Some toothless watchdog:

This year, the S.E.C. has brought the fewest number of securities fraud prosecutions since 1991. That’s according to the data that the Transactional Records Access Clearinghouse (TRAC), a research group at Syracuse University, has amassed.

Soft on White Collar Crime, by the Numbers:

• 2008 had 133 prosecutions for securities fraud (thru Dec 1)  versus 437 cases in 2000, a 70% drop. Form the peak of 513  in 2002, prosecutions are down by 74%;

•  S.E.C. investigations that led to Justice Depart prosecutions for securities fraud dropped from 69 in 2000 to just 9 in 2007, a decline of 87%.

• Non criminal prosecutions (i.e., fines) for white collar crimes increased –  from 503 in 2000 to 636 in 2008 –  a 26.4% increase.

• “Deferred prosecution agreements” — essentially an agreement not to prosecute, so long as the accused stays out of further trouble;

NYT Excerpt:

“Federal officials are bringing far fewer prosecutions as a result of fraudulent stock schemes than they did eight years ago, according to new data, raising further questions about whether the Bush administration has been too lax in policing Wall Street.

Legal and financial experts say that a loosening of enforcement measures, cutbacks in staffing at the Securities and Exchange Commission, and a shift in resources toward terrorism at the F.B.I. have combined to make the federal government something of a paper tiger in investigating securities crimes.

There were 133 prosecutions for securities fraud in the first 11 months of this fiscal year. That is down from 437 cases in 2000 and from a high of 513 cases in 2002, when Wall Street scandals from Enron to WorldCom led to a crackdown on corporate crime, the data showed.

At the S.E.C., agency investigations that led to Justice Department prosecutions for securities fraud dropped from 69 in 2000 to just 9 in 2007, a decline of 87 percent, the data showed.

Federal officials took issue with some of the data compiled by the Syracuse group and said that they had maintained a strong commitment to rooting out fraud and abuse in the stock markets. While the S.E.C. could not provide numbers of its own on criminal cases arising from its investigations, Scott Friedstad, the deputy director of enforcement at the commission, said the numbers did not reflect “the reality that I see on the ground.”

Once again, we must point to our philosophical dispute with those who believe that markets can police themselves.

There is no such thing as Markets that “self-regulate.” Its the humans that require rules, regulations, supervision — not the markets. The phrase “self-regulate” is a non sequitur, a nonsense buzzword repeatedly by mindless parrots.

>

Source:
Federal Cases of Stock Fraud Drop Sharply
ERIC LICHTBLAU
NYT, December 24, 2008

http://www.nytimes.com/2008/12/25/business/25fraud.html

Category: Bailouts, Legal, Markets, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Security Fraud Prosecutions Down 87% Since 2000”

  1. Jurgen says:

    Unfortunately Mr. Cox has been a spokesman for the industry (do only what the industry wants) and not protecting the investors. Everything that he has done was directed to please the industry lobbyists and to screw the investors: not enforcing the laws that were designed to protect the investors, allowing shorting of phantom shares (naked shorting), removing the uptick rule and introducing turbo-charged ultra short ETF’s (resulting in historically high levels of volatility and wide spread market manipulations), etc.

    P.S. Since most of your readers (and you) tend to be on the short side, it would be interesting to hear honest opinions about Ultra Short ETFs from their users.

    Eric Oberg raises very valid concerns, “there are only three reasons someone would play in these: 1.) They are uninformed, 2.) They were trying to sidestep the margin rules, or 3.) They were trying to manipulate the markets.”

    Why Short Sector ETFs Aren’t So Smart
    http://www.thestreet.com/story/10454678/1/why-short-sector-etfs-arent-so-smart.html

    Looking Deeper Into the Pitfalls of Short Sector ETFs
    http://www.thestreet.com/story/10454909/1/looking-deeper-into-the-pitfalls-of-short-sector-etfs.html

  2. DL says:

    One should not be too idealistic about what regulation can accomplish. First, the politicians must have the foresight and the will to put the proper regulations in place, often in the face of strong opposition from those of significant financial means. Then, constant vigilance is required by the prosecutors, even during a roaring bull market. It may be too much to ask in the “real world”.

