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Banks Promise Not to Commit Fraud ... Until Next Time

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As part of a settlement with the SEC last month, Citigroup (NYSE: C  ) promised it would never again, as The New York Times put it, "violate one of the main antifraud provisions of the nation's securities laws." That seems like a noble aim, and we'd love to believe that Citigroup means what it says.

Unfortunately, Citigroup made a similar pledge in July 2010, according to the Times. Oh, wait, and there were other agreements in May 2006, March 2005, and April 2000. When it comes to financial fraud, it seems, you can have five strikes, and still be up at the plate.

And Citi isn't the only one. According to the Times' study, during the last 15 years, there were "at least 51 cases in which 19 Wall Street firms had broken antifraud laws they had agreed never to breach." Here is a complete list of 16 of those companies that declined to comment on the findings:

American International Group (NYSE: AIG  )
Bank of America (NYSE: BAC  )
Bear Stearns
Columbia Management
Credit Suisse
Deutsche Asset Management
Goldman Sachs (NYSE: GS  )
JPMorgan Chase (NYSE: JPM  )
Merrill Lynch
Morgan Stanley (NYSE: MS  )
Putnam Investments
RBC Dain Rauscher
Raymond James
Wells Fargo/Wachovia (NYSE: WFC  )

This is pretty outrageous even by Wall Street standards, and it tells us a lot about our current regulatory system. If financial firms know that their promises to "not commit fraud" are meaningless, then we've created a culture where there is very little downside to unethical behavior and the aggressive pursuit of dubious new products.

The SEC seems to be saying, "Hey, our lawyers are overmatched vis-a-vis these big firms. The best we can do is try to squeeze out a token settlement every once in a while, and call it a day." Surely our financial institutions know this, and probably view the occasional SEC wrist slap as the part of the price of doing business.

All hope is not lost, however. Just the other day a federal judge called into question the toothless practice of asking firms to make meaningless pledges to not break securities laws in the future. U.S. District Judge Jed Rakoff asked the SEC if these agreements were "just for show." He also made it clear that he had very serious concerns about the settlement between the SEC and Citi. He has yet to decide whether or not to approve the deal.

One way or another, we need to ensure that in the future, financial fraud is treated like the serious crime that it is. Maybe the fines should include a few more zeroes at the end of them, and then double from there for future infractions. Remember the "zero tolerance" policy toward petty crime in New York City in the late 1980s and 1990s? Maybe we need "zero tolerance" for financial fraud on Wall Street in 2011 and beyond. Anything would be better than the current "zero effectiveness" approach. We can do better than this.

If you'd like to stay updated on Wall Street and financial reform, shoot a blank email to

John Reeves does not own shares in any of the companies mentioned in this article.

The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2011, at 1:56 PM, BabyArm wrote:

    Dear John Reeves,

    This type of nonsensical journalism is responsible for furthering the rampant anti-bank and anti-american sentiment being perpetrated by the Occupy this or that set (soon to be the occupy mom's basement set when this gets too tiresome/dangerous/too cold). Did banks commit fraud (if so, you fail to mention what the fraud was), or did they break anti-fraud provisions in securities laws? What's the difference? I'd like to know. I was intrigued by the headline, but it's just another empty story with no facts, substance, or insight. In the scope of the NYT story, no case of fraud of any kind was ever brought by the JD and won. So there is no fraud. If you are already pissed at banks (sounds like you have an axe to grind), then readers who sympathize will react: "HERE, READ THIS, NOW THEY'VE COMMITTED FRAUD. BANKS ARE SCREWING ME AGAIN, GET YOUR PITCHFORKS, F THE BANKS." Why not start being part of the solution instead of part of the problem. Try and realize that banks are full of millions of regular people who go to work every day and try to do the right thing, all while having to comply with a set of rules that changes by the minute and, when stacked together, would reach to the moon. Why not write about that.

  • Report this Comment On November 11, 2011, at 2:11 PM, outoffocus wrote:

    *Huge round of applause* We are talking about the same agency that investigated Madoff and gave him a clean bill of health. This is GREAT Journalism. We need to be holding these institutions responsible and the individuals behind them. Dozens of people got away with financial murder, mass blatant fraud in 2008 and at the worst got a huge golden parachute. If we have to use tax money to bail them out, then heads need to roll...

  • Report this Comment On November 11, 2011, at 2:12 PM, TMFBane wrote:


    My article was a response to a story that has been widely reported in the media this week. Here are some relevant stories that provide more detail:

    Promises Made, and Remade:

    Why the SEC Won’t Hunt Big Dogs:

    Judge Unloads on Deal SEC Struck With Citi:

    Citi essentially won a sweetheart deal from the SEC. The SEC only sought $160 million in alleged illicit profits, though investors lost more than $700 million. As part of the deal, Citi was able to avoid a guilty plea, but that was a big part of the problem. When asked by the judge, their lawyer responded, "we don't deny" the charges either.

    By the way, I couldn't agree more with you about the fine employees of the banks. Just today, 1000 employees of MF Global were terminated without any benefits or severance due to the reckless actions of their leaders who don't follow the rules. I'm on their side, and that's why this matters.

    I honestly can't see how you don't see a problem here.

  • Report this Comment On November 11, 2011, at 4:14 PM, HappyEndingz wrote:

    At the end of the day, the fault lies with Congress.

