By Jeff McCord of The Investor Advocate
Impending SEC Recommendation on Anti-Investor Supreme Court Decision a Bellwether on Regulator’s View of “Public Interest”
In one of its filings prior to U.S. Judge Jed Rakoff’s celebrated November 28th refusal to rubber stamp an SEC-Citicorp deal allowing the bank – a “recidivist offender” — to escape significant damages and an admission of wrongdoing for what may have been egregious, knowing fraud in Citi’s sale of bad mortgage-related assets to unwitting investors, the SEC incredibly asserted that “the public interest . . . is not part of [the] applicable standard of judicial review [of the proposed Citicorp settlement.]” To that, Manhattan federal Judge Rakoff simply responded: “This is erroneous.” [see Rakoff ruling here ]
Just a few years’ ago, the idea that a federal judge would need to remind a federal regulatory agency that the judicial and executive branches work on behalf of the public interest would have seemed ludicrous. Now, it is long over-due.
An impending SEC recommendation to Congress (due in January) on whether an anti-US investor Supreme Court decision (Morrison, discussed below) should be overridden will help answer a timely question: has the Commission heard and understood Judge Rakoff’s admonition?
“Prosecuting Bus Boys and Nannies rather than Wall Street Bandits”
When it comes to the need to hold Wall Street fraud perpetrators accountable in the public interest, the Justice Department itself received a wake-up call from one long-time Member of the House Judiciary Committee, Zoe Lofgren (D-CA,16th District), who in May said prosecutors were more focused on immigration offenses than the on-going financial crisis:
The Department [of Justice] is spending its resources prosecuting nannies and bus boys who are trying to get back to their families. And, yet we have not brought any prosecutions of the bandits on Wall Street who brought the nation and the world to the brink of financial disaster. (Bloomberg)
Led by Lofgren, the California delegation of Democratic Members of Congress on October 10 called for Administration officials and the Federal Reserve to conduct an investigation into “systemic wrongdoing by financial institutions” in the mortgage markets.
Regulators Must Believe in Regulation to Prosecute White Collars, Professor Says
In a story on Judge Rakoff’s ruling, even the reliably establishment FORTUNE magazine opined:
For decades, financial wrongdoers have been able to skip public accountability, and slide out from under the consequences by paying out a sometimes substantial sum and moving on to the next deal.
Like Judge Rakoff’s obvious conclusion that the SEC should work on behalf of the public interest, University of California professor of criminology and law Henry N. Pontell made this “goes without saying” observation in a New York Times interview:
When regulators don’t believe in regulation and don’t get what’s going on, there can be no major white-collar crime prosecutions.
Denying US Investors’ Recourse When Foreign Stock Issuers Defraud Them
In what may be a bellwether on the SEC’s understanding of “what’s going on” in relation to its mission of protecting investors in the public interest, in January the Commission must recommend to Congress whether or not it should override one of the most notorious anti-US investor Supreme Court decisions to come out of a Court not known for acting in the interests of investors, consumers or the public. Specifically, the Dodd-Frank Act directs the SEC to review and make recommendations on Morrison v. National Australia Bank Ltd, a 2010 decision that denies U.S. investors the legal right to hold accountable any foreign listed company (such as Toyota, BP, Sony, DaimlerChrysler or Deutsche Bank) that defrauds them in a securities transaction — even if the wrongdoing takes place on U.S. soil. The decision has caused many meritorious investor lawsuits to be tossed from U.S. courts, denying Americans recourse.
Many pension funds, retirement plans, investor and public interest groups have written letters asking the SEC to recommend Congress override Morrison. Fourteen public pension funds managing more than $700 million in retirement funds for teachers, policemen, firemen, and other public servants in California, Colorado, Delaware, Florida, North Carolina, Maryland, Pennsylvania, Rhode Island and other states made a common sense argument:
[Morrison should be reversed because under that decision, foreign companies] can market their shares to American investors, can obtain a significant portion of their market capitalization from American investors, can file their financial statements with the [SEC], and can even engage in fraudulent conduct on U.S. soil, yet cannot be held liable under U.S. law to the victims of their fraud.
And, the pension funds (like Judge Rakoff and more than one professor) reminded the SEC that its mission as stated on its own website is “to protect investors and maintain fair and orderly markets.” The Exchange Act that established the SEC actually says protecting “the public interest and the interest of investors” are the objectives of the law.
Prudent Fund Management Practices “Turned Upside Down” by Supremes
For decades, to discharge their fiduciary responsibility, public pension funds have invested only in securities, including foreign stocks and bonds, protected under United States securities laws. And, prior to Morrison for more than twenty years, modern portfolio management practices dictated that pension funds reduce risk through investment diversity – both by country and industry.
For pension funds, investing in foreign based companies such as Toyota, Nokia, BP and others had been common and considered prudent,” explains Salvatore J. Graziano, a partner at the law firm of Bernstein Litowitz Berger and Grossman, LLP and president of the National Association of Shareholder and Consumer Attorneys. “Fund managers knew that if a foreign company they invested in committed fraud, corporate governance abuses, or other wrongdoing within the United States or harmed U.S. investors, they could hold such a company and its managers accountable and seek recovery of their investment losses in U.S. District Courts. These fund management practices and investor protections were turned upside down in 2010 by Morrison.
Watch SEC on Morrison
Has the Administration heard and absorbed the messages sent to it by Judge Rakoff, many of America’s largest pension funds, professors and millions of polled individuals that its’ Wall Street policies may have strayed from the public interest? In coming weeks, watch what the SEC recommends to Congress regarding Morrison.
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Originally published at The Investor Advocate