SEC Eyes Charges For Bond Players
Securities and Exchange Commission officials are pushing hard as part of their ongoing probe of collateralized debt obligations and other mortgage-related products developed by Wall Street to bring charges against individuals, such as executives involved in selling the deals or outsiders who managed the assets, these people said.
While the situation remains fluid, the agency also could file civil charges against hedge-fund managers who helped structure certain mortgage-bond deals but then bet against them.
The move by the SEC to pin at least some of the blame for alleged wrongdoing on specific individuals follows criticism of the agency for previous fraud settlements in which no enforcement action was taken against executives or other employees.
In 2009, U.S. District Court Judge Jed Rakoff in New York denounced the SEC's proposed $33 million settlement with Bank of America Corp. of civil charges related to its takeover of Merrill Lynch as a "contrivance designed to provide the SEC with the facade of enforcement."
No executives at the Charlotte, N.C., bank were accused of wrongdoing as part of the case. Judge Rakoff eventually agreed "reluctantly" to a $150 million settlement in which Bank of America neither admitted nor denied wrongdoing.
Robert Khuzami, the SEC's director of enforcement, declined to comment on the settlement talks. "Our starting point in any investigation is to see if there are grounds for enforcement action against one or more individuals," he said in an interview.
Financial firms being probed by the SEC include J.P. Morgan Chase & Co., Citigroup Inc., Morgan Stanley, Bank of America's Merrill unit and UBS AG, according to people familiar with the matter. The companies declined to comment.
Talks aimed at reaching settlements with at least some of the firms have accelerated in recent weeks. In its quarterly report last week, J.P. Morgan said it was in "advanced discussions" to resolve the matter, though the New York company said it couldn't assure that a deal would be reached.
In January, the SEC notified J.P. Morgan's former head of CDOs, Michael Llodra, and Edward Steffelin, a former executive at an outside firm that managed the assets in a CDO created by the giant bank, that they could face civil charges related to the bond deal called Squared, according to their records at the Financial Industry Regulatory Authority.
Lawyers for Messrs. Llodra and Steffelin declined to comment.
CDOs are complex pools of mortgages and other loans, made up in part of risky subprime mortgages. Banks and securities firms cranked out more than $1 trillion of CDOs, often at the request of investors who made bets against the same deals. The collapse of the CDO market deepened the financial crisis and triggered investigations of Wall Street's mortgage machine.
In the most significant example, Goldman Sachs Group Inc. agreed to pay $550 million last year to settle an SEC investigation into whether it duped investors in a CDO deal called Abacus 2007-AC1.
Goldman admitted making mistakes but denied cheating clients. No Goldman executives were accused of wrongdoing by the SEC, and the agency is heading to trial against Fabrice Tourre, the Goldman bond trader who helped assemble the Abacus deal. He is fighting the civil fraud charges.
A lawyer for Mr. Tourre declined to comment. A Goldman spokesman declined to comment.
Mr. Steffelin, who worked at investment-management firm GSC Group, was influential in that company's rejection of a request by Goldman to manage the Abacus deal, according to lawmakers who scrutinized the transaction.
A Senate report released last month included an email from February 2007 in which Mr. Steffelin wrote to a Goldman executive: "I do not have to say how bad it is that you guys are pushing this thing." Asked later about the email, sent after GSC had declined to act as a manager for Abacus, Mr. Steffelin said he believed the CDO created "reputational" risk for the market.
As part of a growing push to counter criticism that it hasn't punished enough executives for wrongdoing related to the financial crisis, the SEC launched a new section on its website about the agency's track record.
The SEC has filed charges against 32 senior executives as part of enforcement actions related to the crisis that have resulted in $1.34 billion in penalties and restitution to investors.
"Most of the concern seems to stem from the fact that there have been few senior executives going off to jail as a result of the crisis, though that's not for lack of hard work and dedication on the part of the criminal authorities," Mr. Khuzami said.
"It's a pretty strong track record, and we're still hard at work," he added.