,” Rakoff said in a Dec. 29 order.
Rakoff, who in 2009 nixed a similar deal between the SEC and Bank of America Corp., seems to have broken the spell of courts that rubber-stamp these ultimate regulatory cop-outs.
Paying fines and walking away from liability, though, isn’t the only break that the accused have been catching. It has become routine that, on the heels of a settlement with the SEC, big banks and other defendants request and receive waivers from punishments designed to kick in as a result of their settlement orders. My personal favorites are the series of agreements between the SEC and the investment firms it accused of rigging prices of municipal bonds. Five firms have agreed to pay $743 million in bid-rigging cases since December 2010 — all reaping the benefits of those “neither admit nor deny” clauses along the way, of course.
If we are to believe the SEC, some of those firms that didn’t have to say they did anything wrong really did break laws and hurt the public. Read this quote from a May 4 SEC press release: “Our complaint against UBS reads like a ‘how-to’ primer for bid-rigging and securities fraud,” said Elaine C. Greenberg, chief of the SEC’s Municipal Securities and Public Pensions Unit. “They used secret arrangements and multiple roles to win business and defraud municipalities through the repeated use of illegal courtesy bids, last looks for favored bidders, and money to bidding agents disguised as swap payments.”
I don’t know about you, but that sounds pretty bad to me. Fraud. Secret arrangements. Disguises.
Bad, perhaps, but not bad enough to stop UBS AG’s lawyers at Debevoise & Plimpton LLP from writing to the SEC five days later on May 9 to ask a favor. Through its lawyers, UBS asked the SEC not to enforce a rule that would have disqualified it from participating in securities offerings that are exempt from registration requirements. To help make the case for UBS, the letter cited nine examples of times the SEC had granted waivers for “similar reasons” since 2002, including another action against UBS. On the very same day, the SEC wrote back to say the waiver was granted.
In case you are having trouble keeping track, what we’re talking about here is an exemption from a ban from an exemption. Regulators do have the ability to bring administrative proceedings if a firm abuses the privileges it gets from a waiver. But if we need to go to this much trouble to undo the rules when somebody gets caught — but doesn’t admit it anyway – - why have rules at all? UBS didn’t respond to a request for comment.
While all the settling and waiving and exempting is going on, the banks paying the most for legal juice benefit from remarkable access. Thanks to research by the Project on Government Oversight, the public got hard data back in May showing just how easy it was for SEC professionals to leave their posts for the private sector and, on behalf of their new financial-industry clients, to get rapid entree to sitting securities regulators.
The group got five years’ worth of information about SEC employees who left their jobs and, within two years of their going-away parties, wound up representing financial firms before the agency. In all, 219 former SEC employees filed 789 of the required statements (“Hey guys, we’re back, and wearing nicer suits”) from 2006 to 2010.
To give you a flavor of how these things really work, I’ll mention one of several gems among the 789.
Margaret E. “Mitzi” Moore, former senior counsel in the SEC’s Office of Compliance Inspections and Examinations, resigned Jan. 13, 2006, and within two months disclosed that she and other colleagues at her new job at the Financial Services Roundtable would be meeting March 17 with then-SEC Chairman Christopher Cox. The Project on Government Oversight got its hands on the meeting agenda that Moore submitted, and the first item on the list was a shout-out for the “good start” and “positive mood change at SEC.” The question “positive for whom?” comes to mind. Equally depressing was her memo notation that the SEC had made “good staff appointments.”
Much as we would all love to know exactly which regulators were warming the hearts of Wall Street lobbyists, the names were deleted from the agenda. In July last year, the Government Accountability Office released a study on similar revolving-door issues, but did give the SEC credit for a new policy of collecting post-employment information from departing workers.
Perhaps I am being too tough on the financial cops who pride themselves on being vigilant enforcers of rules that keep financial markets safe and fair. At the Financial Industry Regulatory Authority, the Wall Street-financed self-regulator that is overseen by the SEC, decision makers have been known to be uncompromising in ensuring that members don’t skirt the rules.
With some exceptions, Finra expects members to re-take licensing exams if they have been out of the business for more than two years. It has fought and won battles against some former brokers, invariably small fries, who look for waivers.
Some brokers who challenged Finra’s tough decisions have appealed to the SEC, only to have the agency back Finra with arguments that are hard to criticize. In one case, the SEC said the re-exams can be a safeguard to the public interest. In another, the agency argued that a broker who had been out of the business for more than two years should be denied an exam waiver because “in that time, there have been changes to the securities laws and regulations” with which she should be familiar. And who could argue that understanding the rules is important if you’re entrusted with other people’s money?
Which is why the exam waivers granted to Jon Corzine, the former MF Global chief executive officer who resigned from the bankrupt company last year, make you wonder. Corzine took his Series 7 broker exam in 1975, and took the test for brokerage principals in 1982, yet he landed a waiver of both of those exams when he took over at MF Global in 2010. By then, he had been out of the business since 1999, having served as the Democratic governor of New Jersey and senator of that state. Finra has said it showed no favoritism in granting the waivers.
But as history continues to get written in the MF Global story, regulators might take some lessons from their own tough talk about the importance of keeping up with regulations and safeguarding the public. Sometimes digging in your heels to enforce the rules isn’t such a bad idea.