Is the SEC a Toothless Watch Dog?

SEC enforcement actions are supposed to halt violations, protect investors and the markets, act as a deterrent and prevent a future repetition of wrongful conduct. To facilitate those goals settlements typically incorporate common elements. For example, when settling a civil injunctive action in Federal court the agency generally requires that the defendant admit to the jurisdiction of the court, neither admit nor deny the factual allegations in the complaint and consent to the entry of a permanent injunction preventing future violations of the Sections of the statutes alleged to have been violated. In addition, the defendant will be ordered to pay disgorgement and prejudgment interest if there are ill-gotten gains and a civil penalty. There may be other provisions, depending on the case, such as an officer/director bar or a penny stock bar to protect investors in the future. The settlement papers also provide as a matter of policy that the defendant is precluded from denying the allegations of the complaint – settlements are a matter of principle, not a business decision.

The resolution of SEC administrative proceedings are similar. In many instances there are undertakings to institute certain procedural reforms with the assistance of a retained consultant to preclude a repetition of the conduct. The settling order will then contain many of the same elements as those in a civil injunctive action, substituting a cease and desist order for the injunction. In this age of “get tough” enforcement, the resolution of either the civil injunctive action or the administrative proceeding may be based not just on consent but admissions of fact extracted from the defendant or Respondent rather than on the more traditional basis of neither admit nor deny.

Then came the settlement in SEC v. Syron, Civil Action No. 11 Civ 9201 (S.D.N.Y.), centered on the conduct of GSE Freddie Mac and its officers during the market crisis. The settlement omitted every standard element of an SEC settlement without explanation.

What happened?

The underlying case

The defendants in Syron are the former Chairman of the Board, Richard Syron; former Executive Vice President and Chief Business Officer, Patricia Cook; and former Executive Vice President for the Single Family Guarantee business, Donald Bisenius.

The case centered on claims that the company and the named defendants failed to disclose, and made misrepresentations regarding, the exposure of the firm to the subprime real estate market as the market crisis was unfolding.

The complaint focus on the period from March 2007 through May of 2008. In statements, speeches and filings with the SEC during that period, the complaint alleges that the named defendants misled investors. Investors were lead to believe that the company used a broad definition of subprime loans and that it was disclosing all of its Single-Family subprime loan exposure. Mr. Syron and Ms. Cook reinforce this view by publicly stating that the company has essentially no subprime exposure. Thus at December 31, 2006 Freddie Mac represented in Commission filings that its the exposure to the Single Family Guarantee business for subprime loans was between $2 billion and $6 billion or about 0.1% and 0.2% of its Single Family guarantee portfolio. In fact, as of December 31, 2006, its exposure in that market was about $141 billion or 10% of its portfolio. Those numbers are based on loans the Company internally referred to in various classifications such as “subprime,” “otherwise subprime” or subprime-like.” By June 30, 2008 that exposure grew to about $244 billion or 14% of the portfolio.

Mr. Syron had ultimate authority over the subprime discloses in Freddie Mac’s Information Statements and supplements and Commission filings during the period. Ms. Cook, according to the complaint, provided substantial assistance to Mr. Syron and Freddie Mac in making subprime disclosures by certifying the accuracy of the disclosures which related to her area of responsibility. Mr. Bisenius also certified the accuracy of the subprime disclosures in certain Information Statements and Supplements published during the period and in the Form 10-Q, thus substantially assisting Mr. Syron and the company in making the misleading disclosures.

The disclosures did not reflect the true exposure of the firm to the subprime market and were thus inaccurate and misleading. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a).

The settlement

The case was resolved with an Order by the Court stating that it “retains jurisdiction to enforce the Stipulation . . .” The Stipulation referred to is the Stipulation and Agreement and Order, dated March 2015 and executed by the parties.

The Stipulation resolves the action as to each defendant. After reciting the history of the case, it states that “the parties agree, without conceding the strengths or weaknesses of their respective claims and defenses, that it is not in the interest of justice to continue to litigate this matter . . . the parties have accordingly agreed to resolve this Case without further litigation.” It then provides that the case is resolved and that the Stipulation and Agreement are in full force and effect for twelve months as to defendant Bisenius eighteen months for defendant Cook and twenty-four months for defendant Syron. During those periods each defendant will:

  • Refrain from signing any SEC report based on Exchange Act Sections 13(a) or 15(d) or any certification required by SOX Sections 302 or 906;
  • Cause the following amounts to be donated to the Freddie Mac Fair Fund under SOX Section 308(b): Mr. Syron: $250,000; Ms. Cook: $50,000; and Mr. Bisenius: $10,000; and
  • Each defendant will cooperate fully and truthfully with the Commission as to any related proceeding.

This is the entirety of the agreement.


SEC enforcement actions are supposed to halt violations, protect investors and the markets, and prevent the wrongful conduct from being replicated in the future. In the age of “broken windows” and “get tough” enforcement, those settlements have become punitive in the view of many. Yet here not only did the SEC avoid being punitive it is at best questionable what was accomplished. There is no injunction prohibiting a repetition of wrongful conduct to protect investors and the markets. There is no disgorgement, no penalty, no procedures to prevent a repetition of the wrongful conduct in the future.

Also missing is any explanation – or even a hint of a suggestion – as to the reason the the SEC abandoned every standard settlement provision it routinely imposes on parties. No admissions; no “neither admit nor deny:” no permanent injunction or cease and desist order; no disgorgement; no penalty; no ancillary relief and no requirement that the defendants not deny the claims in the complaint. In place of these standard elements are brief limitations on the ability of the defendants to make filings with the Commission and execute SOX certification coupled with an obligation to “donate” certain amounts to a fair fund. There seems to be little purpose to these provisions.

This is not the stuff of SEC Enforcement settlements. The complaint alleges a significant, systematic fraud on the public and the markets – intentional misrepresentation during a time when investors and the markets were in critical need of the information. It claims the defendants lied to investors and the markets. Yet for no apparent reason the big bad watch dog surrendered his growl and teeth, rolled over and gave up.

If the case collapsed in discovery, which does happen, the proper remedy is dismissal, not a meaningless settlement. If this was supposed to be a face saving settlement, the SEC should think again – this is a face defacing settlement. While the company took responsibility for its conduct and agreed not to contest the statement of facts when entering into an agreement to resolve its liability, that does not explain the result here. The SEC owes the public and the markets it is supposed to protect an explanation.

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