Is the SEC Really Serious about its Vow to Regulate Credit Derivatives?
The Wall Street Journal reports that the Securities and Exchange Commission (SEC) is now ready to police Wall Street firms which have engaged in unlawful practices involving CDO’s (collateralized debt obligations) and other credit derivatives., which are investments backed by mortgage, student loan, or credit card debt which has been bundled and sold to investors in the form of bonds and other securities. Many such investments were misrepresented as low-risk alternatives to money market funds and other cash equivalents. Unfortunately, many investors lost money or found that they were unable to cash out because the markets for certain products had literally dried up. Some investors have already filed civil suits or arbitration claims against broker-dealers, fund managers, and the issuer of certain credit derivatives alleging that they were defrauded by misrepresentations about the risk, yield and liquidity of such securities. Now the SEC says that it is going to get involved.
The SEC does not have a consistent track record when it comes to enforcing the nation’s securities laws, and its stance on derivatives is no exception. For instance, a former SEC commissioner told Congress in 2006 that the agency had no regulatory authority over credit default swaps, a form of credit derivative contract in which the purchaser hedges other investments by betting that the underlying debt will default. The purchaser of a credit default swap (CDS) makes periodic payments to the seller, and if the collateral defaults, then the seller makes a large cash payoff to the purchaser which is analogous to an insurance policy although such contracts fall outside the purview of insurance regulators. While not regulated as insurance policies, however, credit default swaps clearly fall within the category of securities which have always been subject to SEC regulation. As credit default swaps grew to a $38 trillion share of the derivative market and abuses by traders became widespread, the SEC has reversed its 2006 position and has let Wall Street know that credit default swaps and other credit derivatives are on its enforcement radar.
Time will tell if the SEC makes good on its promises. If it does try to prosecute unscrupulous traders, however, the defense lawyers will surely point to the SEC’s inconsistent statements about whether it can regulate such investments in an effort to justify their clients’ actions. Past inaction by the SEC may be construed as an endorsement of trade practices, making juries reluctant to convict. Even in cases where the SEC has successfully prosecuted securities law violations, they have not always focused on the most culpable parties. Many have criticized the agency for going after the little fish and turning a blind eye to abuses at the largest Wall Street firms. Part of the problem is politics, but a large part of it is money since the largest firms—which in some instances have been the worst offenders—have unlimited resources to fight back. It would certainly be ironic if federal bailout funds were used to defend the recipients of those funds against federal securities fraud prosecutions.
If defrauded investors want to recoup their losses, they are not able to count on the SEC or federal prosecutors. Instead, they will need to hire private attorneys to bring civil suits against Wall Street firms, as thousands of investment scam victims have already done in the wake of the current financial crisis. According to attorney Craig T. Jones with the Atlanta law firm of Page Perry, LLC, “the federal government is not going to give a bailout to the investors, and Wall Street is not in the business of giving out refunds.” Securities fraud law firms such as Page Perry are standing up for investors all over the country. According to Jones, “even sophisticated investors have legitimate claims given the level of fraud and misrepresentation that went on in these markets.”
Given the current financial crisis and the failure of many investment markets due to the subprime mortgage crisis, many disgruntled investors are turning to lawyers to determine whether their losses may have been caused by the unlawful conduct of investment advisors and brokers. The Atlanta law firm of Page Perry, LLC represents investors all over the country who are seeking to recover their losses in such cases.
