SEC Goes After Firms For Negligence To Catch More Wrongdoers

The U.S. Securities and Exchange commission (SEC) has shifted gears to enable the agency to catch more people responsible for financial wrongdoings, according to the Wall Street Journal. The move is expected to make it easier for the SEC to file more cases alleging negligence instead of the more stringent burden of having to prove intentional acts. Not only are negligence cases easier to prove, they generally carry smaller monetary penalties, less chance of being barred from the securities industry and cause only minimal damage to a person's reputation versus being accused of fraud.

It is anticipated that there will be a flurry of cases filed by the SEC as it looks into the actions of securities firms leading up to and during the financial crisis. Ken Leach, the head of the SEC's structured and new products enforcement unit, says that the simple act of avoiding outright fraud does not mean one cannot be prosecuted for negligence in a civil matter. He went on to say, "Firms and executives have a duty of care." "Failure to check properly that investors are being provided with fair and accurate information could, under some circumstances, be a breach of that duty, even if there is no intent to defraud them."

Since the financial crisis erupted, the SEC has filed some 70 or more civil cases against Wall Street firms and individuals alleging negligence, resulting in $1.5 billion being awarded to the SEC in the form of monetary fines and disgorgement to investors. While many have been compensated as a result of the filing of civil actions, there is a strong contingency that wants the big time executives' heads to roll for what occurred during the financial meltdown. To date this has not happened.

Some examples of the SEC switching gears includes the case filed against a couple of former Citigroup executives last year, which resulted in monetary penalties of $180,000 to end civil charges related to their role in the firm's failure to disclose $40 billion in risky mortgage assets. Since the charges were based on negligence, the allegations were that the executives should have known that the statements to investors were defective. In another instance, the SEC filed civil charges against Edward Steffelin, former GSC Capital executive, who managed assets in a JP Morgan Chase mortgage bond deal named Squared. He was also said to have been negligent in making full disclosure to investors in the $1.1 billion deal that went bust after 2007. JP Morgan ended up paying $153.6 million to settle their end of the civil charges.

Jeffrey Manns, a law professor at George Washington University, says that the downside to the "negligence only cases" is that Wall Street firms might tend to fight the civil actions that are since the easier burden of proof in negligence cases may make them feel the SEC's case against the firm is weak. This would mean more cases would end up going to trial instead of settling, which is typical.

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