    Deregulating the banking industry at the turn of the century at the urging of Greenspan, Summers, Ruben, a few others, opened the way for financial institutions to maximize profits - their logical mandate - and they chose aggressive risk profiles.

    But without a downside if these models proved incorrect, they could and did gamble with other people's money and then simply walk away, salaries and bonuses in hand, leaving the taxpayer to clean up the mess.

    Congress is elected to serve and safeguard their constituencies, but in fact have done a shameful job keeping the financial machinery from creating destructive boom and bust cycles. Inexcusably shameful.

  • Report this Comment On November 11, 2011, at 7:00 PM, dennyinusa wrote:

    I agree that congress and government agencies could do much better. But it still does not absolve the bank mangers who did commit crimes. That is like blaming the police for the actions of a murderer. Just because nobody is watching doesn’t mean it is ok to do something illegal or unethical. I hate when people blame the person who leaves their keys in their car if it is stolen. The thief bares 100% blame. This is a problem in today’s society. We assign some blame to victims, which is BS.

  • Report this Comment On November 11, 2011, at 10:38 PM, venturen wrote:

    If you have worked on WS or with people from WS you know some of them revel in ripping the customer off. They know they have deep pockets and gaming the system is a way of life. Unfortunately they have gamed the life out of the US economy. Look at Hank Paulson...he award trillion to the very banks the gorged themselves on the way they are fat and happy with profits from the trillions given by Paulson and Benny. The problem is the taxpayers are on to the fraud...and trouble is brewing. Direct action is starting and WS and washington are in for some push back!!!

  • Report this Comment On November 11, 2011, at 10:54 PM, Kiffit wrote:

    One of my professional incarnations was being a school teacher. Early in my 10 year career, I had the unpleasant problem of having to deal with a class that had 'got out of hand'. My fault. I took my eye off the ball and one just cannot do that with 14 year olds, ever.

    It required a degree of ruthlessness, consistency and organization that was ten time greater than what I would have needed to apply, had I maintained control in the first place.

    My system was to identify the main trouble makers and hit them with an infringement penalty if they breathed more than 15 times a minute. I organized it with the parents that they would be staying in detention almost for certain every night, for at least a week. I did the same for second and third rank TMs, with slightly longer leashes. And they all knew that to get off the troublemaker list, they had to keep an extremely low profile for long enough to convince me they were prepared to do as they were told.

    It took two weeks to bust the class of the bad habits I had allowed it to accumulate. It was two of the hardest weeks of my teaching career. But it turned into one of the best classes I have ever had the privelege to teach.

    The SEC has the same problem and in principle, the answer is the same. They pick their targets and keep busting them for anything and everything until its operating culture becomes, from top to bottom, as a matter of standard practice, cleaner than a surgical operating theatre.

    It sounds really hard, and it is. But there really isn't any other way.

  • Report this Comment On November 12, 2011, at 11:28 AM, gkirkmf wrote:

    To quote TMFBane,

    "I honestly can't see how you don't see a problem here."

    I say AMEN!!!

    At the risk of belaboring a point, let’s throw one more statistic into the mix. Chase has 143,000 employees. The entire US Treasury Department has 116,000; ( facts are courtesy of Wikipedia ). It doesn't take a lot of introspection to observe that they are outnumbered, probably 100 to 1 at least with just the listed financial companies totaled up.

    The banking problem is just one aspect of a growing problem caused by LARGE corporations. Lest we take our eye off the ball, remember that GM and Chrysler arranged bailouts for themselves during the "financial" crisis!!!

    Seems to me that if we are to survive as a country 100 years from now, we have to come up with a different way of controlling bigness other than the laze fare capitalistic approach we have today. It's like lemonade stand economics. It works well in the micro, but fails at the macro level. Capitalism works great at the micro level. The rise and failure of small businesses reveal this. It allows the best of breed to survive. But, look what happens when you let this concept grow and grow. We now have gigantic groups of people who have a societal license to act as one person. There is competition in their ranks to achieve higher management level and higher pay. Morality is nonexistent. It’s up (with more pay) or out. The drive to succeed puts heavy pressure on finding ways around the regulatory apparatus to eke out higher and higher bonuses and promotions.

    Does anyone have a solution? I would like to hear other’s approaches to solving this conundrum. At the risk of being roughed up in the MF world, I will propose mine to get the ball rolling. In my view there are two very different approaches to solving the problem.

    One solution is to equal out the playing field to use a sports metaphor. This would solve the jobs problem also by the way. We increase the number of auditors and regulators to the point where the government has a chance of controlling these large corporations. The logical conclusion of the present trend for management to either push to sell out (and take a big golden parachute with them) or acquire another company (and increase their salary accordingly) will result in one large corporation being regulated by one large government. This is not my favorite solutions by the way…

    The other possibility that I see is that we limit the size of corporations which are either incorporated in any of the 50 states, or not incorporated in the US but operate anywhere in it. I leave it to others wiser than myself to come up with an exact limiting formula. Personally, I would just limit corporate assets to a certain size based on industry. I would be especially carefully in setting the size of conglomerates. In my opinion, limiting corporation size would go a long way towards the goals of limiting the size and influence of government in our lives, not to mention enhancing the rule of law in an uncertain future.

  • Report this Comment On November 12, 2011, at 4:03 PM, devoish wrote:

    +1 rec.

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