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EXAMINING THE SETTLEMENT PRACTICES 

OF U.S. FINANCIAL REGULATORS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MAY 17, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–128 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

May 17, 2012 ..................................................................................................... 1 

Appendix: 

May 17, 2012 ..................................................................................................... 57 

WITNESSES 

THURSDAY, MAY 17, 2012 

Alvarez, Scott G., General Counsel, Board of Governors of the Federal Reserve System ......................................................................................................... 6 

Galvin, Hon. William F., Secretary, Commonwealth of Massachusetts .............. 44 

Khuzami, Robert, Director, Division of Enforcement, U.S. Securities and Exchange Commission .............................................................................................. 8 

Osterman, Richard J., Jr., Deputy General Counsel, Federal Deposit Insurance Corporation .................................................................................................. 10 

Painter, Richard W., Professor of Law, University of Minnesota Law School ... 46 

Rosen, Kenneth M., Professor of Law, University of Alabama School of Law ... 48 

Stipano, Daniel P., Deputy Chief Counsel, Office of the Comptroller of the 

Currency ............................................................................................................... 11 

APPENDIX 

Prepared statements: 

Alvarez, Scott G. ............................................................................................... 58 

Galvin, Hon. William F. ................................................................................... 66 

Khuzami, Robert ............................................................................................... 74 

Osterman, Richard J., Jr. ................................................................................ 84 

Painter, Richard W. .......................................................................................... 95 

Rosen, Kenneth M. ........................................................................................... 101 

Stipano, Daniel P. ............................................................................................. 109 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Posey, Hon. Bill: 

Written responses to questions submitted to Richard J. Osterman, Jr. ...... 122 

Written responses to questions submitted to Daniel P. Stipano .................. 125 

Watt, Hon. Melvin: 

Letter to Senator Jack Reed from SEC Chairman Mary L. Schapiro, 

dated November 28, 2011 ............................................................................. 127 

(1) 

EXAMINING THE SETTLEMENT PRACTICES 

OF U.S. FINANCIAL REGULATORS 

Thursday, May 17, 2012 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Manzullo, Garrett, Neugebauer, Campbell, McCotter, Pearce, Posey, 

Luetkemeyer, Huizenga, Hayworth, Renacci, Hurt, Dold, 

Schweikert, Grimm, Canseco; Frank, Waters, Maloney, Velazquez, 

Watt, McCarthy of New York, Miller of North Carolina, Scott, 

Green, Cleaver, Ellison, Himes, and Carney. 

Chairman BACHUS. The committee will come to order. 

Today’s hearing of the Financial Services Committee is entitled, 

‘‘Examining the Settlement Practices of U.S. Financial Regulators.’’ 

Our first panel consists of: Mr. Scott Alvarez, General Counsel of 

the Board of Governors of the Federal Reserve System; Mr. Robert 

Khuzami, Director of the Division of Enforcement for the U.S. Securities and Exchange Commission; Mr. Richard Osterman, Deputy 

General Counsel of Litigation and Resolution for the Federal Deposit Insurance Corporation (FDIC); and Mr. Daniel Stipano, Deputy Chief Counsel of the Office of the Comptroller of the Currency. 

I would like to welcome all you gentleman, and we appreciate the 

good work you do on behalf of the United States. 

At this time, we are going to have our opening statements, and 

I will begin. 

Under our system, Federal agencies that initiate enforcement actions against alleged bad actors have the option of settling their 

cases before going to trial. Typically, these agencies elect a settlement in order to quickly impose a monetary fine or institute remedial action, rather than proceed with lengthy trials that can have 

unpredictable outcomes. 

Often, the fines and penalties assessed against the defendants 

are returned directly to the investors who have allegedly been 

harmed, sometimes months or years before any funds would have 

been distributed if the case had gone to trial instead. 

It is common practice at many Federal agencies, some of which 

are represented at today’s hearing, to permit defendants to ‘‘neither 

admit nor deny’’ wrongdoing or liability when settling the government’s claims. This allows the defendant to avoid providing ammunition to private plaintiffs in suits related to the same conduct at 

2 

issue in the Federal case, and facilitates settlements where the 

government concludes that its interests are better served by avoiding the expense and uncertainty of lengthy legal proceedings. 

Late last year, their practice came under scrutiny when Federal District Judge Jed Rakoff rejected a $285 million settlement agreement between the SEC and Citigroup Capital Markets in a case involving Citi’s marketing of certain mortgage-backed securities. In 

rejecting the settlement, Judge Rakoff stated that it was neither 

fair nor reasonable nor adequate nor in the public interest, because 

the proposed settlement did not include an admission of wrongdoing. 

The SEC and Citigroup jointly appealed this decision and in 

March of this year, the Second Circuit Court of Appeals temporarily stayed Judge Rakoff’s order. The Court of Appeals stated 

that it had no reason to doubt the SEC’s representation that the 

settlement it reached is in the public interest and that it was ‘‘commonplace for settlements to include no binding admission of liability.’’ It is not the function of Federal courts to dictate policy to executive administrative agencies. The appellate court concluded that, 

‘‘The SEC and Citigroup have a strong likelihood of success in their 

joint effort to overturn the district court’s ruling.’’ 

While this is a complex issue, I believe that on balance, the appellate court’s analysis was the correct one, a policy that has judges 

micromanaging Federal agencies’ exercise of their enforcement authority and requiring the government to engage in lengthy and expensive trials in every instance would not serve the best interests 

of taxpayers or investors. 

As a former trial attorney, I can assure you that the results of 

a trial are never certain. They are also exhausting in both resources and energy. It therefore makes more sense, in my view, to 

leave the judgment of whether to try a case or attempt to settle it 

largely to the agency’s discretion rather than shifting that responsibility to Federal judges. 

The agency is most knowledgeable about the merits, value, and 

difficulty of the case they are bringing. One can always secondguess but should do so with caution when second-guessing one in 

a better position to make that judgment call. 

Having said that, I realize that some have raised concerns about 

these settlement practices, and I am pleased we are able to examine this issue today in a bipartisan way. I thank the ranking member for working in a collaborative way to put this hearing together, 

and I will recognize him at a later time. 

But at this time, I will recognize Congresswoman Waters, the 

ranking member of the Capital Markets Subcommittee. 

Ms. WATERS. Thank you very much, Mr. Chairman, for holding 

this important hearing today. 

Last November, when Judge Rakoff rejected a negotiated settlement between the Securities and Exchange Commission and 

Citigroup, it captured the attention of the public and really focused 

us, in Congress, on just how frequently our financial regulators 

enter into ‘‘neither admit nor deny’’ settlements with the firms they 

regulate. 

These settlements, as you know, result in the defendant paying 

a fine but not admitting any wrongdoing. I understand that the 

3 

Commission is constrained on how many cases they can prosecute 

because of budget concerns. I know that the SEC is often 

outgunned in terms of resources when they go up against the industry, and I know that Chairman Schapiro has advocated for legislative changes to empower the SEC to collect additional fines 

against recidivist offenders. 

Finally, let me be clear in saying that I will continue to fight for 

the SEC to have the resources it needs. But with that said, I remain concerned about the frequent use of the ‘‘neither admit nor 

deny’’ settlements. While I know the SEC sometimes has a strong 

interest in settling cases quickly in order to get money into the 

hands of defrauded investors, the Commission also has a broader 

responsibility to enforce the rule of law. 

Settlements should never be viewed as just another cost of doing 

business, and I fear that could be the case. When no wrongdoing 

is admitted, it encourages repeat offenses. In fact, a recent New 

York Times analysis of enforcement actions brought by the SEC 

during the last 15 years found at least 51 cases in which 19 firms 

had broken antifraud laws they previously had agreed never to 

breach. 

Finally, to address our banking regulator settlement practices, 

let me note that I am concerned about the mortgage servicing concept orders the OCC and the Federal Reserve Board entered into 

with 14 banks and mortgage servicers, and I am eagerly anticipating the results of a GAO study that I requested on this topic. 

I look forward to exploring this topic more fully today and hearing our regulators’ perspective on this important issue, as well as 

the views of the other witnesses, and I thank you. 

Mr. Chairman, I yield back the balance of my time. 

Chairman BACHUS. Thank you, Congresswoman Waters. 

At this time I recognize the chairman of the Capital Markets 

Subcommittee, Mr. Garrett, for 2 minutes. 

Mr. GARRETT. I thank the chairman, and I thank the panel also 

for coming today. Although I will say this, I am a little bit skeptical 

as to what the actual motivation is for holding today’s hearing. I 

understand that the Minority wanted to have this hearing to use 

it as a forum, if you will, to try and pressure the SEC not to exercise its legal discretion to enter into settlement agreements with 

banks because they think that those cases should be tried in court 

instead. 

This strikes me as nothing more than political opportunism, if 

you will, especially when one considers that these same individuals 

on the other side never miss a chance to voice their opposition 

when Republican bills try to curb any discretion by the SEC in the 

rulemaking process. 

Is this a double standard? I think it is. I think suggesting that 

Congress interfere with the SEC discretion to determine whether 

to spend taxpayer money on protracted litigation or to settle a case 

based on the facts that the lawyers in the Division of Enforcement 

have evaluated is irresponsible. 

According to a Harvard Law School article, over 95 percent of 

lawsuits in the U.S. courts settle before they go to trial. Why is 

that? Because trials are time-consuming, expensive, risky, and unpredictable. 

4 

The SEC understands this reality, and it acts in the best interests of investors and taxpayers when it settles those cases, despite 

what some other people might think. The fact that my colleagues 

on the other side of the aisle are even considering putting pressure 

on the SEC to use taxpayer money to go to trial instead of trying 

to reach settlements makes me question the actual motive, as I 

said at the start. 

Do they want to bleed the SEC of funds so that they can come 

back and justify spending more money elsewhere, or are they letting the trial attorneys know that, well, they haven’t been forgotten. Or is this really some sort of a gimmick designed to appease 

the base of their party that blames all society’s ills on the banks? 

Whatever the reason, the suggestion that this body should substitute its judgment for the judgment of the SEC lawyers who are 

privy to the facts and the circumstances of each individual case involving complex financial transactions, in my opinion, is completely 

misguided. 

With that, I yield back. 

Chairman BACHUS. Thank you. Mr. Khuzami, since he has been 

in such a supportive mood of the SEC, you ought to the ask him 

for some more money. 

Mr. KHUZAMI. Can we have some more money? 

Mr. GARRETT. You are doing such a good job in this area, I think 

that— 

Chairman BACHUS. Thank you. 

I now recognize Mrs. Maloney, the ranking member of the Financial Institutions Subcommittee. 

Mrs. MALONEY. Thank you, Mr. Chairman, and welcome to the 

witnesses today. 

While many agree that investors are entitled to restitution as a 

result of agency actions against institutions, there are still concerns about how to make those investors whole and how to ensure 

they help prevent future wrongdoing. 

One particular case has drawn the committee’s attention to this 

issue and serves as the basis for this hearing, the rejection by the 

U.S. District Court of an SEC settlement in which there was no admission of wrongdoing. While I believe that admissions of guilt are 

more likely to be a deterrent, we must keep in mind the needs of 

investors who have been harmed in their ability to be made whole. 

Agency settlements return money to harmed investors quickly 

and allow the SEC to continue suits against individuals it believes 

have been fraudulent. However, I am sympathetic to Judge 

Rakoff’s view that we do not want these settlements to be viewed 

as ‘‘a cost of doing business,’’ and that they have little impact on 

future behavior. 

There are many who believe we should follow Judge Rakoff’s lead 

and require companies to admit wrongdoing in these cases, but I 

will be interested to hear from the witnesses today whether they 

believe this could lead to fewer settlements and could do a disservice to investors. The reality is that the budget this Congress 

has allotted the SEC is not enough to fund lengthy legal battles. 

Settlements, which happen much more quickly with an expenditure of fewer resources, are often the only available route for the 

Commission to take. And I would underscore that the SEC’s budget 

5 

has been cut and they have been given greater responsibilities 

under Dodd-Frank, and they have not even completed the rulemaking that they are required by law to do. So they definitely need 

more resources to handle the challenges ahead of them. 

I look forward to the perspectives of the witnesses today on this 

issue, and I thank you all for being here. And I thank you for calling the hearing, Mr. Chairman. 

Chairman BACHUS. Thank you. At this time, I recognize the gentleman from Illinois, Mr. Dold, for 1 minute. 

Mr. DOLD. Thank you, Mr. Chairman. I certainly appreciate it, 

and I want to thank the witnesses for your time, your testimony, 

and your experience. I appreciate that. 

To say the least, I think that most in the legal and regulatory 

community were surprised when the district court rejected the SEC 

settlement with Citigroup because Citigroup did not admit wrongdoing as part of the settlement. Of course, nearly all formal regulatory proceedings result in a voluntary settlement with the defendants not admitting to liability. So this district court ruling 

seems unprecedented. 

As I see it, a legal standard that requires wrongdoing admissions 

from the defendant as a condition of settling regulatory proceedings 

will diminish the number of settlements to something very close to 

zero. And the implications of a significant reduction in the number 

of voluntary settlements would seem to have some meaningful negative implications for all concerned: the victims; the taxpayers; the 

regulatory agencies; the courts; and the litigants themselves. 

So I look forward to hearing from our witnesses today as to what 

the implications are going to be. 

Mr. Chairman, I yield back. 

Chairman BACHUS. Mr. Canseco for 1 minute. 

Mr. CANSECO. Thank you, Mr. Chairman. Mr. Chairman, the 

mission of the SEC is to maintain fair, orderly, and efficient markets and to facilitate capital formation. 

Needless to say, there remains a serious question as to whether 

the agency settlement policies help fulfill this mission. Yet, there 

is a greater question about the direction the SEC has taken over 

the last several years. Almost half of the agency’s budget goes towards enforcement and examination and, in turn, it appears that 

the agency believes pursuing headline-grabbing settlements is the 

best way to protect investors. 

The measure of a Federal agency’s success should not be how 

much enforcement revenue it brings in after wrongdoing has already occurred; rather, in the case of the SEC, it should be whether 

fair, orderly, and efficient markets are being maintained. 

And with that in mind, I look forward to hearing from our witnesses today on this matter. 

I yield back. 

Chairman BACHUS. Mr. Green is recognized for up to 4 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I assure you I will not 

use the entire 4 minutes. I thank the ranking member as well. And 

I thank the witnesses for appearing. 

I think that we are at a point where we have at least one question that has to be answered: Are we going to allow 

megabusinesses to build into their bottom line acts that constitute 

6 

violations of the law? A settlement is a good thing, but the question 

is, are we at a point now where businesses can simply sit and plan 

and conclude that we will have ‘‘X’’ number of settlements, ‘‘X’’ 

amount of damages possibly, and as a result, let’s prepare for this 

knowing that we can cover and move on? There has to be some 

means by which businesses that settle these lawsuits also see 

themselves as being held accountable for wrongdoing. Wrongdoing 

cannot take place and become a part of a bottom line. 

I look forward to hearing the witnesses explain to us how we can 

prevent wrongdoing from being a part of the bottom line, and I 

yield back the balance of my time. 

Chairman BACHUS. Are there any other Members on the Democratic side who wish to be recognized? If not, we will hear from our 

witnesses. Each of your written statements will be made a part of 

the record, and you will be recognized for a 5-minute summary. 

We will begin with you, Mr. Alvarez. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Thank you. Chairman Bachus, Congresswoman 

Waters, and members of the committee, thank you for the opportunity to discuss the Federal Reserve’s enforcement program. 

Authority to take enforcement actions is one of the important 

tools that Congress has provided the Federal Reserve to require financial institutions under its jurisdiction to address serious problems or risks and comply with the banking laws. 

The Federal Reserve employs a variety of formal and informal 

tools for addressing supervisory concerns found at financial institutions under our jurisdiction. The backbone of our supervisory tools 

is the examination process. Many problems are identified and corrected during the course of regularly occurring examinations while 

our examiners are still on-site at the institution. 

Improper conduct that cannot be immediately addressed may 

also be noted in the institution’s examination report or in a supervisory letter as a matter that requires management’s attention and 

corrective action. If a problem requires a more detailed resolution 

or is more pervasive at an institution, the Federal Reserve may 

enter into a memorandum of understanding in which the board of 

directors commits to specific corrective actions. These informal 

tools comprise the most common methods for identifying and addressing unsafe and unsound practices and correcting alleged violations of the banking laws. 

On occasion, the Federal Reserve has also confronted situations 

where financial institutions management refuses to correct an improper practice or to comply with applicable laws or where the 

practice or alleged violation is so serious that normal recourse to 

informal supervisory methods is not appropriate or sufficient. 

In these cases, the Federal Reserve will enter into a formal written agreement or impose a formal order directing the financial institution to cease and desist from engaging in the improper or prohibited conduct. These formal agreements and orders also require 

the institution to take specified corrective action and, where appropriate, to make restitution to third parties harmed by the wrongful 

7 

conduct. We may also assess a civil money penalty against the offending party. 

Finally, the Federal Reserve may remove an individual from the 

banking institution and prohibit that individual from participating 

in banking at other financial institutions. 

Over the past 10 years, the Federal Reserve has taken nearly 

1,000 formal public enforcement actions. This includes more than 

600 written agreements and 100 cease-and-desist orders against institutions subject to our jurisdiction. It also includes the permanent 

ban of more than 80 individuals from the banking industry. More 

than 100 of these actions involved imposing civil money penalties 

and restitution payments totaling more than $1.2 billion. 

The vast majority of the Federal Reserve’s formal enforcement 

actions are resolved upon consent. The Federal Reserve typically 

sets out summary recitations of the relevant facts in whereas 

clauses. However, like our fellow banking regulators, it has not 

been our practice to require formal admissions of misconduct. 

Requiring admissions of guilt as a condition of entering into a 

consent action we believe would have a deleterious effect on our supervisory efforts by causing more institutions and individuals to 

contest the requested relief in formal administrative proceedings, 

which typically take years to reach resolution. That would substantially impede and delay implementation of necessary corrective action and potentially harm the financial institution and the financial 

system. 

Moreover, safety and soundness concerns typically do not give 

rise to third-party claims. Thus, the effectiveness of the regulatory 

framework established for financial institutions does not depend on 

actions brought by third parties to enforce their rights under the 

regulatory scheme. In those few cases where an enforcement action 

cannot be resolved by consent, the Board may issue a formal notice 

of charges that sets forth the factual basis for the remedies sought 

by the Board. 

The respondents in these cases are then accorded the opportunity 

to request a formal trial-like hearing before an administrative law 

judge. Only 11 of the nearly 1,000 enforcement actions taken by 

the Federal Reserve in the last decade were challenged by an administrative law judge. Only one of these actions has been contested in court. 

The Federal Reserve works closely with other Federal and State 

banking regulators as well as Federal and State law enforcement 

agencies on enforcement matters that raise issues that straddle our 

respective jurisdictions. 

We also refer matters to other appropriate Federal and State 

agencies, including law enforcement authorities. The Federal Reserve’s enforcement authority is a critical component of our ability 

to encourage safe and sound banking practices in compliance with 

the banking laws, and I thank the committee for the opportunity 

to provide this information. I am happy to answer any questions. 

[The prepared statement of Mr. Alvarez can be found on page 58 

of the appendix.] 

