The SEC Says It Wants Big Banks to Admit Guilt, But Doubts Remain

Remember when federal Judge Jed Rakoff scared the bejesus out of Wall Street in 2011? That’s when he refused to sign off on a $285-million civil settlement between Citigroup (C) and the Securities and Exchange Commission over a massive mortgage fraud case.

Judge Rakoff balked at the logic of the settlement because Citigroup was not required to admit its misconduct. He called the payment “pocket change” and the SEC’s result “half-baked justice.”

It appears that, perhaps—just perhaps—the SEC and its new chief Mary Jo White have gotten the Judge’s message.

In a policy shift, SEC Chair Mary Jo White announced this month that the Commission will no longer give free passes to companies like Citigroup in the cases it settles. That was the longstanding policy that annoyed Judge Rakoff and so many others to no end. The SEC justified the policy by arguing that it was still exacting punishment while conserving the resources that would be needed to actually try the cases it brought against the big banks it believed had defrauded investors.

According to the Wall Street Journal: “The new policy, which came out of a review Ms. White began when she joined the agency in the spring, will be applied in ‘cases where… it’s very important to have that public acknowledgement (of wrongdoing) and accountability.”

The Journal further reported that “decisions will be made on a ‘case-by-case’ basis,” according to a report by Jean Eaglesham and Andrew Ackerman. But White “added the agency intends to target cases of egregious intentional conduct or widespread harm to investors”. Most cases still will be allowed to settle using the standard ‘neither admit nor deny’ formula,” according to the Journal.

What the Journal article fails to delineate, however, is a policy framework through which what the SEC will decide which types of cases will get the new treatment. Investors who have been victimized by stock fraud or other types of fraud that are disturbingly commonplace on Wall Street deserve to know what type of case meets this new standard. Will the Commission finally take the gloves off with Citigroup, Morgan Stanley (MS), Goldman Sachs (GS), UBS, JPMorgan (JPM) and other “”too big to fail” (and apparently “too big to jail”) firms that issued and traded the destructive mortgage-backed securities, derivatives and other “financially engineered” products that almost destroyed the global economy?

This new policy—we are told—will foster the “interest of public accountability” of Wall Street and deter fraud.

This is sweet music to the ears of investors who are fed up with the Feds giving much of Wall Street a free pass for its inherently financially destructive nature.

Still, we wonder if the SEC will really require a big bank like JPMorgan to admit its illegal conduct the next time around.

Next month’s SEC trial of the 29-year-old former low level Goldman Sachs trader “Fabulous Fab” is a prime example of how the SEC’s focus has been on the small fry and not the big fish.

In Fab’s case, he is going to trial for what Senator Levin famously cited from a Goldman email was “one $%&!” mortgage securities deal. Goldman settled in 2010 for $550 million without admitting its wrongdoing, while Fab faces the music.

Pushing low-level Wall Street managers and traders like Fab to admit their misconduct is all well and good, as long as the SEC shows it has the guts to push Wall Street banks to do the same. We will applaud the Commission when it shows that courage. Until, then, our fingers are crossed!

Disclaimer: Zamansky & Associates are stock fraud attorneys representing investors in arbitration and litigation against financial institutions, including Citigroup, Morgan Stanley, Goldman Sachs, UBS and JPMorgan Chase.
About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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