Journalism in the Public Interest

Needed: A Cure for a Severe Case of Trialphobia

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Does the Securities and Exchange Commission suffer from trialphobia?

Ever since Judge Jed S. Rakoff rejected the S.E.C.'s settlement with Citigroup over a malignant mortgage securities deal, the agency has been defending its policy to settle securities fraud cases. But the public wants a "Law & Order" moment, and who can blame them?

Of course, there was one criminal trial. Federal prosecutors in Brooklyn brought a case against two Bear Stearns hedge fund managers who blew up the firm's internal fund, eventually leading to the demise of Bear. They were acquitted.

But so far, there's been no civil trial in a major case directly related to the biggest economic fiasco of our time: the financial crisis.

The S.E.C. contends that it has received more than $1.2 billion in penalties from financial crisis cases, having accused 81 people and entities, 39 of them chief executives and other senior officers. And it doesn't avoid trials altogether. The agency has averaged almost 14 trials a year from 2008 to 2010, compared with about eight from 2001 to 2003. Finally, in cases that haven't yet gone to trial, the S.E.C. has charged some low-level bankers from big Wall Street firms — but no masters of the universe.

As for the near future, the agency might actually have a financial crisis trial. Right now, it looks as if cases against the mortgage bank IndyMac, the brokerage firm Stifel Nicolaus and the executives who blew up the Reserve Primary money market fund could go to court. But do you see the pattern? None of those is a major investment bank. The S.E.C. is just not hauling in the big boys.

That could change if the S.E.C. sued Citigroup. As Judge Rakoff noted, Citigroup is a "recidivist," repeatedly flouting securities laws. In its settlement with the bank, the agency cited only one mortgage securities deal, but as my ProPublica colleague Jake Bernstein and I wrote, there are many more that look just as rotten.

Yet the reason for putting Citigroup in the dock goes beyond the bank itself. The S.E.C. is not getting big enough settlements out of the largest banks. It's not bringing enough financial cases. It isn't going after the big banks' top executives. It's being way too cautious in its interpretation of its role as defender of the fairness and sanctity of the markets. The frustration, shared by Judge Rakoff and the rest of humanity, is all the greater because the agency rarely, if ever, gets anyone to admit guilt when they settle.

This renders the settlements little more than turning on the light in a kitchen full of roaches. Instead of teaching the banks a lesson, the settlements merely show how the bad actors are scattered everywhere — and the public watches the banks scurry into the pantry to feast some more.

To the S.E.C., this view is profoundly unfair.

The agency's message is, "if you want to resolve a case short of a contested proceeding, come in and be prepared to provide the type of relief we would obtain at the end of a trial," said Lorin L. Reisner, the S.E.C.'s deputy director of enforcement.

"And where that's not available, we'll go to the mat."

On a case-by-case basis, the S.E.C.'s argument for settling is strong. While the public loves a court case, lawyers often believe that trials are failures. They are expensive, time-consuming and capricious, especially in financial cases that are often so complex they challenge even sophisticated juries.

Generally, securities regulators can rack up more enforcement actions by settling. And the agency would do only civil trials anyway; it's the Justice Department that undertakes criminal trials, which probably are a greater deterrent to white-collar crime.

Fair enough. But here's the rub: By taking this doctrine too far, the S.E.C. has undermined its negotiating position.

Agency officials continually advertise how few resources they have, how costly trials are and how irresponsible it is to shareholders to force a trial when a reasonable settlement can be won instead.

Last month, for example, Robert S. Khuzami, the agency's head of enforcement, trumpeted the S.E.C.'s "record-breaking performance during a period of resource constraints."

In doing so, the agency has Beltway blinkers on. Sure, it's speaking to Congress, but Wall Street is also listening. When it complains, even legitimately, about its budget or how costly and difficult trials are, the S.E.C. is inadvertently showing its belly to Wall Street in a sign of submission. It's whimpering that it will shy away from a trial, afraid of draining its coffers.

When it's not signaling its fear about spending money, S.E.C. officials are often talking about how complex financial crisis cases are. In a recent conversation with James B. Stewart of The New York Times, Mr. Khuzami almost sounded as if he were Citigroup's counsel, a role for which he is well suited since he held that role at Deutsche Bank before joining the S.E.C. In that interview, he made Citigroup's case for it. But the bank's lawyers get paid enough and don't need his help.

Above all, the S.E.C. worries about losing. That means it doesn't push cases that would broaden definitions of securities fraud, the ambitious cases that penetrate the gray areas and eliminate murk as a defense against wrongdoing.

In his interview with Mr. Stewart, Mr. Khuzami worried aloud that Citigroup might have made the proper disclosure in its mortgage deal when it mentioned that it was possible the deal might have an adverse impact on its customers. Might have? It absolutely did have a clear adverse impact. If you raise an issue as a mere hypothetical when you know for a fact that it's occurring, isn't that misleading? Shouldn't that be tested? And tested in court, so that a precedent is set?

