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Would you be ticketed for speeding while your mayor escaped penalty? The extent to which the powerful, especially Wall Street firms, influence their own legal outcomes at enforcement agencies like the SEC and the Justice Department is causing alarm among the U.S. public. An appeals court is set to rule soon on whether a judge has the right to answers or must simply acquiesce to an agreement made between the SEC and Citigroup. Here’s why the case should go to trial.
The issues began when the SEC accused Citi of “substantial securities fraud” related to “dump[ing] some dubious assets on misinformed investors,” according to a filing in the case. The securities regulator and the financial behemoth then worked out an agreement that the penalty would be $285 million of corporate funds, with no requirement that Citi admit wrongdoing.
Judge Jed Rakoff wanted more information on the settlement before making a judgment that it should go forward. Writing on November 28, 2011, he said “there is little real doubt that Citigroup contests the [SEC’s] factual allegations.” So he ordered the case to trial – and the SEC appealed.
When I spoke with former SEC chair Arthur Levitt in 2012 about the case, he referred me to his statements on Bloomberg TV: “The public is infuriated. They see executives going scot free.” “For Citigroup with the history they’ve had, the repeated number of cases in the past two or three years, I can understand Rakoff’s reaction to this,” he said.
Today, it’s not just regular folks that feel apprehensive about the state of financial regulation and enforcement. Besides Levitt, other former SEC top dogs also fear our regulatory system is failing us.
Last year, former SEC Chief Accountant Lynn Turner expressed his concerns to me about “the level of regulatory capture and close ties to the securities industry at the current SEC.”
In a wide ranging conversation last week, former SEC chair Harold Williams told me, “There is a feeling generally that the SEC is not being as aggressive as it ought to be, as enforcement minded, and that’s an unfortunate impression. If it’s erroneous, the SEC must dispute it. But I’m not sure they can.” The SEC did not respond to a request for comment for this article.
There are also concerns that regulators like the SEC have become a revolving door for professionals who move to private firms and then use their influence on behalf of those companies at the agency. “We’re concerned that the constant movement of SEC employees to and from powerhouse firms, such as Citi can shape the mindset of employees throughout the agency in a way that benefits SEC-regulated businesses,” says Michael Smallberg, an investigator with The Project On Government Oversight (POGO).
POGO has been studying the SEC’s revolving door for some time and their files include cases of individuals who left the SEC, went to work at Citi and then appeared before the SEC representing Citi. Two such cases include Scot Draeger, former counsel to then-Commissioner Roel Campos and Joshua Levine, former senior attorney in the SEC’s Enforcement Division.
Other situations are more opaque and the SEC redacts information in the disclosures. For example, there are filings related to Andrew Lawrence, former senior counsel in the SEC’s Enforcement Division, and Tammy Bieber, former attorney-advisor in the SEC’s Office of the Chief Accountant. Both went to work at private law firms and worked on the “Matter of Trading in the Securities of Citigroup, Inc. (HO-09548).” An SEC spokesperson would not provide a response regarding what HO-09548 was about.
Of course, not all those who move from the SEC to private industry take advantage of their ties to encourage special leniency for their new employers. Some SEC alumni use their experience to encourage their new bosses to meet high standards.
“The door at the SEC has revolved for a long time, but when you tie that to a sense that the Commission is not aggressive in enforcing its mandate, that’s serious. It reinforces the idea that the SEC is not aggressive,” Williams says.
The appeals court is expected to rule soon. Given the revolving door between the SEC and banks like Citi and the lack of public faith in enforcement, it’s important that the trial proceed. If not, maybe it’s time to just hang up a sign that says, “For Sale: Justice, Seldom Used.”
Separately, there are other SEC issues worthy of note, in particular, problems with President Obama’s SEC nominee.
Her ties to JP Morgan may make it difficult to address the disclosure issues there. The bank board’s report provides a cautionary tale for corporate board members.
Political spending should be on the radar of every corproate board.
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