The SEC’s losing battle against banks

Tim Fernholz

The New Republic

Holding Wall Street accountable may have just gotten harder, said Tim Fernholz. Last week, Judge Jed Rakoff rejected a settlement between the SEC and Citigroup over the bank’s alleged mortgage securities fraud, calling the settlement “neither reasonable nor fair.” But by urging the regulator to punish financial crimes more aggressively, the judge “may have inadvertently made the SEC’s job” that much tougher.

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Proving white-collar fraud is difficult. That’s why the SEC has used “public opinion more than the law” to force through settlements that require banks to pay penalties but not admit guilt. Of course it’s flawed justice that bankers aren’t held accountable, and that penalties are usually a pittance. But in pushing the SEC to take banks to court rather than to settle, Rakoff may have set the bar too high. “The view on Wall Street is that the agency simply doesn’t have the resources” to wage lengthy legal battles with deep-pocketed banks.

Congressional Republicans have refused to give the SEC more money, despite the agency’s new responsibilities under the financial reform bill. Rakoff’s decision forces the SEC to show its teeth, but the watchdog could come away looking toothless.