The SEC has already got a settlement out of Goldman the company, of course. And bear in mind that the case involves the alleged defraudee having formally represented something it now claims to be untrue. It's a tall order, if you ask me.
I didn't read the article yet, but that sort of buck-passing responsibility-evading is (at the most general level) exactly what administrative regulation, as opposed to criminal prosecution, is for. To criminally prosecute someone, you need to prove beyond a reasonable doubt that they intended to do whatever the bad thing was, and it's really easy for a sophisticated wrongdoer to set things up to make it impossible to prove. To enforce a properly drafted regulation, on the other hand, all you need to do is show that the bad thing happened, and you don't have to care if the actor was a criminal mastermind or a haplessly innocent buffoon -- you can take their license away (or whatever) anyway.
To enforce a properly drafted regulation, on the other hand, all you need to do is show that the bad thing happened, and you don't have to care if the actor was a criminal mastermind or a haplessly innocent buffoon -- you can take their license away (or whatever) anyway.
Though the SEC (and other regulatory agencies) have shown little appetite for doing that, even when banks have clearly violated consent orders.
Oh, the SEC is a defanged mess. But while I'll hedge and waffle all day about why financial fraud criminal prosecutions don't happen as much as it seems they should ("Criminal prosecution is hard! Let's go shopping!"), that excuse doesn't apply to administrative regulation generally. Failures there are failures of competence and intent.
Speaking as one of the slatherees in broadly similar cases,[1] I think you guys are overestimating the ingenuity (and the carefulness) of the criminal mind. People who try to break the law deliberately and not create evidence of it tend to create *more* damning evidence, not less. Maybe Goldman's an exception. They have that whole "vampire squid" thing going on.
What administrative regulation catches that criminal law can't are people who if asked would say the unscrupulous things they are doing are lawful and part of their job, and organizations that either have a similar attitude or that have a culture of not asking questions.
[1] Disclaimer: Goldman isn't a client, I know nothing about Abacus but what I read in the papers, and no specific reference to any case I do know anything about is intended or implied.
Would say the unscrupulous things are lawful and believe it (often without having thought too hard about it in advance), I mean to say, if that wasn't clear.
5.1: Those guys who put lemon juice on their faces to become unrecognizable on the security camera suggest you have a broadly applicable point.
One problem is that the SEC's major administrative regulation for going after deceptive business practices requires a showing of intent that's basically the same as that for common law or criminal fraud.
6 - It does! This anonymity is so freeing, it makes me want to share with you my innovative technique for leveraging credit default swaps . . .
This way is nice too. Eggplant comments on! What a trooper.
What if everybody in this thread commented this way?! So fresh and clean!
So fresh and clean!
Yes! It's like giving the side bar a Brazilian wax.
Kinda sorta not really on topic:
Will the day ever arrive when we will finally be free of Larry Summers?
I couldn't believe it when I heard that he's apparently the new favorite for head of the Federal Reserve.
The guy seems to be as indestructible as Jason Voorhees.
Is he the favorite according to anybody but Ezra Klein? That is, I have seen that everywhere, but is there any real sourcing?
Oh look, I forgot a post title.
Comments on comments on comments on comments.
Whee!
Stop playing with the lightswitch! You'll break it!
Too-ra-loo-ra, too-ra-loo-rye, aye
I've got extra sidebar powers.
2,10. So removing the current intent requirement from the regulations would be sufficient to improve behavior of investment bankers without destroying credit?
I'm dubious. Ginger Yellow was really helpful in explaining in 2009. I thought that the logistical question was how to regulate shadow banking without shutting it down, given the responsibility-diffusing structure of the wrongdoers and the fuckery of the revolving-door financial veterans who are the SECs prosecutors.
I like dealbreaker a lot, btw. Last week among the snark they pointed out that Khuzami is ex-Deutsche, and Deutsche's CDS shenanigans alone among large banks went unprosecuted.
32: .?
What's the purpose of it all? What does it all mean?
Yeah, SEC/FINRA is some hella defanged shit. Their audits are such a joke. We could have hidden a battleship in our files and they'd never have noticed the trail of seagulls. Most of the people they catch, pace 5, are serial fuck-ups who are utterly mendacious and incompetent at hiding their tracks.