    The top of the next bull market will produce more Enrons and Madoffs.

  3. km4 says:

    Will Mary Schapiro step up and get the SEC back to work and not just shilling for Wall St Crooks ?

    Legitimacy Dwindles
    http://jameshowardkunstler.typepad.com/clusterfuck_nation/

    The tipping point seems to be the Bernie Madoff $50 billion Ponzi scandal, which represents the grossest failure of authority and hence legitimacy in finance to date in as much as Mr. Madoff was a former chairman of the NASDAQ, for godsake.

    It’s like discovering that Ben Bernanke is running a meth lab inside the Federal Reserve.

    What seems to spook people now is the possibility that everybody in charge of everything is a fraud or a crook.

    Legitimacy has left the system.

    The bums who ran the US banking sector into a ditch have to account for their turpitudes. They can’t be allowed to hide under a TARP.

  4. Patrick Neid says:

    Parrots and peacocks, they seem to be in vogue these days. All knowing the solutions. Ain’t it amazing.

  5. DL says:

    Jurgen @ 12:06

    People who favor re-imposing the uptick rule, together with those who favor banning the ultrashort funds would have us believe that if we made these two changes, the VIX never would have gotten above 30 over the last few months.

    I’m not convinced. Certainly, there is no way to prove (or disprove) such a proposition through statistical analysis. One factor missing from the analysis is the fact that if the ultrashort funds were banned, or if the uptick rule were reinstated, there would be increasing use of put options. As I understand it, the people who make markets in put options hedge their positions by shorting the underlying stock or index. So if the ultrashort funds were banned, we would likely see increased put buying, and shorting of stocks in conjunction with that. Maybe these people want to ban options trading as well.

    (Possibly also there could be some spillover effect from the futures market as well, over the course of a few hours, from those attempting to arbitrage differences between the futures price and the S&P cash price).

    The point is that one should not make “static” assumptions about how behavior will change as a result of a given policy change.

    Those who want to see lower volatility should perhaps be arguing against the announcement of government bailouts on options expirations days.

  6. KJ Foehr says:

    Looks like the Bushies achieved this goal.

    Salutary neglect and defeating Saddam was easy; balanced budgets and ferreting out bin Laden was too difficult.

  7. when I first saw that the SEC rescinded the ‘uptick’ rule, I thought I had slipped through some type of wormhole and was watching HBO’s “Not necessarily the News”..
    http://query.nytimes.com/gst/fullpage.html?res=9B0DEFDF1330F931A35754C0A961948260

    anyone who read any accounts of ‘Bear Raids’, of Old, knew what was coming..

  8. Robert says:

    Markets that have many players, transparency, no principal-agent problem and consequences for your actions will self regulate. Markets that have few players, hidden information, principal-agent problems and bailouts will not.

  9. Winston Munn says:

    It is one thing to hold a belief system to be likely right, and another altogether to believe in its absolute rightness. Absolutes cannot fail. Thus, blame must fall elsewhere – CRA, Fannie, Freddie, regulation, government intervention, fractional reserve banking, central banks, etc…..

  10. KJ Foehr says:

    Who needs an uptick rule when you got the invisible hand?

    “I thought I had slipped through some type of wormhole and was watching HBO’s “Not necessarily the News”..”

    Yes, I had several of those wormhole / alternate reality moments over the past 8 years.
    W wins in 2000
    American torture,
    Rendition,
    Ignoring the WMD inspectors,
    Pulling them out and then,
    Invading Iraq instead of pursuing bin Laden,
    Axis of Evil,
    Medicare Part D,
    AG Ashcroft,
    AG Gonzales,
    “bring ‘em on”,
    Guantanamo,
    Abu Ghraib,
    “Mission Accomplished”,
    Ninja, no doc, liar loans,
    Coalition of the Willing,
    And many others.

