We are discussing the Report of the Inspector General of the SEC on the termination of a case against, among others, Bear Stearns, by the Miami Office. A copy can be found at the Miami Herald web site.
Much of the Report explores the reasons for the decision not to bring the case. What makes the decision somewhat surprising is that the staff had negotiated settlements with three of the four defendants, including one with Bear Stearns that would have resulted, according to the Report, in the payment of a $500,000 penalty. Some of the press has focused on the more salacious details, particularly the fact that some of the attorneys on both sides of the case were friends.
In fact, however, the most interesting thing about the Report is probably the discussion of the interaction between the Enforcement staff and the US Attorney's office. The SEC has no criminal authority. If criminal charges are to be brought, the US Attorney's Office must independently decide it is worth bringing the case. The relationship is of considerable interest since all parties subject to SEC actions under Section 10(b) and Rule 10b-5 know that there isn't much difference between the civil and criminal standard for liability. Civil liability requires proof of at least recklessness, criminal of willful behavior.
It turns out in this case that while the Miami Office was investigating Bear Stearns, so was the US Attorney's Office. The two offices were, however, investigating a different cast of characters. Nonetheless, the two investigations did involve some of the same issues. The Report, in a tantalizing fashion, suggests that had there been greater cooperation between the two offices, some of the issues in the debt markets that contributed to the current turmoil might have been uncovered earlier.
- [SEC Official] told [US Attorney] that MIRO [Miami Regional Office] was looking at “similar allegations with a different alleged victim, but the same alleged perpetrator.” During his testimony, [US Attorney] clarified that the Bear Stearns employee Bank complained about was not [the same person under investigation by MIRO]. However, [US Attorney] found it significant that “the fact of having two investigations into the same general type of conduct spoke to at least potential systematic problems at Bear Stearns, as a company.”
There was, apparently, no more contact between the offices for a year. The US Attorney eventually contacted a Branch Chief in the Miami Office. The Branch Chief described the theory against the registered representative in Bear Stearns as a "rogue trader." As the Report noted:
- During the call, [Branch Chief] revealed to [US Attorney] that the Commission had not closed its investigation; that the SEC had Wells’d both W. Holding and Bear Stearns, and that MIRO was “in hard core settlement talks, hoping to be done by September .” [Branch Chief] insisted to [US Attorney] that MIRO believed [Bear Stearns Employee] to be a “rogue trader” who had acted on his own, confirming the defense provided by Bear Stearns.
- [US Attorney] questioned [Branch Chief] about the “rogue trader” theory, since [US Attorney] was concerned about the conduct in question being a larger problem at Bear Stearns: “I think I asked whether there was anything that they had learned that suggested this was a systematic problem at Bear Stearns, and [Branch Chief's] response was, which paralleled the response from Bear Stearns, was that it was just a solo actor”. [US Attorney] placed importance on the fact that Bear Stearns’ traders out of New York and Florida were being investigated for the same type of conduct: “There were certainly allegations of issues with respect to pricing, and that there was more that on trader involved in the pricing of those.” He added: “I mean, there were also news articles about these issues going on. They [sic] were general problems with pricing of CBO’s at the time. So there was more out there than just the rogue trader story, and certainly more that would suggest that there might be systematic problems.” [US Attorney] went on to say that finding out the results of the Commission investigation would be “useful to understand what they learned, and how it developed, because that would be relevant, the question of whether there was some systematic issue.”
- [US Attorney] indicated that the U.S. Attorney’s Office might have pursued its investigation futher had MIRO provided him with information about its investigation of the matter. He stated to MIRO staff on at least two occasions that he thought there might be a systematic problem with pricing at Bear Stearns, and stated that the U.S. Attorney’s Office was “relying on [the] information that was provided” by the Commission, however, he was never informed by MIRO that they closed the investigation.