A front page New York Times [NYT] article by Edward Wyatt [1], on November 11, 2011, reported that the recent SEC settlement with Citigroup was rejected by federal judge Jed Rakoff because of a lack of any admission of guilt of fraud on the part of Citigroup. This has been a strategy in past cases with the SEC and other banks, because the SEC contends it must settle most of the cases without obtaining admissions of guilt. It does not have the necessary funding to battle the “deep pockets” of Wall Street firms, who will rarely admit wrong doing. Admission could be used against them in the case of an investor lawsuit.

 Judge Rakoff claimed that the SEC “has a duty, inherent in its statutory mission’ to see that truth emerges”. He also said” in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth”.

  Additional evidence addressing inadequate financing was reported by George Packer[2] in The New Yorker [6-27-11]. He stated that nearly three years after the financial crisis, “Wall Street still relies on reckless practices to create wealth”. He also stated that the SEC remains starved of resources. Its budget this year was less than the net worth of Raj Rajaratnam’s at the time of his arrest.  Rajaratnam, former head fund manager of Galleon, was recently convicted of insider trading. Additionally Packer states “the agency lacks the technology to keep track of the enormous volume and lightning speed of algorithmic trades, like the ones that caused last May’s “flash crash” of the stock market. The market has become more of an exclusive gambling club for the very rich than a level playing field open to the ordinary investor.”

 Shortly after Wyatt’s article, James Stewart [3] argued in the NYT [12-3-11] that the facts in the SEC case of fraud by Citigroup may be difficult to establish legally because the existing relevant law now seems inadequate to address the problems that have come to the surface in this case. It is really up the Congress to fashion a remedy. Mary Shapiro head of the SEC, has also asked Congress for stronger penalties, which must include clear guidelines for the financial institutions that will insure sufficient punishment to deter future security law violations. Any congressional action must conclude adequate funding for the SEC and the Justice Department.
 Another example of under funding of regulators was reported on December 10, 2011 by James Stewart [4] NYT 12-10-11]. He described the disappearance and unaccounted for $1.2 Billion of investor’s assets recounted in the details of the recent bankruptcy of MF Global as the “once unthinkable risk”. Stewart mentions that the Commodities and Futures Trading Commission [CFTC], is one of the regulators of the commodities and securities industry and involved in regulating the activities of MF Global. Stewart reports the director of CFTC stated the organization is greatly under funded and in the recent past it has declined to such an extent that the CFTC is incapable of overseeing every activity in every firm. Thus their investigative and enforcement capabilities are greatly diminished. The director said “If people are determined to misuse customers’ funds they will misuse them”. He was also reported as saying that they expect people to know the rules and obey them. However, that seems like wishful thinking given the situation of the missing investor [customer] funds at MS Global. That reality makes a strong argument for enhanced regulatory funding to more adequately protect investors’ financial interests.

 IPPA feels an obvious answer to these deficiencies is for Congress to provide adequate funding to insure that these regulatory and enforcement agencies of the federal government can fulfill Judge Rakoff’s admonitions regarding truth and transparency. [This includes not only the SEC and CFTC but also the Justice Department as they are the ones to institute prosecution in these cases].

1. Wyatt, Edward, “Citing ‘Legal Error’ S.E.C. Says It Will Appeal Rejection of  Citigroup Settlement”. New York Times [NYT], 11/29/11
2. Packer, George, “A Dirty Business” The New Yorker, 6/27/11
3. Stewart, James, “Few Avenues for Justice in Case against Citi,” NYT 12/3/11
4. Stewart, James, “A Risk Once Unthinkable” NYT 12/10/11

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