In devising punishments, SEC faced with competing interests

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, August 3, 2010

What's $75 million?

For Citigroup, it's a week of profits, less than 0.1 percent of its market value, a rounding error on a balance sheet worth more than $2 trillion.

And for the Securities and Exchange Commission, it's a fair price to pay for the bank to settle allegations that it misled its shareholders about nearly $40 billion in subprime mortgage investments it held in 2007, the year before the bank began its slide into the abyss.

The settlement of the Citigroup case last week, after settlements earlier this year with key Wall Street banks involved in the financial crisis, has raised a host of questions about how the SEC devises punishments to meet the alleged crimes.

Two competing factors have been at play.

On the one hand, the agency wants headline-grabbing settlement numbers that send a message that regulators will be tough on companies that do bad things. On the other hand, the agency is cognizant that it's a company's shareholders, who might have been harmed in the first place, who ultimately pay when the agency assesses a fine.

"The punishment of a corporate entity like Citigroup serves a limited purpose," said Mark J. Roe, a professor at Harvard Law School. "There's a lot of smoke and drama around it, but it ends up shifting money from one group of shareholders to another."

Two other major settlements involving Wall Street banks this year have been with Goldman Sachs, which paid $550 million, and Bank of America, which paid $150 million.

In the Goldman case, the bank paid what amounted to two weeks of profit for allegedly selling an investment to two clients that was secretly designed to fail. No senior executive was charged.

In the Bank of America case, the bank was accused of concealing billions of dollars in losses and compensation from shareholders. No executive was charged by the SEC, but a lawsuit against the bank filed by New York Attorney General Andrew Cuomo is pending.

In initially rejecting the $33 million Bank of America settlement, U.S. District Judge Jed S. Rakoff of the Southern District of New York was incredulous about the terms, saying the settlement suggested "a rather cynical relationship between the parties."

But even when executives are charged and have to pay a fine, there is a question about whether the price is high enough. The SEC doesn't have criminal authority and so it can't use that ultimate weapon -- jail -- to deter and punish financial misconduct.

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