Chairman BACHUS. Thank you. Mr. Khuzami, before I call on 

you, let me say this: I am aware that we have a panel with three 

safety and soundness agencies and one disclosure agency. So there 

8 

are some differences there. But while we are discussing this, there 

are also many similarities, so we have put the panel together but 

there are differences, which I recognize. 

Mr. Khuzami? 

STATEMENT OF ROBERT KHUZAMI, DIRECTOR, DIVISION OF 

ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. KHUZAMI. Thank you, Chairman Bachus, Ranking Member 

Waters, and members of the committee. Thank you for the opportunity to testify on behalf of the United States Securities and Exchange Commission on the subject of our settlement practices. 

The Division of Enforcement recommends a settlement to the 

Commission only where we believe the settlement agreement that 

we have negotiated after months or years of painstakingly detailed 

investigative work is within the range of outcomes that we reasonably could expect if we litigated the case. In making that decision, 

we consider many factors, including the strength of the evidence 

and the potential defenses, the delay in returning funds to harmed 

investors caused by protracted litigation, and the resources required for trial, including the opportunity costs of litigating rather 

than using those resources to investigate other cases and protect 

other victims. 

This approach serves the goals of the Commission’s enforcement 

program by first protecting investors, by returning their money 

with increased speed and certainty, and by more quickly getting 

bad actors out of the business by imposing bars that prohibit them 

from continuing to work in the industry or serving as an officer or 

director of a public company. 

Second, it enhances deterrence and accountability because we 

outline publicly in detail both the wrongdoer and the wrongdoing, 

which the wrongdoer is prohibited from denying, by obtaining large 

sums of money in disgorgement and penalties, by frequently barring wrongdoers from working in the industry, and by imposing, 

where appropriate, business reforms to prevent companies from engaging in future wrongdoing, all accomplished while the misconduct is fresh in the public’s mind as opposed to years later after 

a trial. 

This package of sanctions leaves little, if any, doubt in the 

public’s mind that the securities laws have been violated and that 

other would-be violators should think twice before crossing the line. 

In our view, going the further step of requiring admissions of liability in every case from defendants would come at a high cost of 

delay: delay in bringing wrongdoers to justice; delay in returning 

funds to harmed investors; and delay in investigating other frauds 

and protecting other victims, all for a purported benefit that we believe is largely already achieved through our settlements. 

For example, in the Citigroup settlement, the Commission obtained most of what it could have obtained after a successful trial, 

including injunctive relief, business reforms, charges against the 

person responsible for the transaction, and a $285 million payment 

to be returned to harmed investors, an amount which represented 

81 percent of what we could have gotten in the best case had we 

prevailed at trial and been awarded full remedies. 

9 

And the bank issued a statement in connection with the settlement saying, in effect, that, ‘‘We hope to be a stronger bank with 

better risk management controls in the future.’’ Given that statement and given the totality of the settlement, it is not clear to me 

what an admission would add or whether it would be worth the 

cost of delay and resources. 

Nonetheless, the district court rejected our proposed settlement 

because it claimed we lacked facts obtained by admissions or by 

trial. But in granting our motion to stay the proceedings, the court 

of appeals ruled that it knew of no precedent for requiring admissions, that the SEC correctly considered the value of the settlement, the perceived likelihood of obtaining a still better settlement, 

the prospect of coming out better or worse at a trial, and the resources it would need to be expended in that attempt, and that it 

saw no reason to doubt that the Citigroup settlement was in the 

public interest. 

Whether in the Citigroup case or in any of our other financial crisis cases, where today we have filed actions against 102 individuals 

and entities, including 55 CEOs, CFOs, or senior corporate officers, 

and we have obtained orders of more than $2 billion in 

disgorgement, penalties, and monetary relief, we will recommend a 

settlement only where it makes sense and it serves the public interest, not because we lack options. 

If the settlement doesn’t reach our standards, we will not recommend it or the Commission will simply reject it. In either case, 

we will litigate. 

In our financial crises cases, 75 percent of our cases against individuals were filed as litigated matters. Since June 2011, our trial 

unit in Washington has seen an increase of over 50 percent more 

actively litigated matters. 

And when we litigate, we typically prevail. Our record in litigation victories—we have prevailed in over 80 percent of our trials 

since the beginning of Fiscal Year 2011—sends a strong message 

to defendants and enhances our settlement negotiating posture. 

However, litigation requires resources. The cost of trials, both in 

terms of the thousands of staff time hours and other out-of-pocket 

costs such as expert witnesses, can be exorbitant. That is why we 

believe it is wiser to save our resources by demanding settlements 

approximating what we could expect to achieve at trial and spending those saved resources on fighting other frauds or litigating 

when a settlement does not meet our standards. With this approach, more investors get more protection more of the time. 

Thank you, and I would be happy to answer any questions. 

[The prepared statement of Mr. Khuzami can be found on page 

74 of the appendix.] 

Chairman BACHUS. Thank you. And let me apologize, I am always calling you ‘‘Khuzami,’’ instead of ‘‘Khuzami,’’ and my staff 

corrects me every time. Obviously, it didn’t do any good. I will practice in front of a mirror before the next hearing. 

Mr. KHUZAMI. That is all right. It happens a lot. 

Chairman BACHUS. Mr. Osterman? 

10 

STATEMENT OF RICHARD J. OSTERMAN, JR., DEPUTY GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. OSTERMAN. Good morning, Chairman Bachus, Congresswoman Waters, and members of the committee. Thank you for the 

opportunity today to testify on behalf of the Federal Deposit Insurance Corporation about our settlement practices. 

In my testimony today, I will discuss the FDIC’s approach to enforcement and the tools we have available, as well as the public interests benefits derived from our enforcement policies and procedures. The core mission of the FDIC is to maintain stability and 

public confidence in the Nation’s banking system. 

As recent events have reminded us, the financial condition of 

banks influences the economy in direct, substantial, and often immediate ways. Mindful of this, the FDIC’s supervision of insured 

depository institutions focuses on promptly correcting unsafe and 

unsound practices, violations of law, and breaches of fiduciary duty. 

Among the banking regulators, the combination of FDIC’s responsibilities as supervisor, insurer, and receiver is unique. As supervisor, the FDIC is the primary Federal regulator for approximately 4,100 State nonmember banks, as well as over 400 Statechartered savings associations, and ensures the FDIC has backup 

enforcement authority for the rest of the over 7,000 FDIC-insured 

depository institutions. 

In addition, the FDIC acts as receiver for all failed insured depository institutions, and under Dodd-Frank we have substantial 

responsibilities for large, complex financial companies that may 

pose a systemic risk to our financial system. The FDIC, like the 

other Federal banking agencies, has been given very strong enforcement powers under Section 8 of the Federal Deposit Insurance 

Act. These powers are used when corrective action is needed to protect the public interest. 

The vast majority of our cases are resolved through stipulated 

settlements which achieve our statutory responsibilities and protect 

the public interest without admissions of liability. Indeed, requiring a respondent to specifically admit the alleged conduct in a settlement may have the unintended consequence of delaying prompt 

relief and corrective action. 

One of the corrective actions Congress has granted the agency is 

the authority to remove and prohibit individuals from banking 

when warranted under statutory authority. Under this authority 

found in Section 8(e) of the Federal Deposit Insurance Act, the 

agency has issued hundreds of removal and prohibition orders 

against insured affiliated parties who were determined to have dishonestly or recklessly engaged in violations of law. 

An AE order prohibits the individual from participation in any 

manner in banking under a lifetime industry ban. This powerful 

tool serves to address past conduct while also protecting the industry as a whole. Furthermore, a person subject to stipulated removal 

and prohibition is precluded from participating in banking immediately upon the order’s issuance. 

Stipulated civil money penalty orders often accompany removal 

and prohibition actions as a means of further deterrence. The FDIC 

uses its enforcement authority to assess C and Ps against instituVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
11 

tions and institution-affiliated parties where we have found violations of law and unsafe and unsound practices or breach of a fiduciary duty, under a progressive increase in the penalty amount 

based on the egregiousness of the conduct involved. 

Cease-and-desist orders are used as another enforcement tool for 

corrective action. For example, when banks are in troubled conditions, such orders allow us to quickly implement a detailed corrective program, which serves as a virtual roadmap for the institution 

to follow to correct practices and to raise capital to return the institution to a safe and sound condition. We believe that prompt action 

in such cases is essential to avoid loss to the insurance fund and 

cost the communities into the economic system as a whole that 

arise when a bank fails. 

Additionally, we have the power through cease-and-desist actions 

to order affirmative relief, including ordering an institutions or an 

institution-affiliated party who has unjustly been enriched to make 

restitution. And the power to seek restitution can be particularly 

important when an institution or institution-affiliated party violates consumer protection laws and regulations. 

In these consumer cases, orders for restitutions are vehicles for 

consumer redress and the FDIC has an interest in issuing such orders as quickly as possible. 

The FDIC also brings professional liability cases as a receiver for 

banks that have been closed by Federal or State regulators where 

our investigations uncover facts that support such actions. These 

cases, which promote good corporate governance and discipline, 

serve a very different purpose than the enforcement cases that I 

have addressed thus far. 

The professional liability cases are civil tort and contract actions 

and are intended to maximize recoveries for the receivership at 

stake in keeping with the statutory priorities set out by Congress. 

In conclusion, we believe the FDIC’s process accomplishes its 

statutory responsibilities and purpose while ensuring that actions 

it takes serve the public interest promptly and effectively. 

We would be happy to answer any questions. Thank you. 

[The prepared statement of Mr. Osterman can be found on page 

84 of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Stipano? 

STATEMENT OF DANIEL P. STIPANO, DEPUTY CHIEF 

COUNSEL, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. STIPANO. Thank you, Mr. Chairman, and members of the 

committee. 

I welcome the opportunity to appear before you today to discuss 

the OCC’s supervisory and enforcement authorities and process. 

The OCC vigorously uses its authorities to protect the safety and 

soundness of national banks and Federal savings associations and 

to ensure fair treatment of customers. The OCC and the other Federal bank agencies have a broad range of supervisory and enforcement tools to achieve this purpose. 

My written statement today covers the OCC’s activities and perspectives on enforcement in three areas. The first is our overall approach to enforcement. The OCC’s enforcement process is interVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
12 

twined with our supervision of the institutions we regulate. These 

institutions are subject to comprehensive, ongoing supervision that, 

when it works best, enables its examiners to identify problems 

early and obtain corrective actions quickly. 

Once problems or weaknesses are identified, we expect management and the board of directors to correct them promptly, and institutions usually take the corrective steps necessary to address 

problems or weaknesses before they develop into more serious 

issues problems that adversely affect their financial condition or 

their responsibilities to their customers. 

That is not always true, however, and in some cases the seriousness of the problem requires a heightened enforcement response. In 

those circumstances, we have a range of enforcement tools at our 

disposal, from informal enforcement actions such as a commitment 

letter or memorandum of understanding to formal enforcement actions such as a formal agreement, cease-and-desist orders, or removal and prohibition order. 

We use all of these tools, depending on the circumstances, to 

swiftly and forcefully require correction of unsafe or unsound practices and violations of law. These include actions taken to address 

a wide range of issues including capital adequacy, managerial competency, asset quality, earnings, and fair treatment of customers. 

The second part of my testimony describes the process we employ 

to initiate and resolve enforcement actions. When circumstances 

warrant enforcement actions, it is important that the OCC take 

such actions as soon as practical. Prompt and effective action is 

critical to ensuring that institutions take immediate corrective and 

remedial measures to ensure safety and soundness and protect depositors and customers. The OCC follows a well-established process 

for initiating and resolving enforcement actions that promotes its 

supervisory goals. 

In resolving cease and desist, civil money penalty, and removal 

in prohibition actions, it is the OCC’s long-standing practice to 

present the actions in the form of a proposed order or a proposed 

order and stipulation in the case of C&D. A proposed order or stipulation includes the Comptroller’s findings supporting an action 

and a statement that the institution or individual neither admits 

nor denies wrongdoing. 

In the vast majority of cases, OCC enforcement actions are resolved by consent. However, in those relatively rare cases where a 

negotiated settlement cannot be reached, the OCC will initiate an 

administrative proceeding by serving a notice of charges on the institution or individual. 

Permitting the institution or individual to settle the case without 

admitting or denying wrongdoing facilitates the imposition of an 

enforceable order at a point where, in many instances, the problems are still manageable and can be corrected. 

If the OCC were to insist on an admission of wrongdoing, it 

would prolong settlement negotiations and increase the number of 

respondents who choose to litigate the merits of the action. Even 

if the OCC is successful in litigation, it could be several years before an order is issued. 

In the meantime, the institution’s condition could continue to 

worsen and the institution might ultimately fail if the institution 

13 

continues to engage in unsafe or unsound practices, or in a consumer protection case restitution owed to victims could be substantially delayed while new victims arise each day that the violation 

goes uncorrected. 

In either case, resources of an institution that could have been 

used to fix the problem are instead diverted to financing litigation. 

The third part of my statement describes how the OCC coordinates with State and Federal regulatory agencies and with law enforcement agencies in enforcement cases. As further explained in 

my statement, the OCC coordinates closely with many Federal 

agencies and regularly shares information with State and Federal 

agencies pursuant to interagency information-sharing agreements. 

Thank you very much. I will be happy to answer any questions 

you may have. 

[The prepared statement of Mr. Stipano can be found on page 

109 of the appendix.] 

Chairman BACHUS. Thank you. I would like to compliment the 

entire panel for your opening statements. I thought they were very 

educational. 

Mr. Khuzami, can you give me an estimate of the length of time 

between bringing an action and a consent settlement and then the 

amount of time between bringing an action and, if it is litigated, 

and the final judgment? 

Mr. KHUZAMI. The time from opening an investigation to completing it and coming to a settlement is largely a function of the 

complexity of the case. But leaving aside those matters that we 

bring on an emergency basis to halt ongoing fraud or wrongdoing, 

it is typically in the 1- to 3-year range, I would suspect. 

If you file it as a litigated case, the time from that point through 

trial, I think that we are in the range of the general stats for civil 

cases generally, which tend to be more in the 2- to 4-year range, 

which does not include appeals. 

Chairman BACHUS. And with the appeals, how much does that 

prolong recovery by the investors? 

Mr. KHUZAMI. If the appeal was taken, that typically can be another year to 3 years as well. 

Chairman BACHUS. So the investor recovers much quicker in the 

case of a settlement, consent settlement, in most cases, in two comparable cases in complexity? 

Mr. KHUZAMI. That is absolutely right. 

Chairman BACHUS. How about the cost of enforcement or the cost 

of obtaining a consent settlement as opposed to the cost of litigating just in two similar cases? 

Mr. KHUZAMI. Obviously, you would have to spend the resources 

to get the settlement, but if you didn’t, you chose to litigate rather 

than settle, we don’t quantify it in that way, but I can tell you that 

it is thousands of hours of staff time in a complicated matter, expert witness fees, which are just one expense in the litigation, particularly in complicated financial transactions. It is not unusual for 

that to cost seven figures, and I can tell you that there are probably better metrics on the defense side where I have seen statistics 

that indicate the defendants can spend $5 million or $10 million or 

$15 million litigating a case. So it is a considerable expenditure of 

14 

resources. If it is a small case with half a dozen witnesses in a 3- 

day trial, obviously it would be less. 

Chairman BACHUS. What are the factors in deciding whether to 

settle an enforcement action or procedure? 

Mr. KHUZAMI. As I indicated, it really comes down fundamentally 

to whether we can get in a settlement everything that we reasonably could hope to get if we were to go to trial and win, taking into 

account, as we must, the strength of the evidence, the defenses, the 

judge and all the other factors. And it is only when we meet that 

standard, really, do we settle a case. 

If we don’t meet that standard, we will litigate, because obviously if you don’t have a legitimate trial threat, if you don’t communicate to the targets of your investigation that you are prepared 

to go to trial, then you can be exploited, defendants will simply 

hold off for a softer settlement and not fear the alternative. But in 

our case, we are fully prepared to litigate, and we are doing more 

of it. 

Chairman BACHUS. All right. Thank you. Congresswoman Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Mr. Khuzami, I would like to ask you about the Residential 

Mortgage-Backed Securities Working Group. There is some more 

information in the newspapers, I guess as of today, where Elizabeth Warren expresses no confidence in the current bank accountability measures. On April 26th, I led about 40 Members of Congress in writing to you and the other co-chairs of the Residential 

Mortgage-Backed Securities Working Group about my concerns 

that this important task force was stalled, that you didn’t have the 

resources you required, and about the need for a strong executive 

director, to be clear. Does the RMBS Working Group have the resources you need to carry out your mission? 

Can you tell me as part of this RMBS task force work what— 

can you say whether if SEC will enter into these ‘‘neither admit 

nor deny’’ settlements. With the firms you are investigating, I believe that it is important for the SEC to litigate some of these cases 

under the umbrella of this task force, given the commitment to justice and the promises that were made about this task force when 

the President made his State of the Union Address. 

Are you concerned that the task force still has not appointed an 

executive director? When can we expect an announcement on this? 

Your budget justification requested a total of 56 new full-time 

equivalent provisions in your Enforcement Division. Are any of 

these positions being specifically assigned to this task force and are 

any of the existing SEC employees being shifted to exclusively 

work on this task force? 

The reason I am pressing on this is that we have had this 

subprime meltdown in this country which created this recession. 

We have all of these foreclosures, and we don’t have loan modification standards that services are employing. We are trying to keep 

homeowners in their home. We want to know what went wrong in 

many of our financial institutions. 

We have been making a lot of promises. What is happening with 

this task force? Is it working? Where is the executive director? Can 

you explain to me what is going on? 

15 

Mr. KHUZAMI. Sure, Congresswoman. First, from the Securities 

and Exchange Commission’s perspective and, as you see from our 

statistics, we have brought a significant number of financial crisisrelated cases, 101 entities and individuals, 55 high-ranking CEOs 

and officer— 

Ms. WATERS. Yes, but now you are part of a task force. 

Mr. KHUZAMI. Understood. I just want you to know that there is 

a record of productivity. 

Ms. WATERS. Yes, but I want you to know I only have so much 

time. 

Mr. KHUZAMI. Okay. With respect to the task force, we have a 

significant amount of resources. The five agencies that make up the 

task force have all contributed significant resources. We have a 40 

to 50 member Structured and New Products Group, large portions 

of which are dedicated to these cases. Resources are being supplied 

by the Department of Justice and the New York State Attorney 

General. We have just hired a coordinator to help coordinate some 

of this activity. There is a lot of activity, a lot of investigation. 

Ms. WATERS. What is happening with the executive director? Do 

we have one coming soon? 

Mr. KHUZAMI. Congresswoman, I think we are preparing a draft 

to respond to a letter that you sent. We hired a coordinator, but 

most of the investigative work being done here is not really being 

done by a staff that belongs to the task force; it is being done by 

the individual investigative groups that make up the task force. 

Ms. WATERS. So, are you going to proceed with some investigating that is going to lead to some litigation, or are you going 

to continue to work in ways that will allow those who are being accused to ‘‘neither admit nor deny’’ and just keep settling and settling and settling as usual? 

Mr. KHUZAMI. Like I said, if we get offered a settlement in this 

or any other case that comes close to what we could hope to get 

in the best-case scenario at a trial, then I think we would be unwise not to settle under those circumstances. If we don’t, then 

those cases will be litigated. We will follow the same procedures in 

all of our cases that we do for the RMBS task force, at least as far 

as the SEC is concerned. The other agencies may take a different 

view. 

