Stale Enforcement Actions Do Not Protect the Public: Why Bring Stale Cases Against Banc of America and Goldman?

The purpose of SEC and NYSE enforcement actions is to protect the markets, investors and public, not explore history.  Two settled enforcement actions filed yesterday raise significant questions about their purpose.

Yesterday, the SEC announced settlements in two actions in which it claimed that two major Wall Street firms disadvantaged their customers by violating the securities laws.  First, in a settled administrative proceeding against Banc of America Securities the SEC claims the broker willfully violated Sections 15(f) and 15(c) of the Securities Exchange Act of 1934 by failing to provide clear and effective internal policies and to detect failures in its internal controls to prevent the misuse of forthcoming research reports by the firm or its employees, including analyst upgrades and downgrades, and for issuing fraudulent research.  According to the SEC, failure to comply with these procedural requirements significantly disadvantaged BofA Securities’ clients because the broker traded ahead of its own clients, using its own research reports to trade for its account prior to releasing those reports to its unsuspecting clients.  This informational advantage was very profitable for BofA Securities according to the SEC.  To resolve the action BofA Securities agreed to a censure, a cease-and-desist order, and payment of $26 million in disgorgement and penalties.   Linda Thomsen, Director Division of Enforcement, took the opportunity to reiterate the SEC’s Wall Street focus, “We are determined to plug the improper leak of information on Wall Street . . . . Today’s action makes it clear that firms must have appropriate safeguards on all their nonpublic information, including upcoming research reports.”

In a second settled administrative proceeding the SEC and the NYSE claimed that Wall Street giant Goldman Sachs violated regulations that require brokers to accurately mark sales long or short and restricting stock loans on long sales.  According to the SEC and the NYSE, selected Goldman customers were permitted to trade short in advance of public offerings of the companies’ securities by improperly disguising their short trade as long trades.  According to the Order, two Goldman customers’ pattern of trading and Goldman’s records reflected that the customers were selling securities short in violation of Rule 105 and Rule 10a-1(a).  The SEC’s Order also found that Goldman was a cause of its customers’ violations of the short sale rules.  The NYSE Decision further cited the company for failure to supervise its business activities.  The SEC Order and the NYSE Decision censured Goldman for its conduct and compels the firm to pay $2 million in civil penalties and fines. 

If these actions are serious violations of the law as the SEC and the NYSE claim, one has to wonder where these regulators have been.  The conduct in these cases is several years old; since 1999-2001 in the BofA Securities and from 2000-2001 in the Goldman action.  Bringing these actions years after the conduct began and ended does not seem to serve the investor protection purpose of enforcement actions.  Indeed, there seems to be little purpose in ordering that conduct cease and desist now when it began and ended years ago.  Likewise imposing penalties years later is hardly remedial, although it may be arguably a deterrent and punitative.  The bottom line is that if enforcement actions are to protect the public they need to be brought in a timely fashion.