Penalizing the power players

August 7, 2013 admin

The Securities and Exchange Commission (SEC) has had a busy summer so far as it has been actively prosecuting investment managers for charges ranging from theft to fraud — but when most plaintiffs refuse to admit guilt or innocence, is the SEC really effecting positive oversight in the investment universe?

In a civil suit finalized this week, a New York jury found former Goldman Sachs trader Fabrice Tourre liable for fraud in an investment deal known as Abacus, which closed in the midst of the global financial crisis and cost investors $1 billion, according to the BBC. He is expected to pay hundreds of thousands of dollars in penalties for his behavior, which gained notoriety after his emails revealed his glee at the economic collapse, as well as an ostentatious nickname: “Only potential survivor, the Fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Stemming from these emails, Tourre was first accused of misleading investors by the SEC in 2010. The SEC alleges Tourre knew the investments, linked to subprime mortgage deals, would fail. The investment portfolio was allegedly created to benefit Paulson & Co., a New York City–based hedge fund that had an economic interest adverse to the investors. Without admitting guilt or innocence, Goldman Sachs paid the SEC $550 million in 2010, one of the largest settlements paid by Wall Street to the SEC according to the New York Times. The failure of the SEC to hold Goldman Sachs responsible, and instead letting Fabrice Tourre be the fall guy, was critiqued in The Guardian this week:

“This is why the SEC has to push for better, clearer, more damning settlement terms than ‘neither admitting nor denying’. If the SEC already allowed Goldman Sachs to escape with a ‘no harm, no foul’ excuse, it makes no sense to go after a relatively junior former Goldman Sachs employee and accuse him of harming investors.”

The lack of accountability for illegal or unethical behavior continues with Chauncey Mayfield, CEO and founder of MayfieldGentry Realty Advisors (MGRA). In June, the SEC filed a lawsuit against Mayfield and his colleagues for allegedly taking $3.1 million from a Detroit pension fund in 2008, and conspiring to keep it a secret until it could be repaid. So far, only $1.1 million has been paid to the pension fund, and Chauncey and his colleagues neither admitted guilt nor denied the allegations to the SEC. Mayfield pled guilty to participating in a “pay to play” scheme, as part of a separate matter.

With great power comes great responsibility, but parallel wisdom states that with great risk comes great reward. Maintaining a sense of ethical engagement in business is critical to the viability of the industry, but the SEC would be wise to hold investment firms who mislead their investors accountable for their deceit.

When is the last time someone from Wall Street ended up in prison for their crimes, which impact the financial stability of investors and individuals?

Penalizing firms with fines and fees will do little to encourage businesses to have better oversight and transparency in their business practices. Punitive measures ought to be taken against people and companies that manipulate the system through fraudulent measures.

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SarafinalwebSara Kassabian is a reporter with Institutional Real Estate, Inc.

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