News reports about the September 22, 2010 Senate Banking Committee hearing regarding the SEC have focused on the provocative statements by SEC Inspector General H. David Katz. Among other things, Katz suggested that a Texas-based SEC official quashed the investigation of allegations regarding Stanford Financial Group, allowing the Stanford-related Ponzi scheme to continue. Katz also suggested that the SEC times its initiation of its enforcement action against Goldman Sachs to draw attention away from the Inspector General’s report critical of its Stanford-related failures. (Katz’s written testimony, which focuses primarily on the Stanford-related issues, can be found here.)
But along with the headline-grabbing commentary on the SEC’s processes, there was also other commentary and information at the Hearing suggesting the possibility of future regulatory and enforcement actions against corporate and banking figures in response to the global financial crisis.
First, at least according to press reports, the hearing seemed to reflect political expectations, in the wake of the financial crisis, for regulators to pursue actions against corporate officials. For example, the September 23, 2010 Wall Street Journal quotes Delaware Senator Edward Kaufman as having observed at the hearing that "we have seen very little in the way of senior officers or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin. Why is that?"
Second, the same Journal article quotes the deputy inspector general of the FDIC as saying that the FDIC is investigating 227 banks.
There undoubtedly will be further fallout from the SEC Inspector General’s report about the SEC’s handling of the Stanford investigation. But amid those details, the larger picture should not be overlooked. That is, we remain in an atmosphere of recrimination that includes a political expectation that government officials should pursue action against corporate executives in connection with the financial crisis. In this atmosphere, because of the political pressures, it seems probable that government officials will feel obliged to bring claims and pursue actions.
And while these government actions might take any number of forms, one area where regulatory and enforcement action seems probably is in the banking arena. Just as during the S&L crisis, the FDIC pursued numerous claims in response to political pressure, the FDIC may well feel the same kind of pressure in the current circumstances, and may pursue claims as a result.
All of which is a reminder that larger forces may drive claims against corporate and banking officials, possibly for years to come.