Ted Kaufman - United States Senator for Delaware

SEC Blasted on Goldman

Source: Wall Street Journal

By Kara Scannell, Liz Rappaport, and Thomas Catan

September 23, 2010

The Securities and Exchange Commission's internal watchdog said the timing of a fraud lawsuit against Goldman Sachs Group  Inc. filed by the SEC was "suspicious," suggesting agency officials tried to distract attention from a report criticizing the SEC for failing to detect an alleged Ponzi scheme.

Republican lawmakers asked SEC Inspector General H. David Kotz earlier this year to investigate how the SEC decided to file its April suit against Goldman, which settled the case in July for $550 million. The federal lawsuit alleged wrongdoing in a sale of mortgage securities called Abacus 2007 AC-1, and was filed as Senate Democrats were taking up the financial-regulation bill.

On the same day, the SEC released a scathing report by Mr. Kotz that concluded the agency had repeatedly missed chances to detect an alleged $7 billion fraud run by R. Allen Stanford, a money manager indicted by a federal grand jury last year. Mr. Stanford denies wrongdoing.

At a Senate Banking Committee hearing Wednesday, Mr. Kotz was questioned about the timing of the Goldman suit. He responded: "It would strain credulity to think it was coincidental." He added: "I can't give you a conclusion right now, but it was suspicious."

At the time of the Goldman case, the SEC denied any political connection and said the timing wasn't swayed by factors unrelated to the case. The SEC declined comment Wednesday. Goldman also declined comment.

The comments by Mr. Kotz, echoing his previous findings on the agency's oversight of Mr. Stanford, cast an unflattering spotlight on the SEC just as it has been showing signs of progress in revamping its embattled enforcement unit.

Still, the ghost of the agency's spotty record at uncovering investment schemes was raised again Wednesday. And some frustrated lawmakers prodded financial regulators to rev up prosecutions of top executives and directors for criminal wrongdoing, complaining that it is taking too long to punish those responsible for causing or deepening the financial crisis.

"I know that the Justice Department, the FBI, and the SEC have all been working incredibly hard, reviewing countless transactions, interviewing myriad witnesses, poring over literally millions of pages of documents," said Sen. Edward KAUFMAN (D., Del.). "And yet we have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin. Why is that?"

Officials from the Justice Department, SEC and Federal Bureau of Investigation defended their track record, ticking off numerous cases they've brought against low-level mortgage brokers, chief executives of mortgage companies, and Wall Street investment banks.

The SEC also has pursued insider-trading cases, including the one that ensnared Galleon Group founder Raj Rajaratnam. About a dozen people have pled guilty in the case. Mr. Rajaratnam has denied wrongdoing.

Lanny Breuer, head of the Justice Department's criminal division, said the real challenge is public perception.

The agency has committed resources to complicated investigations that take a long time to review but are being doggedly pursued, he said. All criminal cases brought so far involve bad public disclosures, he said. "At the end of the day, that's the difference," he said at Wednesday's hearing.

Robert Khuzami, the SEC's enforcement director, said that in complex areas such as mortgage securities, one hurdle in bringing cases is that the disclosures were often there in the offering documents.

According to a tally by the SEC, the agency has filed 634 civil cases since its fiscal year began last October, extracted $968 million in penalties and distributed nearly $2 billion to investors. Those figures "don't capture the breadth and complexity of cases we've filed," said Mr. Khuzami, who is shaking up the unit.

The Justice Department said nearly 3,000 defendants were sent to prison between October and June for financial fraud. The number of criminal mortgage-fraud cases filed by the agency has more than doubled so far this year compared with 2007, while new corporate-fraud cases also have surged.

Still, few criminal charges have been filed against high-ranking executives often blamed for the crisis.

After a two-year probe, the Justice Department and SEC dropped their investigation into former American International Group Inc. executive Joseph Cassano after being unable to prove misconduct. Federal prosecutors lost a jury trial against two former Bear Stearns Cos. hedge-fund managers accused of lying to investors about how they invested their assets.

The inspector general of the Federal Deposit Insurance Corp. is investigating 227 banks; its caseload is up nearly 20% from a year ago.

"There hasn't been a prosecution that's put a face on this crisis," said Fred Gibson, deputy inspector general of the FDIC, which works with the FBI to investigate crime at financial institutions. "It is proving to be a time-consuming process."

One reason for the small number of criminal cases so far, according to current and former regulators: Many of the highest-profile disasters of the crisis look increasingly like they were caused by too much risk-taking and bad decisions—not criminal behavior.

"One of the challenges in this environment is there were such broad systemic failures that identifying the one or two people or the six enterprises that are quote responsible, which is what we see a broader appetite for, I don't think that's doable," William McLucas, a former SEC enforcement chief, said in an interview. "There may be cases where the rules were broken. Are they all cases where you can or should put people in jail? Probably not, but that doesn't satisfy the lust for accountability."

A Justice Department official said the agency has uncovered lots of mortgage fraud and investment fraud, though it might not amount to the high-level malfeasance for which many outsiders are hoping.

U.S. prosecutors are preparing for trial against Lee Bentley Farkas, the founder of mortgage firm Taylor, Bean & Whitaker, who is accused of a $1.9 billion fraud that led to the failures of his company and Colonial Bank, based in Montgomery, Ala. Government agencies still are tallying the losses.

A lawyer for Mr. Farkas, who has denied wrongdoing, said he is getting ready for the trial.

The FDIC has brought one case alleging professional liability for a failed bank. Four former executives of IndyMac Bank, Pasadena, Calif., were accused in a July lawsuit of granting loans to borrowers they knew were unlikely to repay. The agency is seeking $300 million in damages. The former executives deny wrongdoing.

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