If I were world-emperor, post-Halfordismo, I would at least quadruple the number of auditors/investigators, give them far more power to look into transactions randomly and continuously, and put a lot more effort into enforcement at both the top and the bottom of the financial industry food chain. Those little mom-and-pop brokerages are always up to something, and the captains of industry are up to even more.
Not to forget moral hazards and post-hoc rationalization.
moo
I would at least quadruple the number of auditors/investigators,
An interesting position for an anarchist. I would too, but I'm a state socialist.
43: That's how much I hate brokers.
34 -- not sufficient, no, not at all. But, without having thought about it in detail, I do think a negligent, as opposed to intentional, misrepresentation statute, probably limited to actions brought by the SEC only and limited to certain classes of financial professionals (as opposed to everyone covered by 10b-5) would be a very nice regulatory bulwark.
I do think a negligent, as opposed to intentional, misrepresentation statute, probably limited to actions brought by the SEC only and limited to certain classes of financial professionals (as opposed to everyone covered by 10b-5) would be a very nice regulatory bulwark.
Is there not already? There is over here*. You still have to prove reliance and causally link the loss to the misrpresentation, but you don't have to prove intent.
* Well, there's well established common law. I'm not sure what a statute would achieve over and above that.
5: In a field I'm involved in oversight for, I've heard about explanations like "I had to [violate professional rules] in order to get the right number on the bottom line" given to the person whose job it is to determine whether someone gets punished for breaking the rules.
Maybe the criminals pulling in millions a year are bright, but the ones making high 5 to low 6 figures aren't, usually.
39: I think there are two different questions here. One is whether regular FINRA audits as currently practiced are sufficient. I don't work in that area; I'm not going to contest your view that they're not. The other is whether, once there is an investigation that enforcement authorities are trying to bring to trial, target companies and individuals are able to avoid fraud liability for deliberate misconduct through strategies such compartmentalization or willful blindness, where any particular individual avoids learning enough to open themselves up to personal fraud liability. I took that to be the claim made by the article linked in the opening post and endorsed by lw and possibly also LB. I'm skeptical.
46: I have never defended a case brought under sections 17(a)(2) or (a)(3) of the '33 Act but I think they already provide roughly the authority you are describing. Also there is control person liability under both the '33 and '34 Acts, which I believe has lately been used more aggressively.
47: Many US jurisdictions do have common law actions for negligent misrepresentation which can be brought by individual injured plaintiffs. They come into play more in commercial litigation and don't feature as much in big-ticket private securities litigation because you can't get class certification (individual proof of reliance is generally required). In some cases you can use Sections 11 and 12 of the '33 Act, or equivalent state law, for misstatements in offering documents or certain types of oral statements. Better move fast, though -- there is a tight statute of limitations that is often an issue in those cases.
To avoid confusion, the difference between 49 and 50 is that 49 is talking about agency enforcement authority and 50 is talking about actions available to private plaintiffs.
Well, that's not quite right. Private plaintiffs can bring suits based on control person liability, which is one of the things discussed in 49. But I'll stop talking to myself now.
49: Yes, I can't really say much about the second question -- I worked for a pretty clean brokerage, at least as far as I could tell, and if there were that sort of shenanigans, (a) nobody ever got caught, and (b) they were at such rarified heights that I would have never caught a whiff. Where I would think the threads intersect is at the question of self-policing vs. outside policing. I doubt very much that we could get to a point where there was viable self-policing throughout the industry again, if indeed there ever was. So then you're back to actual enforcement actions from outside, and those don't seem to be going so well either, in part because the whole regulatory regime is indeed defanged.
From my worm's-eye view, it seemed like the thing that has actually cleaned up the dirty parts of the industry successfully was the entrance of big multi-national banks into the brokerage industry, which meant that the smaller scammers got pushed out, because the big guys wanted to protect their ability to make money on the long cons. Why bother defending some $600K/year rep who's playing fast and loose with suitability rules in a $300K account when you can engage in these mega-frauds? If that's an accurate assessment (and it may not be, given how long I've been out) then it would seem like, given ongoing, though slower, consolidation, the main things left to enforce will be those situations where somebody up top can compartmentalize deniability and stuff.
50: Better move fast, though -- there is a tight statute of limitations that is often an issue in those cases.
Ain't that the truth? Read your statements RIGHT AWAY!