Ms. WATERS. Since you are here today, for all of the others who 

are involved in the task force, I think it would be wise to share 

with them that a lot of people are watching to see what is happening with this widely announced task force that is supposed to 

do all of these investigations and bring about some justice for many 

of these homeowners who got into mortgages they couldn’t afford 

because they were all exotic and they were products that really 

could lead only to disaster. 

But let the task force know. We anxiously await what they are 

going to be able to accomplish and we think it is taking too long 

for them to get up and going and showing us what they can do. 

I yield back the balance of my time. 

Mr. GARRETT [presiding]. The gentlelady yields back. The gentleman from Texas is next, I believe, for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. I think one thing 

that is obvious is that if this proposal actually becomes policy to 

16 

force those subject to enforcement actions into admissions, there 

will be an explosion of litigation, civil litigation, litigation by our 

regulatory agencies. 

So when I first heard of this proposal, knowing that the Administration, both the worst employment record since the Great Depression, my immediate thought was, well, this was a trial attorney’s 

relief act and that maybe this is another failed jobs program so 

that we can somehow reemploy trial attorneys. 

But, Mr. Chairman, as I look before me and I see the representatives of these agencies, I believe the head of every agency has either been appointed or reappointed by the President, in which case 

that is clearly a false conclusion because what I think I heard from 

all four witnesses and on behalf of their agencies, is they would oppose this policy. 

Mr. Chairman, I think I have just a few simple questions to 

make sure what I thought I heard, I actually heard, and so the 

first question I have for our panelists is, in your professional opinion, on behalf of your agency, will enforcement be more effective or 

less effective if you are forced in your enforcement actions to have 

parties admit guilt? 

Mr. Alvarez, less effective or more effective? 

Mr. ALVAREZ. I think it would be less effective. 

Mr. GARRETT. Mr. Khuzami? 

Mr. KHUZAMI. I agree. 

Mr. GARRETT. Mr. Osterman? 

Mr. OSTERMAN. It would definitely be less effective. 

Mr. HENSARLING. Mr. Stipano? 

Mr. STIPANO. I agree with my colleagues. 

Mr. HENSARLING. Okay. Well, then, my ears did not deceive me. 

The next question I have is, in your professional opinion, would 

investors that you consider to have been wronged—do you believe 

if this becomes policy, that investors would end up with more resources or fewer resources to redress their grievances? Do you have 

an opinion on that, Mr. Alvarez? 

Mr. ALVAREZ. Sir, of course, the banking agencies look at things 

not from the investor point of view, but from the safety and soundness of financial institutions, so we are considering customers of 

the banks, depositors of the banks, the taxpayers who stand behind 

the deposit insurance. 

Mr. HENSARLING. Let’s go to the SEC, then. Mr. Khuzami. 

Mr. KHUZAMI. I think that while there might be some cases 

where they would get marginally more, that it would come at the 

cost of delay and at the cost of our inability to investigate other 

cases and bring money back to other victims. 

Mr. HENSARLING. Let’s go back, Mr. Alvarez, to safety and soundness. 

My guess is that, again, those who are being asked to admit to 

guilt, frankly, are going to be very loath to do so in an enforcement 

action. 

I think what I heard in your testimony, and I don’t wish to put 

words in your mouth, is that—and I think I might have heard it 

from you, too, Mr. Osterman, that in enforcement actions, particularly dealing with safety and soundness, that it is quite often imVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
17 

portant to move quickly. Litigation is something that doesn’t move 

quickly historically. 

So will our financial system be more safe and sound or less safe 

and sound? Should this policy be enforced upon you to require parties in enforcement actions to admit wrongdoing? Greater safety 

and soundness or less safety and soundness? 

Mr. Alvarez. 

Mr. ALVAREZ. Oh, I think our system would be safer and sounder 

if we had the flexibility— 

Mr. HENSARLING. If you had the flexibility. Therefore the flip 

side of the coin is less safe, less sound if you did not have the flexibility. 

Mr. ALVAREZ. I think that is correct. 

Mr. HENSARLING. Mr. Khuzami, same question. 

Mr. KHUZAMI. Yes. 

Mr. HENSARLING. Which of the two, since Mr. Alvarez kind of restated it? 

Mr. KHUZAMI. Again, we are less about safety and soundness 

than we are about investor protection. But if we were required to 

have the admissions, I do think that we would have more delay 

and fewer victims would get their money back. 

Mr. HENSARLING. Mr. Osterman? 

Mr. OSTERMAN. Yes, I think the system would be less safe and 

sound if we required an admission of liability, because we wouldn’t 

be able to take the corrective actions as quickly. 

Mr. HENSARLING. Mr. Stipano, take a full 12 seconds to answer 

the question. 

Mr. STIPANO. I have the same view. If we required an admission 

of wrongdoing, that would delay the imposition of an enforcement 

action that could adversely affect safety and soundness. 

Mr. HENSARLING. Thank you, gentlemen. I yield back my 1 second. 

Mr. GARRETT. The gentleman yields back. Mrs. Maloney is recognized. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Mr. Khuzami, you said in your testimony that your decision to 

settle is based on whether or not you believe the settlement is 

equal to what you would achieve with a trial. 

I would like to ask you to elaborate on how the appropriations 

process and your funding level impacts on your decision, and would 

you be more likely to initiate more actions if you had independent 

funding and more resources similar to other banking regulators? 

Mr. KHUZAMI. Oh, I think independent funding would help us 

greatly across the Enforcement Division. We would be able to litigate more cases. We would be able to investigate more cases. We 

would be able to have better technology which would make us more 

efficient, and more trial lawyers. It would help us across-the-board. 

Mrs. MALONEY. One of the persistent criticisms is that many people belief that the SEC’s penalties do not deter bad actors. And one 

of the criticisms is that the settlement penalties amount to pocket 

change or, as the judge said, ‘‘the cost of doing business.’’ And how 

does such a penalty deter bad actors? 

Mr. KHUZAMI. Congresswoman, candidly, I don’t agree with those 

assessments at all. Within the statutory limits that we have with 

18 

respect to penalties, we impose significant and substantial penalties. 

The Goldman Sachs case was identified as one where the penalty 

was deemed to be insufficient. In fact, the company paid 37 times 

what they expected to make in a fee for that single transaction and 

a penalty. 

So our penalties are substantial, they send a strong message, but 

they are limited by the transaction at issue. When we impose a 

penalty for financial crisis-related conduct, we can’t assess a penalty based on all the wrongs arising out of the financial crisis. It 

has to be based on the evidence of the particular transaction at 

issue. 

And second of all, we can’t get investor losses as a penalty. We 

are limited to disgorgement, which is the amount the company 

earned on the transaction and a penalty equal to the amount of the 

disgorgement. We can’t get the investor losses. So if a company 

only earned $20, we can get that $20 in disgorgement and another 

$20 in penalty, but we can’t get the $100 that the investors might 

have lost. That is why Chairman Schapiro has written Congress 

and asked for expanded penalty authority. 

Mrs. MALONEY. Okay, so basically you are limited by statute, the 

penalty that you can charge, is that correct, you are limited, and 

it is outlined? So would you describe some legislative changes that 

would permit the SEC to levy larger penalties? 

Mr. KHUZAMI. Chairman Schapiro proposed that we have various 

penalty mechanisms. The first is sort of a tiered approach, and Tier 

3 is the most substantial penalty category. It currently is $725,000 

per violation, per institution. She proposed that it be increased to 

$10 million. 

She also asks that we could use investor loss as a gauge to measure penalty or 3 times the gain. And that is really for those situations—it wouldn’t come into play in every case, but there are some 

cases where the investor loss so dwarfs the amount of 

disgorgement and the gain that we could get that you would like 

some more authority. 

We also asked for authority to add additional penalties in the 

case of recidivists, those who have been previously convicted of a 

criminal violation or an SEC order or decree and those who violate 

injunctions. Those remedies would help us a great deal. 

Mrs. MALONEY. Thank you. And the bank regulators—in one of 

your testimonies, you noted that consent agreements allow the 

banking regulators to enforce compliance with banking rules and 

make corrections that can prevent a bank failure. 

So if the banking regulators were prevented from allowing the 

defendant of an enforcement order to ‘‘neither admit nor deny’’ the 

allegations in the order, how would enforcement change for the 

banking regulators? 

Any banking regulator who wants to answer? 

Mr. ALVAREZ. Congresswoman, as I mentioned in my statement, 

I think that it would substantially delay our ability to get effective 

changes at the organization and put in jeopardy, then, the safety 

and soundness of the institutions themselves, and put the taxpayers at greater risk. 

Mrs. MALONEY. Would anyone else like to add anything? 

19 

Mr. OSTERMAN. I would just add that we do have several tools 

in our arsenal on the enforcement front, including removal and prohibition. So if we do see continuous action or egregious action, we 

actually can remove the individuals from banking, which doesn’t 

require them to admit or deny any wrongdoing. 

Mr. STIPANO. The only think I would add is just that the consequence, the primary consequence of requiring admission is delay. 

So our enforcement documents, which are remedial documents in 

nature, they are designed to rehabilitate the institution, would not 

get in place very quickly or as quickly as they do now, and that 

could affect the safety and soundness of the institution. 

Mr. GARRETT. Thank you. The gentlelady’s time has expired. The 

gentlelady yields back. I recognize myself. 

First of all, just very quickly, Mr. Khuzami, with regard to the 

practices and enforcement and settlement practices that you are 

talking about today, these are current practices that you are discussing? 

Mr. KHUZAMI. That is correct. 

Mr. GARRETT. But these are also longstanding practices at the 

SEC as well? 

Mr. KHUZAMI. The ‘‘no admit, no deny policy’’ goes back to the 

1970s. 

Mr. GARRETT. So if the SEC had been funded at the level that 

the President has requested in Fiscal Year 2013, would these longstanding practices change in any way, shape or form? 

Mr. KHUZAMI. With respect to ‘‘no admit, no deny’’ in settlements? 

Mr. GARRETT. Yes. 

Mr. KHUZAMI. The practices wouldn’t change, we just would be 

able to bring more cases. 

Mr. GARRETT. Did the SEC enforcement actions change? Did the 

practices themselves change or were they any different when the 

Democrats controlled the House? 

Mr. KHUZAMI. No. We had the same policies in place. 

Mr. GARRETT. Thanks. So what we are talking here in general 

is about enforcement of when financial institutions are accused of 

breaking specific rules and regulations. So maybe I was going to go 

a little bit off from that but just talk about some of the new rules 

and regulations that are currently being proposed and developed 

out there. 

Mr. Alvarez, I will turn to you on that. One is in the area of 

money market funds. There are new proposals to deal with them 

and it is in summary reports, in the paper, that if the SEC fails 

to act in this regard, to provide additional regulations with regard 

to money market funds, the Fed, FSOC, may step in and engage 

in that process and supersede the SEC’s regulatory authority and 

basically exert its authority over the industry individually or designate the entire industry as systemically important. 

When I read those reports, one of the things that came to mind, 

and what I have seen in some of the papers on this, is that regulating the money market funds would be one way to basically put 

money market funds effectively out of business and then to have 

the funds in that segment of the economy flow from them, and 

where else would they go but to the banking institutions, which 

20 

would be a way for them to backfill some of the banks that are out 

there, which would be a way to then provide for additional capital 

for them to make them more safe and sound, which of course is 

what you have been saying is, rightly so, the responsibility of the 

Fed. 

Is that the avenue or the approach that the Fed takes to this regulation? 

Mr. ALVAREZ. Sir, I read a lot of things in the newspaper, too, 

and sometimes I believe them and sometimes I don’t. 

Mr. GARRETT. So I shouldn’t believe any of those reports? 

Mr. ALVAREZ. I think that the FSOC has made clear that money 

market mutual funds are an area that requires attention. That was 

in the report issued last July. The FSOC made some recommendations in that area, and the SEC is moving forward on taking steps 

to improve the safety and soundness and the strength of money 

market mutual funds, and we all, I think, await the SEC’s action 

on that. That is as far as the Federal Reserve has made any statements or participation at this point. 

Mr. GARRETT. Let’s look at one other area. The area of risk retention which Dodd-Frank talked about, but outside of Dodd-Frank 

and some of the proposals that are out there that was not contemplated in Dodd-Frank is the PCCRA, which is the Premium 

Capture Cash Review Account, many people state, again in reports 

but I agree with these reports, that if this is implemented, it would 

basically put capital on the sideline, it would freeze up the markets, the securitization markets which are already frozen and basically keep the Federal Government on the hook as far as providing 

financing for the marketplace, the housing marketplace. Mark 

Zandi estimates that the cost of this would be 1 to 4 percent in additional financing costs for consumers, which I have read and agree 

with. 

Now, Chairman Bachus and myself have written to the Fed twice 

asking, are those numbers correct, or more specifically, has the Fed 

done a cost-benefit analysis or any analysis on the cost? I think my 

last letter was back around March 26th. So I will ask you a couple 

of questions along those lines. Has the Fed done such an analysis? 

Does the Fed intend to reply to either one or both of the letters 

that Chairman Bachus and myself sent to the Fed inquiring about 

this? 

Mr. ALVAREZ. Obviously, we will reply to your letter. 

Mr. GARRETT. That is good. 

Mr. ALVAREZ. The question of premium capture—as you recall, 

the risk retention rule is not a Federal Reserve rule alone. This is 

a multiagency rule. 

Mr. GARRETT. My time is short. What is the Fed doing? Will you 

reply? And will you reply with an analysis? 

Mr. ALVAREZ. We will reply as best we can during the comment 

period. We have gotten a lot of comments on the premium capture 

accounts and the concerns people had with how the proposal was 

designed. And so we are analyzing your comments, as well as other 

comments. 

Mr. GARRETT. Have you done an analysis yet? 

Mr. ALVAREZ. We are in the process of doing an analysis. 

21 

Mr. GARRETT. And when is the completion date on that supposed 

to be? 

Mr. ALVAREZ. We are working on that as best we can. 

Mr. GARRETT. Do you have an estimate on the completion date 

on that? 

Mr. ALVAREZ. I do not. 

Mr. GARRETT. Like this week? This month? This year after the 

elections? 

Mr. ALVAREZ. It will not be this week. I am sorry, Congressman. 

That is the best I can do at this time. 

Mr. GARRETT. It will be done before the rule goes out? 

Mr. ALVAREZ. Absolutely. 

Mr. GARRETT. We will be anxious, I think the chairman and I 

will both be anxious to hear back to either one or both of our letters. 

With that, I yield back. And I recognize Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Osterman, the U.S. District Court for the Southern District 

of New York rejected a proposed settlement between the SEC and 

Citigroup and specifically criticized the SEC policy in consent judgment, stating the policy does not serve any interest other than 

those of the party. How would the FDIC’s enforcement and compliance process be affected if you were prevented from allowing institutions to enter into consent decrees without having to admit or 

deny any allegation? 

Mr. OSTERMAN. I think the decision would have a negative effect 

on our ability to carry out our statutory functions. As has been discussed by several of the panelists, if we were required to get an admission or denial of liability, the other side is quite likely not going 

to agree to that without a long litigation and possibly until after 

a judgment has been entered. They may not agree to it at all. And 

so, we could be talking about rather than getting the corrective action taken care of within a matter of months or a shorter period 

of time, looking at years. 

Ms. VELAZQUEZ. How do you address the troubling aspect for average Americans who are watching this proceeding, and how would 

you discourage or be a deterrence if people know that they don’t 

have to admit guilt? 

Mr. OSTERMAN. I think the process actually has been working. 

The fact is we have been able to effectively police the industry and 

to make corrective actions through this policy. If you look at our 

actions in the last 5 years, we have brought over 2,000 enforcement 

actions, and we have removed 377 individuals from banking who 

had engaged in improper activities. We have issued over 753 civil 

money penalty orders. 

And so, I think the process is working as it is. We are not afraid, 

and we are certainly ready to litigate if that is necessary. But one 

of the things about our powers is that our process works through 

administrative process, so when we issue the order, it is effective 

immediately. 

Ms. VELAZQUEZ. So what is the criteria for you to determine 

when it is necessary? 

Mr. OSTERMAN. The criteria is, has our statutory mission been 

achieved? Has the action that was improper been corrected? 

22 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. GARRETT. And the gentlelady yields back. Mr. McCotter is 

recognized. 

Mr. MCCOTTER. Thank you, Mr. Chairman, I have a couple of 

questions. I hope that they are not repetitious. If they are, I apologize. 

When structuring a settlement, do we address the concerns, as 

colleagues like my colleague Representative Green have raised, 

where you make sure that an entity that is entering a settlement 

does not net out a profit despite the fact of the payment? Because 

you would hate to have a situation where someone is engaged in 

an act that you have taken them to court over, and at the end of 

the settlement process, the bad act still nets out a gain for the entity? Is that something you factor into when deciding how the settlements go? 

Mr. KHUZAMI. From the SEC’s perspective, the first thing we are 

entitled to obtain in a settlement or in a trial is disgorgement, 

which means all of the ill-gotten gain can be obtained by us. So if 

you get all of the ill-gotten gain, then you have eliminated that 

issue, and then you get a penalty on top of that. That way, you 

make sure that it is not a wash from the defendant’s point of view. 

These are additional amounts that they are paying to be punished, 

if you will, for engaging in the misconduct. 

Mr. MCCOTTER. So on your part you do consider that a factor? 

Mr. KHUZAMI. Yes. 

Mr. MCCOTTER. You want to make sure they don’t net out at the 

end of the day the cost of business argument? 

Mr. KHUZAMI. That is correct. 

Mr. MCCOTTER. Where does the money—would anybody else like 

to address that? You all do the same thing? 

Mr. ALVAREZ. At the Federal Reserve, we do the same thing with 

one variation. We don’t have express authority to achieve 

disgorgement of the profit. We have a specific statutory schedule of 

fines that we are allowed to impose, but we take into account the 

amount of the profit that is made in assessing how to employ those 

fines and we do the best we can to ensure that there is no profittaking from illegal activity. 

Mr. MCCOTTER. Where do the proceeds of the settlement go, 

again? I am sure it was asked and I might not have been cognizant 

of it. Generally, where do they go? 

Mr. KHUZAMI. From the SEC’s perspective, we obtained the socalled Fair Fund authority under Sarbanes-Oxley, so we are now 

able to take the disgorgement and the penalties and return them 

to harmed investors. 

If there are no harmed investors, or more amounts are obtained 

than there is harm, then it goes to the U.S. Treasury. 

Mr. MCCOTTER. Does that hold true with everything else? 

Mr. ALVAREZ. For the Federal Reserve, we are required by law 

to provide the fine portion of an assessment directly to the Treasury. However, we also have authority to require restitution to customers, and we do that as well. 

Mr. MCCOTTER. The reason I ask this is, and maybe this is not 

necessarily in your instance but there have been reports of other 

instances where you have had bad acts reported by an entity, volVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
23 

untarily, prior to the government being aware of them. They would 

then go into a settlement with the agency they were involved with, 

and the money would remain within the agency’s budget. 

I am not saying, and again, I take you at your word, I believe 

you that yours is not the agency I am discussing. So I am just glad 

to see that from you individuals and from your agencies’ entities 

that we have not gone from a point where these banks are no 

longer just too-big-to-fail; they have become ‘‘too-big-to-jail.’’ And I 

thank you for that. 

I yield back. 

Mr. GARRETT. The gentleman yields back. 

