A Pen, a Telephone, and the SEC?

June 16, 2014

Hardly a day passes without news of one financial scandal or another in the financial services industry, particularly hedge funds, with SAC Capital Advisors, LLC being one of the higher profile examples.

Colossal Fines

The Security and Exchange Commission (SEC) has posted a list of cases on its website detailing the results of its efforts. This list is composed only of those defendants charged with offenses relating to the Financial Crisis and the fines, penalties, etc., total just over $3 billion. While this is an enormous sum, it is a mere fraction of the total monies the government extracts from the financial community as a whole. This begs the question, what becomes of the money these firms and individuals pay in atonement for their transgressions?

Following the Money

For example, in the SEC’s April 16, 2010 complaint charging Goldman Sachs with misstating and omitting material facts regarding a Collateralized Debt Obligation (CDO) it was marketing to investors. One critical piece of information Goldman Sachs failed to disclose was hedge fund Paulson and Co. Inc.’s role in the selection process of the portfolio and, more significantly, the fact that Paulson held a short position in the CDO (known as ABACUS 2007-AC1).

A brief three months later, the SEC was announcing Goldman Sachs’ settlement agreement in the amount of $550 million, $250 million of which was earmarked for victim restitution and, the remaining $300 million slated for the coffers of the U.S. Treasury. Additionally, Goldman Sachs pledged to reform its business practices.

The SEC’s financials reflect $378.7 million transferred to the U.S. Treasury in 2012 and about $520 million in 2013. One significant factor complicating transparency in the disposition of these monies is the fact that the SEC financial statements do not include any amounts collected by other government entities (courts, receivers, etc.). In short, tracking the ultimate disposition of penalties and disgorgement is challenging at best and nigh impossible at worst.

JP Morgan Chase & Co., a more recent example, has paid $3.68 billion in fines and other settlements through September of 2013 alone.

None of the numbers mentioned here contemplate the legal costs firms incur in defending themselves against these Government allegations. JPMorgan is estimated to have spent between $3.7 and $9.8 billion.

Politically Motivated?

President Obama’s January 14, 2014 statement that, “I’ve got a pen and I’ve got a phone”, may cause cynics to question whether any correlation exists between the ceaseless attacks on hedge funds, private equity firms and banks and the administration’s philosophical bent. Could these probes, investigations and record fines be something beyond coincidence? Are this administration’s Justice Department and SEC tools used to circumvent congressional inaction—tools in addition to the pen and telephone touted by the President as a means of advancing his agenda in the face of congressional inaction?

The Answer Seems to Be No

A review of the SEC’s enforcement actions from 2004 through 2013 revealed that penalties from 2004 through 2008 averaged $887.6 million compared to an average of $889.2 million from 2009 through 2013 inclusive. These figures clearly fail to support any correlation between this administration’s pen and telephone philosophy and the enforcement record of the SEC.

One thing, however, is certain … regulators need to provide the public consolidated information regarding the disposition of fines, penalties and disgorgement; possibly through a single website providing cumulative data from all government entities.

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