Another Fumble by the S.E.C. on Fraud

The following is an excerpt from an article in:


The New York Times
Saturday, November 17, 2012

Another Fumble by the S.E.C. on Fraud

By JAMES B. STEWART

Edward S. Steffelin was at a dinner with clients in Beijing in June 2011 when he got the call from his lawyer, Alex Lipman. The Securities and Exchange Commission was about to charge Mr. Steffelin with securities fraud, blaming him in part for the financial crisis.

With public anger at Wall Street still at fever pitch, the pressure was enormous on Mr. Steffelin, whose reputation until then was unblemished. JPMorgan Chase, the giant bank responsible for the exotic mortgage security, known as a collateralized debt obligation, or C.D.O., at the center of the case, had already caved in, agreeing to settle and pay $153.6 million.

“Do you really want your client to be the poster child of the JPMorgan C.D.O. fraud?” an S.E.C. lawyer had told Mr. Lipman, as the lawyer later told the judge in the case.

Mr. Steffelin was angry and incredulous that it had come to this, and his first impulse was to blame his lawyer. He yelled at Mr. Lipman over the phone.

Mr. Steffelin, who worked for a financial firm that advised JPMorgan on the deal, was formally charged on June 21, 2011. But on Friday, in a rare public about-face, the S.E.C. asked Judge Miriam Goldman Cedarbaum of Federal District Court in New York to dismiss the charges against Mr. Steffelin with prejudice, meaning the case can’t be refiled.

Now, if Mr. Steffelin is going to emerge as a “poster child” for anything, it will be as a victim of regulatory overreach.

“It’s very unusual and unusually embarrassing for the S.E.C.,” said John C. Coffee Jr., a professor at Columbia Law School and an expert in securities law.

An S.E.C. spokesman, John Nester, said: “Our duty in all cases is to achieve a just and appropriate outcome. Our decision here appropriately reflects information that came to light as the litigation progressed.”

Coming on the heels of a jury’s acquittal of a midlevel Citigroup executive, Brian Stoker, this summer on charges in another mortgage-backed securities deal, the S.E.C.’s campaign to hold someone accountable for the huge losses in mortgages at the heart of the financial crisis is in shambles.

Of the three individual defendants in these cases, only Fabrice Tourre, the self-described Fabulous Fab, who is currently on leave from Goldman Sachs, still faces trial, now scheduled for July 2013.

The failure to go after high-ranking officials at the big banks responsible for the mortgage crisis has been a recurring issue for the government in its pursuit of individual fraud cases.

As the foreman of the jury that acquitted Mr. Stoker this summer told my Times colleague Peter Lattman, “Stoker structured a deal that his bosses told him to structure, so why didn’t they go after the higher-ups rather than a fall guy?”

Professor Coffee pointed out: “Very few high-ranking individuals at any institution have been charged. Take the Goldman Sachs case. It was strong. But the highest-ranking individual charged was the Fabulous Fab, and he was the equivalent of a trainee sergeant. This is part of a pattern.”

The S.E.C. points to more than a hundred cases related to the financial crisis that have brought in about $2.2 billion in penalties. They include Angelo Mozilo, the co-founder of the mortgage lender Countrywide Financial, who paid $67.5 million to settle S.E.C. fraud charges, and senior officers of Fannie Mae and Freddie Mac, the government-backed mortgage companies. But otherwise, few if any of the individual defendants would qualify as boldface names.

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