Mrs. McCarthy is recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman, and 

I thank the panel. It has been very interesting clarifying—I am one 

of those who, over the years when I would read in the paper about 

the settlements, and to be very honest, why didn’t somebody go to 

jail? I have a better understanding from all of your testimony. I 

just want to follow up because I have almost the same question as 

Mr. McCotter. 

On the Citi settlement, it was $285 million. So no money went 

back to your agencies to pay for what it cost to bring the settlements to that point? 

Mr. KHUZAMI. We have absolutely no ability to use the money 

that we obtain in fines, penalties, or any other monetary sanctions 

and use that money for our own purposes. It either goes to investors or it goes to the Treasury. 

Mrs. MCCARTHY OF NEW YORK. So technically, the American taxpayer is paying you to go against the bad guys, but we don’t get 

any money back. 

Mr. KHUZAMI. The Treasury gets money back but we—the SEC 

does not. We then get appropriations, obviously. 

Mrs. MCCARTHY OF NEW YORK. What does the Treasury do with 

the money? 

Mr. KHUZAMI. I am not quite sure. You would have to ask them. 

Mrs. MCCARTHY OF NEW YORK. Obviously, we are not sure either. 

And one other question to you, after settlement and after the 

court cases but before the Second Circuit came to their decision, on 

January 7, 2012, you modified settlement language by bringing in 

language for cases involving criminal convictions where a defendant has admitted violations of the criminal law, and if the defendant has been convicted in a parallel criminal proceeding, the SEC 

will no longer allow that defendant to settle the SEC enforcement 

action without admitting wrongdoing. 

Could you explain that a little bit more to me on how that works 

and how is that going to affect what you said earlier in your testimony and from the beginning of this hearing that sometimes it is 

better to settle than to prosecute? 

Mr. KHUZAMI. Sure. We constantly review all of our policies, and 

that change was a result of our review, and those circumstances 

are where there is a parallel criminal case, and in the criminal 

case, the defendant has either pled guilty or been convicted at a 

trial. So there already exists, if you will, an admission, and then 

he or she settles the SEC civil case. Under those circumstances, exVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
24 

tracting the admission makes perfect sense because the admission 

has already been obtained, and by us demanding the admission we 

are not causing delay or more litigation or any of the other evils 

that we are trying to prevent through the ‘‘no admit, no deny policy.’’ So it just makes sense because the admission has already 

been obtained. It doesn’t apply in that many cases because there 

are not criminal convictions or criminal pleas in a large majority 

of our cases. 

Mrs. MCCARTHY OF NEW YORK. Okay. And just one more question to all of you, when proceeding with enforcement action against 

an institution engaging in wrongdoing, is there ever a time when 

‘‘neither admit nor deny’’ is not an option? 

Mr. KHUZAMI. The whole range of options are already there. We 

can choose to stray from our policy and demand admission. It is 

our view that the best approach is to use the ‘‘no admit, no deny’’ 

approach for the reasons I have stated today. But it is not a law 

that we are required to use; it is an informed policy that we choose 

to use. 

I will also say that, just to keep in mind for ‘‘no admit, no deny,’’ 

everyone focuses on the ‘‘no admit,’’ but there is also a ‘‘no deny’’ 

aspect, which means in our settlements, individual entities can’t 

then after the settlement get on the courthouse steps and say, ‘‘We 

deny liability.’’ There are other Federal agencies including the 

FTC, the Department of Justice—the FTC just settled cases with 

Facebook and with Skechers yesterday, I think, and DOJ settled a 

civil case with Countrywide and Fair Lending where it is only a 

‘‘no admit’’ policy, which means the defendants can deny liability. 

We do not permit that, and we monitor that very closely because 

we think that would undermine the integrity of the process and the 

deterrent impact. 

Mrs. MCCARTHY OF NEW YORK. Thank you, and I yield back the 

balance of my time. 

Mr. GARRETT. I thank the gentlelady, and I thank you for that 

point. I had not ever recognized that. 

Mr. Posey is recognized for 5 minutes. 

Mr. POSEY. Thank you very much, Mr. Chairman. I dDefinitely 

believe there is a place for consent decrees, no doubt about it, but 

I think when we have consent decrees where nobody admits any 

guilt and they only pay a relatively minor fine, that it will not 

change bad behavior. 

I think when you prosecute people and the penalty is severe, that 

changes behavior. Under the RICO laws, you don’t just fine the 

company $40 million for $40 million worth of bad behavior. You 

fine them $80 million for $40 million worth of bad behavior, you 

take the Mercedes, you take the office building, you take the Rolex 

watch, and that changes behavior. The only way you change behavior more than that is when you put somebody in jail. That really 

is a game changer. I don’t see anybody going to jail. With all the 

criminal activity we have seen from Wall Street, I just see a real 

lack of accountability and prosecution. 

I don’t expect any of you to be able to answer this today, so with 

the chairman’s permission and the other Members’ permission, I 

would like to ask each of you to please submit in the next week 

information to us about how many criminal prosecutions for wrongVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
25 

doing you have actually pursued and how many convictions you 

have. We have some notations in here. Some of you submitted that 

but they didn’t get that explicit. 

I would like to know how many stipulated settlements you have 

had, I would like to know the amount of the settlements, and also 

the amount of damages that the settlement was pertaining to or 

been established. Please do not send me any of those stupid brochures that the public relations department does for you guys that 

talks about how great you are and just highlights a couple of wonderful things that you did. All I want is the facts, simple, pure, 

nothing more, nothing less and nothing else. I think the other 

Members would appreciate that too. 

Mr. Stipano, I think overregulation is a problem. I think when 

your regulators go into a bank and they say, we are going to put 

this loan on nonaccrual because the parents made the payments 

while the kids were unemployed, I think that is improper. When 

they say, we are going to put this loan on nonaccrual because it 

was modified, it was renewed, and the interest rate was changed, 

I think that is bad behavior. The most egregious thing I have ever 

heard is when your regulators go into the bank and say, we don’t 

think these people should be able to make their payment given this 

economy even though the loan has been in existence for 7 years 

and they have never been more than one minute late, they found 

a way to make the payment. 

I think it is egregious when your regulators break the rules provided by the Fed that says you shouldn’t mark down a loan or put 

a loan on nonaccrual just because the appraisal is upside down. We 

have a lot of bad behavior by regulators, too, and I would like to 

know who holds them accountable? The old appeal used to be to 

their boss. But I want to know if there is an outside agency that 

objectively looks at abuse by regulators, because I think that is 

happening. We have talked about it in here. We have nodding of 

heads from the Secretary of the Treasury, the Chairman of the 

Federal Reserve, and the former Chairwoman of the FDIC. So this 

is not something that we are all imagining up here. That is just 

the reality outside the Beltway where a lot of people in the real 

word have to live and make a living every day despite what is happening in Washington. 

So I would like to know if any of you have investigated any investigations or compensation committees who have awarded the 

prima donna CEOs multimillion dollar bonuses as they have the 

helm of the sinking ship all at the stockholders’ expense. I think 

it was Andrew Jackson who said something to the effect of, it 

should be a crime when people profit by investors’ money and gobble up the proceeds in their own bonuses and then turn around and 

stick the stockholders, the investors with the losses. They don’t 

count those. 

And I would like to know, also put in your reference to us, how 

many compensation committees you have investigated for impropriety in abusing stockholders’ money. 

I have actually been involved once with a false charge, and the 

other side attempted to intimidate me, so that even though it may 

have been wrong, it would cost me so much in legal fees, and for 

25 percent of that, they would be glad to settle. And I basically told 

26 

them, at the end of the day you are going to own everything I have 

or you are going to have nothing, and they didn’t have a good 

enough case to pursue it. But I can’t think that I am an exception 

to the rule; I am sure there are a lot of people being shaken down 

across America every day, wrongfully shaken down. I want to see 

some wrongdoers go to prison. I think it is an obligation of yours 

to see that happens because it is the best way, the surest way we 

are going to change the process, we are going to change the paradigm, we are going to change the behavior of people who have been 

getting away with wrongdoing for way too long in this country. 

And I thank you, Mr. Chairman. 

Mr. KHUZAMI. If I could just respond briefly, we will pass your 

request along to the Department of Justice but we don’t have criminal authority; we can’t put anyone in jail and I don’t believe my 

colleagues here can, either. That is the province of the Department 

of Justice, but I will be happy to pass along your request. 

Mr. POSEY. Mr. Chairman, I have asked the Department of Justice for the exact same information I have asked you for, and I am 

having difficulty getting it from the Department of Justice. So you 

should know what referrals you have given to the Department of 

Justice and what the outcome of that referral is. And I should be 

able to get that information from you even if the Department of 

Justice has not been that forthcoming so far. 

Thank you. 

Mr. GARRETT. The gentleman yields back. 

Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. Khuzami, I think you said all the right things about the decision to settle cases. And I know just about every lawyer who actually goes into court says that a bad settlement is usually better 

than a good trial. 

But you also said the right thing, that if your reputation is of 

being unwilling to try cases, you will never get a decent settlement, 

and that was also my observation in practicing law. 

It is hard to measure, it is really hard from our perspective, 

without being submersed in the facts of the law as you are, which 

obviously cannot possibly happen to decide, to determine whether 

you are settling cases on the right basis or settling for enough or 

going after the right people. 

The Inspector General of the FHFA, the Federal Finance Housing Agency, reviewed the settlement of Freddie Mac with Bank of 

America and Countrywide, it has probably been a year, and issued 

a very critical report that they had settled too cheaply, they had 

settled on the wrong basis for the wrong reasons, their emails suggested that they wanted to protect the business relationship with 

Bank of America and pushing too hard might damage their relationship, like they aren’t the entire market for buying mortgages. 

Is there anyone who can review or has reviewed your settlements? 

Do you have an Inspector General? Is there some third party who 

can review the settlements that you have entered into? 

Mr. KHUZAMI. We do have an Inspector General. The position is 

currently vacant. But we will have one shortly. There hasn’t been 

an overall review of settlements. Settlements have been reviewed, 

I think, episodically. But I will tell you there is a great deal of scruVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
27 

tiny and review within the Commission, not just from the Enforcement Division. When we investigate a case and come up with a recommendation, that recommendation is the defense counsel gets all 

the opportunities to put all their information— 

Mr. MILLER OF NORTH CAROLINA. But the idea behind an Inspector General, which I have come to admire, is that there is an independent watchdog within agencies that have Inspectors General 

that report to the head of the agency and to Congress, and I think 

they give a slight headstart to the head of the agency, but they report both to Congress and the independent agency. So, they have 

an open transom for any employee to tell them about things at that 

agency that someone should look at, and it is a pretty useful management tool both for Congress and for the executive agencies, and 

it was certainly very useful, I think very useful, that the IG at the 

FHFA is examining their litigation to make sure that they are not 

being settled too cheaply or not being pursued as vigorously as they 

should be, and they are independent. 

I understand that you have a lot of eyes within the SEC looking 

at these cases, but do you have anyone independent, who will provide a fresh set of eyes that may be critical? 

Mr. KHUZAMI. No. There is no ongoing general review of settlements. 

Mr. MILLER OF NORTH CAROLINA. Okay. And I know that you do 

not have criminal authority, but—and a lot of the calls for putting 

people in jail have sounded like Judge Roy Bean, the Old West 

judge, who said, ‘‘We’ll give the man a fair trial, and then we’ll 

hang him.’’ I understand that there is due process. But I think 

there has only been one criminal prosecution for conduct that was 

really part of the financial crisis. I am not talking about prosecuting a homeowner or a broker for exaggerating income on their 

application, but I am talking about actually in the securitization 

process, and those are the two guys at Bear Stearns, which resulted in an acquittal. 

Have there been others? And there have been referrals from the 

Levin commission, the Levin committee, to the Department of Justice, the Financial Crisis Inquiry Commission also made criminal 

referrals. Do you know if anything has come of those and have you 

made other criminal referrals? 

Mr. KHUZAMI. There have been some other prosecutions. There 

are indictments of high-ranking traders at Credit Suisse for 

mismarketing their subprime portfolio. There was successful prosecution of Colonial Bank for mortgage-related fraud. We have made 

referrals and, look, I was with the Department of Justice for 11 

years as a prosecutor in New York. I can tell you the Department 

is focused and committed to these cases and is looking very hard 

at them. They are challenging criminal cases to make for a variety 

of reasons, primarily because the securities laws are premised on 

disclosure, and if you sell a RMBS security or a CDO and it has 

dozens of pages of risk disclosures and someone buys it nonetheless, you have to be able to prove that what was concealed from an 

investor was something that was not disclosed. 

They are just challenging cases to make for a variety of reasons, 

but that shouldn’t be taken as evidence of a lack of commitment 

on the Department of Justice, from what I see. 

28 

Mr. GARRETT. The gentleman’s time has expired. Mr. Dold is recognized for 5 minutes. 

Mr. DOLD. Thank you, Mr. Chairman, and I certainly want to 

thank you all again for your time and your testimony today. I just 

have a series of questions and it should be pretty quick. For the 

entire panel, what percentage of your case load is settled before 

trial? Just a rough idea, just a quick— 

Mr. ALVAREZ. About 99 percent. 

Mr. DOLD. About 99 percent. Mr. Khuzami? 

Mr. KHUZAMI. I think about one-third of them are litigated, so 

about two-thirds are settled. 

Mr. DOLD. So 66 percent. Mr. Osterman? 

Mr. OSTERMAN. High 90 percent. 

Mr. STIPANO. Ninety-eight, 99 percent. 

Mr. DOLD. If this policy is put in place where it is required that 

wrongdoing must be determined or admitted in a settlement, do 

you think the percentage of settlements is going to go up or down? 

Mr. Alvarez? 

Mr. ALVAREZ. The percentage of settlements would definitely go 

down. 

Mr. KHUZAMI. They would go down. 

Mr. OSTERMAN. They would go down. 

Mr. STIPANO. Fewer settlements. 

Mr. DOLD. I have put in my opening statement that I think it 

is going to go down significantly. 

Does anybody think it is not going to go down significantly? 

Mr. KHUZAMI. I think they will go down significantly. I think 

what you also would see is settlements may eventually happen, but 

there would also be a significant amount of delay even if they ultimately settle. 

Mr. DOLD. In your various agencies, will you be able to handle 

more cases or less cases if this policy were to be put in place? 

Mr. Alvarez? 

Mr. ALVAREZ. We would likely require much more staff to handle 

the same amount of cases. 

Mr. DOLD. So, ultimately, if you had the same amount of staff 

you have right now, you would be able to handle less cases, right, 

is that right? 

Mr. ALVAREZ. I think that is right. 

Mr. KHUZAMI. I think that is right, fewer cases. 

Mr. OSTERMAN. It definitely would tie up staff, and we would be 

able to handle fewer cases. 

Mr. STIPANO. We would operate less efficiently, we would need 

more staff. 

Mr. DOLD. Less efficiently, fewer cases. Okay. So will victims, the 

taxpayers, the litigants themselves be better of or will they be set 

back if this policy were to go into place? 

Mr. Alvarez? 

Mr. ALVAREZ. Sir, I think from our perspective, the taxpayer and 

the depositors’ financial institutions would be less safe and sound 

than they are under the current policy. 

Mr. KHUZAMI. I think the investors would receive not as much 

by way of funds in exchange for their losses, and they would get 

it on a much delayed basis. 

29 

Mr. OSTERMAN. Institutions and depositors would be much less 

safe and sound. We wouldn’t be able to take as many actions. 

Mr. STIPANO. The safety and soundness of our institutions could 

be compromised. Also, I think there would be substantial delays in 

some cases, and less restitution paid to consumers who are victims. 

Mr. DOLD. And I certainly agree with my good friend and colleague that we are looking to make sure that those who have done 

illegal things, we want to make sure that they are held accountable, that they are put away, in those instances going to jail, because I do think that does send a shock wave in terms of wrongdoing. 

Another question for the panel is, do you think you have competent staff attorneys who work for the agencies? 

Mr. ALVAREZ. Absolutely. 

Mr. KHUZAMI. I think they are highly professional and competent 

and dedicated, and I am proud to be associated with them. 

Mr. DOLD. I am glad to hear that. 

Mr. OSTERMAN. Yes. 

Mr. STIPANO. Yes, sir. 

Mr. DOLD. So good, competent staff attorneys. In your opinion, 

do you think they understand the complexities in the implications 

of settlement? 

Mr. ALVAREZ. Yes, I think we do. 

Mr. KHUZAMI. Yes. 

Mr. OSTERMAN. Yes. 

Mr. STIPANO. Absolutely. 

Mr. DOLD. Are you forced, does anybody force your staff attorneys to take a settlement? So in the implication, you say, you know 

what? We really want to take this one to trial, this is a big case, 

we have to take this to trial. Is anybody forcing them to take the 

settlement if it is not the right mix or it is not right for the agency? 

Mr. ALVAREZ. No, we only settle cases in the way that we think 

is appropriate for the action and gets the kind of remedial action 

that we think is appropriate. 

Mr. KHUZAMI. No, we have internal debates and discussions 

about the strength of the evidence and evaluate the case, but no 

one is forcing a settlement. 

Mr. OSTERMAN. No one is forcing a settlement. We look at the 

merits of the case and decide to go forward where it is appropriate. 

Mr. STIPANO. No, we only settle cases when it achieves our supervisory goals. 

Mr. DOLD. And so, at least I am glad that I heard you all properly. I thought that was the case, and so I am just trying to get 

a better handle on the policy. 

If this policy were to move forward, it seems to me that we are 

going to take an enormous step backwards, a step backwards for 

the taxpayers, for the litigants, for everyone. And we have competent staff attorneys out there who are weighing the pros and 

cons and whether they want to settle. I certainly appreciate your 

comments here today, and I hope that we have shed a little clarity 

for those who are watching all across the country. 

Mr. Chairman, I yield back. 

Mr. GARRETT. The gentleman yields back. The gentleman from 

Massachusetts is recognized for 5 minutes. 

30 

Mr. FRANK. Thank you, Mr. Chairman. I apologize, I had a previous engagement that I had to deal with at the World Bank. And 

I am grateful to Chairman Bachus. I had asked him if we would 

have this hearing because this is a case where there are important 

public policy questions that needed to be addressed. And I apologize if I am being—I will try not to be repetitive. 

I will say once again, and I gather my colleague Mrs. Maloney 

asked Mr. Khuzami about this, given the Federal budget, the enormous amount that is spent in so many other areas, I think it is 

deeply regrettable that fiscal constraints drive some of this, and 

when people are critical of the agencies they ought to factor in 

what is inadequate funding on the part of the Congress. Money is 

a lot or a little depending on the context. When we talk about hundreds of millions of dollars for the Securities and Exchange Commission or the Commodity Futures Trading Commission, which 

isn’t represented here, for their carrying out law enforcement, we 

sometimes call that a lot of money. Of course in another context, 

specifically JPMorgan Chase, with $2 billion, we are told there is 

nothing to worry about, and I think maybe there is a happy medium there. 

Mr. Khuzami, I take it you have said that one of the things you 

have to factor in, in deciding whether to prosecute or settle is financial constraints, is that correct? 

Mr. KHUZAMI. That is correct. If you are doing case ‘‘A,’’ you are 

not doing case ‘‘B,’’ and so there are opportunity costs with everything. 

