Big Wall Street Firms Avoid Fraud Penalties

Article excerpt

The S.E.C. has let financial giants like JPMorgan Chase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies.

Even as the U.S. Securities and Exchange Commission has stepped up its investigations of Wall Street in the last decade, the agency has repeatedly allowed the biggest firms to avoid punishments specifically meant to apply to fraud cases.

By granting exemptions to laws and regulations that act as a deterrent to securities fraud, the S.E.C. has let financial giants like JPMorgan Chase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong.

An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.

JPMorgan Chase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has "a strong record of compliance with securities laws." Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers.

Only about a dozen companies -- Dell, General Electric and United Rentals among them -- have felt the full force of the law after issuing misleading information about their businesses. Citigroup was the only major Wall Street bank among them. In 11 years, it settled six fraud cases and received 25 waivers before it lost most of its privileges in 2010.

By granting those waivers, the S.E.C. allowed Wall Street firms to have powerful advantages, securities experts and former regulators say. The institutions remained protected under the Private Securities Litigation Reform Act of 1995, which made it easier to avoid class-action shareholder lawsuits.

And the companies continue to use rules that let them instantly raise money publicly, without waiting weeks for government approvals. Without the waivers, the companies could not move as quickly as rivals that had not settled fraud charges to sell stocks or bonds when market conditions were most favorable.

Other waivers allowed Wall Street firms that had settled fraud or lesser charges to continue managing mutual funds and to help small, private companies raise money from investors -- two types of business from which they otherwise would be excluded.

"The ramifications of losing those exemptions are enormous to these firms," David S. Ruder, a former S.E.C. chairman, said in an interview. Without the waivers, agreeing to settle charges of securities fraud "might have vast repercussions affecting the ability of a firm to continue to stay in business," he said.

S.E.C. officials say that they grant the waivers to keep stock and bond markets open to companies with legitimate capital-raising needs. Ensuring such access is as important to its mission as protecting investors, regulators said.

The agency usually revokes the privileges when a case involves false or misleading statements about a company's own business. It does not do so when the commission has charged a Wall Street firm with lying about, say, a specific mortgage security that it created and is selling to investors, a charge Goldman Sachs settled in 2010.

Different parts of the company -- corporate officers versus a sales force, for example -- are responsible for different types of statements, officials say.

"The purpose of taking away this simplified path to capital is to protect investors, not to punish a company," said Meredith B. …