Charlie Rose Talks to the SEC's Robert KhuzamiBy
There’s been an outcry against the “neither admit nor deny” clause that companies use when they settle with the SEC. Now you’ve altered the rules on this. Explain why it’s better.
It’s a method of disposition that has been in place in the SEC since the early ’70s and probably used by every federal and even state civil law enforcement authority. I think Facebook recently settled a matter with the FTC that was sort of on that basis. What that allows us to do is, it gets us money to return to investors today with certainty, not waiting two, three, or four years till you went to trial. We get it without the risk of getting nothing. In the Citigroup case, for example … we got 100 percent disgorgement, which was $160 million. We got another $95 million in the penalty. Citigroup issued a statement saying, “We hope to be a better bank in the future.” We got reforms in how they operate their mortgage businesses going forward. … There’s not a stand-up-and-raise-your-right-hand admission, but it’s pretty clear from the overall package that it’s an implicit acknowledgment of wrongdoing.
So if the Citigroup settlement was fair and in the public’s interest, why do you think the courts rejected it?
Keep in mind that we do 735 cases a year, and we settle a high percentage of them. And you can count on one hand—and you’ll have a couple of fingers left over—settlements that have been rejected. So while Judge [Jed] Rakoff got a great deal of publicity, it by no means [affects] how courts view our settlements. Judge Rakoff is an individual judge, one of 700 in the country. With all respect, we disagree with the standard that he set up. For decades, the precedent is fairly unbroken that you don’t need admissions or adjudicated facts before a court can approve a settlement. He went a different way. The Second Circuit will decide that case.
So in what situations does the change in the rule for neither-admit-nor-deny announcements apply?
Long before Citigroup, we were reviewing the policy. In parallel cases where we file along with the criminal authorities, they’re either admitting wrongdoing because the criminal rules require admission or they’ve been convicted by a jury. In that case, the question was: Does it make sense for them to continue to neither admit nor deny the SEC case? Our parallel cases are a minority of the overall cases we do, although they tend to be some of the most serious ones.
Let’s talk about the SEC’s case against top executives at Fannie Mae and Freddie Mac. Some say the charges show that these enterprises played a big role in creating the financial crisis. Is that how you see it?
I don’t mean to duck the question, but at the end of the day we’re not about that. I saw a lot of the commentary back and forth after the case was filed, and folks of different political persuasions seemed to cite the case as evidence of support for their position. But we’re not about who caused it or didn’t. We have a narrower mission: Did they lie to investors in what they told to them about their subprime exposure?
It’s been suggested that the Fannie/Freddie case was political, that it would be looked on with favor by Republicans in the House.
I’ve been in the white-collar law enforcement business for quite a while and—whether in New York or here [in Washington]—and I know this is hard for people to believe, but never once has anyone told me to bring or not bring a case for those kinds of considerations.
Why have there been so few suits against Wall Street CEOs, if any? Where’s the sense of accountability?
Ask yourself candidly, what prosecutor, what law enforcement authority, what SEC staffer wouldn’t like to bring the case against the high-profile executive? While we brought a number of CDO [collateralized debt obligation] cases, they are cases based on particular transactions. And in those cases, the deals don’t get vetted and reviewed in the executive suite. They’re done by deal captains on desks. It doesn’t rise up to the corporate suite. And all those deals have pages of risk disclosure and are vetted by lawyers. So you just don’t have the coming together of the two critical elements of a securities fraud case, which are investors being told one thing and the truth being something else. Try as we might—and we try mightily to figure out whether or not people higher up in the food chain were aware that what was being told to investors was not true—those types of cases are simply much more difficult. Poor risk management, recklessness in investments … people can’t be prosecuted for that. Perverse compensation, inattentive boards—those things are simply not legally actionable.