To overcome its greatest fear, the S.E.C needs to realize that it can win even if it loses. A trial against a big bank could be helpful regardless of the outcome. It would generate public interest. It would put a face on complex transactions that often are known only by abbreviations or acronyms. Litigation would cost the bank money, too. And it could cast the way Wall Street does business in such an unflattering light that even if the bank won, it might bring about better behavior.

A trial would show boldness. And when the S.E.C. found itself at the negotiating table again, it would feel a new respect.

Please get an education on how Commercial Trading Banks operate and remove yourself from the quagmire of ignorance.

TRADING BANKS create credit from nothing. DO YOU UNDERSTAND THIS??? or will you choose to for ever remain in ignorance.

It cost nothing to fight legal cases, ALL COSTS to a licenced Commercial Trading Bank, including purchases of assets, it pays for buy simply honoring its own check.

These licenced banks are powerful beyond your imagination.

So, please grow up and think about whether you want these corporations to continue to “create” credit in your name or consider alternatives.

But alternatives require an educated populace, and Americans are truly dim in this respect.


The only balance that can come into play is that other nations need to build a rock, which they are doing by purchasing and retaining as much gold as quickly as possible to a point they can band together to float another currency other than the USD.

The BRICS are working on that project post hast as they can no longer put up with out of control Wall St. and City of London.

Internel control is impossible under the present system unless Ron Paul becomes POTUS. He seems to be the only polictician who has an inkling of how the system works.

The real problem may lie in Eliot Spitzer’s story in his Washington Post Op/Ed (February 14th, 2008—everybody should go read it now).  There, he explains that he was rallying the Attorneys General to stand against the banks’ predatory practices in lending, which is arguably the root of this mess.

In response, the Office of the Comptroller of the Currency issued an “opinion,” which by their charter allows them to invalidate any and all lending laws to ensure “the safety and soundness of the national banking system,” as Wikipedia puts it.

Is it possible, then, that the real reason the SEC isn’t prosecuting the banks is because the OCC and similar agencies have been overriding any laws that might apply?

It’s the only reason I can imagine that the SEC thinks it’s hard to build a fraud case, for example, when the public (let alone investigators) has access to (a) failed securities, (b) communications from the selling banks acknowledging the worthlessness of the “products,” (c) sales pitches that assert high values for the products, and (d) the same banks taking out insurance for the products’ failure in excess of even the sale price.  If even a first-year law student can’t make an open-and-shut case out of that, then there must be something happening that allows the basic logic to be denied.

Khuzami is a shill. He has virtually never won a significant case .His restructuring of the SEC has been a joke.Consulting Wikipedia or Matt Taibbi would have been more informative.

“A former SEC investigator, Gary Aguirre, who was fired after he questioned the SEC’s failure to pursue an insider-trading case against John J. Mack,[22] describes the new program differently. Aguirre says it turns the SEC into a middleman between Wall Street firms and the Justice Department that will negotiate fines and circumvent a prison sentence.[13] As Aguirre describes it, “First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC. Then the Justice Department commits itself to pass, so that the player knows he’s ‘safe.’ Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department.”[13] Khuzami has been criticized for the new policy, which Republican Senator Chuck Grassley says the SEC’s own enforcement manual prohibits[13] and the senator has asked for an explanation of Khuzami’s remarks.[23]”

There is a term in skydiving known as “ground rush”. You know you’re falling at a fairly constant rate, but the ground still seems far off. By the time you realize that the ground is rushing up at you it is far too late to pull the rip cord and live. Sadly, it appears that we’re perilously close to economic ground rush. Those who can pull the cord are blithly addicted to the ride. Mr. Eisinger and a few others are seeing it coming, but world history tells us that the messengers are only credited, if at all, after the damage is done. Still, many of us appreciate your valient efforts, Jesse.

David Harvey talks about how capitalism “cannot abide a limit,” and I’m afraid the situation with regulating banks and ensuring they stick to the confines of the law is just such a case. Harvey has a good RSA YouTube video that explains it well.

lawrence castiglione

Dec. 14, 2011, 8:25 p.m.

Even in a case that is eventually lost, discovery turns up people and paper that can be useful in another case.  One must look to find.


Your column is about as timid as you make the SEC out to be. Do you really think there have been no meaningful prosecutions b/c they’re spineless? You’re appealing to their pride (they’ll get respect)?

Say what’s really up. Don’t mislead people into thinking there’s a way the system might straighten itself out.