Mr. FRANK. There obviously is not an infinite amount of money, 

but I think there is more money out there that we should make 

available to the SEC. I think if in fact we were to make some more 

money available, even an increase of a couple hundred million dollars, which again in the context of—we are talking about the defense budget today. I read a New York Times article the other day 

that said a $500 million investment in teaching Iraqis how to be 

policemen turns out to have been largely wasted and it is going to 

be aborted. That is, of course, far more in total than the budget of 

the CFTC, and half of that would have gone a long way in enforcing this. 

The other question I have is—and again if it has been asked, just 

tell me that, and I will apologize, but one of the things that has 

frustrated people is seeing people promise not to do it again for the 

second, third, fourth or fifth time. Is there reasonable doubt, the 

three strikes and you are out rule, not out but three strikes and 

you can’t settle again, and how do you address all of those who are 

frustrated by the repeat offenders who for the fifth time say, I am 

sorry, I won’t do it again, and that is the end of it? 

We will start with you, Mr. Khuzami. 

Mr. KHUZAMI. I would say first that our recidivism rates for individuals are extremely low. That is anecdotally, just based on cases 

that I see, but there are very few repeat offenders who are individual persons, and when they do, those are most often the ones 

that we would work closely with the Department of Justice— 

Mr. FRANKS. What about entities? 

Mr. KHUZAMI. Institutions are a different story. Although even 

then, to understand whether or not an institution that has had 

31 

more than one violation deserves a higher sanction because of the 

second violation, it is a little— 

Mr. FRANK. You make a distinction there that some people in our 

society don’t accept; you are distinguishing between individuals 

and institutions. But there are those who believe that corporations 

are people, in which case the distinction you are making wouldn’t 

hold. But, please continue. 

Mr. KHUZAMI. I understand. All I am saying is if in year 1, you 

had a mortgage violation in Seattle in an institution, and in year 

3, you had a currency violation with the peso in Mexico in year 3, 

whether or not that is deemed to be a recidivist institution, you 

have to look to see whether or not there are common links between 

the misconduct there. But your point is well-taken. That is why 

Chairman Schapiro has asked for additional penalty authority for 

recidivists. 

Mr. FRANK. Do we have to give you that? Is that statutory? 

Mr. KHUZAMI. Yes. 

Mr. FRANK. I hope we will take that up. And then let me say finally, I understand that if it is a different part of the entity, it is 

a different type of thing, it is not 100 percent repeat, but neither 

is it zero. And an institution that does one thing wrong in one place 

one year and 2 years later does another thing wrong in another 

place, that ought to be at least a percentage; the recidivism 

shouldn’t be all or nothing. But I appreciate that and I will be 

working with the staff on our side and will be talking to the chairman. I would hope that people who have been at all critical of you 

would agree that giving you the power to increase the penalty for 

recidivism, appropriately defined, would be a very important thing 

to do. 

Thank you. 

Mr. GARRETT. The gentleman yields back. Mr. Luetkemeyer for 

5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I am just kind of curious, gentlemen, whenever your agency is 

proposing new rules, do you do a cost-benefit analysis on each one 

of those rules? 

Mr. Alvarez? 

Mr. ALVAREZ. Yes, we do. There are certain kinds of cost-benefit 

analysis that we are required to do by statute, the Regulatory 

Flexibility Act for example, the Paperwork Reduction Act we do 

particular analysis there, but in addition to that as part of our 

rulemaking process, we consider various alternative approaches to 

implementing the rules and the relative costs and benefits of those 

different alternatives. 

Mr. LUETKEMEYER. Mr. Khuzami? 

Mr. KHUZAMI. Congressman, in the Enforcement Division we 

really don’t have rules, in Dodd-Frank we had— 

Mr. LUETKEMEYER. I understand. I have someplace to go with 

this. 

Mr. KHUZAMI. Okay. 

Mr. LUETKEMEYER. Generally, you don’t, though? 

Mr. KHUZAMI. We don’t. We have the whistleblower rule in DoddFrank. That was it. 

32 

Mr. OSTERMAN. We do consider the costs and benefits in looking 

at—we are statutorily required to do so. 

Mr. LUETKEMEYER. For every rule? 

Mr. OSTERMAN. We do look at alternatives and the way things 

can be done, yes. 

Mr. STIPANO. I am not normally involved in the rulemaking function at my agency, but my understanding is that we do consider 

the costs and burdens to the industry of specific rules. 

Mr. LUETKEMEYER. Quite frankly, I sit on this committee, I have 

been here a long time now, and all of your colleagues have been 

coming through here, and I have gotten different answers from 

them on that particular issue. And it is disturbing because you can 

do a cost-benefit analysis on your cases to decide when you need 

to go, when you don’t need to go, who you need to go after, when 

you need to settle. So you can do it, but you don’t do it on every 

single rule that you promulgate. That is a problem, and I am frustrated with that because quite frankly especially with the smaller 

institutions, they can’t survive with this continued onslaught of 

rules and regulations that you are promulgating that are really not 

necessary and yet they are costing them an arm and a leg to comply with. And I am frustrated with that. 

But moving on, I am just kind of curious. You believe that each 

one of you has enough authority, I know, Mr. Khuzami, you have 

mentioned a few things already that you would like to see more 

flexibility with and more things. 

What about the other three of you? Do you see some things that 

you would like to see where you would have more tools in the toolbox to be able to go after the bad guys spoke, so to speak? 

Mr. ALVAREZ. No, I think at this point we think Congress has already addressed many of the concerns we have had. 

Mr. LUETKEMEYER. Mr. Osterman? 

Mr. OSTERMAN. I would agree. We have quite a few tools in the 

toolbox, which we talked about in our testimony. 

Mr. STIPANO. At this stage, it is a very big toolbox. 

Mr. LUETKEMEYER. It is a very good toolbox. Thank you. I think 

you are doing a good job. I don’t have a problem with what you are 

doing I am just a little frustrated with some of the other things. 

Do you believe that by having all the tools that you have, that 

your enforcement presently is adequate, or do you need to do more 

or do less? Are you okay where you are at? What do you think? Do 

you think that—as we go through and somebody has a problem, 

like JPMorgan lost some money the other day but obviously a bank 

is in business to take risks. And the first thing everybody does is 

run out and ask, has somebody done something wrong? Is the penalty too far? Are we doing enough investigation? What do you 

think? 

Mr. ALVAREZ. During the 41⁄2 years of the financial crisis, beginning in 2008 up to the present, we have done 3 times more formal 

enforcement actions than the 5 years prior to that. And that is 

driven, I think, a lot by the behavior of the institutions and the 

concerns that are raised at the institutions. 

My hope is not so much that we will raise the number of enforcement actions to try to achieve a certain number, but that the inVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
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dustry will get back to a better, more coherent and more safe and 

sound and compliant mode. 

Mr. LUETKEMEYER. Mr. Khuzami? 

Mr. KHUZAMI. I think we could certainly use more. We understand the importance of using what we have efficiently and appropriately because it is taxpayer money. But having said that, the 

SEC oversees 35,000 registrants, investment investors, broker dealers, public companies, transfer— 

Mr. LUETKEMEYER. You think we need to go after more people? 

Mr. KHUZAMI. I think we need to be able to investigate and survey the landscape more thoroughly and bring more cases. 

Mr. LUETKEMEYER. Mr. Osterman? 

Mr. OSTERMAN. You can always improve processes but I think, 

as with my colleague at the Fed, our enforcement actions have increased substantially. I think that is as a result of what has been 

happening in the industry, but I think we do have the tools necessary to address these issues that we are doing. 

Mr. LUETKEMEYER. Mr. Stipano? 

Mr. STIPANO. The OCC has taken about 2,200 enforcement actions in the last 4 years. We think that those actions, coupled with 

our supervision, our supervisory actions, help promote the safety 

and soundness of the system and improve compliance with the law. 

Mr. LUETKEMEYER. Thank you all for trying to squeeze in one 

more question quickly. With regards to Mr. Osterman, one of the 

things that the FDIC has is an insurance fund to back up and pay 

for some of the wrongdoings or the misgivings of some of the institutions. Right now, the investment banks are being merged into 

the depository banks. Do you feel that is a threat to the insurance 

fund? 

Mr. OSTERMAN. It is certainly something that we would need to 

look at very carefully. To any extent that you have exposure of the 

insurance fund, it creates a risk. And so, it is something that we 

would have to be concerned about. 

Mr. LUETKEMEYER. I see my time is up. Thank you very much. 

Thank you, Mr. Chairman. 

Mr. GARRETT. And the gentleman yields back. 

Mr. Watt is recognized for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. I had to step out, and I 

lost my place in the queue. 

Mr. GARRETT. So, never step out is the rule. 

Mr. WATT. Don’t ever step out of the room, that is the lesson to 

be learned from that. But in a sense I am kind of glad I did because I had the opportunity to hear Mr. Posey’s line of questions 

and was relieved that he blew up the theory that Mr. Garrett had 

advanced that this was somehow; this hearing was somehow a 

Democratic conspiracy and that there is somehow some partisan 

position on this issue. 

This is a very difficult issue, the extent to which we require people to litigate or settle, or oversee settlements. My views on this 

are informed by 22 years of practice of law, I guess, in which I both 

litigated numerous cases and settled numerous cases and never 

walked away from a case not having second thoughts about whether I did the right thing or the wrong thing whether I litigated it 

or settled it. It is a very complex set of things that go into that, 

34 

having to do with the cost of litigation, the prospects of winning or 

losing, the whole myriad of issues. And I don’t think there is any 

partisan position on that, as Mr. Posey has in his comments indicated. 

Mr. Alvarez, you were kind enough to make the distinction between your job as the Fed’s job is protecting the safety and soundness of institutions versus protecting customers, which is a lot different, I take it, from what the SEC’s responsibility is, and I appreciate you making that distinction. 

Mr. Khuzami, you mentioned that the SEC has the right to require disgorgements of profits that were obtained improperly, but 

there are some limitations on the extent to which you can recover 

lost investor investments as a result of wrongdoing. Can you elaborate on that and tell us a little bit more about the request that the 

SEC has made for additional authority in that area? 

Mr. KHUZAMI. Certainly. We are entitled to obtain disgorgement, 

which is ill-gotten gains, plus a penalty equal to the amount of that 

disgorgement. And so, to take a simple example— 

Mr. WATT. Tell me what you are not entitled to do. 

Mr. KHUZAMI. What we can’t do is look at how much the investors lost in a transaction and get that amount as a penalty. 

Mr. WATT. And can you give any of that disgorgement or the penalty back to investors? 

Mr. KHUZAMI. We can give it all back, but there are cases where 

it falls short of what they lost. 

Mr. WATT. Okay, and so what is the remedy, the additional authority that you have requested? 

Mr. KHUZAMI. Chairman Schapiro has requested that our penalty 

authority be increased in a couple of different ways; one, just using 

up to the amount of the investor loss as an amount that we can 

obtain in a penalty. As an alternative, to get 3 times the gain as 

a penalty if it turns out that that amount might be greater than 

the investor loss and it would be appropriate to get it. And third, 

to increase the tiers, which are the statutory ways that we can get 

penalties on an alternative calculation. 

Mr. WATT. And to complicate this even further, that would be as 

an alternative to some kind of private right of action in which individuals would be able to go in and do their own enforcement actions, I take it, is that correct? 

Mr. KHUZAMI. That is correct, although a private plaintiff who 

won at trial and lost $100, if they had received $50 of it from the 

SEC as part of our distribution presumably would only be entitled 

to get the remaining $50 in the private litigation. 

Mr. WATT. My time is about up. But I will just say that this is 

a very tricky area here that we are dealing with and if there is 

some partisan Republican position on this, I hope you will communicate it to your colleagues on the Judiciary Committee because 

they have been all over the lot on whether settlements are appropriate, regulatory enforcement is the appropriate remedy, private 

rights of action they hate with a passion, I don’t know how they 

sit on the Judiciary Committee and take that position, but posturing this as a partisan issue is I think not a good thing to do, 

Mr. Garrett. I am directing that comment to you. 

Mr. GARRETT. And I appreciate that. 

35 

The gentleman’s time has expired. 

The gentlelady from New York is recognized. 

Dr. HAYWORTH. Mr. Chairman, I am happy to yield to 2 minutes 

to you or— 

Mr. GARRETT. I appreciate that. I won’t use all that. Just two 

quick points. Mr. Khuzami, during the panel you mentioned on at 

least a couple of occasions with regard to the issue of civil penalties 

and the potential for changing that—my understanding is that 

Chairman Schapiro has written to Congress on that suggesting 

that it should be done, but the request on that letter has only gone 

to the Senate and has not been directed to the chairman of the 

committee or myself, is that true? And if so, is there a reason why 

we are not in the loop on this? 

Mr. KHUZAMI. I believe that is the Senate—the letter was addressed to Senator Reed. I am sure we would be happy to send it 

along here as well. 

Mr. GARRETT. The ranking member brings it up, and others have 

brought it up as well, but if it is a legitimate position that the 

agency is looking for, we would certainly like to be included on 

that. 

And the second point is with regard to the funding issues and 

what have you. I just remind—the ranking member is not here on 

this—but I believe Chairman Schapiro asked for a funding level at 

$1.6 billion, but for some reason the Administration came in at 

$1.5 billion. So if the issue were, as the other side argues, one of 

funding, then you would think that they would be asking for the 

complete funding that Chairman Schapiro was asking for. I am 

mindful of the fact that the President’s budget, of course, has come 

through both Houses now and apparently has not received a single 

vote in either House, so that may be part of the rejection from 

both, from the other side of the aisle, that they disavow anything 

to do with what the Administration is suggesting in their funding 

for this program and other programs as well. 

And with that, I yield back to the gentlelady from New York. 

Dr. HAYWORTH. Thank you, Mr. Chairman. And I thank our 

panel for the most informative perspective on challenges you face 

in cost-effectively and efficiently enforcing the law without unnecessarily disrupting the services that the American public needs. 

With that, I think just summing up what we have been talking 

about, the American public needs assurance that your approach is 

working and that you are not missing out on appropriate deterrent 

measures, which is what punishment is supposed to be, in order to 

expedite processes. 

If each of you could in about 30 seconds, and I apologize for the 

restriction, but just give the best argument that we can give to the 

American public for continuing to pursue enforcement under the 

methodology that you have now? 

Mr. Alvarez? 

Mr. ALVAREZ. It allows us to most quickly and efficiently require 

institutions to change their behavior and to provide resources to 

customers who have been harmed. 

Dr. HAYWORTH. Mr. Khuzami? 

Mr. KHUZAMI. I think if you look at the entire package of a settlement, which is a substantial financial penalty, a detailed comVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
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plaint laying out the allegations, business reforms where appropriate, individuals charged, people barred, all of the legal costs, 

reputational damage, client concerns, shareholder concerns, everything that is packaged up in a settlement both as a result of the 

agency’s action as well as simply the consequence of the wrongdoing, all told it really has a powerful deterrent message. 

Mr. OSTERMAN. It allows us to accomplish the purposes of our 

statute and meet the public interest in an efficient and effective 

way and avoids protracted long-term litigation which may actually 

lead to less effective regulation. 

Mr. STIPANO. We have taken a large number of enforcement actions in recent years. It is really only a small part of what we do 

when you consider the corrective action that is obtained through 

the examination process. And once we put an action in place, we 

are not done. Our examiners monitor for compliance through the 

exam process, and if those actions are violated, we can take progressively severe actions against the institutions. 

Dr. HAYWORTH. Thank you. Mr. Chairman, could I possibly ask 

for 1 additional minute? I have one more question. 

Mr. GARRETT. You still have time. 

Dr. HAYWORTH. Would each of you tell us, is there some modification you might make, if possible, that would be even more productive in terms of the way in which you pursue your protective 

actions for the public? 

We will start with Mr. Alvarez. 

Mr. ALVAREZ. Our policy is to not require admission of guilt. In 

some cases more recently, we have also prohibited folks from denying guilt. That is a practice the SEC does regularly, and we are 

considering whether we should adopt that regularly. 

Mr. KHUZAMI. For us, it is more about resources and the enhanced penalty authority. 

Dr. HAYWORTH. Thank you. 

Mr. Osterman? 

Mr. OSTERMAN. We believe our practices are working quite efficiently. 

Dr. HAYWORTH. Thank you. 

Mr. STIPANO. We are comfortable with our present approach. 

Dr. HAYWORTH. Thank you all. And thank you, Mr. Chairman. 

Mr. GARRETT. And I thank the gentlelady very much. 

Mr. Scott is recognized for 5 minutes. 

Mr. SCOTT. Thank you very much. First, let me yield 10 seconds 

to the gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Mr. Chairman, I just wanted to ask unanimous consent to put into the record a copy of the letter that was written by 

the SEC to Jack Reed, the chairman of the committee and in it, 

in the first paragraph, it does say why it is addressed only to the 

Senate as opposed to the House, because it was in response to a 

hearing that was being held there and was requested by the Senate. 

Thank you. 

Mr. GARRETT. Thank you. Without objection, it is so ordered. 

Mr. SCOTT. Thank you, Mr. Chairman. Let me ask a question 

about the investors, when they can and cannot bring a lawsuit. Mr. 

37 

Khuzami, does an SEC settlement preclude or not preclude an investor from bringing action against a defendant? 

Mr. KHUZAMI. It does not preclude. 

Mr. SCOTT. And would you please describe how the SEC’s settlement does not preclude that? 

Mr. KHUZAMI. An injured investor or a shareholder is entitled to 

bring their own private cause of action irrespective of what the 

SEC does. 

Mr. SCOTT. And what are the types of cases where the SEC can 

bring a case against a defendant? 

Mr. KHUZAMI. All sorts of accounting violations, disclosure violations, registration violations, everything that is actionable under 

the securities laws, the Foreign Corrupt Practices Act violations, et 

cetera. 

Mr. SCOTT. And in such cases, does the fact that an investor cannot bring an additional action change the decision-making process 

for determining whether it is appropriate or not to settle with the 

defendant? 

Mr. KHUZAMI. No. In general, we are going to follow the same 

guidelines that I outlined previously. 

Mr. SCOTT. Okay, and let me ask you about repeat offenders. Are 

they treated differently? How does the SEC identify and pursue repeat offenders? 

Mr. KHUZAMI. With respect to individuals, if we see repeat offenders, that is more likely to result in a criminal referral and us 

working with criminal authorities to bring criminal sanctions to 

bear on the individual. Otherwise, we take past violations into account in setting our penalties. We have the same ceiling that I described earlier, but within that ceiling we have discretion, and it 

would be standard and appropriate for us to extract higher penalties for recidivists. 

Mr. SCOTT. And does the SEC consider previous settlements by 

a defendant with either the SEC or another regulator when considering bringing an enforcement action against a defendant? 

Mr. KHUZAMI. We would consider the previous violation, not necessarily the settlement. If we knew that somebody had violated the 

law, particularly in a similar way to what we are currently looking 

at, we would most assuredly take it into account. 

Mr. SCOTT. Would an admission of guilt in a previous settlement 

or a trial change how the SEC considers future actions against defendants? 

Mr. KHUZAMI. No, not necessarily. No, I don’t think it would because when we conduct our investigations and arrive at a settlement, our view is that what we have found in that investigation 

is accurate and correct and true, as a result of months, if not years 

of investigations. 

So we settled the prior violation. Even without an admission, we 

know what that person or that entity did previously, and we take 

that into account. 

