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An analysis by The New York Times of the Securities and Exchange Commission (SEC) enforcement actions during the past 15 years has found that Wall Street firms have broken anti-fraud laws they had pledged not to breach in at least 51 cases.

The New York Times Report

These cases involved 19 different firms, according to a report that appeared in the newspaper on Nov 7.


Citigroup’s recent attempt to settle civil charges that it had defrauded customers during the housing bubble is one example. The gigantic financial services firms agreed last month to pay $285 million after the SEC charged that it had peddled a bundle of mortgage to investors that it claimed was independently assembled. The allegations were that Citigroup itself had assembled the mortgage package and was betting on it to fail.
Citigroup made $160 million from the deal, while investors lost $700 million, according to a Washington Post report on the case.
The case is outstanding. Judge Jed Rakoff of the U.S. District for Southern District of New York signaled he would refuse to approve the settlement. Rakoff stated that the deal would recover only a fraction of investors’ losses. In addition, he criticized a term of the settlement that would have allowed Citigroup to neither admit nor deny the allegations, saying it would leave the bank free to claim that it did nothing wrong in private lawsuits over the remaining damages, the Post report said.

Citigroup Breaks Anti-fraud Pledges

The Citigroup settlement also included a pledge that has become typical when the SEC pursues such matters. The firm said it would never violate one of the main antifraud provisions of federal securities laws. But according to the report in the Times, this was not the first time Citigroup made this pledge.
Between the predecessors of Citigroup, its parent company, and its main brokerage subsidiary, the firm has agreed not to violate the very same antifraud statute four times, the Times report said: In July 2010, May 2006, March 2005 and April 2000.

Several Financial Companies Break Pledges

The Times analysis found that almost all of the biggest financial companies, including Goldman Sachs, Morgan Stanley, JP Morgan Chase and Bank of America, have entered settlement agreements in fraud cases that included the pledge that they would never again violate an antifraud law, followed by further action by the SEC in a few years charging that they had done precisely what they pledged not to do.
Judge Rakoff, in the course of the Citigroup case, asked the SEC whether it ever brought contempt charges against the firms that have treated the pledge as worth less than the paper it’s printed on. The SEC said in a court filing that it has not brought contempt charges against any large financial firms in the last 10 years.
The SEC could bring civil contempt charges against a company for violating one of it orders, but the agency has said it prefers to use its resources to bring charges of new violations against a company rather than to pursue contempt charges.
Since the financial crisis revealed serious weaknesses in the regulatory system, the SEC has been criticized for being soft on securities law violations. Given the SEC’s limited resources, a lot of malfeasance goes unpunished, critics say, including Sen. Carl Levin, D-Mich, chairman of the Senate permanent subcommittee on investigations, and Barbara Roper, director of investor protection for the Consumer Federation of America, according to the Times report.
Even when the SEC take an enforcement action, firms often pay a small price, considering the staggering amounts of money involved.
The SEC said it often settles because of limited resources. The settlements cost far less than litigation against Wall Street firms with deep pockets, litigation the SEC could lose.
Robert Khuzami, enforcement director of the SEC, told the Times that the pledges do have a purpose. When it comes time to settle, a firm’s history will figure in the negotiations regarding fines and penalties.
Some experts have said the settlements are mostly meaningless, especially because nearly every one of them allows a company to neither admit nor deny the accusations, the method called out by Judge Rakoff in the Citigroup case as one companies use to make themselves less vulnerable to investor lawsuits.

Repeat Pledge Offenders Are Plentiful

For example, since 2005, Bank of America’s securities had made four pledges to not violate a major antifraud statute, and agreed another four times not to violate other laws. Merrill Lynch agreed not to violate the same two statutes seven times since 1999. Bank of America acquired Merrill Lynch in 2008.
The Times’ analysis showed 19 companies were found by the SEC over the last 15 years to have repeatedly violated fraud statutes they had promised not to violate. The list contains some of the biggest names on Wall Street: American International Group, Ameriprise, Bank of America, Bear Stearns, Credit Suisse, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, Putnam Investments, Raymond James, RBC Dain Rauscher, UBS and Wells Fargo.

Bank of America

The Times report tracked matters involving Bank of America, which was one of a handful companies charged in 2005 with allowing traders to buy or sell a mutual fund at the previous day’s closing price, at a time when it was clear the price was poised to move up or down sharply. Thus, the trades guaranteed a big short-term gain or avoided a big loss.
In the settlement, Bank of America neither admitted nor denied the conduct. It paid a $125 million fine and placed $250 million into a fund to repay the investors. And it pledged to never violate the major anti-fraud statutes.

Bank of America Breaks Anti-fraud Pledges

Two years later, the SEC again accused Bank of America of fraud. The bank had allegedly used independent research analysts to bolster investment banking activities. Again, without admitting or denying guilt, the bank paid a $16 million fine to settle the matter and promised once again not to violate the law.
In 2009, the SEC went another round with Bank of America for defrauding investors. The case involved $4.5 billion of risky auction-rate securities sold by the bank in 2007 to 2008. Buyers were told these securities were as safe as money market funds. They were not. This time Bank of America agreed to be “permanently enjoined” from violating the same section of the law it had agreed not to break before, according to the Times report
Last year, the bank pledged once again to never violate the very same law.
It was accused of rigging bids in the municipal securities market from 1998 through 2002, according to the SEC. Bank of America paid no penalty to settle the charges. Investors were refunded $25 million, plus $11 million in interest.
And yes, once again, the SEC let the bank neither admit not deny the charges, despite the fact that it had settled a case with the Justice Department’s antitrust division at the same time, admitting the same conduct, the Times report said.
Companies routinely argue, the report said, that while they may be settling multiple violations of the same law, because the facts of each case are different, they should not be considered a repeat offense.

Guiliano Law Group

If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.