The SEC and the small fish versus the big fish

Joe Nocera's New York Times Column Saturday reviled a real S.E.C. horror show. Seems like they like to go after the small fish and ignore the more obvious fraud and violations. The S.E.C. is an independent agency, so one must wonder if policies of going after the vulnerable and ignoring the guilty have changed.

The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C.

In that 2007 trial, Mr. Kwak and another defendant, Stephen J. Wilson, were cleared of one charge, with a hung jury on the remaining charges. (The third defendant, who foolishly acted as his own lawyer, was found liable and fined $10,000.)

The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him.

Mr. Kwak’s life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker — he certainly can’t afford to retire — he long ago lost his job with Morgan Stanley, where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was.

It seems the S.E.C. is measuring job performance statistics not on total value of a particular case, but on the number of cases.

But even the new S.E.C. enforcement chief, Robert Khuzami, acknowledges that the agency has for too long judged itself primarily on “quantitative metrics” — that is, the number of actions it brings and cases it settles — something he hopes to change. John A. Sten, a former S.E.C. lawyer who was Mr. Kwak’s lawyer during the second trial, said, “As an investigator, you are pressured to generate ‘stats.’ ” Clearly, it is far easier for the S.E.C. to add scalps by going after little guys, who will often agree to a settlement and a fine even when they are innocent. They either run out of money, or lose the will to keep fighting, or both.

So, the vulnerable get the pit bull attack, the large and complex....well, say you can Bernie Madoff?

The article does report the S.E.C. is going through a self assessment on management and operations due to being under new leadership.

Subject Meta: 

Forum Categories: 

I am starting to wonder do we need any new regulations

Maybe if we enforced are current regulations in a fair and even manner maybe we won't have the crisis we have. Indy Mac comes to mind. But that is too much to ask or expect.

We will be in this same predicament a few years from now (maybe sooner based on wave theory). What we need is some hard fast rules - don't leave anything up to the discretion of a regulator. "Thou shall not build a financial conglomerate that is deemed a systemic risk to the entire global financial economy."

By preserving "too big to fail" institutions we are only guaranteeing "socialized losses" in the future - just like the financial oligarchy likes it. All upside and no downside.

Remember this great SEC move.

Wall Street Gets Lift From SEC That May Boost Profit

The SEC selectively lowered net capital requirements for certain conglomerates:

Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns, the only firms cleared by the SEC to adopt the new capital- adequacy standard

The new rule takes a more nuanced approach. Reserves are determined according to a combination of risks including losses from credit deterioration, adverse market movements, inadequate internal controls and changes in legislation. They permit securities firms to use non-cash assets, such as derivative contracts, to offset risk.

Get that, naunced - translation: "have at boys". The other fun thing that the SEC did was allow these conglomerates to police themselves by allowing them to use their own risk management systems to monitor things.


This makes me more convinced of a check/balance system of the regulators. That's just another example of two sets of for the Zombies and one for the rest.

I spent almost 20 years under the eyes of the NASD/SEC

and I can attest that the NASD or SEC does NOT watch out for the big fish. It is a well know fact but the public doesn't know it.

The regulators are more about producing fines from archaic rules. For a long time the NASD would not allow brokers to use e-mail. The NASD worries about things like, do you have an insurance application in the same file case as securities clients. They worry about things like, did you send your client letter sent or received to compliance? All things that would never stop a bad actor BUT it generates fines and fines keep the NASD (now FINRA) in business.

I was anal about compliance and never received a fine, a complaint or anything. Clean as new fallen snow. But all their shuffling of papers makes it look like the regulators are protecting the public.