Should financial firms accused of improprieties be able to get away with paying fines without admitting their guilt? That’s a matter of growing debate in the US, where instead of prosecuting cases involving the financial crisis, insider trading or other nefarious events, regulators and the government have often opted to settle with the accused party.
Judges have increasingly questioned that practice. The latest is Victor Marrero, a district judge who yesterday wondered how the Securities and Exchange Commission’s record million settlement with SAC Capital, a hedge fund, over insider trading allegations would look if indicted SAC employees end up being convicted. Today, in the latest of a series of SAC arrests, the FBI picked up Michael Steinberg, a portfolio manager at the hedge fund.
SAC opted to pay $602 million to settle under an SEC provision that allows accused parties to “neither admit nor deny” any wrongdoing. Marrero pointed out that, if SAC had truly done nothing wrong as it claims, and fought the case, it would have paid only $1 million in legal fees—so why would it pay $602 million instead? A lawyer for SAC argued the fund didn’t want to deal with years of litigation. But that’s part of the problem, say critics of the system: SAC was allowed to make the case disappear, instead of possibly answering for the allegations.
Marrero’s criticism follows that of his fellow judge Jed Rakoff, an early opponent of such settlements. Rakoff refused to accept a $285 million SEC settlement with Citigroup on accusations that it misled investors on a risky mortgage-related financial product. He said the settlement wasn’t in the public interest and the decision is in the appeals process.
But corporate lawyers and regulators complain that having judges question SEC settlements brings unpredictability to the legal system. One lawyer who defends corporations told Quartz that if judges have a problem with SEC settlements, then the focus should be on changing the law. For now, he said, the SEC has the right to settle cases, and both regulators and companies need to know those agreements will be upheld in court.
Regulators, for their part, have argued that the bar to obtaining convictions in financial crisis-era and other cases is so high that it’s better to settle than to pursue cases with little chance of succeeding. US attorney general Eric Holder earlier this month also said some banks are too big to prosecute, because of how that could affect the US and world economy. Proponents of more aggressive prosecution counter that it’s not the job of regulators or prosecutors to worry about the economic effects, only whether the law was broken.
One thing is for sure: the SEC’s fines don’t necessarily put a dent in the lifestyle of the people behind the companies with which it settles. SAC Capital’s head, Steven Cohen, who is worth $9.3 billion according to Forbes, has been on a shopping spree lately, buying a $155 million Picasso and a $60 million East Hampton home. And if he gets his $115 million asking price for his Manhattan apartment, those won’t even leave him too much out of pocket.
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