Although most “fiscal cliff” rhetoric concerns Defense cuts, Congressional budgetary intransigence could also push federal investor protection agencies off the cliff come January 1. Should public securities law enforcers be sent to the bench, private enforcers will continue to hold fraudsters accountable and deter future wrongdoing. And they may even prove more effective.
A case in point is the recent $2.43 billion settlement by Bank of America of a securities class action lawsuit brought by its investors alleging fraud in valuing mortgage-backed financial instruments and sub-prime mortgages the Bank acquired when it bought Merrill Lynch at the height of the financial meltdown in September, 2008. No major federal prosecutions – civil or criminal – have yet been initiated in arguably the world’s biggest financial crime.
First, let’s measure the cliff fall. Barring Congressional action, automatic cuts in all Federal programs will occur January 1. These include the Securities and Exchange Commission (a $115 million reduction), Commodity Futures Trading Commission ($17 million on the chopping block), federal courts ($384 million at risk), Public Accounting Oversight Board ($18 million) and the Securities Investor Protection Corporation ($23 million). In sum, $557 million would be cut from investor protection programs.
These chilling numbers affecting agencies and Commissions already hard-pressed to fulfill their missions can be found in Appendix A of the 394 page report by the Office of Management and Budget issued September 15, as required by The Sequestration Transparency Act of 2012. See:
Speaker Boehner: “House Did Its Job”
Will an evenly split Congress at loggerheads since 2010 reach a fair compromise plan? House Speaker John Boehner (R-OH) says he is “not confident at all.” Seemingly washing his hands of responsibility, Boehner — second in-line for the Presidency following Vice President Biden – dismissively said the “House has done its job.” https://abcnews.go.com/blogs/politics/2012/09/can-congress-avoid-fiscal-cliff-boehner-not-confident-at-all/
Even if some “grand bargain” can be made by lame ducks following the election, will Congress save investor protection programs from immobilizing cuts? Will financial services lobbyists and GOP ideologues permit even the current fin reg lite regime to survive?
“Wall Street Always Wins” in Congress
“Wall Street always wins,” concludes Jeff Connaughton, former chief of staff to Senator Ted Kaufman (D-DE) and one-time Clinton White House attorney and corporate lobbyist. In his new book (“Payoff: Why Wall Street Always Wins”), Mr. Connaughton ably describes the continuous war upon securities laws, enforcement and financial regulation waged since the early 1990s by the accounting and financial services industries. As a young White House lawyer he witnessed an early notable Wall Street victory:
“President Bill Clinton was steamrolled by Wall Street (and by its biggest booster, the most Machiavellian of United States Senators, Chris Dodd) in 1995. Dodd had led Congress to overturn President Clinton’s veto of the Private Securities Litigation Reform Act, which he and the Republicans had drafted to gut the class action securities-fraud laws. It was the only Clinton veto given the back-of-the-hand by two-thirds of Congress. And, it was my first taste of how Wall Street had come to own Washington.”
(from pre-publication review copy of “Payoff: Why Wall Street Always Wins,” by Jeff Connaughton, published in August by Prospecta Press, www.prospectapress.com)
The Private Securities Litigation Reform Act (PSLRA) was merely the first of a decade-long effort by Congress and the Supreme Court to shield corporate securities fraud perpetrators and their professional aiders and abettors from shareholder and consumer accountability. During the same period, the dismantling of the Glass-Steagall Act’s separation of commercial and investment banking (this time supported by the Clinton Administration) enabled banks and brokers to merge and use customer money to engage in the high-risk securities and derivatives practices – make possible by lawyers and accountants who designed the instruments and covered-up the magnitude of their inherent risks — that led to the catastrophic 2008 meltdown.
Mr. Connaughton says despite the “nearly fanatical dedication” of Senator Kaufman and other financial reformers in Congress, “there have been no high-profile prosecutions for financial wrongdoing.”
“Too-big-to fail banks continue to act lawlessly, teeter on the brink, and destabilize the global economy. The post-crisis regulatory reforms (particularly, the Dodd-Frank Act) were and are being written by over-matched regulators with the help of Wall street lawyers instead of by the elected representatives of Americans, a substantial majority of whom support rules to rein in Wall Street excesses.”
OK, so financial regulators could well take a hit – possibly, a substantial one – regardless of who wins the Presidency.
Federal Courts Will Likely Survive Serious Damage
Nevertheless, it is a safe bet that even recalcitrant GOP House Members will not gut our federal courts. Why? Because corporate America routinely relies upon lawsuits against competitors and others to conduct business. Indeed, U.S. businesses file at least four times as many suits as individuals (and are far more likely to be penalized by judges for frivolous lawsuits). See:
Fortunately, during the past decade, Congress and the Supreme Court failed to completely curtail private securities law enforcement through investor suits. Several studies – including one published this summer by professors at Fordham, University of Pennsylvania and Northwestern – demonstrate that meritorious securities fraud class actions can overcome even the heightened standards of proof and other “stacked deck” legal hurdles put in-place since 1995.
Private Securities Law Enforcers at Their Posts, Even if SEC Out to Lunch
So, if federal courts remain open, financial and corporate managements will be held accountable through private actions initiated by pension funds, retirement plans, municipalities, groups of individual investors and others.
Indeed, several studies find that, when compared with SEC actions, private investor suits recover far more for victims and punish wrongdoers more effectively. Columbia Law professor and SEC expert John C. Coffee recently called on the Commission to “stop writing parking tickets and hunt bigger game.” In a recent National Law Journal article (“Is the SEC’s Bark Worse than its’ Bite?”), professor Coffee cited a “disquieting” recent study questioning “whether SEC settlements actually generate any meaningful deterrence”:
“A study of SEC settlements released this year by NERA Economic Consulting found that ‘just over half of SEC settlements [since the Sarbanes-Oxley Act in 2002] have involved a monetary payment.’ Indeed, in fiscal year 2011, only 46 percent of SEC settlements with individuals and only 59 percent of SEC settlements with companies involved any monetary payment. In short, many pay nothing to settle.
“Overall, settlement amounts have not increased significantly during the past decade. In fiscal year 2011, the median SEC settlement with a company did climb to $1.47 million, but this was still below the high of $1.50 million in 2006.”
Compare these trends with the $2.4 billion investor securities fraud settlement with Bank of America announced September 28, or the historic $7.2 billion investors’ won from Enron in 2001, and the $6.1 billion settlement recovered from WorldCom in 2002.
Should securities regulators be pushed off a cliff, policemen will still be on the beat.