How To Get In Trouble With The SEC

Major dealer banks, such as Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), and Morgan Stanley (MS), are accustomed to settling lawsuits stemming from LIBOR manipulation, restraint of trade in blocking the listing of credit default swaps, and abuses committed in mortgage security underwriting and sales. But these dealer banks are not alone in feeling the heat. Wells Fargo (WFC) has come to grief over abuse of retail product sales. Now one of the two major specialists in clearing and custody services, State Street Corp. (STT), has felt the wrath of the SEC as well.

Nonetheless, I believe the futures of State Street and it’s chief competitor, Bank of New York Mellon (BK), are brighter than that of the dealer banks in the long run. Clearing will ultimately trump dealing; custody services will ultimately replace direct credit exposure.

A recent article written by a former Goldman Sachs employee reveals how bankers fall into the kind of mistake that results in multi-billion-dollar legal settlements of government-brought lawsuits. Matt Levine, here, describes three settlements of government actions brought against State Street Corp., totaling slightly over $55 million.

These three cases provide useful insight into the way financial institutions run afoul of the SEC. The points made here are two:

  • Always, the suit is the result of either email, chat room, or taped phone conversations.
  • Executives are frequently faced by an inevitable conflict when a legally questionable decision – one that benefits stockholders in the short run; but, when uncovered, damages stockholders in the long run – is considered. The pressure to profit breeds deceit.

Source: Seeking Alpha

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