SEC Archive Holds Lessons for Dealing with Citigroup: The Ticker

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By Jonathan Weil

My column today focuses on the problem of recidivist violators of the securities laws, specifically Citigroup Inc. The Securities and Exchange Commission has accused the company's broker-dealer subsidiary of fraud five times since 2003.

Each time, Citigroup has agreed to the entry of cease-and-desist orders or court injunctions barring it from future violations. Over and over, however, the SEC keeps accusing the company of breaking the same exact laws covered by those directives, without ever seeking to enforce violations of the prior "obey-the-law" orders.

There was a time long ago when the SEC professed a desire, outwardly at least, to be more vigilant on this front. Consider these excerpts from a 1985 speech by then-SEC Commissioner Charles C. Cox. The address was called "Making the Punishment Fit the Crime."

To me the problem of overriding importance is the chronic recidivist -- the individual or firm to whom an SEC action means little or nothing. I believe that the commission must take steps to realign the priorities of the recidivist, to indicate that repeat violations will not be tolerated ...

Unquestionably an important part of such a program is an unfaltering contempt and criminal referral program. The commission can and should seek to invoke criminal sanctions against recidivists. Repeat violations are often of an egregious nature suitable for a criminal referral, and a violation of an existing injunction needs to be called to the attention of the issuing court by the commission, with coercive or punitive measures to be imposed as the court deems appropriate ...

Commission orders and injunctions must be obeyed -- this is an elemental concept, but yet still ignored by a surprising number of individuals and firms. It is vital that their priorities be reordered: compliance with commission directives must be given a higher priority than profit-taking at the expense of public investors ...

I would note that the problem of remedies which are not taken seriously can be addressed quite succinctly from an economic viewpoint -- and as an economist I am often situated at just such a viewpoint. I believe that the indifferent violator and certainly the chronic violator constantly engages in at least an implicit balancing of the profits gained or costs avoided by illegal or at least questionable activity against the costs and probabilities of getting caught ...

Our job is to increase the expected cost of SEC enforcement so that a rational wealth-maximizing individual or firm chooses not to violate the law.

Maybe someday the SEC will take those words to heart.

(Jonathan Weil is a Bloomberg View columnist.)

-0- Nov/03/2011 19:05 GMT