SEC - Really A Threat To JPMorgan?
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The Securities and Exchange Commission (SEC) was formed by Congress in 1934 as part of its response to the market crash of 1929 and resulting Great Depression. The SEC's succinct mission: “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Sort of, kind of, the SEC has done at least a part of its jobs over the years. I do not expect that an administrative body can protect investors from their own stupidity, so no problem there. Fairness in trading is not always part of the current landscape, such as the recent Facebook (FB) initial public offering, in which institutional investors were given information, and trading preferences, that individuals lacked.
To the casual and not so casual observer alike, the SEC sat idly by while expensive failures with substantial public repercussions took place in companies such as Lehman Brothers and individuals such as Angelo Mozilo made a mockery of fair play in general and securities laws in particular. The fundamental problem is that the SEC, at its best is reactionary, and seemingly has neither the budget, energy, nor guts to go toe to toe with those over which the SEC has jurisdiction. The pace of enforcement actions by the SEC is a small fraction of what it was in the 1980's. The latest bit of information showing the SEC's reticence to do anything is when it was announced that despite a court appointed examiner finding evidence of fraud and accounting gimmickry at the old Lehman Brothers brokerage, the SEC would not be bringing actions against the failed investment house or its officers.
I remember well the days of the Savings and Loan scandal in the 1980's, Michael Milken, Ivan Boesky, and even Martha Stewart demonstrate that until quite recently the SEC was a dog that could bite as well as it barked. But, as luck would have it, by the beginning of the most recent banking crisis in 2008, the SEC became a kinder and gentler body. The advent of “deferred prosecution agreements” in 2008 allowed the self-reporting and correction or crimes, in return for which there would be no criminal indictments nor even admissions of guilt. That came in really handy in defending private, civil suits. Nowadays the SEC is apparently uninterested in bringing enforcement actions against individuals. Against the hundreds of potential suspects in last decade's banking crises, a grand total one person has faced criminal enforcement action.
Against this backdrop, Reuters reported that the SEC is mulling a plan to get to JPMorgan Chase (NYSE: JPM) by pointing to how it objectively increased its risk profile without alerting regulators, analysts, or shareholders. In December, 2011, JPMorgan rated its risk profile at $69 million per day. In April, 2012, it rated it at $67 million per day. But then, upon reported the London based trading loss on May 10, 2012, the bank in passing mentioned its risk profile had spiked to a daily $129 million. I do not know if the investment community pays any attention to that “value at risk” number. But even if true, at worst the SEC would mete out a couple hundred million dollars in fines, and that would be that.
As proof that the SEC is powerless to be more than an unofficial fund raiser for the Administration, one needs only to look to the SEC's attempt to bring an action against Citigroup (NYSE: C) for mortgage banking trades made on the eve of the banking crisis in 2007. In 2010, the SEC and Citigroup made the customary settlement of a fine, in this case $285 million, in return for which Citigroup did not even have to admit guilt, let alone be indicted.
District Judge Rakoff, in a decision I applauded at the time, and consistent with other decisions he had made in SEC actions with other mortgage banks, denied the settlement because it was neither sufficient in amount, nor did it compel Citigroup to admit wrongdoing.
On appeal, the SEC claimed that if the deferred prosecution agreements were halted, so would all regulatory enforcement action. The appellate court agreed, and with Citigroup also supporting the SEC's argument, Judge Rakoff had exceeded his authority in not simply “trusting” that the SEC was acting in good faith in agreeing to the amount of the fine. SEC actions against Citigroup, Bank of America, Regions Financial, Suntrust, or the countless other banks whose errors, omissions, or frauds caused hundreds of billions of dollars in overall losses have resulted in a shocking lack of enforcement. Not even the infamous Countrywide leader Angelo Mozilo, who described his own products as “toxic” did any more penance than pay a fine.
So it goes. The SEC for the sake of efficiency does not care about right or wrong anymore. Just write the check and go on your way. I am sorry, but it is not supposed to be that way. Individual investors are on their own.
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