Tuesday, April 15, 2014

Delamaide: SEC catching minnows, not sharks

WASHINGTON — Few fishermen would take as much pride displaying the catch of a minnow as the Securities and Exchange Commission did last month when a federal judge imposed an $825,000 fine on a Goldman Sachs junior executive for misleading customers about a dubious investment.

A good six years after wildly speculative trading by Wall Street banks delivered hundreds of millions in bonuses to top executives while bringing the global financial system to its knees and billions in losses to investors, the best the SEC can manage against these big banks and their executives is this single judgment of a bit player who was only 28 at the time.

Fabrice Tourre, who styled himself "Fabulous Fab" in an e-mail, may well have misled investors, but he has long been seen as a fall guy for widespread abuse by executives at Goldman and other Wall Street firms who are much more highly placed.

And yet Andrew Ceresney, chief of enforcement at the SEC, congratulated himself and his agency for this court victory. "The ruling reflects the SEC's intent of pursuing meaningful sanctions to punish individuals responsible for misconduct and deter others from violating the federal securities laws," he said in a statement last month.

Another SEC lawyer was much less congratulatory in remarks he made at his retirement party later in the month.

The SEC has become "an agency that polices the broken windows on the street level and rarely goes to the penthouse floors," James Kidney said at his goodbye party, according to a report by Bloomberg News, drawing applause from the 70-some people in attendance. "On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening."

The union representing SEC employees has since posted Kidney's retirement speech online. The trial lawyer said his bosses at the agency were "tentative and fearful" and were more concerned about getting high-paying jobs af! ter they left the SEC than tackling tough cases against top executives.

Goldman Sachs did pay a settlement of $550 million last year for misinforming investors on that same synthetic security that Tourre was brought to trial for. But no other executives, including Tourre's supervisors, were charged or fined. SEC enforcers, Kidney said at his retirement party, are "at most a tollbooth on the bankster turnpike."

A separate report in American Lawyer last week provided more details about the internal struggle at the SEC to hold higher-ups at Goldman personally accountable.

The publication sued under the Freedom of Information Act for transcripts of an investigation by former SEC inspector general David Kotz into the agency's handling of the Goldman Sachs case.

Lawyer Kidney was speaking out then, too, according to the American Lawyer report by Susan Beck.

"My experience in this case still bothers me a lot," Kidney said during 80 minutes of sworn testimony in the summer of 2010. "We take extraordinary inferences and apply them to common little people," he said. "It still bothers me that we had a lot more than inference here, and we didn't do anything with it."

Kidney felt there was enough indication of involvement by Tourre's supervisor, Goldman managing director Jonathan Egol, to warrant interrogation, though other SEC lawyers working on the case felt it was not sufficient. When, at Kidney's insistence, Egol was questioned, there was no follow up.

For the record, both Bloomberg reporter Robert Schmidt and American Lawyer's Beck harvested the usual "no comment" from spokesmen for the SEC and Goldman regarding Kidney's remarks.

The American Lawyer report notes that nearly a dozen other collateralized debt obligations similar to the one Tourre was found guilty of civil fraud for were never subject to SEC allegations or settlement.

At issue with all the CDOs was the fact that the hedge fund Paulson & Co. helped Goldman construct these synthetic securit! ies and t! hen sold them short in the confidence they would implode — which they did, reaping the hedge fund a handsome profit at the expense of the investors Goldman sold the securities to.

It's easy to understand why Kidney might be upset by all this.

The SEC chief enforcement officer at the time, Robert Khuzami, who was general counsel at Deutsche Bank before taking the SEC post, is now a partner at the corporate law giant Kirkland & Ellis.

Khuzami, like his successor Ceresney, would regularly trot out a blizzard of statistics about enforcement actions undertaken and disgorgements of profits and penalties levied, all to preserve the appearance that the SEC is a tough cop on the job.

In his retirement speech, Kidney criticized the use of misleading statistics to tout its enforcement efforts. "It is a cancer," he said of the practice. "It should be changed."

The SEC is spending too much time "picking on the little guys," he said. For the big fish on Wall Street, however, "we are a cost, not a serious expense." His conclusion: "The system is broken."

Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.

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