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SEC extracts promises, instead of penalties, in fraud cases

WASHINGTON — When Citigroup agreed last month to pay $285 million to settle civil charges that it had defrauded customers during the housing bubble, the Securities and Exchange Commission wrested a typical pledge from the company: Citigroup would never violate one of the main antifraud provisions of the nation's securities laws.

To an outsider, the vow may seem unusual. Citigroup, after all, was merely promising not to do something that the law already forbids. But that is the way the commission usually does business.

Citigroup's main brokerage subsidiary, its predecessors or its parent company agreed not to violate the very same antifraud statute in July 2010. And in May 2006. Also as far back as March 2005 and April 2000.

Citigroup has a lot of company in this regard on Wall Street. According to a New York Times analysis, nearly all of the biggest financial companies — Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America among them — have settled fraud cases by promising that they would never again violate an antifraud law, only to have the SEC conclude they did it again a few years later. The list includes St. Petersburg-based Raymond James Financial.

A New York Times analysis of enforcement actions during the past 15 years found at least 51 cases in which the SEC concluded that Wall Street firms had broken antifraud laws they had agreed never to breach. The 51 cases spanned 19 different firms. Of the 19 companies that the New York Times found to be repeat offenders, 16 declined to comment.

SEC officials say they allow these kinds of settlements because it is far less costly than taking deep-pocketed Wall Street firms to court and risking losing the case. And Robert Khuzami, the SEC's enforcement director, said it prefers to use its resources to bring charges of new violations against a company rather than to pursue contempt charges in court.

But some experts view many settlements as essentially meaningless: Nearly every settlement allows a company to "neither admit nor deny" the accusations, so that they are less vulnerable to investor lawsuits.

Sen. Carl Levin, a Michigan Democrat who is chairman of the Senate permanent subcommittee on investigations, said the SEC's settlements are problematic.

"It's like a cop giving out warnings instead of giving tickets," he said.

SEC extracts promises, instead of penalties, in fraud cases 11/08/11 [Last modified: Tuesday, November 8, 2011 8:20pm]

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