Corporate Death Penalty

The first corporate casualty — as in death — appeared in the expanding mutual fund scandal. It was reported yesterday that Eliot Spitzer and the SEC “filed charges yesterday against the Security Trust Company, which processes fund trades, and three of its former executives. The Office of the Comptroller of Currency said it would force the company to be dissolved by March 31. The soon to be deceased company brokered deals between large hedge fund to make improper trades of the mutual fund firms.

“The company is history,” Mr. Spitzer said.”

This came about after Spitzer — that’s NY Attorney General Eliot Spitzer, if you’re Nasty — had warned the U.S. Senate that the mutual fund industry was in danger. The “punishments could be devastating.”

Spitzer used language some considered combatitive and incendiary — not me, but some. Spitzer testified that a “criminal conviction could be a “death penalty” for a brokerage company. He added “No company should be considered too big to fail.”

The only reason Merrill Lynch was allowed to survive was that it employed so many people in the NY area. I suspect Spitzer didn’t want to be responsible for putting all those people out of work; It was economics, not politics, because you just KNOW those Merrill employees ain’t voting for him anyway. Killing Merrill would have been a devastating blow to the NY and NYC economies. That’s right, Spitzer has the power to whack the entire NY economy. Such is the nature of the vaccuum left by the S.E.C., which the NYAG is more than amply filling. Instead, there was that small matter of a $1.4 billion settlement. Give the guy credit, for a lawyer, he certainly can add.

Still, that kind of strong talk has plenty of people scared, as well they should be. If I was Dick Strong, or Pilgrim or Baxter, I’d be hunting around for some serious legal talent about now.

“Some people on Wall Street are starting to worry about the possible repercussions of a rush to prosecute the people who manage $7 trillion of investors’ savings.” I would suggest that these people are worrying about the wrong things. They should think about putting the fire out before they start choosing new wall paper.

The Times also quoted former S.E.C. chairman Arthur Levitt:

“Although Mr. Spitzer’s more aggressive stance and tone may seem improper to some regulators in Washington, it reflects the sinking attitudes of investors. “This kind of extreme language often brings about a reaction, but I haven’t seen that reaction kick in yet because the public disgust is still running its course,” Mr. Levitt said. “There are some dangers in what he’s doing because he can overplay his hand,” he added. “But right now the public is so disgusted with the business community that they want to see heads roll, they want to hear intemperate conversation and they want to see people go to jail.”

I would submit that its more dangerous to allow these theives to operate unchecked. The bigger danger is for investors to feel the entire system is utterly corrupt beyond all repair. THAT would be devastating.

A Man of His Word
By Patrick Mcgeehan
NYT, November 26, 2003

Banking Regulators Shut Down Security Trust Company
By Diana B. Henriques
NYT November 25, 2003

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