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REGULATORY ISSUES
Why the SEC Settles for Settlements

The Securities and Exchange Commission's recent case alleging fraud at Goldman Sachs helped soften the regulator's bruised reputation, at least temporarily. It created an image of the SEC as a proactive enforcer against banking behemoths, after more than a year of high-profile misses (such as Bernard Madoff's Ponzi scheme).

But the initial glow from the lawsuit's announcement last month has faded, as it appears likely the two sides will settle to make the matter go away. If that happens, the regulator will once again face criticism of its settlements. The SEC's announcements in such cases tend to include few details, and give accused companies a clean slate by allowing them to say they "neither admit nor deny" wrongdoing in the press releases that accompany the deals.

Indeed, this habit rankled Judge Jed Rakoff when he oversaw the initial $33 million settlement between the SEC and Bank of America in late 2009 (BofA later agreed to pay $150 million over disclosure issues surrounding its Merrill Lynch acquisition). He called the agreement "a contrivance designed to provide the SEC with the facade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry."

The SEC is well aware of the frustration lingering after some of its settlements. "If we take away this tool [of "neither admit nor deny"], companies would have little reason to settle, and many more cases would end up in litigation," said SEC chairman Mary Schapiro via video at the CFA Institute's annual conference in Boston on Tuesday.

Moreover, the regulator leans toward settling with defendants in order to bring more cases forward. According to Schapiro, her resource-strapped agency couldn't maintain its level of enforcement actions if it had to increase its court appearances. Settlements at the commission have been on an upward trend over the past year, according to NERA Economic Consulting. The SEC settled with 354 defendants during the first half of its 2010 fiscal year, an 8% increase over the same period in 2009. Ninety-seven of those agreements involved companies.

Schapiro offered hope for critics of the details (or lack thereof) that come out of SEC settlements. She said she's "interested" in including more data about the findings that lead to civil charges, something that would be welcomed by investors but likely fought by companies as they negotiate terms to close their cases. It's an area where the SEC could hold itself to the same standard of transparency that it requires of its registrants.

Posted by Sarah Johnson | May 18, 2010 04:05pm | Comments (1)

Comments
This is an interesting post. On one hand the SEC does have a nasty habit of settling too easily, but in some cases something is better than nothing. When dealing with large corporation the issue may become so engrossed in litigation nothing would happen. It appears we will just have to take each step forward the SEc take in stride, and just hope for a little more transparency in the future. www.blogs.vbpoutsourcing.com
Posted by Marcelle Green | July 29, 2010 05:20pm

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