SEC Winding Down Financial-Crisis Investigations, Leaving Sad Track Record: Report


After managing to pin the entire financial crisis on one Goldman Sachs vice president, the Securities and Exchange Commission is apparently close to declaring victory and going home.

The Wall Street Journal reports that the SEC has decided to take no action against the hedge fund Magnetar Capital, which allegedly helped build toxic securities that Merrill Lynch sold to unsuspecting investors before the financial crisis. What's more, the SEC is "quietly winding down some of [its] highest-profile investigations related to the crisis," the WSJ writes, citing "people familiar with the situation." The article is consistent with earlier reports that the SEC had few crisis-era cases left in the pipeline.

This likely means the SEC is unlikely to extract much more from Wall Street than the $2.73 billion in penalties and restitution it has already gotten in crisis cases, a figure that pales in comparison to the $14 trillion in damage the financial crisis is estimated to have caused. (Story continues below a graphic that will help put this into context.)

This news follows less than a week after the SEC won its first "major" victory in a crisis-era trial, when a civil jury found former Goldman banker Fabrice "Fabulous Fab" Tourre liable for six charges of fraud. Tourre was accused of selling toxic securities to investors without telling them that hedge-fund manager John Paulson had guided the construction of those securities so that he could bet against them and make billions. Tourre is so far the only individual who has successfully been taken to trial, civil or criminal, for actions leading to the crisis. He may also be the last.

The SEC long ago decided that Paulson, Magnetar and other hedge funds didn't commit fraud just because they bet against mortgage securities. The hedge funds didn't sell toxic securities to investors, after all. But the Tourre verdict suggests that fraud did actually occur somewhere between the creation of those securities, their sale to investors, and their collapse, which nearly brought down the financial system.

Unfortunately, those other episodes of fraud may never have their day in court, if the SEC is really winding down its probes. The agency is certainly running out of time: The five-year statute of limitations is about to expire for many of these cases, although in some cases banks have signed "tolling agreements" that extend the deadline.

To be fair, it's not as if the SEC has just been Googling porn all day, like it used to. It has brought several actions in crisis-related cases in recent years.

But those cases have resulted mainly in settlements in which banks neither admit nor deny wrongdoing. That group includes Tourre's old employer, Goldman Sachs and curiously does not include Deutsche Bank, which also worked with Paulson to build toxic securities, and which once employed the SEC chief of enforcement, Robert Khuzami.

The Justice Department and other government agencies have done some of the SEC's lifting, filing civil lawsuits against major banks, although some of them repeat the same allegations and have not gained much traction. The financial fraud section of the Justice Department's "Accomplishments" website, last updated in October 2012, lists only one major action involving the financial crisis, its October 2012 civil lawsuit claiming Bank of America tried to defraud Fannie Mae and Freddie Mac by selling them bad mortgages. Earlier this week, the Justice Department sued BofA again, this time over bad "jumbo" mortgages. But the Justice Department has quietly dialed back its allegations in the earlier lawsuit, The New York Times pointed out.

Federal cases involving mortgage bonds sold before the crisis have targeted JPMorgan Chase, Credit Suisse and others. But we may be nearing the end of those cases, too.

And there haven't been, and likely will never be, any criminal charges arising from the crisis. This is not the SEC's fault, as it only has the power to bring civil charges. The Tourre trial suggests the agency, under the new leadership of former federal prosecutor Mary Jo White, has finally grown a little bolder in targeting individuals -- but it increasingly looks like Tourre's scapegoated scalp will be the last.

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