Mr. SCOTT. And do you believe that the infrastructure that you 

have in place now, the process, the procedures, is this sufficient 

moving forward to protect the markets, to protect investors, to protect everyone? In other words, do you feel you have all the necVerDate Nov 24 2008 12:51 Feb 08, 2013 Jkt 075734 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\75734.TXT TERRI
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essary tools that you need or is there something else we need to 

do here in Congress to help you do a better job? 

Mr. KHUZAMI. From the enforcement perspective, we did the 

largest restructuring in the history of the Division of Enforcement 

in 2009 and 2010, created specialized units, cut out a layer of management, created a COO, upgraded tips and complaints, did a lot 

of things, but still, we have a strong need for IT resources so that 

we can better collect all of the information we get and search it, 

better monitor our cases. 

We need additional trial lawyers, and we need additional private 

sector experts to help us in very technical fields, so it is really 

those kinds of resources that would be most helpful to our effort. 

Mr. GARRETT. I thank the gentleman. The gentleman’s time has 

expired. The gentleman from Arizona is recognized for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman, and as you always 

worry sometimes when you see the empty chairs, understand you 

are never not in front of a television camera, so when we are running between offices, you are on all these screens around the building. 

In the types of—let’s just take a year’s worth of different settlements for the last couple of years. Would I ever find a case where 

the decision was bifurcated, where the firm entered into a settlement agreement and said, we are going to change our practices, 

but an individual in the firm was referred to criminal action? 

Are there any cases like that, where it has provided you flexibility to even sort of break up saying, I have an individual bad 

actor over here but the firm didn’t have certain control mechanisms 

and that was their failure. That was more worthy of a settlement, 

this needed a criminal referral? 

Mr. KHUZAMI. Yes. There are many cases where the entity may 

settle the matter. The individual employee may continue to litigate 

with us and may be referred to criminal authorities as well. 

Mr. SCHWEIKERT. And do your settlements always cut off private 

rights of action? 

Mr. KHUZAMI. No, they don’t cut off private rights of action at 

all. 

Mr. SCHWEIKERT. Okay, I am sorry, that was partially because 

I heard—I may have misheard. I thought I heard someone on my 

other side say that, so I wanted to come back to you. 

Mr. KHUZAMI. There are some laws that we can proceed under 

that private plaintiffs can’t, but our actions don’t cut them off. In 

fact, our actions help them because when we file a 20- or 30-page 

complaint laying out all of our evidence and emails and meetings, 

plaintiffs can use that. 

Mr. SCHWEIKERT. And, Mr. Chairman, this would be for whoever 

would have this expertise. Okay, you do a settlement. How much 

of the discovery work of that settlement is public? 

Mr. OSTERMAN. When we do a settlement, all of our orders and 

settlements are public. They are required to be, under the law. 

Mr. SCHWEIKERT. So in that case, you have actually done much 

of the research for—if there was some private right of action, you 

have actually done much of the work for it. 

39 

Mr. OSTERMAN. The work that has been done internally would be 

our work product. But in terms of the actual settlement itself, it 

is a public document. It has to be published. 

Mr. SCHWEIKERT. I am just sort of curious, and this one I probably shouldn’t go to, but how much of the work product goes immediately public and how much of it is discoverable, either through 

a Freedom of Information request or other court action? 

Mr. STIPANO. I think one problem for us as bank supervisors is 

that our enforcement actions are really based on findings of our examinations, which by regulation are confidential. 

Mr. SCHWEIKERT. And if you were to think about it, over the last 

12 months, how many settlements have there been, and I won’t 

hold you to an exact number. 

Mr. KHUZAMI. In Fiscal year 2011, we filed 735 cases. About twothirds eventually settled, some before litigation, some during litigation. 

Mr. SCHWEIKERT. If you were to take a sort of a guess, how many 

of those, from both rumor to facts—and I am not going to hold you 

to a number—do you think also had other legal actions moving either after or in parallel? And I know that is a little ethereal. 

Mr. KHUZAMI. That is speculation. 

Mr. SCHWEIKERT. Okay, jump on to another one. How many of 

those did you have, my sort of earliest scenario, which is sort of a 

bifurcation, where a bad actor was referred to either criminal or 

other types of litigation where the firm was separated out with a 

settlement to clean up its practices? 

Mr. KHUZAMI. Again, I would have to—I don’t know off the top 

of my head. 

Mr. SCHWEIKERT. Okay, but it is a scenario that does happen? 

Mr. KHUZAMI. Yes, although candidly, most of the time, if, because, because corporations have liability because of the acts of 

their employees, if the company is under scrutiny and the individual is under scrutiny, it is likely to be both under criminal scrutiny and SEC scrutiny. It is not so often that one would go to one 

place and one would go to the other. Because if the individual engaged in something that might be criminal, the criminal authorities 

are also going to be interested in the entity. 

Mr. SCHWEIKERT. Okay, and I note in my last 14 seconds, and 

you have already touched on this once before, okay, 700-some cases 

last year, if you were in an environment where you had to litigate 

everything, what happens to you? What happens to compliance, 

what happens to the mechanics out there? 

Mr. KHUZAMI. I think you have to shift a substantial amount of 

your resources from your investigative staff to your trial staff, 

which means investigations are not getting done, which means 

there are a lot of people who did bad things who are running 

around out there who are not being caught, and a lot of investors 

lost money who are not being compensated. 

Mr. SCHWEIKERT. Thank you. Thank you, Mr. Chairman. 

Mr. GARRETT. Thank you. Mr. Ellison is recognized. 

Mr. ELLISON. Thank you, Mr. Chairman. And let me thank the 

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ment could include a nonadmission provision. Has there been such 

a proposal made as that? 

Is there an existing proposal, are there agencies that offered a 

proposal which said you must try every case, or if you do settle a 

case, it can only be settled with an admission of responsibility or 

guilt? 

So this discussion that we have had about not being able to settle 

cases, while interesting, doesn’t really bear out any of the proposals 

that you all have made. Am I right about that? 

Mr. KHUZAMI. Not in our proposal, and other than Judge Rakoff’s 

opinion, which has now been questioned by the Second Circuit, 

there is no proposal that I am aware of. 

Mr. ELLISON. Yes, okay, okay. Because I am an old trial lawyer 

myself, and I can’t imagine a situation where you could make a 

prophylactic rule prohibiting nonadmission clauses. I think these 

things have to be done on a case-by-case basis. 

But here is another question related to that, and this is a question that I know comes with some risk for anybody who answers 

it perfectly candidly, but I am just going to throw it out there anyway. Do you believe, based on resource issues or lack of resources, 

that you have had to settle cases that you would rather have gone 

forward and prosecuted, or do you believe you have settled cases 

that should have included some admissions but didn’t simply because it would just cost too much and take too much time and energy and resources to demand that you would get results? Do you 

understand my question? 

Mr. KHUZAMI. The resource issues don’t dictate whether or not 

we require admissions. We have a policy that I have described, and 

we follow it regardless. 

The lack of resources can affect cases in a more indirect way. 

There is some category of cases that you are going to pursue to the 

ends of the Earth, regardless. There are others where maybe you 

are going to narrow the theories, so you don’t need an expert witness, or you are going to maybe charge only two defendants rather 

than four. 

Mr. ELLISON. Yes. 

Mr. KHUZAMI. And more, it manifests itself more in those kinds 

of decisions. 

Mr. ELLISON. Mr. Stipano, do you want to address that? 

Mr. STIPANO. The only thing I would add is that we don’t initiate 

cases that we aren’t prepared to litigate, and I think if we departed 

from that we would have a much harder time settling cases. I 

think one of the reasons why we are able to settle them so efficiently is that the respondents on the other side of the case know 

that we are prepared to litigate it all the way through the Court 

of Appeals if necessary. 

Mr. ELLISON. Exactly, and it is those other cases that I am worried about. For example, there are numerous companies existing in 

America today who can drown you guys. They can just drop buckets of interrogatories, requests for admissions, depositions, et 

cetera. I know you can imagine that there are some corporations 

it would be tough to tangle with. Can you imagine a scenario where 

you wouldn’t charge them because even though you think they are 

wrong, you just can’t handle them? 

41 

Mr. KHUZAMI. We punch above our fighting weight. 

Mr. ELLISON. Okay. I like to hear that. That is the right spirit, 

Mr. Khuzami. Thanks. 

Mr. ALVAREZ. The other thing the banking agencies have that 

helps us quite a lot is we examine the institutions that we regulate 

on a very regular basis. 

Mr. ELLISON. Okay, so you walk in there with a certain advantage? 

Mr. ALVAREZ. Yes. 

Mr. ELLISON. In terms of discovery? 

Mr. ALVAREZ. And they know they have to deal with us on a regular basis. 

Mr. ELLISON. Yes, right. 

Let me ask you a few questions that kind of have something to 

do with the whole JPMorgan thing. I just want to get your views 

on it. I am asking you because I want you to know what I am getting at, as if it wouldn’t be obvious, but I am not asking you specifically about that case. So I am not asking about that case, but my 

motivation for asking you is because of that full disclosure, okay? 

And let’s start with you, Mr. Stipano. 

If a federally-insured bank was investing in credit default swaps 

that could result in them losing as much as 3 months of profit, 

would you expect that to be disclosed to investors? 

Mr. STIPANO. I think that is really a question that involves interpretation of the Federal securities laws, and I am not in a position 

to answer that. 

Mr. ELLISON. Okay. Does anybody want to answer that? No? 

Okay. 

Mr. KHUZAMI. There are various rules that require disclosures of 

various kinds and various risks, so it would depend on the other 

variables as to whether or not that was the case. 

Mr. ELLISON. So, if a federally-insured bank, again we are talking about federally-insured money, the public’s money, would you 

expect that if such a bank was invested in CDS, that could result 

in the loss of 3 months of profit that regulators would be informed 

that these trades were going on, or do you think you are regulating 

to a degree that you would know that this was going on? 

Again, I am not asking, I am not trying to pin anybody here with 

any wrongdoing. I am just asking theoretically, what kind of activity, when we are dealing with federally-insured money needs to be 

disclosed to either investors or regulators? 

Mr. STIPANO. We should know about it. Under our exam authority we have access to all the books and records of the institution. 

Mr. ELLISON. Okay. My time has expired. Let me say thank you 

to all of our witnesses and good luck on all your work. 

Mr. SCHWEIKERT [presiding]. Mr. Ellison, I would never think of 

you as an old trial attorney. I recognize Mr. Carney for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. And thank you to the 

panelists. When you get to me, you know it is almost done, you 

have 5 minutes left. I want to thank you for all the information 

that you have provided us with today, your answers. You have obviously done a good job of explaining the rationale for your settlement practices. 

42 

And I think there is really kind of a fundamental disconnect. The 

reason, I suspect, that gave rise to this hearing today was the perception that people who have done wrong, who created a very serious financial crisis in our country is that there hasn’t been adequate accountability. I think I heard my colleague from the other 

side of the aisle say that people didn’t go to jail, and we have heard 

that from a number of Members. 

And I agree with Mr. Watt that this isn’t a Democrat concern, 

a Republican concern, whatever. I hear it from Democrats, Republicans, and Independents in the district I represent, which is in the 

State of Delaware. 

You talk about your responsibility—and I am not a lawyer, so I 

have learned a lot today about legal processes—and you don’t have 

the authority to put anybody in jail; is that correct? 

Mr. KHUZAMI. That is correct. 

Mr. CARNEY. So that really maybe we got the wrong panel this 

morning. Maybe we should have DOJ up here, because I think that 

is what people really are focused on and concerned about. 

Is part of your consideration, prudential regulators, it is safety 

and soundness, Mr. Khuzami, it is investor protections or recovery, 

is deterrence or punishment part of your consideration in these actions and enforcement actions to take? If you would just go right 

down the line, starting with Mr. Alvarez. 

Mr. ALVAREZ. Yes, certainly deterrence is and punishment is as 

well a concern for us. Most importantly, it is correcting the problem 

that we have observed, and that is our first priority. But we have 

a variety of ways of ensuring deterrence and getting the policies 

and procedures out to the world, informing the world of the kinds 

of judgments that we want to make. 

Mr. CARNEY. But correcting the problems for the safety and 

soundness of the institution is primary? 

Mr. ALVAREZ. It is the first priority. 

Mr. CARNEY. Mr. Khuzami? 

Mr. KHUZAMI. Yes, deterrence is a strong part of what we do. 

You are much better off preventing the wrong before the fact rather than trying to pick up the pieces afterwards. 

Mr. OSTERMAN. Yes. Deterrence is certainly a big part of what 

we are doing in terms of the enforcement. 

But as my colleague at the Fed said, we are really focused on 

safety and soundness of the banking industry. In terms of punishment, we do have powers through civil money penalties to seek 

penalties and we do that quite often when it is appropriate. 

Mr. STIPANO. As my colleagues said, the primary focus of our enforcement action is remedial in nature. We are trying to address 

unsafe and unsound practices and violations of law that we find in 

the institutions. We do think there is a deterrent effect to our actions, both for the institution or the individual involved, as well as 

for others in the industry. 

Mr. CARNEY. The perception that we are dealing with is that 

these perpetrators haven’t been punished adequately. Do you believe that what you have done in these settlements—part of the 

problem is just the ‘‘no admit, no deny policy’’ just sounds pretty 

soft to me, and I know it sounds pretty soft to my constituents. 

43 

I understand your explanations completely and how you get to 

the settlements and it helps you achieve your objectives. But do 

you feel like what you have gotten in these settlements actually accomplishes what your considerations are for punishment and deterrence, again starting with Mr. Alvarez? 

Mr. ALVAREZ. Yes, I do. I think we have been able to be more 

effective in improving the safety and soundness of institutions. But, 

remember, that also means that we are protecting depositors and 

taxpayers. We have had a number of actions that provide restitution to customers, so it is a broader array of folks that we are trying to deal with and punishment or retribution is not as high a priority. 

Mr. CARNEY. Mr. Khuzami? 

Mr. KHUZAMI. For the SEC, I think our record in financial crisis 

cases is strong, as I said earlier—over 100 entities and individuals, 

55 CEOs and CFOs, I think sends a strong message. 

Mr. CARNEY. By the way, I don’t know in the context whether 

those numbers are impressive or not. It sounds pretty big, but I 

don’t know relative to who might have committed these offenses. 

You specifically, though, have asked for higher penalties, so that 

suggests that you are not completely satisfied with the punishment 

aspect of it. 

Mr. KHUZAMI. What it means is there are some circumstances 

where more authority would be appropriate. 

Mr. CARNEY. Fair enough. I only got a— 

Mr. OSTERMAN. And I think we—the deterrent factor is definitely 

there. As we said before, we are there in the institution supervising 

it. We have cease-and-desist order authority, which we use quite 

often to address and remediate issues, and we do have civil money 

penalty authority to actually penalize. 

And the ultimate penalty, frankly, is the removal and prohibition 

authority. We can remove an individual from banking for life, and 

we have done that. 

Mr. CARNEY. It is a pretty big stick, I would say. 

Mr. OSTERMAN. Yes. 

Mr. STIPANO. Rich just made the point I wanted to make. But I 

think the broader point is that when we take enforcement actions, 

they are often part of a broader package. So civil money penalties, 

for example, may be coupled with restitution action, may be coupled with a removal and prohibition. There could be an action on 

an institution as well. And I think together, when it is viewed that 

way, it is very effective. 

Mr. CARNEY. Again, thank you very much, and thank you for 

fighting above your weight class. 

Mr. SCHWEIKERT. Thank you, Mr. Carney. 

All right, I think we are out of questions. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

With that, this panel is dismissed. Thank you, gentlemen. 

Will our second panel please be seated? 

44 

Welcome, gentlemen, and, actually as a courtesy, Mr. Frank 

would like to make an introduction. 

Mr. FRANK. Thank you, Mr. Chairman. I want to introduce a 

man who has been before this committee before at my request, the 

Secretary of the Commonwealth of Massachusetts, William Galvin. 

By virtue of being elected Secretary of the Commonwealth of Massachusetts, he is our securities regulator and he has used that 

power—and it hasn’t always been used by the incumbent in that 

office—in a very creative way and he is a good example of how you 

can use the prosecutorial authority, the civil prosecutorial authority, which he has, effectively. And, there are sometimes complaints 

that people who bring these charges, particularly those in an elected office, grandstand from time to time. Mr. Galvin has a long 

record of bringing enforcement cases, and I can’t think of a time 

when he was repudiated by a higher authority, by judicial authority, or whether he—no accusation of overreach has come forward. 

So I am very pleased that he accepted our invitation to come here, 

because he is somebody who does this very well. 

He also is a reminder that the administration of the securities 

laws and protection of the investors, protecting the stability of the 

economy is like other things in this country a shared Federal-State 

responsibility. And I have always tried to, as a member of the committee, be fully protective, frankly, of the role of the States when 

there have been some who wanted to make them go away. 

And Mr. Galvin and others—and in a bipartisan way, because I 

think he is here—I don’t know if he is here on behalf of the North 

American Securities Administrators, which is a very effective 

American-Canadian agency of State and provincial authorities who 

have been very helpful to us. So I thank you for that opportunity. 

Mr. SCHWEIKERT. Thank you, Mr. Frank. Actually with that 

glowing introduction, how can it get any better. Mr. Galvin? 

STATEMENT OF THE HONORABLE WILLIAM F. GALVIN, 

SECRETARY, COMMONWEALTH OF MASSACHUSETTS 

Mr. GALVIN. Thank you, Chairman Schweikert. And Ranking 

Member Frank, thank you very much for those kind words. 

Thank you for this opportunity to discuss regulatory settlements 

in the financial services industry. As you now know, I am Bill 

Galvin, Secretary of the Commonwealth and the chief securities 

regulator of Massachusetts. 

Regulation without effect of enforcement makes such regulation 

little more than political rhetoric and, worse, leads to a false sense 

of financial security for our citizens. 

We are not here today to compare bureaucracies or records of bureaucracies. I believe we all share a common goal of restoring confidence in the financial marketplace. For too many Americans, 

their recent experiences in the market have consisted of shattered 

retirement plans, broken promises, and broken dreams. They cannot understand and will not accept a regulatory system that holds 

none of the major actors accountable. 

My Securities Division carries out an active program of civil enforcement in order to detect and stamp out securities fraud. These 

enforcement actions have returned over $400 million directly back 

to defrauded investors in Massachusetts. I have long spoken out 

45 

against the established pattern in Federal settlements of allowing 

respondents to enter into settlements where they ‘‘neither admit 

nor deny’’ the allegations in the administrative complaint for the 

enforcement action. 

In 2003, I had the opportunity to testify before a subcommittee 

of the United States Senate on Government Affairs. I said at that 

time, that too often the guilty ‘‘neither admit nor deny’’ any wrongdoing and routinely promise not to cheat again until they come up 

with a more clever method to do what they just said they would 

not do again. 

I repeat those words today with an even greater sense of urgency 

as events of recent years and days have shown. One of the priorities of my Securities Division is the firms and persons who have 

violated the law should be required to acknowledge what they have 

done. Permitting a firm to enter into a settlement where it pays 

a fine but ‘‘neither admits nor denies’’ that it has done anything 

wrong permits that firm to avoid basic culpability for its actions. 

In some instances, we have seen firms enter into regulatory settlements, pay large fines, and also issue press releases saying the 

firm settled the matter to avoid the distractions created by prolonged litigation. Permitting firms to take this kind of posture allows the firm to avoid acknowledging any misconduct and permits 

such firms to publicly take the stance that such settlements are 

part of business as usual. 

