Have U.S. Regulators Finally Grown Teeth?

Former Goldman Sachs trader Fabrice Tourre exiting a New York federal court after he was found liable for defrauding investors Photograph by Justin Lane/EPA

The five-year anniversary of the financial crisis is a bit more than a month away (Lehman weekend!) and for most of the last four years, the story on U.S. regulators has been one of basic ineptitude: Not only were they asleep at the wheel leading up to the crisis, but they’ve pretty much let off the hook those most responsible for blowing up the world in 2008. No criminal convictions of major Wall Street executives, no jail time, just a series of fines and settlements that, while they’ve added up to more than $2 billion, often carried no admission of wrongdoing.

That stigma is slowly fading, thanks to a recent flurry of regulatory crackdowns. In the last three weeks, we’ve seen criminal insider-trading charges filed against Steve Cohen’s hedge fund SAC, plus news that JPMorgan is under criminal investigation for allegedly underwriting bunk mortgage securities and that two of its traders are reportedly likely to be arrested in connection with the bank’s London Whale debacle. The U.S. Securities and Exchange Commission is even winning in court. It’s been a nice dose of red meat for a bloodthirsty public.

Why now? What has changed? Honestly, probably not a lot. All these actions are the result of years-long investigations that happen to be bearing fruit at the same time. And the JPMorgan traders, who allegedly helped conceal the size of the London Whale losses by trader Bruno Iksil, appear to have committed a sin that SEC officials are usually quick to punish. “Regulators are typically very aggressive at bringing obstruction charges when warranted,” Tom Gorman, a former SEC attorney, writes in an e-mail. Gorman, now a partner at Dorsey & Whitney, sees no overarching theme running through these recent actions, no thread that connects them. “The suggestion that new charges are coming out of the London Whale incident do not suggest, in my view, any change.”

It’s been only months since U.S. Attorney General Eric Holder told the Senate Judiciary Committee that some banks are simply too big to prosecute. And despite the recent actions, we’re nowhere near the conviction rate of the last big financial meltdown: After the savings and loan crisis in the early 1990s, when more than 1,000 bankers were sent to prison.

New SEC chairwoman Mary Jo White does, however, seem bent on drawing a firmer line in the sand. She’s effectively put an end to the practice of allowing firms to settle without admitting they did anything wrong. While that sends a “no more Mr. Nice Guy” message to Wall Street, it might not be the most practical move.

Given how outgunned the SEC is, both in manpower and money—compared to the massive banks it is going after—settling a case and moving on is often a function of practicality, says Tom Sporkin, a former SEC lawyer who’s now a partner with BuckleySandler. Under the new law, the SEC “could be biting off more than they can chew,” says Sporkin. “The public sometimes appears to want blood, but you can’t lose sight of the bigger issue, which is the resources it takes to pursue these actions in court, vs. the benefit of settling the actions when you’re running an enforcement program.”

In other words, under White’s new mandate, the SEC could waste precious time and resources seeking an admission of guilt from one case, then miss out on tackling a second. And the clock is ticking. The commission faces a hard 5-year statue of limitations when it comes to prosecuting fraud. That was upheld in a recent Supreme Court case decided in February. Which means the SEC is just about out of time to do anything about alleged fraud that happened in 2008. Anything from 2007 is already in the clear.

Given all that, Sporkin thinks this recent flurry of activity marks the end, not the beginning of enforcement stemming from the financial crisis. “The SEC has had a long time to think about how this era should be concluded and these will be some of the statement cases of the financial crisis,” says Sporkin.

Too bad there weren’t more of them.

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