Not with a Bang but a Whimper – the SEC Enforcement Team’s Propaganda Campaign

Not with a Bang but a Whimper – the SEC Enforcement Team’s Propaganda Campaign
By William K. Black



The New York Times has one of those “inside” stories that unintentionally demonstrate the collapse of justice and financial reporting.  This genre involves the media reporting gravely (and uncritically) the administration’s claims that its failure to prosecute any elite for the largest and most destructive financial frauds in history actually demonstrates the exceptional ethical rectitude of the non-prosecutors and non-enforcers.  Journalists, unlike alchemists, can transmute dross into gold.  In the NYT’s account a pathetic failure of competence, integrity, and courage at the SEC is reimagined as a fantastic triumph of vigor and ethics on the part of the SEC enforcement attorney who refused to seek to hold Lehman’s senior officers accountable for their violations but otherwise became the scourge of elite frauds.  In the end, he is promoted for his dedication to “justice” and is now the anti-enforcement leader of the SEC’s enforcement group.


“Justice” became an oxymoron in the Bush and Obama administration.  It now means that the elite frauds that became wealthy through their crimes that drove our financial crisis should enjoy de facto immunity from prosecution.  The NYT, however, pictures the SEC as an ultra-aggressive enforcer that virtually never fails to take on the elite CEOs leading the control frauds.  The entire piece is one extended leak by the SEC’s enforcement leadership which has been severely criticized for its failure to recover the fraudulent profits that elite Wall Street bankers obtained by running the control frauds.  The puff piece, with no critical examination, presents these key statements.

“The S.E.C. … has brought civil cases against 66 senior officers in cases linked to the financial crisis. The agency also extracted nine-figure settlements from banks like Goldman Sachs. According to new research by Stanford University’s Securities Litigation Analytics, the S.E.C. has declined to charge individual employees in only 7 percent of its securities fraud cases.”

My article is the first installment of a three-part series of articles correcting the NYT propaganda.  This installment deals with these three sentences quoted above.  Someone carefully constructed them to maximize the misleading nature of the statements.  The “66 senior officers in cases linked to the financial crisis” is a phantom number without a source or useful definitions that falls apart as soon one looks at the SEC’s claims.  Here is the SEC source for the claim (note that it is posted on the SEC’s home page as part of the propaganda campaign that enlisted the NYT reporters’ aid).

How many C-suite officers of Wall Street firms were individually sued by the SEC?  The SEC says it took action against the following elite financial institutions:

Bank of America:  No officers sued

Bear Stearns:  No senior officers sued

Citigroup:  No officers sued

Countrywide:  CEO sued, settled for “record $22.5 million penalty and permanent officer and director bar. (10/15/10)” [WKB: most, perhaps all, of the penalty was paid by Countrywide’s acquirer and insurer.  According to the SEC’s complaint, the penalty represents a small percentage of the CEO’s fraudulent gains.  The CEO was already retired by the time the SEC sued.]

“Credit Suisse bankers – SEC charged four former veteran investment bankers and traders for their roles in fraudulently overstating subprime bond prices in a complex scheme driven in part by their desire for lavish year-end bonuses. (2/1/12)” [WKB: None of the officers sued was close to being C-suite level.]

Fannie Mae and Freddie Mac:  “SEC charged six former top executives of Fannie Mae and Freddie Mac with securities fraud for misleading investors about the extent of each company’s holdings of higher-risk mortgage loans, including subprime loans” [WKB:  all six executives are C-suite or very senior.]

Goldman Sachs:  No senior officers sued

IndyMac:  “SEC charged three executives with misleading investors about the mortgage lender’s deteriorating financial condition. (2/11/11) – IndyMac’s former CEO and chairman of the board Michael Perry agreed to pay an $80,000 penalty.” [WKB: The penalty figure is not a misprint.  IndyMac made hundreds of thousands of fraudulent “liar’s” loans and sold them to the secondary market through fraudulent “reps and warranties.”  It was the largest “vector” spreading mortgage fraud through the system.  The three executives sued were C-suite level.]

J.P. Morgan Securities:  No officers sued

UBS Securities:  No officers sued

Wachovia Capital Markets:  No officers sued

Wells Fargo:  No senior officers sued

The SEC has brought suits against only a dozen of the elite firms whose frauds drove the crisis.  In five of the cases it sued no individuals.  In four of the cases it sued no C-suite officers.  In nine of the twelve cases (I follow the SEC’s practice of counting Fannie and Freddie as one case) involving elite financial institutions it sued no senior officers.  The Stanford study of all closed SEC actions filed since 2000 that the reporters cite indicates that only 7% of overall SEC cases failed to sue an individual, but for the elite banks that the SEC says contributed to the crisis that percentage is 42 percent – six times the normal rate.  The Stanford study also reported that “the SEC has targeted solely lower level executives in only 7% of its cases.”  In the case of the elite banks that proportion rose to 33 percent – well over four times the normal rate.  In sum, the SEC data prove the opposite of what the SEC propagandists and their allied reporters sought to convey.  The pattern of SEC action with regard to elite banks and elite fraudulent bankers demonstrates that they are treated far differently than smaller, non-financial corporations.  (Note that this ignores the most important differences – the elite banksters’ frauds are far less likely to be investigated or sued by the SEC and enjoy de facto immunity from prosecution.)  The Stanford study does not include cases that the SEC failed to investigate or bring.)

The controlling officers of firms, not the corporation, make decisions.  They are happy to trade off penalties that will be paid by the firm.  Those penalties sound large but they merely represent the modest cost of doing fraudulent business to ensure that the controlling officers escape individual accountability.  The SEC can only achieve deterrence and take the profit out of elite fraud by making the criminal referrals and conducting the investigations that convict senior officers of felonies for their frauds and by recovering all of the officers’ fraudulent proceeds.

The SEC data demonstrate its epic failure in preventing the current crisis (the SEC was useless) and deterring future crises (the SEC leaves the fraudulent wealthy officers immensely wealthy).  The SEC has tried to bring enforcement actions against the senior officers of only three of the elite financial institutions (banks).  It has sued twelve senior officers of those three banks (or four if we depart from the SEC’s practice and call Fannie and Freddie different cases).  Its biggest “success” left the former CEO of Countrywide with virtually all of the vast wealth that the SEC claims to be the product of fraud.  It obtained $80,000 (also almost certainly paid by an insurer) from the CEO of IndyMac, the largest fraudulent seller of fraudulent mortgage loans.  That is it for the senior officers of the elite banks whose frauds the SEC says drove the financial crisis.

The SEC, as always, focuses its enforcement on non-elite corporations where it is far easier for its enforcers to rack up higher numbers of “successes.”  The “66 senior” individual defendants were overwhelmingly employed by non-elite banks.  The SEC’s own data demonstrate that it is a paper tiger when it comes to the elite banksters who grew wealthy by leading the frauds that caused the mortgage fraud crisis.

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