The SEC Doesn’t Score Much In Blame Game

The Securities and Exchange Commission’s latest attempt to assign blame for the financial crisis hit a roadblock last week, after what was already a journey over a bumpy road.

A federal judge awarded only a small fraction of the penalty that the SEC sought from the Reserve Primary Fund, a large money market fund that “broke the buck” in September 2008. U.S. District Judge Paul Gardephe also denied the SEC’s motion for a new trial against two of the fund’s executives, Bruce Bent Sr. and his son, Bruce Bent II.

A jury cleared both father and son of civil fraud last November, though it found the company itself made fraudulent statements. At the time, I observed that the jury’s decision seemed likely to have been a compromise, especially given that Hurricane Sandy had forced the jury to suspend its deliberations for a week. Gardephe’s decision finally arrested the lingering momentum of what the Bents’ lawyer characterized as a case of “fraud by hindsight.” The judge awarded civil penalties of $650,000 against the corporate entities, out of the $130 million the SEC had sought; against Bruce Bent II, whom the jury found liable of one claim of negligence, Gardephe awarded $100,000 of the SEC’s requested $1.3 million.

“These entities were in business for decades and committed few regulatory violations,” the judge wrote, adding that the wrongful conduct cited by the jury “took place over a period of less than 36 hours and during a time of enormous economic stress.”

As I observed last November, just because something bad happens does not necessarily mean that there is someone to blame for it, regardless of the political pressure to find someone blameworthy.

The Reserve Primary Fund was essentially put out of business by the financial crisis. This gave the fund and its executives every incentive to continue engaging with regulators through the legal system. They had nothing to lose in fighting the SEC’s attempt to assign a large share of blame for the crisis to a party that had almost no role in creating it. Further, as a spokesman for the Bents noted after Gardephe’s decision, “Investors have already received more than 99% of their investment from 2008.”

In contrast, I wrote recently about JPMorgan Chase’s (JPM) decision to resolve the SEC’s investigations into the trading loss known as the “London Whale,” which cost shareholders more than $6 billion. The bank agreed to pay $920 million in fines and to admit fault in the incident. Could Chase have continued to fight? Probably. But Chase is a big, ongoing banking business. Its leaders made a business decision to make nice with their regulators. Unlike the Reserve Primary Fund, Chase still has a lot to lose if it chooses to push back.

The SEC continues to look for scapegoats, yet reality continues to intervene. Lehman Brothers failed to offer a viable target for blame, and it seems increasingly clear that no simple villain will emerge from the largely settled dust of the 2008 financial crisis. Without an evident wrongdoer at whom to aim, the SEC’s attempts to assign blame will continue to miss most of their targets.

It is too bad that only individuals and entities with their backs against the wall are willing to take a chance on juries and judges who recognize baseless scapegoating when they see it. If bigger businesses had the same faith in the legal system, I think we would see a lot less regulatory grandstanding. Perhaps we would even see a bit more attention to wise regulation as a result.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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