@ John
I like how your framed your fact pattern (a) to (d)  because it reminds me of the SEC v Goldman case. However, at the risk of sounding like I’m coming to the defense of Goldman (I’m certainly not) the SEC conceded in the four corners of their complaint that the initial transaction of the ABACUS pool to investors met regulatory guidelines. 

The item in question was the “marketing material” that was circulated among investors which failed to mention that the pool was being “shorted’. 

The investors knowingly bought into a bond pool that was below investment grade.. The securities were properly rated as to reflect their poor performance expectation and as with all junk bonds, they were insured against default. 

Buying junk bonds is not a crime and no one expects below investment grade securities to fully mature.

I think in the end the SEC is simply ill-equiped to regulate securities exchange particulaly in this arena with exotic products that arguably fit the definition of a security instrument.

Setting aside all conspiracy theories, (and I believe they are very credible) the SEC at best is inept. 

And although however competent Ron Paul may be in handling the financial markets, he is going to lose independents with his talk of abolishing the Federal Reserve.

Why aren’t there attorney’s out there looking for plaintiffs in a CLASS ACTION LAWSUIT against many of these banks who were irresponsible, thus causing harm to many of its borrowers?!?  I’ll be one of the first to sign up—Citimortgage was a real treat to deal with in getting two loan modifications.  Our commercial bank was a treat as well…sarcasm here.

That’s a good point, Alex, and one of the reasons I tried to tease out “the elements of the crime” (fancy talk courtesy a lawyer friend).  If the chain doesn’t actually link up, better to know it than keep shaking a fist at an impotent SEC and DoJ.  If there’s in fact no crime, then asking for prosecution is just wasted energy.

Of course, the real problem with the SEC (and Treasury, and Fed, and…) is that we appoint bankers to the important positions.  Of course the system is going to deregulate when there’s no outside viewpoint, because at the end of the day, bankers believe they’re filling a good and necessary role.

(Derailing the conversation slightly, that’s the problem with Intellectual Property law like the idiotic “Stop Online Piracy Act” that was in committee all day yesterday, continuing today.  Congress generally believes that only big publishers would care about copyright, so only their opinions matter on the bill.  The thousands of artists, engineers, businessmen, constitutional lawyers, and so forth that are calling to change or dismiss the bill as dangerous are irrelevant.)

Jesse, You complain that the “The S.E.C. is just not hauling in the big boys” and ” It isn’t going after the big banks’ top executives.”

Buty they’ve already filed cases arising out of the financial crisis against Citi, Goldman, and JP Morgan. Aren’t those the big boys? And now they’ve sued Fannie and Freddie and their top execs. And the cases against the execs are NOT settled actions so now you’ll get the trials you think we so desparately need.

So will your next column be entitled, “Please Disregard My Last Column.”?

Also, you say “The S.E.C. contends that it has received more than $1.2 billion in penalties from financial crisis cases” What do you mean “contends”? Are you implying that they didn’t actually get that money? Isn’t that something that a journalist like you could/should check out before writing an article about it?

Contend: to assert or maintain earnestly

@Alex Frias—not sure if you are agreeing with me or not but your use of the definition supports my point—you “assert” or “maintain” something that not everyone accepts as fact (but which you think they should). Whether or not the SEC obtained $1.2 billion in penatlies is a demonstrable fact (that the author could have confirmed one way or the other).

Using the word “contends” in this situation is like saying, Antonin Scalia “contends” that he’s a justice of the Supreme Court.


With all due respect my friend, I don’t believe Jesse’s intent was to state with probative evidence the amount of penalties that the SEC actually collected. 

I think it suffices that he points out what the SEC “contends” they received simply so that the reader may have the understanding of the SEC’s position on the matter.

In the end, I think most people would agree that the SEC has fallen short of their regulatory obligations.

@Alex Frias—“the SEC’s position on the matter”?? We’re talking about a simple fact; not a debatable issue. Either they did collect that amount or they didn’t. Jesse, as a journalist, has a responsibility to find out the relevant facts and report them (or report why he wasn’t able to determine the facts).

Using “contends” in order to turn a fact into an “debate” is eerily similar to what Fox News does (e.g., “Barrack Obama cotends that he was born in the U.S. but others aren’t so sure ...”).

Ron, The asserted SEC penalties is not the main crux of the story.  Whether the penalites are proven to be more or less than the 1.2 billion, the debatable issue is whether the SEC should be seeking penalties in lieu of full prosecution in the first place.

@AlexFrias—Whether or not it was the main point of the article, the point stands that the reporter’s use of the word “contends” with respect to an uncontroverted fact was misleading and not up to the standards of propublica.

And I’m sure what you mean by “full prosecution” but the SEC is a civl regulatory agency. It does not have the ability to file criminal charges against any individual or company. So if you think that there is a debatable issue as to whether the SEC should be putting people in jail, that would be another example of how the article has misled its readers.

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)