Securities and Exchange Commission faces heat from Democrats over settlements


Scott Alvarez, general counsel with the board of governors of the U.S. Federal Reserve; Robert Khuzami, director of the division of enforcement at the SEC; Richard Osterman Jr., deputy general counsel with the FDIC.; and Daniel Stipano, deputy chief counsel with the Office of the Comptroller of the Currency, testify during a House Financial Services Committee hearing Thursday. (Andrew Harrer/BLOOMBERG)
May 17, 2012

The Securities and Exchange Commission, which polices corporations, can usually count on support from Democrats and a rougher reception from Republicans. But, on Thursday, the agency found an issue on which its traditional friends are its critics and its traditional critics are its friends.

At a House hearing, Republican lawmakers defended the agency against complaints that it lets wrongdoers off the hook too easily when it routinely allows them to settle charges without admitting wrongdoing.

Democrats said they were worried that such settlements could send the wrong message, allowing corporations to treat SEC enforcement actions as just another cost of doing business.

The issue has become a flash point in the debate over who is to blame for the financial crisis and whether the wrongdoers are being held accountable.

A federal judge in New York, Jed S. Rakoff, last year challenged what has long been official policy at the SEC by refusing to approve Citigroup’s $285 million, “no-admit” settlement with the agency over charges that it misled investors during the mortgage meltdown. The SEC and Citigroup have appealed, and in a preliminary ruling, appellate judges have expressed sympathy for their position.

The SEC has argued that defendants would refuse to admit wrongdoing because those admissions could be used against them in private lawsuits or criminal cases. If the agency had to take all its cases to trial, it could tackle far fewer cases, officials have said.

At Thursday’s hearing, Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services Committee, said that, when it comes to resolving enforcement cases, the SEC knows best and judges should not micromanage.

“One can always second-guess but should do so with caution when second-guessing one in a better position to make that judgment call,” he said.

Rep. Scott Garrett (R-N.J.) said Democrats sought the hearing to pressure the SEC not to use its legal discretion to settle cases.

“This strikes me as nothing more than political opportunism, if you will, especially when one considers that these same individuals on the other side never miss a chance to voice their opposition when Republican bills try to curb any discretion by the SEC in the rulemaking process,” Garrett added.

Garrett, who chairs a subcommittee on capital markets, sponsored a bill last year that the SEC protested could have required the agency to go through a crippling analysis before taking enforcement actions.

At Thursday’s hearing, Garrett said it was “completely misguided” for the House to “substitute its judgment for the judgment of the SEC lawyers who are privy to the facts and circumstances of each individual case.”

It was so unusual for Garrett to rise to the agency’s defense that the committee chairman took note of it, jokingly urging an SEC official at the witness table to seize the moment.

“He’s in such a supportive mood of the SEC that you ought to ask him for more money,” Bachus said.

Rep. Maxine Waters (D-Calif.) said the SEC sometimes has good reason to settle cases quickly, but it “also has a broader responsibility to enforce the rule of law.”

“Where no wrongdoing is admitted, it encourage[s] repeat offenses,” she said.

Democrats highlighted the fact that at least one committee Republican, Rep. Bill Posey of Florida, seemed to share their concerns.

“I think when we have consent decrees where nobody admits any guilt and they only pay a relatively minor fine, that it will not change bad behavior,” Posey said.

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