The Securities and Exchange Commission’s latest attempt to assign blame for the financial crisis hit a roadblock last week, after what was already a journey over a bumpy road.
A federal judge awarded only a small fraction of the penalty that the SEC sought from the Reserve Primary Fund, a large money market fund that “broke the buck” in September 2008. U.S. District Judge Paul Gardephe also denied the SEC’s motion for a new trial against two of the fund’s executives, Bruce Bent Sr. and his son, Bruce Bent II.
A jury cleared both father and son of civil fraud last November, though it found the company itself made fraudulent statements. At the time, I observed that the jury’s decision seemed likely to have been a compromise, especially given that Hurricane Sandy had forced the jury to suspend its deliberations for a week. Gardephe’s decision finally arrested the lingering momentum of what the Bents’ lawyer characterized as a case of “fraud by hindsight.” The judge awarded civil penalties of $650,000 against the corporate entities, out of the $130 million the SEC had sought; against Bruce Bent II, whom the jury found liable of one claim of negligence, Gardephe awarded $100,000 of the SEC’s requested $1.3 million.
“These entities were in business for decades and committed few regulatory violations,” the judge wrote, adding that the wrongful conduct cited by the jury “took place over a period of less than 36 hours and during a time of enormous economic stress.”
As I observed last November, just because something bad happens does not necessarily mean that there is someone to blame for it, regardless of the political pressure to find someone blameworthy.
The Reserve Primary Fund was essentially put out of business by the financial crisis. This gave the fund and its executives every incentive to continue engaging with regulators through the legal system. They had nothing to lose in fighting the SEC’s attempt to assign a large share of blame for the crisis to a party that had almost no role in creating it. Further, as a spokesman for the Bents noted after Gardephe’s decision, “Investors have already received more than 99% of their investment from 2008.”
In contrast, I wrote recently about JPMorgan Chase’s decision to resolve the SEC’s investigations into the trading loss known as the “London Whale,” which cost shareholders more than $6 billion. The bank agreed to pay $920 million in fines and to admit fault in the incident. Could Chase have continued to fight? Probably. But Chase is a big, ongoing banking business. Its leaders made a business decision to make nice with their regulators. Unlike the Reserve Primary Fund, Chase still has a lot to lose if it chooses to push back.
The SEC continues to look for scapegoats, yet reality continues to intervene. Lehman Brothers failed to offer a viable target for blame, and it seems increasingly clear that no simple villain will emerge from the largely settled dust of the 2008 financial crisis. Without an evident wrongdoer at whom to aim, the SEC’s attempts to assign blame will continue to miss most of their targets.
It is too bad that only individuals and entities with their backs against the wall are willing to take a chance on juries and judges who recognize baseless scapegoating when they see it. If bigger businesses had the same faith in the legal system, I think we would see a lot less regulatory grandstanding. Perhaps we would even see a bit more attention to wise regulation as a result.