It has been widely commented that there have been virtually no prosecutions under criminal statutes related to the financial crisis. Yet, so many reported transactions and episodes have that slimy feel. They feel like a crime was committed. People feel like they were victimized by a crime.
Some want to justify slimy episodes and transactions on the basis of economic philosophy. George Washington posted this week on the matter under the headline that A Free Market Is Not Possible Without Strong Laws Against Fraud.
Imposing accurate accounting standards, stopping high-frequency trading, quote-stuffing and front-running, and prosecuting fraud to the fullest extent of the law are prerequisitesto restoring trust in our economy.
America has a long tradition of using fraud, antitrust, conspiracy and racketeering laws to rein in the worst economic abuses. These laws are an important part of American history, and our recent abandonment of them must be reversed.
George is absolutely correct about this and recent revelations continue to point out the shame of our captured regulators. It was a shocking headline a couple of months ago when the Comptroller of Citicorp was given a virtually free pass on proven and egregious misrepresentations to his own shareholders. His penalty? A civil fine of $100,000. His compensation in the year he made the misrepresentations? $19.4 million.
This week the SEC was defending its actions in that case.
The Securities and Exchange Commission made its case in a filing Wednesday to a federal judge, who said last month she was “baffled” by the proposed settlement and wasn’t ready to approve it without more information. The SEC said the $75 million penalty is “fair, adequate, reasonable and in the public interest.”
The SEC announced the settlement of unintentional civil fraud charges in late July. The agency had accused the third-largest U.S. bank of repeatedly making misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high-risk mortgages. Citigroup had said the exposure was $13 billion or less; the SEC said it exceeded $50 billion.
While Crittenden paid $100,000, Citicorp paid a fine of $75 million. The undisclosed risks ultimately lead to losses of billions of dollars and contributed to a stock price drop from approximately $55 per share to under $1.00 per share at the low. How many investors and citizens lost money in that debacle? How much? What about the taxpayers? $45 billion bailout.
The SEC found unintentional civil fraud. Well excuse me, but that is baloney. The non disclosures were intentional. People who are paid $20 million per year are not unaware of risks involving an extra $37 billion in assets.
Who else knew? CEO Chuck Prince and the disgraced Robert Rubin.
But perhaps the government is learning something. While I do not know enough about Hydraulic Fracking of gas wells to make any claims about whether it contaminates drinking water or not, the EPA request for information this week had a little glimmer of light. It actually asks for individual accountability.
The agency seems to be taking names with this latest request. The letter calls for a corporate officer to certify that the information provided is, to the best of his or her knowledge, “true, accurate and complete,” and it requires the company to specify the source of each piece of information by name, position and title. These two requirements could be important, should the information provided prove to be insufficient or inaccurate.
I had to read several media versions of this story before this little jewel showed up. Requiring an individual to sign a certification will increase the likelihood of complete disclosure, with this caveat. If the SEC and other agencies slap the wrists of those who lie to shareholders, regulators, and the public, then some corporate officials will decide the best bet is to lie, because the upside of the deception exceeds the downside of the penalty.
Are the Citigroup guys “rogue employees”? No. This is our culture, and will be until we change it.