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July 25, 2012 at 10:00 AM
In case you missed it, next week we will have a new entrant in the competition for ‘Most Useless Law Passed by Congress in a Transparent Attempt to Appear to Be Actually Doing Something.’
As reported in Reuters earlier this week, this coming Monday, a bipartisan bill will be introduced in the Senate (by Sen. Jack Reed, D-R.I., and Sen. Charles Grassley, R-Iowa) that will increase the fines that the SEC can levy in cases of securities law violations: maximum fines for individual violations will increase from $150,000 to $1 million, while the top costs for firms will rise from $725,000 per offense to $10 million. In either case, the SEC will also have the option of demanding three times any ill-gotten gains or investor losses.
Apparently, this bill is intended to increase “the costs of doing business” for firms that break securities laws, in an attempt to “break the cycle of misconduct,” as Sen. Reed put it. By way of illustrating this cycle, the bill sponsors cited the decision last November by a Federal judge to reject as too low a $285 million settlement that SEC reached with Citigroup, which allegedly misled investors in the sale of $1 billion worth of mortgage-linked securities.
Perhaps I’m missing something here, but the Citigroup “settlement” could certainly have been higher under existing law, or else why would have Judge Rakoff have rejected it on the grounds of being too low? So that would mean if the Reed/Grassley Bill becomes law, and the SEC’s potential penalties become substantially higher, it would have had exactly no effect on this case, at all. That is just one case, however. In fairness, perhaps we should examine how the bill if passed would affect other high profile financial cases that have hit the headlines, and which Congress has a habit of using to justify many of the the laws it does pass.
The Bernie Madoff case seems like a good place to start, as it has been trotted out as a prime example of the kind of financial fraud that the Dodd-Frank Act was drafted to prevent, and why we need a fiduciary duty for brokers, tighter regulation of RIAs and more glue on Donald Trump’s hairpiece.
As we now know, in an attempt to bolster his increasingly commoditized clearing business, Mr. Madoff began siphoning off funds from his managed investments while maintaining unrealistically high returns to investors out of the inflow of new investments. How do you think the proposed higher SEC penalties (presumably for cases just such as this; that involve financial businesses, and business decisions to commit fraud) would have affected Madoff’s decision to run his classic Ponzi scheme? Considering that under current law, his businesses have been closed, his family bankrupted and he’ll spend the rest of his life in jail, I’m just guessing that that even the spectre of fines amounting to treble investment losses would not have dissuaded Bernie.