    Oh give me the days of Bill and Monica!

  11. KJ Foehr says:

    And one more big one,

    Preventive War.

    BTW, IMO, Iran was / is the real threat we should have been trying to prevent, if anyone, not Saddam Hussein whom we already had “in a box”; what a monumental strategic error.

  12. Lars39 says:

    Predictions for improving the fraud count over the next 4 years? With the characters in Congress and an unknown from the Chicago machine entering the Whitehouse, I’m not confident that we won’t trade securities fraud for more government fraud. Call me skeptical.

  13. Winston Munn says:

    KJ,

    Adding to the list:

    Unitary Executive Theory
    NSA warrantless wiretapping
    Valerie Plame outing

  14. algernon says:

    You are right to criticize the SEC for not enforcing the law. & it seems they are guilty. I further agree that the relaxation of leverage ratios for the brokerages was misguided.

    But I think you are approaching the rant stage on ‘regulation’ as the answer. Remember that it was gov’t regulation that turned the rating agencies into an established oligopoly, paid not by the borrower but by the lender with all those perverse insentives–not a product of a free market. And is Sarbannes-Oxeley beneficial on net?

    We need gov’t to combat fraud. But a guy as smart as you has to see that market participants interacting voluntarily under a system of rule of law & secure property rights is the optimal. We don’t have this in the US & it shows every sign of getting worse. We have less & less of a market economy each day. Does this not worry you?

  15. super_trooper says:

    What made you think Iran was a real threat. The regime was very pro american after 9/11 and very willing to move towards normalizes relationships. However, the “axis of evil” speech changed all of that. Iran is an enemy if you make it one. And don’t pull the BS about Ahmadinejad. (i) He’s not the Commander in Chief (no power over the nuclear weapons and (ii) he never said anything about “wiping israel off the map” that’s a incorrect neocon translation of his speech. If you believe that you probably believed Rumsfeld claim that the weapons of massdestructions are around Baghdad, and north, east, south and west of there.

  16. KJ Foehr says:

    “What made you think Iran was a real threat. The regime was very pro american after 9/11 and very willing to move towards normalizes relationships. However, the “axis of evil” speech changed all of that. Iran is an enemy if you make it one.”

    It is my opinion that a nuclear armed Iran is much more of a threat to peace and stability in the Middle-East, and thus to our peace, than Saddam Hussein was after the 1990 Gulf War.

    I sincerely hope you are correct that the “Iran threat” is nothing but neocon propaganda, but it does seem to me that relations between America and the Islamic world have deteriorated since the Iranian Revolution in 1979, and no clear path to reconciliation is yet apparent.

    If you are correct that Bush’s Axis of Evil destroyed the possibility for normalization of relations with an Iran that seeks only peace with its neighbors in the region, then that is even more evidence of how wrongheaded his foreign policy has been.

  17. Jojo99 says:

    @KJ Foehr – There was a good story on Iran a few months back in Smithsonian magazine.

    =================
    Inside Iran’s Fury

    Scholars trace the nation’s antagonism to its history of domination by foreign powers

    Link
    =================

  18. usphoenix says:

    @Robert

    Agree totally. Who, given recent events including Madoff, is going to trust Wall Street? How well Wall Street is trusted or distrusted can determine whether it has a chance of retaining it’s pre-eminence in global finance. And that I think is a huge deal. IMHO the whole bailout thing is all about America saying “yeah, they’ve slimed everybody but you can TRUST us to make it right. (Us being the taxpayers).

  19. KJ Foehr says:

    Jojo99 Says:

    “There was a good story on Iran a few months back in Smithsonian magazine.”

    Thank you for the link. It definitely gives me a different view of the whole situation, and it is a must read for anyone who is interested in this issue and not familiar with Iran’s history.

    As an aside, it amazes me that the same three things always come up when I study anything about the history of the second half of the 20th century: Britain, Communism, and oil. And in Iran’s case, as well as the Middle-East in general, it seems we have been stuck, or chosen to stick ourselves, with cleaning up Britain’s messes in order to get oil and contain the Soviet Union.

