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SEC’s Top Enforcer Defends Lack of Cases Against Execs

The U.S. Securities and Exchange Commission hasn’t sought enforcement actions against top investment banking officials in connection with the housing-finance collapse because decisions about mortgage securities can’t usually be traced to the executive suite, the agency’s enforcement director said.

Collateralized debt obligations and “other deal-specific matters often aren’t vetted at the senior corporate levels,” SEC Enforcement Director Robert Khuzami said in an interview broadcast today on the C-Span cable network. “You’re not going to see as many prosecutions of those folks for those types of violations as you might otherwise.”

The SEC has faced criticism from lawmakers, judges and investors who say it hasn’t been tough enough in holding individuals on Wall Street to account for actions leading to the 2008 financial crisis, which was triggered by the failure of mortgages packaged into securities.

The agency has largely targeted its enforcement effort at lower-level employees or at Wall Street firms themselves for misleading investors about the quality of loans in securities they were selling.

The SEC is litigating at least four cases related to complex financial products linked to residential mortgages. Firms including Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co. have settled SEC claims without admitting wrongdoing. Individuals named in the suits were those who structured the faulty deals, not the executives who run the firms.

Pursuing Lenders

The SEC has taken action against more than 55 senior executives at companies such as Countrywide Financial Corp. and New Century Financial Corp., both lenders dealing in subprime loans, with misconduct leading to the financial crisis, Khuzami said. Those cases often center on whether the executives made misleading statements to investors about their firms’ exposure to souring home mortgages.

Continuing litigation includes lawsuits against six former executives of Fannie Mae and Freddie Mac, three executives from IndyMac Bancorp Inc., the ex-CEO and chief financial officer of Franklin Bank Corp, and three former executives of Thornburg Mortgage Inc.

“I think our performance has been very strong in this area,” Khuzami said.

At the same time, Khuzami said the agency needs a bigger budget to be even more effective.

“We are significantly underfunded,” he said. “We are responsible for regulating 35,000 entities, and yet we are about the size of the D.C. police force.”

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