Why do bad things happen to good people? The Securities and Exchange Commission thought it knew the answer after the 2008 financial crisis: Because bad people cause those bad things to happen.
Judges and juries, however, have a different perspective - namely, that just because something bad happens, it doesn’t mean anyone intended it.
The pressure on the SEC to find scapegoats to blame for the crash, and the lack of much concrete evidence that there is culpable blame to be assigned, this week led a Manhattan jury to clear Reserve Management Co. Chairman Bruce Bent and his son, the firm’s president, Bruce Bent II, of civil fraud charges, although it upheld the government’s position against the younger man on one allegation of negligence. In a move that smacks of a time-saving compromise decision (jury deliberations were halted for a week by Hurricane Sandy), the jury also found that the management company itself made fraudulent statements, even though the individual executives were not liable.
The Reserve Primary Fund made history, in what was arguably the worst moment of the 2008 financial crisis, by “breaking the buck” due to its over-exposure to Lehman Brothers. This incident temporarily forced the government to back the entire money market fund industry and to institute some immediate reforms, both of which were smart moves that helped stem the crisis. More recently, the political and regulatory fallout spurred the SEC’s misguided efforts to reform money market funds out of existence, as well as the civil case against the Bents, which the SEC filed in 2009.
The jury concluded, however, that the fund’s managers committed mistakes, not fraud. I agree with the Bents’ attorneys that the government was pursuing a case of “fraud by hindsight.” Just because the fund’s executives were wrong when they asserted that Reserve investors wouldn’t lose money did not imply that they maliciously hid information to the contrary.
The decision is yet another in a series of blows to the SEC. As of last week, the agency reported that it had charged 117 entities and individuals in connection with the financial crisis. Many of these cases have been settled out of court, with no admission of wrongdoing on the part of the entities charged. In May, U.S. District Judge Manuel Real dismissed large parts of the SEC’s case against former executives at IndyMac Bancorp. Earlier this year, the Justice Department closed a criminal investigation against Goldman Sachs without bringing charges, and the SEC decided not to pursue a civil case, either. And, despite pressure to do so, the SEC did not bring a case, criminal or civil, against Lehman Brothers itself.
It now seems unlikely that a high-profile criminal case will arise out of the financial crisis, especially as more time passes since the events in question.
Andrew Vollmer, a former deputy general counsel at the SEC, told Reuters after the IndyMac decision, “I think the fairest assessment (of the SEC's record) is that the record is mixed. The commission has brought some good cases, well-grounded cases, and I think they have brought some other cases where they have been criticized.”
That criticism isn’t without grounds. Some of the SEC’s cases have been notably weak or sloppily constructed. It’s clear that public officials continue to feel pressure from voters, who would like someone - or a few someones - to blame for the crisis and its aftermath.
In some cases, politicians have made a show of taking action themselves. New York Attorney General Eric Schneiderman, as co-chairman of a group called the Residential Mortgage Backed Securities (RMBS) Working Group, certainly isn’t hiding the group’s light under a bushel as it pursues a civil case against JPMorgan, hinging on the actions of Bear Stearns - which JPMorgan acquired at the government’s urging in the first place. Federal lawyers also brought a new civil case against Bank of America last month related to the housing market’s collapse.
Yet despite the political imperative of witch-hunting, the courts have generally resisted the hysteria and demanded that prosecutors prove the cases they bring. If they lack proof, it certainly is not because any efforts have been spared in searching for it.
Bad things happen to all sorts of people, for all sorts of reasons. Just because we want to blame somebody does not mean somebody is to blame. Those Manhattan jurors, and others in the previous cases, met their responsibility to decide the charges based on evidence rather than emotion. Those are good people, and they did a good thing for all of us.