SEC Slapped Down in Two Cases Against Banks

Question No. 7 challenges the SEC on culpability: “Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the ‘culpable individual offenders acting for the corporation?’ If the SEC was for the most part unable to identify such alleged offenders, why was this?”

Rakoff also asked whether “the SEC’s charges are true,” given that Citigroup neither admitted nor denied wrongdoing, and he challenged the fairness and consistency of the agency’s supervision of financial firms, asking, “How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?”

Meanwhile, Rakoff’s colleague in the Pearl Street courthouse just a mile from the SEC’s Manhattan office issued a second major rebuke to the government agency’s handling of its CDO cases by dismissing fraud charges against JP Morgan executive Edward Steffelin. Reuters reports the judge said Steffelin did not engage in fraud or deceit against CDO investors, though she did not dismiss other charges against him in the ongoing negligence case.

CDOs played a starring role in the subprime mortgage crisis, leading to the collapse of Bear Stearns when two of its hedge funds owning the risky mortgage securities lost nearly all their value in July of 2007. Managers of the two funds were arrested on criminal fraud charges that summer but both were subsequently found not guilty of misleading investors. This week’s legal setbacks for the SEC show once again just how hard it is to prove securities fraud particularly in cases involving sophisticated investors.