The other is whether, once there is an investigation that enforcement authorities are trying to bring to trial, target companies and individuals are able to avoid fraud liability for deliberate misconduct through strategies such compartmentalization or willful blindness, where any particular individual avoids learning enough to open themselves up to personal fraud liability.I'm skeptical.
In a case like this, though, where the documentary evidence only clearly shows that the defraudee had an incorrect understanding, but not how it came to have it, surely compartmentalisation/diffusion would help to avoid personal liability. How are you going to prove misstatement by a particular person if you don't have a statement from that person? If only one person is doing all the stating, then it's going to be easier to establish that they're responsible for the mistaken understanding.
50 -- I had a case that I'm dimly remembering that minorly involved the 33 act, and I think you're right. But as you say the 33 act isn't a very powerful tool for fraud claims.
I disagree somewhat with your broader assessment. I mean, sure, I don't think there's (often) a deliberate plan of "let's break the law, but if we all compartmentalize and no one person totally knows everything we'll never get caught [twirls moustache]". But I think there's a LOT of very deliberate compartmentalizing to allow for reckless not-quite knowing about devious but profitable activity. I'm mostly thinking about the accounting firms, which basically have an entire organizational structure that allows them to kinda sorta know when a fraud is going on but maintain plausible deniability unless the fraudster is too stupid for words. The sales reps for various products pitched by banks often have a similar structure.
And you're right about control person liability as well.
I now unfortunately have to run to a meeting -- no lack of courtesy intended by delayed responses.
OK, so, if anyone is still interested I think this probably comes down to how strong a claim is being made about the relationship between organizational structure and the difficulty proving fraud.
Can special problems of proof come up in fraud cases involving large organizations where not everyone knows everything that is going on? Sure, absolutely, I wouldn't dispute that. Though those are at least somewhat offset by other factors, such as the vulnerability of the large corporate defendant to a subpoena requiring comprehensive e-mail search and production. People will write things in e-mail that you wouldn't believe.
Is the "mustache-twirling" compartmentalization scenario common? Meaning a situation in which Executive A consciously sets up a structure where Schemer B has the guilty knowledge and Innocent C is the only one who makes the statements to potential victims? No, I don't think so. Too much coordination is required. Tends to leave tracks. And if there were any evidence of that kind of deliberate behavior, it would make a very easy case for the government. (I don't intend to create a strawman here -- I'm not sure whether anyone is actually arguing for this. It's more or less what I was responding to initially, but maybe I was overreading the claims being made.)
Is minimizing future exposure to fraud liability something that Executive A has in mind when structuring the organization, even if there's no particular deliberate plot to separate out B's knowledge from C's? Maybe. I'm still skeptical. I think in big organizations that get into trouble it's because the relevant actors are thinking in the short term about things like quarterly earnings targets, promotion opportunities and personal bonuses, not in the long term about how they are going to avoid personal exposure when the prosecutors or the regulators come in. Less able to comment about the specifics of accounting firms, though.
50 and 59 are really interesting to read, thanks.
59.2 (giants are vulnerable) might be solved by having some effective limit on the size of the corporate defendant. I have no practical suggestion for how to do this, I am basically just really hostile to the demonstrated mismanagement of credit by the very large investment banks, and am appalled at regulatory feebleness years after the crash.
Beyond the childish wish to see individual financiers getting to meet say Jeff Fort, I'm surprised that there's no effective barrier been installed to prevent a rerun (not with CDOs, but with something else clever) a few years down the road. Explaining how those guys deserve a completely fair hearing doesn't mitigate the public harm they have already done, and will do next time.
Beyond the childish wish to see individual financiers getting to meet say Jeff Fort, I'm surprised that there's no effective barrier been installed to prevent a rerun (not with CDOs, but with something else clever) a few years down the road
Well, part of that is surely that the "big problem" wasn't securities fraud, as generally understood. The big problem was people believing their own bullshit, and then persuading other people to believe it too. So the barrier needs to be built in a different place (eg minimum federal mortgage underwriting standards, substance over form capital/leverage rules) than itt would need to be if fraud were the main problem. That's not to say actual cases of fraud shouldn't be prosecuted vigorously or that measures shouldn't be taken to minimise the possibility of fraud in future. But that wouldn't be sufficient to prevent a rerun.