Who's protecting investors from bailed-out bankers?

The SEC's enforcement failures, along with a lack of proper funding and legislation, leave investors on their own.

By MSN Money Partner May 29, 2012 10:47AM

By Abigail C. Field, guest columnist

Watch out investors -- the Securities and Exchange Commission has forgotten why it exists. You're on your own.

The latest proof? The SEC admitted it was doing nothing in the face of Lehman Brothers' crisis-leading fraud.

The Lehman bankruptcy examiner's report maps out, at a minimum, Sarbanes-Oxley charges against CEO Dick Fuld and other key executives. Lehman was using an accounting gimmick to misstate its financial condition by some $50 billion. But the gun shy SEC isn't willing to sue, fearing that even in today's Wall Street executive-hating world a jury would vindicate Fuld by interpreting 'subjective' accounting rules in his favor.

Bailed-out banker recidivism

The SEC's enforcement failures go far beyond Lehman Brothers. For a decade, the SEC has demonstrated that it would rather massage the wrists of the Wall Street elite than bring cases big enough to deter future wrongdoing.

Let's look just at JPMorgan Chase (JPM), since it's the bailed-out bank that most recently showcased its recklessness. As the New York Times documented, in 2006 JPM promised not to violate Section 17(a) of the 1933 Securities Act. But violate it again JPM did, in 2008, 2009 and 2011. JPM similarly reneged on its 1999 commitment not to violate Section 15(c) of the 1934 Exchange Act by violating it in 2011.

Despite this recidivism, the SEC gave JPM 12 waivers from related penalties that would ordinarily automatically kick in. Eight waivers allowed JPM to make forward looking statements with little risk, and four that let JPM sell its own stock without prior SEC approval. Ten of the 12 waivers date between 2006-2011.

The SEC's biggest failures relate to the financial crisis. Lehman isn't the only company let off the hook. The SEC also gave AIG (AIG) and its leaders a pass. Countrywide's Angelo Mozillo was treated so gently that not a dime of his $45 million insider trading penalty came out of his own pocket.

Frankly, the entire mortgage securitization industry, including all the related derivative products, was so rife with fraud that investors since then won't buy new MBS unless issued by Fannie or Freddie and thus backed by taxpayers. Or as the OECD delicately put it in a 2011 report, "investor confidence in the asset class remains weak."

Despite the SEC's list of financial crisis enforcement actions, investors are not reassured. Beyond the recidivism sketched above, investors realize that the SEC's suits have barely touched the tip of the fraud iceberg. And investors are showing their distrust by withholding their dollars.

Blame congress and the President

Blaming the SEC alone, however, is unfair. Congress and President Obama deserve even more blame. Both failed to enact desperately needed, market healing reforms, such as reinstating the original Glass-Steagall act and creating a transparent derivative market. Dodd-Frank did some good, but is nowhere near the equivalent of the 1933 and 1934 Securities laws.

In addition, Congress has failed to give enforcers like the SEC real money. Sure, the SEC could be much more effective with the dollars it has, but to really clean house the SEC's budget needs another zero at the end. Finally, President Obama deserves blame for putting the wrong people in charge.

The SEC's Mary Shapiro is such a lousy prosecutor she can't spot a massive conflict of interest right under her nose. Somehow she didn't have a problem with the lead SEC person on Madoff having a substantial financial interest in the Madoff case.

Even worse, however, is putting Robert Khuzami in charge of enforcement. As the Wall Street Journal reported in 2010, Khuzami was Duetsche Bank's top CDO lawyer in 2006 and 2007, peak bubble and fraud years. Is it really surprising Khuzami has not been aggressive against his former industry colleagues?

The bottom line for investors is clear: buyer beware; no one, from our President and Congress down to the SEC's Chief of Enforcement, is protecting investors from the bailed-out bankers.


Abigail C. Field is a freelance writer and attorney who blogs at Reality Check.

Tags: aigJPM
May 29, 2012 2:34PM
Shapiro should be sacked .Obama is a timid eunuch who doesn't seem to realize that if he showed some guts he might really help his reelection chances.The public want to nail these Wall Street bankers who get bailed out and go right back to endangering the whole financial system
May 29, 2012 11:11AM
What a load. They worry because a jury would give him a death sentence.
May 29, 2012 12:59PM
I don't believe JPM ever took any TARP funds.
May 29, 2012 12:58PM

So who is really in charge?  I think events of the last decade have shown us that it is really those who were bailed out and their ilk who are really in charge.   We live in dangerous times... but not for them.  They're golden.

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
267 rated 2
455 rated 3
612 rated 4
682 rated 5
695 rated 6
632 rated 7
472 rated 8
279 rated 9
147 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.