考研阅读精选：金融监管下的华尔街躁动不安
A financial regulator under fire Unsettling Wall Street金融监管下的华尔街躁动不安
A judge rules against the SEC’s favorite way of penalizing financial institutions
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AS AMERICA looks back on the financial crisis, the Securities andExchange Commission (SEC), Wall Street’s main regulator, is underparticular scrutiny. On November 28th a judge took aim at one of its pethabits: agreeing to “plea bargains” with financial institutions.
It works like this. A bank is accused of wrongdoing. It agrees to pay ahuge fine to make the charges go away. Instead of going to court, theSEC agrees. The bank avoids admitting guilt, or being found guilty ofanything. It also disarms aggrieved investors of a weapon (a conviction)which they might have used in future lawsuits.
From the public’spoint of view, the advantage of such deals is that they are cheap andeasy. A full trial against a big bank can cost a fortune. The bank,obviously, can mount a vigorous defense. By settling, the SEC guaranteesa good-enough result. It collects money. The bank is shamed by theairing of (unproven) charges. The regulators can claim victory in pressreleases and self-congratulatory reports to Congress.
It is hard toimagine a more thorough rebuke of these arguments than that delivered byJed Rakoff, a New York district judge, in rejecting a $285m settlementbetween Citigroup and the SEC.
The case involved a fund that, itis alleged, the bank had designed to fail. The subsequent implosion costinvestors $700m while earning Citi $160m. Mr. Rakoff called thesettlement not just a betrayal of the public interest, but the productof an approach “hallowed by history but not by reason” that provided theSEC with little beyond a “quick headline”. Settling withoutestablishing the facts “is worse than mindless, it is inherentlydangerous,” Mr. Rakoff wrote.
If the unproven allegations werecorrect, they constituted a violation of core principles of securitieslaws. Citi, said the SEC in its complaint, created a billion-dollar fundhalf-full of wretched mortgages. It then bet against it, earning feeson both ends of the transaction. Investors were not told of Citi’s rolein choosing securities, nor how it stood to benefit if defaults ensued.
Those contentions alone would put Citi in violation of the disclosureprovisions at the heart of the 1933 Securities Act, the foundation ofmarket regulation. But in a curious twist, Mr. Rakoff noted that in aparallel complaint against the Citi employee who structured the fund,the SEC went a critical step further, suggesting deliberate deceptionand thus fraud, which would have put the bank at odds with another coreprovision of the act, and opened it up to civil litigation. The absenceof the charge in the Citi complaint makes some wonder if the scope ofcharges is inversely proportional to the size of the defendant.
Beyond the issues in the immediate case, Mr. Rakoff noted that althoughthe settlement called for Citi to operate under an injunctionprohibiting further illegal conduct, such conditions had been imposed onit, and others, in the past, with no consequences. Merely establishingthe authority of the court without firm cause, “serves no lawful ormoral purpose and is simply an engine of oppression”, he wrote.
Asettlement also carries other large costs for society, Mr. Rakoffadded. “In any case like this that touches on the transparency of thepublic markets whose gyrations have so depressed our economy anddebilitated our lives, there is an over-riding public interest inknowing the truth.” He ordered a retrial to begin in July 2012.
Unsurprisingly, Citigroup and the SEC both expressed their objections.Citi said it stood ready with “substantial factual and legal defenses”.The SEC noted decades of precedent, and asserted that the settlement“reflects the scope of relief that would be obtained after a successfultrial”.
The SEC then released a letter from its chairman, MarySchapiro, asking Congress for the right to inflict heavier penalties onrecidivists, a barely veiled reference to Citi and its like. That mayplacate some of the SEC’s critics, but it does nothing to address Mr.Rakoff’s most important concern: that before a suitable punishment canbe set, there must be a determination as to what occurred, and why itwas wrong. Of such sentiments are revolutions born.
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