    Truman comes out the wisest in this case, but Churchill, the great leader of Britain in WW2, seems shortsighted indeed. But for America it is Eisenhower who is the real villain here. I guess we can blame both W and him for the situation we find ourselves in now. Reading such articles always makes our government’s and mainstream media’s view of America good / Country X bad much harder to believe.

    Colonialism, hegemony, and puppet dictators are all policies that are doomed to failure, and for which we have paid and will continue to pay a much greater price than the benefits we received therefrom, IMO.

  20. old trader says:

    Jurgen

    “Eric Oberg raises very valid concerns, “there are only three reasons someone would play in these: 1.) They are uninformed, 2.) They were trying to sidestep the margin rules, or 3.) They were trying to manipulate the markets.””

    I call BS on this, having successfully used SDS purely for the purpose of hedging my core portfolio.

    old trader

  21. philipat says:

    The Madoff case alone is sufficient to demonstrate incompetence by SEC. Ask yourself, if this were the private sector, would Cox still be in his job?

    The very fact that they can offer no data of their own to refute the latest charges against them further demonstrates incompetence. Makes you wonder what they actually DO with all those resources? How do they dare to make such a limp arguement as “We have no proof but it’s not what we see”?

  22. KJ,

    kindly, if the info in that Smithsonian art., was revelatory for you, you have to read much more broadly..

    this: “Reading such articles always makes our government’s and mainstream media’s view of America good / Country X bad much harder to believe.” certainly shows that you can get 4 out of 2 2′s..
    see, for topic starter:
    http://www.harvardlawreview.org/issues/120/jan07/witt.shtml

    and:
    U.S. Secretary of State Condoleezza Rice says international sanctions against Iran are succeeding in driving away investors from the country, harming the economy, and isolating its leadership. But she continued to express support for setting up a U.S. interests section for improving contacts with the Iranian people. In a wide-ranging interview with CFR.org, Rice put an emphasis on diplomatic efforts to solve nuclear proliferation concerns with Iran and North Korea. Asked about charges that regime change in Iraq had tainted U.S. efforts to help pro-democracy forces in Iran, Rice said: “The United States is not going to be able to change every regime in the world.” She said the best role for the U.S. government is to “strengthen civil society, strengthen democracy forces, hold governments accountable publicly when they take harsh measure against those forces.” Rice also credited U.S. democracy promotion efforts with spurring fundamental changes in the discourse on democratic reform in the Middle East.
    http://www.cfr.org/publication/18048/war_diplomacy_and_democracy.html?breadcrumb=%2F
    “”We’ve tried to tailor [sanctions] not to have a general effect on the Iranian people, but they are having an effect on the Iranian economy because Iran is not able to get the kind of investment or investment support, for instance, from countries in Europe. Western oil companies have all left.”

    yep, really sweete~

  23. Jurgen says:

    Old Trader,

    You are falling into the uninformed category.

    Lets say an uninformed trader has picked a perfect bottom on November 20th and went long SPY at closing price of $75 ($75K capital, 1000 shares at $75). Lets say he has hedged it with SDS that on November 20th closed at $128 (because it is twice the inverse, he would need 1/2 of $75K to fully hedge his SPY bet, risking $37.5K of capital to hedge $75K investment).

    On December 24th, SPY closed at 87 and SDS closed at 77. The uninformed trader would made 14% profit on SPY ($12K) and at the same time he would lose 40% on SDS ($15K). The uninformed trader would actually be a loser with $3K loss, despite perfectly picking the bottom.

    Lets say a second informed trader, instead of using SDS, bought 10 January put contracts to hedge 1000 SPY shares exposure, risking $3.75K of capital to hedge $75K investment.

    On December 24th, the informed trader makes $12K of profits on SPY and loses $3K on January puts. The informed trader makes $9K profit.

    What is better, $9K profit or $3K loss?

    I hope you can see now as to why the pros would never use SDS for hedging (risking too much of capital, freezing too much of capital, and losing money on correct trades).

