Are regulators too soft on prosecuting securities fraud?
If you thought too many incidents of securities fraud in the U.S. go unpunished, you’re probably right. This is the view of trial attorney James Kidney, who recently retired from the Securities and Exchange Commission.
Speaking at his retirement party, Kidney said his bosses were too “tentative and fearful” to prosecute many Wall Street leaders after the 2008 credit crisis. He noted that the commission can pursue fraudsters more vigorously, and should ratchet up enforcement, since it operates with a lower burden of proof than the Justice Department.
However, Kidney noted that he often got the message from his superiors that he should not take too many risks. He contended that those above him were more focused on getting high-paying jobs after their time with the agency than on bringing difficult cases.
As a result, Kidney argued, the SEC pursues smaller, less egregious cases. And when major cases are prosecuted, the agency backs away from using the toughest enforcement measures allowed.
He added that the SEC cites misleading statistics to showcase its enforcement efforts, and that the commission should focus on filing fewer quality claims rather than filing a myriad of suits in order to impress lawmakers and the media.
An experienced litigator, Kidney worked at the agency since 1986, except for a four-year stint elsewhere. He won at least six insider-trading trials, and campaigned internally to bring charges against more executives in the SEC’s 2010 case against Goldman Sachs Group Inc.
Kidney is not alone in criticizing the SEC. Lawmakers, judges and advocacy groups claim that the agency has been too easy on the banks that helped fuel the 2008 financial crisis. The banks did this by selling questionable mortgage-backed securities to unwary investors. The SEC brought civil charges against only a few, and no senior executive at a major financial firm has been imprisoned
According to Kidney, the SEC’s suit against Goldman Sachs illustrates the agency’s failure to go after the biggest fish. The bank agreed to pay $550 million to settle claims that it misled investors by packaging and selling collateralized debt obligations that were linked to subprime mortgages.
The SEC also sued the vice president of the team that put together the deal over which the agency brought suit. The VP was found liable and ordered to pay $825,000 in penalties and costs.
However, the commission did not sue the vice president’s boss or executives from other companies who picked the risky securities for Goldman Sachs.
Despite his harsh words, Kidney says he will always be loyal to the SEC and was simply trying to offer constructive criticism.
Scott Starr, investment fraud attorney at Starr Austen & Miller LLP, points out that the three regulators of the securities industry–FINRA, SEC and State Securities Commissions–do not have sufficient resources to police the industry.
Echoing sentiments expressed by industry insiders and people familiar with SEC actions, Starr said, “The SEC is too cozy with the industry to truly go after the bad guys.” He adds, “That leaves the few securities law firms like ours who specialize in securities fraud cases and broker malpractice to enforce the rules and get justice for those who have been victimized by the industry.”