How Do You Fix SEC Broken Windows? The answer is – you can’t!

By Richard Bowen

The Securities and Exchange Commission (SEC) has recently announced it is discontinuing their enforcement program requiring admissions of wrongdoing and the prosecutorial approach they were supposedly taking after the 2008 financial crisis. Steven Peikin, co-director of the SEC’s enforcement division, said the SEC would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.” 

Remember in 2013, under Mary Jo White’s leadership, the SEC announced it would make companies and individuals admit wrongdoing as a condition of settling civil charges in certain cases.

What I found ironic and hypocritical was Mr. Peikins’ remark that the SEC “would continue to run a tough enforcement program with the goal of rooting out intentional wrongdoing”… “I think when people resolve cases with the commission [and] neither admit nor deny but agree to all the points of relief, I don’t think most people in the world say, ‘Boy, they really got away with that.’”  

He is so far off track. People really do say ”Boy, they got away with that.” As the Wall Street Journal article points out, “many have criticized the SEC’s practice of settling cases without fault admissions, including U.S. District Court Judge Jed Rakoff, who said it made enforcement cases look like “pocket change” and a “cost of doing business” for Wall Street.

I’ve talked about Ms. Whites’ abysmal record on several occasions as have many others. The facts bear it out. According to research by David Rosenfeld, a professor at the Northern Illinois University College of Law, during Ms. White’s leadership only about 2% of the 2,063 cases filed from 2014 to 2017 involved admissions. His research points out that makes for 22 entities admitting fault in the most egregious fraud cases. I may be missing something, but 22 entities in 3 years, that’s a really tough enforcement program?!

Surely Mr. Peikin did not say “I think we have room for improvement” out loud with a straight face. Room for improvement. Well, that may be a challenge. It appears that the SEC’s budget is frozen. The enforcement division, which in 2016 had 1,400 employees might be cutting 100 investigators from its staff and not bothering to replace them.

As Jerri-Lynn Scofield , who has worked as a securities lawyer and a derivatives trader recently posted”no matter how aggressive Peikin might like to be in rooting out corporate wrongdoing, that will be a difficult goal to achieve, with a frozen budget and a shrinking staff. Which is no doubt exactly what our current crop of Congress critters intended.”

And I do believe this, in fact, is what is intended.

Ms. Scofield asks, “Now, I don’t dispute that the SEC intends to dial back its commitment to seeking admissions. Yet I want to raise here: How much of a policy change does this announced shift actually represent?” As she points out, even though they claimed they would be pursuing a tougher enforcement line, post 2013, when it announced a policy change with much fanfare, the SEC did not pursue “bold and unrelenting results.”

As she reminds us, in Ms. White’s tenure, her results were so disappointing; Senator Warren called for Ms. White’s firing in 2015. News Flash: Mary Jo White Claims SEC Produces “Bold and Unrelenting Results.” READ MORE

Photo: Securities and Exchange Commission by Scott S, CC BY 2.0


5 thoughts on “How Do You Fix SEC Broken Windows? The answer is – you can’t!

  1. “The FBI Estimates That 80 Percent Of All Mortgage Fraud Involves Collaboration Or Collusion By Industry Insiders”
    Posted on December 13, 2011 by WashingtonsBlog
    Fraud By The Big Banks – More Than Anything Done By The Little Guy – Caused The Financial Crisis

    The U.S. Treasury’s Office of Thrift Supervision noted last year (page 7):

    The FBI estimates that 80 percent of all mortgage fraud involves collaboration
    or collusion by industry insiders.

    This confirms what one of the country’s top fraud experts has said for years: that it was fraud by the big banks – more than anything done by the little guy – which caused the financial crisis:

    William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – explained last month before to the Financial Crisis Inquiry Commission why banks gave home loans to people who they knew couldn’t repay. The whole piece is a must-read, but here are excerpts from the introduction:

    The data demonstrate conclusively that most liar’s loans were fraudulent, which means that there were millions of fraudulent mortgage loans because liar’s loans became common (Credit Suisse estimates that they represented 49% of new originations by 2006). The data also demonstrate that even minimal underwriting of the loan files was sufficient to detect the overwhelming majority of such fraudulent liar’s loans. No honest, rational lender would make large numbers of liar’s loans. The epidemic of mortgage fraud was so large that it hyper-inflated the housing bubble, which allowed refinancing to further extend the life of the bubble (and the depth of the ultimate Great Recession.


    In the cases where there have been even minimal investigations (New Century, Aurora/Lehman, Citi, WaMu, Countrywide, and IndyMac) senior lender officials were aware that liar’s loans were typically fraudulent. The lenders could not make an honest business out of selling overwhelmingly fraudulent mortgages.

    Liar’s loans were done for the usual reason – they optimized (fictional) short-term accounting income by creating a “sure thing” (Akerlof & Romer 1993). A fraudulent lender optimizes short-term fictional accounting income and longer term (real) losses by following a four-part recipe:

    A. Extreme Growth
    B. Making bad loans at a premium yield
    C. Extreme leverage
    D. Grossly inadequate loss reserves

    Note that this same recipe maximizes fictional profits and real losses. This destroys the lender, but it makes senior officers that control the lender wealthy. This explains Akerlof & Romer’s title – Looting: The Economic Underworld of Bankruptcy for Profit. The failure of the firm is not a failure of the fraud scheme. (Modern bailouts may even recapitalize the looted bank and leave the looters in charge of it.)

    The first two “ingredients” are related. Home lending is a mature, reasonably competitive industry. A lender cannot grow extremely rapidly by making good loans. If he tried, he’d have to cut his yield and his competitors would respond. His income would decline. But he can guarantee the ability to grow extremely rapidly by being indifferent to loan quality and charging weaker credit risks, or more naïve borrowers, a premium yield.

    In order to become indifferent to loan quality the officers controlling the lender must eviscerate its underwriting.


    There is no honest reason for a secured lender to seek or permit inflated appraisal values. This is a sure marker of accounting control fraud – a marker that juries easily understand.

    In other words, banks made loans to borrowers who they knew couldn’t really repay because the heads of the banks could make huge bonuses based on high volumes and fraudulent appraisals, and they didn’t care if their own companies later failed.

    In short, they looted their companies and the economy as a whole.

    Professor Black brings us current to where we are today:

    History demonstrates that if the control frauds get away with their frauds they will strike again.

    By allowing the banks to use their political power to gimmick the accounting rules to permit them to hide their massive losses on liar’s loans we have made it far harder to take effective administrative, civil, and criminal sanctions against the elite frauds that caused the Great Recession. Hiding the losses also adopts the dishonest Japanese approach that cripples economic recovery and public integrity.

    Prosecuting the elites control frauds can be done successfully. Create a new “Top 100” priority list and appoint regulators that will make supporting the Justice Department a top agency priority. That’s how we obtained over 1000 priority felony convictions of elite S&L criminals. No controlling officer of a large, non-prime specialty lender has been convicted of running a control fraud. Only one has even been indicted.

    The FBI has written that any discussion of the crisis that ignores the role of mortgage fraud is “irresponsible.”

    But instead of prosecuting fraud, the government just continues to cover it up.

    And see this and this.

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