If we intend to reform the worst practices in the financial industry, then the firms that have violated a law must acknowledge 

what they have done is wrong. In many cases there is a thin line 

between arriving at a satisfactory settlement and failing to reach 

any settlement at all. 

I think it is very important that the most important aspect of a 

settlement, and in many cases the best resolution, is to require an 

issuer of securities or securities broker to repay defrauded investors and make them whole. One of the greatest satisfactions of my 

role is getting restitution for investors and preventing the operators of financial fraud from simply walking away from their victims 

with their ill-gotten profits. 

Our enforcement actions also seek other sanctions. We have imposed significant fines, we have also served as a warning, we have 

secured agreements about future practices. For instance, in 2011 

my Securities Division settled the Goldman Sachs ‘‘analyst huddles’’ case which involved the practice of Goldman Sachs giving its 

best research recommendations to preferred customers in order to 

attract more business from those customers, while denying it to 

others. 

Goldman Sachs settled this case by agreeing to reform its practices and by paying a $10 million fine. In the settlement, Goldman 

Sachs admitted the factual allegations in the consent order, which 

we believe will deter Goldman and other firms from engaging in 

the same sort of conflicts in the future. 

Between 2003 and 2012, total investor restitution of $404 million 

was paid directly to investors in Massachusetts securities cases, 

and this does not include auction rate security cases. We have also 

suspended the local licenses of many bad actors. 

46 

The Massachusetts Securities Division analyzed the 82 consent 

orders it has entered into since 2003, and based on that analysis, 

the respondents admitted to the facts alleged in the administrative 

complaints in more than 40 percent of the cases. The Securities Division has placed a high priority on getting restitution for the defrauded investors and sometimes that results in a variation. So 

when you do get restitution you may well not get an admission, but 

the goal should be to try to get an admission. 

Much of the testimony I have heard here today suggests that 

these are opposite goals. They are not. If the system was working 

so well over the last 9 years, I don’t think we would be seeing the 

repeat offenders we have seen over and over again. Much of the 

testimony I have heard today suggests that these are two 

unachievable goals. I disagree. 

I believe that it is important that regulators ought to seek admissions if they can get them and certainly should not be required to 

get them if they can get a better result for investors, but at the 

same time the idea that somehow we should defer all results and 

avoid getting any admissions is a far too cosy relationship that has 

not protected the American people and has not led to a safer and 

better system for our country. 

And so I hope that as a result of this hearing, and some of the 

changes I have heard discussed here this morning, there may well 

be a change of heart on this issue. 

Thank you for this opportunity. 

[The prepared statement of Secretary Galvin can be found on 

page 66 of the appendix.] 

Dr. HAYWORTH [presiding]. Thank you, Mr. Secretary. Next, Mr. 

Richard Painter, professor of law at the University of Minnesota 

Law School. 

STATEMENT OF RICHARD W. PAINTER, PROFESSOR OF LAW, 

UNIVERSITY OF MINNESOTA LAW SCHOOL 

Mr. PAINTER. Thank you very much, Madam Chairwoman and 

Ranking Member. I have worked in securities law, I have taught 

securities regulation for almost 2 decades, and for 21⁄2 years I was 

the chief ethics lawyer for the White House under President Bush. 

I agree with the Second Circuit’s view on the settlement in the 

Citigroup case, and that is for several reasons. 

One, the SEC has very limited resources, as we all know, and, 

by the way, I would strongly urge Congress to seriously consider 

an increase in the budget of the SEC. I think it would be a good 

investment. But that being said, they have a very limited budget, 

and they need to be able to make the enforcement and investigation decisions. 

And every time they investigate a case, they don’t investigate another. Every time they litigate a case, they may have to spend resources there that could have been spent investigating other 

frauds, and they need the discretion to decide how to spend those 

resources. 

Second, when you have a large settlement, such as you did with 

Citigroup, there is a clear message they did something wrong— 

$285 million is a lot of money. We all know they did something 

47 

wrong. Exactly what they did wrong, which statute they violated, 

may not be so clear, but they clearly did something wrong. 

Third, there often is legal ambiguity. 

For example, Goldman Sachs—there was a settlement of a case 

with Goldman Sachs that involved securities that may not have 

been sold in the United States. And after the Supreme Court’s decision in Morrison v. National Australia Bank, it might very well be 

the case that some of those transactions might not even be covered 

under the Federal securities laws. 

There is ambiguity on that question. And the SEC settled that 

case with Goldman Sachs and then ran into that very ambiguity 

in litigation against an executive of Goldman Sachs, Fabrice 

Tourre, in the Southern District of New York. So there is often a 

reason to settle in order to not have to deal with legal ambiguity 

with respect to interpretation of statutes, even though there is 

clearly a situation of where the company did do something. 

And the SEC sometimes will have a situation where if they take 

an ambiguous case into the courts and get a disfavorable decision 

and they lose, they not only lose that case, but bad facts make for 

bad case law, which could frustrate the SEC’s enforcement agenda 

in other areas and a range of other cases. 

Now, that being said, I do have two concerns that I want to express to this committee. One is that some of these settlements also 

involve waivers of specific regulatory—specific rules that provide 

that lenient regulatory treatment in a range of areas is not provided to entities that have entered into these types of settlements 

and SEC consent decrees. And what the SEC does is then goes and 

waives those provisions so that favorable regulatory treatment intended for companies that have been behaving themselves is still 

given to those companies that have not, and this is in a range of 

different areas that I have discussed in my written testimony. 

I do not categorically disagree with those waivers, but I think 

that serious thought needs to be given to whether companies that 

have not complied with the law ought to be permitted, for example, 

to take advantage of favorable regulatory treatment given to socalled well-known seasoned issuers: Lehman Brothers; Bear 

Stearns; and Merrill Lynch; all well-known seasoned issuers—perhaps not as well-known and as seasoned as we thought. 

And my last concern is that we need to focus on the individuals 

who are responsible for the conduct, not just the institutions. If 

$285 million, which might not mean a lot to Citigroup, but if that 

money were taken out of the bonuses of the individuals, not only 

who were responsible for the conduct but who supervised the entity, we might get a very different result with respect to repeat conduct. 

And for this reason, I have suggested that we need to go back, 

in the investment banking area we need to go back to the system 

of personal liability of senior investment bankers for the debts of 

their firms, and that is the way it was when Salomon Brothers, 

Lehman Brothers, Goldman Sachs, Morgan Stanley—those were 

general partnerships and they were jointly and severally liable for 

the debts of their firms, and they did not take the types of risks 

that those firms take today. 

48 

My grandfather was an investment banker. He had a small shop, 

it folded, and he paid back the creditors. He paid back every single 

penny. And then when he was a partner of a larger firm, the same 

thing. They were jointly and severally liable, and they didn’t behave the way they do today. 

And that is why I proposed in some materials described in my 

written testimony that we need to take very seriously the need for 

personal responsibility, and that may mean personal liability for 

the people who are in charge. 

[The prepared statement of Professor Painter can be found on 

page 95 of the appendix.] 

Dr. HAYWORTH. Thank you, sir. And now Mr. Kenneth Rosen, 

professor of law at the University of Alabama School of Law. 

STATEMENT OF KENNETH M. ROSEN, PROFESSOR OF LAW, 

UNIVERSITY OF ALABAMA SCHOOL OF LAW 

Mr. ROSEN. Thank you, Madam Chairwoman, and Ranking Member Frank. I appreciate the opportunity to testify on the use of settlements by financial regulators. 

Settlements constitute a crucial part of the enforcement process, 

especially as regulators seek to allocate limited resources in fulfilling their missions. Accordingly, it is critical that regulators retain flexibility to settle the cases that they pursue. 

My testimony will focus on the practices of the United States Securities and Exchange Commission, where I previously served as a 

Special Counsel. However, the issues and concerns that I raise also 

might prove relevant to enforcement efforts of other regulators. 

Settlements constitute a longstanding part of the enforcement 

process. Driving settlements are calculations by litigants about 

their potential to win and lose cases. For regulators, settlements 

may be especially attractive when the alleged violator of the law 

accepts conditions that give the agency comfort in ceasing litigation. When actions are settled, monetary and nonmonetary consequences may be significant. Of course, requisite for successful 

settlement negotiations is that notwithstanding such serious consequences, the alleged offenders also view it in their best interests 

to settle. Possible motivators for such action might be how exactly 

the language of settlements is phrased, especially as it relates to 

acknowledgment of legal violations. 

Notwithstanding the tradition of settlements, settlements are not 

without controversy. Last November, in SEC v. Citigroup Global 

Markets Inc., a United States District Judge rejected the Commission’s efforts to settle a case and sought to proceed to trial. In 

granting the SEC’s motion to stay the proceedings below, the Second Circuit rightly recognized multiple flaws with the District 

Court’s opinion. 

The Second Circuit warned, ‘‘the scope of a court’s authority to 

second-guess an agency’s discretionary and policy-based decision to 

settle is at best minimal.’’ 

The Court’s observation is wise because government authorities 

pursuing supposed wrongdoers must harness limited resources to 

pursue an agenda that is fair to the parties involved and that secures both goals of punishment and deterrence of future violations. 

The calculation of how best to serve the public interest is a difficult 

49 

one, and great deference to the agency seems merited as it pursues 

its mission. 

Although a District Court might view individual settlements as 

‘‘pocket change’’ to large financial institutions, others certainly can 

view payment of hundreds of millions of dollars as significant, and 

as a punishment for potential future violators to avoid. 

It also seems useful to note that avoidance of an admission of 

guilt in a settlement does not necessarily equate to avoidance of 

reputational harm for the institution that settles. 

Although frustration with the economic crisis might lead some to 

seek more restrictions on financial agencies’ abilities to enter settlements, discretion to settle remains an important regulatory tool. 

Indeed at a time of rapidly shifting regulatory landscapes in light 

of the crisis, such discretion may be more important than ever. 

Informing an agency’s decision to consider settlement might be 

genuine concern about the understanding of what constitutes a violation as rules rapidly change. Settlement may permit agencies to 

ameliorate the consequences of confusion during regulatory transitions. While some might seek rigid outcomes or language in settlements related to new rule violations, efforts to impose such rigidity 

might incentivize odd results. Agencies might opt out of pursuing 

violations when results would be dictated in a settlement process 

related to such violations. This might further fray investor confidence. 

The enforcement process certainly remains subject to possible improvements. However, if enforcement efforts seem inadequate, one 

should focus on the effectiveness of efforts to detect wrongdoing 

and the actions of officials actually charged with pursuing wrongdoers. Review of settlements in individual cases seems a secondbest solution for changing how the enforcement process generally 

operates. 

Moreover, enforcement is only one of a modern financial agency’s 

many difficult tasks. As limited resources are taxed by other legislatively mandated actions, agencies may, by necessity, have to pull 

back on some enforcement efforts. Settlements likely will remain a 

vital tool for agencies to have some regulatory impact without expending the full resources involved with taking all enforcement actions to trial or administrative completion. 

Thank you again for the opportunity to testify, and I welcome the 

chance to answer your questions. 

[The prepared statement of Professor Rosen can be found on page 

101 of the appendix.] 

Dr. HAYWORTH. Thank you, sir. The Chair yields 5 minutes to 

herself. 

Secretary Galvin, the recidivism rate that you would cite would 

be what, roughly? 

Mr. GALVIN. I think in terms of the firms, many of the large 

firms are constantly coming in with different types of violations. I 

think more than the firms themselves, the fundamental problem 

that we keep seeing reappearing is treatment of customers unfairly 

in different ways. For instance, in my testimony I cited the settlement we just reached last year with Goldman Sachs on the socalled huddles, where, in effect, they were distinguishing between 

50 

their preferred customers, giving them better information than 

their other customers. 

Go back to 2003 when we had the market timing on mutual 

funds. It was really the same thing. 

Dr. HAYWORTH. Okay, but— 

Mr. GALVIN. So essentially, the firms are doing the same thing. 

They see no deterrent in having paid fines and being caught doing 

it before. 

Dr. HAYWORTH. But would you say it is occurring at a rate of 

more than 50 percent? 

Mr. GALVIN. I would say so, yes. We don’t find, very rarely—I 

have a wide range of entities that are licensed, obviously many 

smaller ones who are less likely to return because the effect of this 

would be much more damaging to them if they have to pay damages. But the larger firms frequently are coming back with situations. 

And the attitude doesn’t change. That is the problem. That is my 

concern about the idea that they admit or deny is something that 

is acceptable. 

Dr. HAYWORTH. Or perhaps the nature of the penalties could 

change or, as Mr. Painter says, joint and several liability mechanism might be appropriate. 

Mr. GALVIN. I agree with him. 

Dr. HAYWORTH. But another question, do you think in terms of 

the whole issue of admission—and this is for each of you, maybe 

we will start with you, Professor Rosen, since there is this question 

of secondary lawsuits or proceedings, civil liability that might be 

crippling, do you think that would act as a deterrent from admitting wrongdoing and thereby prolong a process that might lead to 

litigation instead of settlement? 

Mr. ROSEN. Yes, I think that is really a concern. It is interesting 

if you look at the text of Judge Rakoff’s opinion. One of the things 

that seems to give him great concern about the language is the fact 

that when one puts that language in, one doesn’t essentially estop 

future use of that particular case from private litigations; but ultimately, that might make it attractive to the defendant in the SEC’s 

case to engage in a settlement. 

Once you take that away, you are starting to limit the upside. 

And, again, settlement has to be viewed as something that is mutually recognized by both parties to be in their interests. 

Dr. HAYWORTH. Right, and it is essentially. It is a compromise, 

as we have said in the Second Circuit’s opinion and that makes 

sense. Professor Painter? 

Mr. PAINTER. Right. An admission of guilt is an admission to 

plaintiff lawsuits, and that is one of the biggest problems I have 

with requiring the SEC to insist on an admission of guilt. It drags 

the SEC into a battle between the large banks and other defendants and the plaintiffs’ bar. And it is a battle that is extremely expensive and the SEC has very limited resources to deal with it. The 

defendants will dig their heels in, and they will burn up the SEC’s 

resources fighting these cases. 

Dr. HAYWORTH. And Professor Painter and Professor Rosen have 

both mentioned SEC resources in specific ways, if you will, Professor Painter, with regard to funding, you feel that the level of 

51 

funding is not adequate to cover what the SEC needs to do in this 

world, and Professor Rosen, you have said we need better detection. 

So do you think that if we could devote resources to detection, 

certainly it comes into play. And when we think about the 

eponymous law for our ranking member, many people have said if 

we had better detection and enforcement of antecedent law prior to 

Dodd-Frank, then we might have been able to deter some of the 

consequences that some of us fear from that law. 

Your comments, Professor Rosen? 

Mr. ROSEN. Yes, I think that detection is really such a critical 

thing in this particular instance. In fact, one of the things that was 

interesting in the prior panel of looking at the different types of 

regulators, is that the SEC versus the prudential-type regulators, 

the SEC actually has a compliance office as well, OCIE, which conducts examinations and thinking about those issues is important. 

I would be worried that in some ways, our focus on the exact language of settlement becomes a distractor to try to better address 

those kinds of inspections issues and also the issues with enforcement at the Enforcement Division, which as Mr. Khuzami pointed 

out has really changed how it goes about enforcement quite drastically in the last year or so. 

Dr. HAYWORTH. And our technology keeps changing so we have 

better tools. I yield to the ranking member. 

Mr. FRANK. Thank you. Let me ask, obviously you have a decisionmaking any given day and then you have to look at the whole 

system. Sometimes you may decide to try to change the behavior— 

even if it would be a cost in the short term—basically what I have 

in mind is what would you guys all think about, in one egregious 

case where the SEC was pretty sure to respond—in the case of 

bankers you are exactly right, you don’t want to bring a case that 

is going to set you a bad precedent, that is very clear—but what 

about in a very clear case if they are recalcitrant, go after them. 

Let them sue if you think you can win, and that might be setting 

a precedent for the future, that is, is there something to be said 

for picking a very strong case in where you can’t get what you 

think you should get, including admissions, I think an admission— 

and I understand the points about reputation, but the admission 

can be very important. What about saying to the SEC, look, pick 

a strong case and make an example of somebody, not in a negative 

way, because you wouldn’t do it unless you had a strong case and 

they had done things wrong and they were significant—what about 

that kind of approach? Say, yes, we know it is going to cost us 

something, but we think if we can bring this strong case and win, 

that can have a good impact on potential settlements going forward. 

Mr. Galvin? 

Mr. GALVIN. I definitely think so. One of the concerns I have, and 

this goes to the prior question from the lady from New York, I believe, I think the system is inverted when it doesn’t put the investors first. In other words, I heard the testimony of Mr. Khuzami 

about how they used some of the results of the settlements. I think 

the SEC needs more authority to put money directly back in the 

52 

hands of the investors. I don’t think the experience with the socalled fair funds event have been that effective. 

Secondly, as far as the financing of the agency, I would also suggest that the SEC should be able to retain some of the revenue that 

they get as a result of fines and employ—put costs on some of these 

they have to pursue. Why shouldn’t the violators pay for some of 

the costs of enforcement? It seems to me— 

Mr. FRANK. Let me respond to that. The SEC, of course, does 

levy fees and they make money for the Federal Government. I appreciate, Professor Painter, your point about raising the fee. But I 

would say to the Secretary, he will know, when I talk about New 

Bedford, that our problem with some of that is, if you give an enforcement agency the ability to levy fines and then spend some of 

them, I do worry about the incentive in that situation. 

Mr. GALVIN. With scrutiny. 

Mr. FRANK. Let me add—Professor Painter, I very much agree 

with—let me ask, what about the scenario of saying okay, this is 

a strong case, and we are going to take it and we understand it 

is going to spend some resources, but we think winning this case 

will be helpful in the future in terms of their attitude? 

Mr. PAINTER. I think they should do that. When they have a 

strong case, they should fight that case and win when they are 

very confident they can do that. But there are a number of these 

cases where there are ambiguities. 

Mr. FRANK. I agree with that. Mr. Rosen— 

Mr. PAINTER. But the second point I want to make clear is that 

they need to hold the individuals responsible. For Citigroup shareholders to pay $285 million may not be what we need to do. We 

need to take it out— 

Mr. FRANK. Let me ask you and then I will go to Professor 

Rosen, because on that point, I very much appreciate your testimony. The waiver point is a very strong point, and I intend to 

write to the SEC and say they ought to be very strict about the 

waivers. I appreciate that. That is one of those things where experts help us. 

On the individual responsibility, I very much again appreciate 

that point. I note you say in the testimony—and I would ask you 

not to do anything right now—I would ask you to take a look at 

this, not off the top of your head. 

We did include in the financial reform bill a provision that instructed every regulator of the financial institution to require that 

they have compensation practices that had good facts, that said 

that you would end the situation of a bonus in which heads, I win, 

and tails, I break even. 

Is there some way to use that authority not to prescribe anything 

by the Federal Government but for the regulators to give a very 

strong incentive to the institutions to do the kind of individual responsibility. That is, is there some way to say under that authority 

you should say in the compensation package that an individual executive or a group who are responsible for that kind of a serious 

loss ought to bear some of the financial pain themselves? 

Mr. PAINTER. I believe to some extent they could if it is a claw 

back of the bonus that is covered by the specific provision that you 

are talking about. My concern is that may not be enough and, as 

53 

I said, these investment banks in the old days were general partnerships. 