    Most likely if you see large buying Ultra Short ETF orders, it is to manipulate the market or the sector (big trading houses actually set programs to buy these ETFs at specific time during the day to create a selling panic so their firm traders can cover their short trades in underlying securities)

  24. KJ Foehr says:

    @MEH
    Thanks, I started reading the HLR art. and will continue tomorrow. But if I do read much more broadly, I will have much less time to hold forth with my ill-informed opinions…

    And I still need to get to the bottom line of Mises.

    So much history; so many ideas; so little time; how can a person learn it all?

  25. KJ Foehr says:

    Jurgen,

    What about the $11.49 SDS paid in capital gains distribution and dividends that went ex-date on Dec. 23?

  26. Security Fraud Prosecutions Down 87% Since 2000 | politikly.com…

    \r\nThis year, the S.E.C. has brought the fewest number of securities fraud prosecutions since 1991….

  27. Moss says:

    @ DL, (Don Luskin perhaps?)

    Don’t be too idealistic about what regulation can accomplish you say….

    The problem was that the ideologues of ‘free markets’ were absolutely sure of the benefits, therefore in their minds absolutely correct in following the policies that assumed markets could self regulate.

    These same people are now clamoring for a continuation of the policies that got us into this mess in the first place. BTW this is NOT a normal business cycle.. The top of the next bull market will not be when you expect.

  28. VoiceFromTheWilderness says:

    Nobody could ever possibly have predicted that a policy that ‘government is evil’ and ‘the market is always right’, would have resulted in lax enforcement. Nobody could ever have possibly predicted that lax enforcement would lead to an explosive growth in fraud, and market manipulation. Nobody could ever have predicted that giving financial executives positions of authority in government would lead to a boom time for financial executives. Nobody could ever have predicted that laissez-faire capitalism would lead to economic crisis and industry consolidation and a two tiered society.

    Could they?

  29. steel breeze says:

    @Robert

    This:

    Markets that have many players, transparency, no principal-agent problem and consequences for your actions will self regulate. Markets that have few players, hidden information, principal-agent problems and bailouts will not.

    is nonsense.

    Care to specify how many players are sufficient for a “self-regulating market”? Care to define “transparency”? Are privately held companies to treated the same as publicly held companies? Are hedge funds transparent enough?

    Good luck with that no principal-agent problem. And is there anyone that does not suffer the consequences of their actions? How about suffering the consequences of someone else’s actions? What does your “self-regulating market” do about those?

  30. KJ,

    this: “So much history; so many ideas; so little time; how can a person learn it all?”

    is a good Q:, simply, one cannot.

    lends weight to the ol’ adage: “Learn more than you’re Taught.”

    the only thing I can say, as you already know, some sources are better than others..

    with that, be exposed to many, different sources..fairly readily, the BS will become more obvious.

    then, we’ve a choice to make, Hew to the Facts, as we best determine them, or Wallow..

    as we know, some things just aren’t Kosher.

  31. AGG says:

    2009 will be the year that America rediscovers lawyers. As you all know, in most states (Vermont is an exception), you have to be a lawyer to be a judge. Judges and lawyers have been undermined, ridiculed, disrespected and generally forced through more semantic loops in the last year than at any time in history since the Supreme Court of the late 19th century twisted the constitution to gut amendments ment to free slaves and give them citizen rights and instead, used them to create and defend corporate personhood. This “wormwhole” moment is passing. Sure, some big rats will get away. But by and large, a lot of lawyers and judges will labor to restore a semblance of respect for the laws. I think it will be a great year for justice.
    Some may ask what grounds I have for optimism. I say that, not only do I have grounds, but I’ll throw in a potato patch too. The Big Picture is the potato patch I’m talking about. Just compare the comments now with those a year ago and you’ll see what I mean.

  32. Francois says:

    “Scott Friedstad, the deputy director of enforcement at the commission, said the numbers did not reflect “the reality that I see on the ground.”

    Since when a Bush lackey can see reality as we know it?