Mr. FRANK. I appreciate that, and that might be a start on that 

and I think that might be—Professor Rosen, what about the scenario of saying, ‘‘Okay, this is one strong case, so we are going to 

fight you, we are going to spend a little money, but we think that 

may help for the future?’’ 

Mr. ROSEN. Yes, I don’t disagree with that. In fact, in talking 

today about the need for the discretion of the SEC and other regulators to settle, I think they also need the discretion to go forward 

with cases where they see they are relevant, and, in fact, I think 

that having served at the Commission, the folks who are there are 

very strategic in making those decisions and trying to get those 

proper precedents out there. 

Mr. FRANK. I think we all agree that greater resources would 

give them the flexibility to make that kind of a decision. 

Mr. SCHWEIKERT [presiding]. Thank you, Ranking Member 

Frank. 

Mr. Rosen, can I come straight to where you just—doesn’t the 

SEC still have that discretion to pursue a settlement or to say, this 

one is so egregious that we are going after them criminally? 

Mr. ROSEN. Yes, absolutely. I guess the point— 

Mr. SCHWEIKERT. It was just your tone, I just wanted to make 

sure I wasn’t—not being burdened with a law school education. 

Mr. ROSEN. Sure. I think that sometimes, like I said, the danger 

of this discussion of the settlements is it is almost a distractor from 

everything else that is out there and it is important to remember 

that discretion as well, to actually bring the cases when necessary. 

Mr. SCHWEIKERT. Thank you. For anyone on the panel, have any 

of you engaged in a case over the last couple of years where there 

was settlement action at the SEC level but from a State level or 

an individual actor that the decision was we are going to go after 

them either civilly or criminally on a separate track? 

Mr. Galvin? 

Mr. GALVIN. We often work with the SEC. Usually, we try to coordinate our activities and we do, but sometimes we choose to go 

on cases that the SEC has passed on or perhaps has not gotten to 

yet. I can think of a number of instances where we initiated an 

issue and the SEC later joined in. 

So I don’t think it is always necessarily that—the range of possibilities is broad. As I said in my formal testimony, we try first and 

foremost to get restitution for our investors who have been defrauded. We do try to get an admission, and we succeed in many 

instances. We would sacrifice an admission if we thought it would 

help get restitution, so it is not a hard and fast rule. 

My concern, and I voiced this earlier, was that to the extent that 

the discussion seemed to be with the earlier panel that there were 

alternatives that could not be mixed, I disagree with that. I think 

no one is suggesting, at least I am not suggesting, and I don’t know 

of anyone who is suggesting, that in every case the SEC must get 

an admission; that is not the issue. The issue is, in my opinion, the 

that this has been too easy in denying admissions or seeking admissions. 

54 

Mr. SCHWEIKERT. Mr. Painter, your observations of what you 

have experienced? 

Mr. PAINTER. I have seen cases pursued by the State that are not 

pursued by the SEC. Often, they involve a smaller number of investors, and I believe that the State enforcement is critical, a critical supplement to what the SEC is doing. And in Minnesota we 

benefit from what Secretary Galvin is doing in Massachusetts. It 

is important to the whole country that there be effective State enforcement. 

Mr. SCHWEIKERT. Mr. Rosen? 

Mr. ROSEN. Yes, I will go a little bit into professorial mode here. 

Mr. SCHWEIKERT. Uh-oh. 

Mr. ROSEN. And one of the things that I stress in my course in 

securities regulation is not to forget the States. I think sometimes 

folks become so fixated on the Federal regulatory system that they 

forget that the States do have this authority, particularly as it relates to antifraud actions. 

Mr. SCHWEIKERT. Your specialties and what you see happening 

from an academic standpoint and what is actually happening in the 

States, Mr. Galvin, I almost heard you sound as if sometimes you 

will do a triage decision, saying, look, the SEC is doing this, they 

are not pursuing this person, you are going to go after this bad 

actor. Was I reading more into what you were saying? 

Mr. GALVIN. No, it may be the same, it could be multiple companies or multiple entities doing the same thing. They may choose to 

go after a large national company, we may choose to go after local 

actors. Obviously, the trigger for us is that in general our State, 

investors from our State have been affected. But in working with 

the other State regulators, we often trigger national efforts. For instance, I mentioned the auction rates securities matter, which is 

more a matter of liquidity than anything else, but it was the States 

that really led the way there in terms of taking action to get liquidity for its investors. 

The SEC was very helpful because you do need a national regulator. I am a firm, I am very concerned about the SEC’s ability to 

do what it needs to do. I think that is very important. States can’t 

substitute themselves for the SEC. On the other hand, the States 

can be supplementary, and I think in many instances, we are. 

Mr. SCHWEIKERT. Mr. Painter? 

Mr. PAINTER. I strongly agree. 

The work at the States is very important, particularly in light of 

the restricted budget of the SEC. 

Mr. SCHWEIKERT. But my scenario, we know the SEC is going 

after these national players, you may have someone who has committed similar acts. Will you sort of triage who you pursue and say, 

look, they are going after them, I have other States and we have 

the same player. I am just sort of trying to understand the decisionmaking at the State level. 

Mr. PAINTER. I think that is the approach, and it would make 

sense to have coordination. The problem is a lot of different factors 

may feed into whether a State decides to pursue actions or the 

SEC, so you may have both at the same time. You may have overkill in some cases and in other cases nothing happens. 

55 

Mr. SCHWEIKERT. With unanimous consent, I am going to give 

myself another 2 minutes. 

No one argued. 

I have two other questions. Forgive me for keeping you longer. 

How often will a decision to pursue at the State level be because 

you see coordinated action amongst a number of States or States 

within a certain region? Particularly for where you are, if your 

neighboring States are pursuing something, will that often be what 

draws you in? 

Mr. GALVIN. Not necessarily. Usually, it is an investor from Massachusetts or a case we become aware of. 

Mr. SCHWEIKERT. You beat me to the second half and that was 

how often will it be an investor or private action taking place that 

hits your radar that also draws you in? 

Mr. GALVIN. It is primarily, sometimes it is our national practice 

we become aware of, like I mentioned, the auction rate securities 

situation. However, most often, it is an individual investor who 

comes to us with a specific issue or complaint. 

We also do books and records examinations of companies. So we 

do some additional work where we discover things in the course of 

our books and records examinations as well that lead us to investigations. 

Mr. SCHWEIKERT. Mr. Painter? 

Mr. PAINTER. I do not know specifically what is being done in the 

States on that, but I believe that what Secretary Galvin is saying 

seems consistent with what I have heard is happening in other 

States. 

Mr. SCHWEIKERT. Mr. Rosen, your perception from even some of 

the research and things that hit your desk, is it because they see 

motion in other States or there is a complainant or a filed complaint at the State level? What do you see draws much of the State 

regulators in? 

Mr. ROSEN. Again, on some levels, it is sort of more speculation, 

not actually sitting in the offices with those regulators, but I think 

that what Mr. Galvin is saying makes sense and I think all of the 

above really can come into play. I think that as a typical matter, 

when regulators decide to pursue issues, some of those issues are 

ones that they generate through their own investigation, which is 

why I think that investigation is so important, but others are 

where they read the Wall Street Journal also and find it. And particularly now that we see a movement towards greater I think situations of universal settlements and so forth, once the bandwagon 

starts rolling along, there might be more prominence given to what 

is going on in particular litigation that might attract attention from 

other State regulators. 

Mr. SCHWEIKERT. Gentlemen, I have to say ‘‘thank you’’ to you 

and to the previous panel. This actually has turned out to be a 

much more interesting day than I ever expected it to be. So I have 

learned some things. 

Now, I have to read the script. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

56 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

And with that, this hearing is adjourned. Thank you gentlemen. 

[Whereupon, at 1:05 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

May 17, 2012 

58 


75734.001

For release on delivery 

10:00 a.m. EDT 

May 17,2012 

Statement by 

Scott G. Alvarez 

General Counsel 

Board of Govemors of the Federal Reserve System 

before the 

Committee on Financial Services 

U.S. House of Representatives 

May 17,2012 
59 


75734.002

Introduction 

Chairman Bachus, Ranking Member Frank, and members of the Committee, thank you 

for the opportunity to discuss the Federal Reserve's enforcement progranl. Authority to take 

enforcement actions is one of the important tools Congress has provided the Federal Reserve to 

require financial institutions under its jurisdiction to address serious problems or risks that are 

found during the course of the supervisory process. 

The Federal Reserve has supervisory authority over stale member banks, bank holding 

companies, savings and loan holding companies, and subsidiaries of these holding companies, as 

well as foreign banks that operate branehes, agencies, and certain other offices in the United 

States. The Federal Reserve's basic supervisory responsibility is to oversee the financial 

soundness of these institutions and their adherence to applicable banking laws. To this end, we 

monitor the largest of these institutions on a continuous basis and routinely conduct inspections 

and examinations of all of these firms to encourage their safe and sound operation. The vast 

majority of the Federal Reserve's supervisory actions address unsafe and unsound banking 

practices and are integrated into our supervision and exan1ination proeess. 

Over the past ten years, the Federal Reserve has taken nearly 1,000 formal, public 

enforeement actions, which includes the issuance of more than 600 written agreements and 100 

cease-and-desist orders against the institutions and individuals subject to our jurisdiction. 

During this same period, in response to some of the more serious banking practices and 

suspected violations oflaw, the Federal Reserve has assessed more than 100 civil money 

penalties and restitution payments totaling more than $1.2 billion. Moreover, our investigations 

of insiders have led to the permanent ban of more than 80 individuals from the banking industry, 

including untrustworthy loan officers and traders, directors, and other banking officials. 
60 


75734.003

2 

Enforcement Tools 

The statutory scheme established by Conf,'fess confers on the Federal Reserve and the 

other bank regulators a broad array of both informal and formal enforcement tools to be 

exercised at appropriate points throughout the course of the supervisory process. The primary 

means for addressing supervisory concerns at regulated financial iustitutions is informally during 

the ordinary course of the routine examination process. 

The Federal Reserve examines, on a regular basis, institutions for which we have been 

granted supervisory authority by Congress and, through that authority, has complete and 

unfettered access to an institution's most sensitive financial information and processes, including 

information that would otherwise be privileged and not subject to public disclosure. Thus, many 

problems are identified and corrected during the examination process while examiners are still 

on site. These types of informal actions are well suited to address safety and soundness 

deficiencies or violations of law that bank supervisors believe can be readily corrected by the 

institution's management. 

Enforcement measures may escalate depending on the severity or difficulty of the 

problem. Problems that carmot be corrected irrunediately will be formally reported to the 

institution in the examination report or in a supervisory letter as matters requiring management's 

attention and corrective action. These matters are presented to the institution's board of 

directors, which is charged with ensuring that management addresses and corrects them. 

Supervision staffwill subsequently follow management's actions to ensure that the problem is 

corrected. If a problem requires a more detailed resolution or is more pervasive at an institution, 

the Federal Reserve may enter into a memorandum of understanding with the financial 
61 


75734.004

- 3 -

institution in which the board of directors commits to specific actions to correct potentially 

unsafe and unsound banking practices or possible violations of laws or regulations. 

Unsafe and unsound practices and violations of banking laws found during the course of 

the supervisory process are usually resolved using the informal methods described above; 

however, an institution's failure to remedy an unsafe or unsound practice or comply with 

banking laws can subject the institution to the fonnal enforcement measures provided by 

Congress to the Federal Reserve and our fellow federal banking regulators. For example, in 

instances where a fmancial institution's management is recalcitrant in addressing a supervisory 

issue or the condition of the bank has become less than satisfactory, the Federal Reserve may 

enter into a formal written agreement, which is statutorily enforceable by assessing civil money 

penalties or imposing other sanctions. 

On occasion, the Federal Reserve has also confronted situations where a financial 

institution's management either refuses to correct an unsafe or unsound practice or to comply 

with applicable laws or regulations, or where the practice or alleged violation is so widespread or 

so serious that normal recourse to informal supervisory methods is not appropriate or sufficient. 

In these cases, the Federal Reserve will commence more formal types of enforcement action 

against the regulated financial institution and its institution-affiliated parties. 

These more formal remedies include, among other things, imposing orders directing the 

financial institution or its institution-affiliated parties to cease and desist from engaging in the 

improper or prohibited conduct, directing the firm to take certain actions to return to safe and 

sound banking practices, and, where appropriate, requiring the firm to make restitution or 

provide reimbursement, indemnification, or guaranty to third parties harmed by the wrongful 
62 


75734.005

- 4-

conduct. I The Federal Reserve may also remove an institution-affiliated party from the banking 

institution and prohibit the party from participating in banking at other financial institutions.2 

Finally, we may determine that the assessment of civil money penalties is appropriate against 

either the offending institution or an institution-affiliated party.3 

The Federal Reserve may commence a formal investigation to determine whether more 

stringent enforcement action is appropriate. This investigative authority, which complements 

our statutory examination authority, empowers designated Federal Reserve staff to issue 

subpoenas to take sworn witness testimony and compel the production of relevant documents 

necessary to establishing a factual basis for the alleged misconduct. These investigations usually 

involve circumstances where relevant information cannot readily be obtained through the normal 

supervisory process and that are more likely to result in a contested action. 

Resolving Enforcement Actions 

The vast majority ofthe Federal Reserve's formal enforcement actions are resolved upon 

consent, which is fully consistent with the goal of resolving supervisory concerns with bank 

management quickly and firmly_ In crafting enforcement actions that are entered by consent, the 

Federal Reserve typically sets out summary recitations of the relevant facts in "Whereas" clause 

provisions; however, like our fellow banking regulators, it has not been our practice to require 

formal admissions to the misconduct addressed in our enforcement orders given the remedial 

nature of our enforcement program. Requiring admissions of fact and legal conclusions as a 

condition of entering into a consent action is likely to have a deleterious effect on our 

supervisory efforts by causing more institutions and individuals to challenge the requested relief 

J 12 U.s.c. ISIS(b) 

212 U.S.c. ISI8(e) 

3 See 12 U.S.C. lSI8(i) 
63 


75734.006

-5 

in contested administrative proceedings, which typically take years to reach final resolution, and 

which could delay implementation of necessary corrective action. 

The enforcement authority of the Federal Reserve and the other banking agencies is 

different in significant respects from that of some other federal financial institution regulators. 

For example, in order to foster the soundness and stability of financial institutions and the 

nation's financial system, bank regulatory agencies must act quickly and effectively to address 

safety and soundness issues as well as potential violations oflaw. Moreover, safety and 

soundness concerns typically do not give rise to third-party claims and often require remedial 

action by banking institutions to address risks and conditions that are SUbjective in nature. Thus, 

the effectiveness of the regulatory framework established for financial institutions does not 

depend on actions brought by third parties to enforce their rights under the regulatory scheme. 

Where an enforcement action cannot be resolved by consent, the Board may issue a 

formal notice of charges, which sets forth the factual basis for the remedy sought by the Board. 

The respondents named in the notice of charges in these cases are accorded the opportunity to 

answer the charges and request a formal hearing before an administrative law judge. 

Administrative hearings may be public and entitle the respondent to full and complete discovery 

of the information that forms the basis for the Federal Reserve's charges as well as the 

opportunity to present evidence at a formal trial-like hearing presided over by an administrative 

law judge. At the conclusion of the hearing, the administrative law judge will prepare a 

recommended decision including findings of fact and conclusions of law that is then presented to 

the Board for final adjudication and issuance of a final decision. Respondents may appeal the 

Board's decision to a federal court of appeals. 
64 


75734.007

-6-

Only 11 of the nearly 1,000 enforcement actions taken by the Federal Reserve in the last 

decade were not resolved by consent. The Federal Reserve sought removal from banking of 

current or former institution-affiliated parties in eight of these contested cases, and sought 

compulsory cease-and-desist relief in the remaining three cases. Seven of the 11 cases went 

through the full administrative hearing process, while the remaining four were settled upon 

consent just prior to the scheduled administrative hearing. In the cases where a consent 

settlement was not reached, the contested action typically required an additional six months to 

two years to reach final resolution. 

To the extent that there is noncompliance with one of our enforcement orders, we are 

statutorily authorized to apply to the appropriate federal district court for enforcement of the 

order.4 The Federal Reserve also takes past conduct into account in determining both the level of 

enforcement action we will take and the type of corrective or punitive action we will require. 

Individuals who knowingly fail to comply with one of our final enforcement orders suspending 

them from office or prohibiting them from participation in the banking industry may be referred 

for criminal prosecution by the Department of Justice.5 

Coordinating State and Federal Enforcement 

In the exercise of our enforcement authority, the Federal Reserve works closely with 

other state and federal banking regulators, as well as other state and federal law enforcement 

agencies, on enforcement matters that raise issues within their respective jurisdiction. These 

efforts have led to many successful coordinated enforcement actions with these agency 

counterparts. 

4 12 U.S.C. 1818{i) 

'12 U.S.c. 18180) 
65 


75734.008

- 7 -

The Federal Reserve refers matters that come to our attention during the supervisory 

process to other appropriate federal and state agencies, including law enforcement authorities.6 

We also provide technical assistance to other federal and state law enforcement authorities where 

violations of criminal or other laws may occur within their jurisdiction involving our regulated 

institutions. 

Conclusion 

The Federal Reserve's enforcement program serves the important purpose of addressing 

serious problems found in the normal course of our supervision and regulation of the financial 

institutions under our jurisdiction. It is a critical component of our authority to ensure safe and 

sound banking practices and enforce compliance with the banking laws. 

Thank you for the opportunity to provide this information to the Committee. I would be 

happy to answer any questions you may have. 

6 Historically, fair lending matters have been referred to the Department of Justice and fair housing violations have 

been referred to the Department of Housing and Urban Development. Now, most consumer law matters will be 

referred to the Consumer Financial Protection Bureau as provided by statute. 
66 


75734.009

Testimony of William F. Galvin 

Secretary of the Commonwealth of Massachusetts 

Before the Committee on Financial Services 

U.S. House of Representatives 

May 17,2012 

Examining Settlement Practices of U.S. Financial Regulators 
67 


75734.010

Chainnan Bachus, Ranking Member Frank, and other members of the Committee, 

thank you for this opporttmity to discuss regulatory settlements in the financial services 

industry. 

I am Bill Galvin, Secretary ofthe Commonwealth and Chief Securities Regulator 

of Massachusetts. 

Regulation without effective enforcement makes such regulation little more than 

political rhetoric and, worse, leads to a false sense of financial security for our citizens. 

My Securities Division carries out an active program of civil enforcement in order 

to detect and stamp out securities fraud. These enforcement actions have retumed over 

400 million dollars directly back to defrauded investors. As our reputation for effective 

securities enforcement has grown, we have detelTed fraud from entering our state -

promoters of many stock frauds do not want to risk dealing with our Enforcement Section, 

and they stay out of Massachusetts. 

I have long spoken out against the established pattem in federal settlements of 

allowing respondents to enter into settlements where they neither admit nor deny the 

allegations in the administrative complaint for the entorcement action. In 2003, I had the 

opportunity to testify before a subcommittee ofthc U.S. Subcommittee on Govemment 

Affairs. I said at that time, "too often the guilty neither admit or deny any wrongdoing 

and routinely promise not to cheat again until they ean come up with a more clever 

method to do what they just said they would not do again." 

I repeat these words today with even a greater sense of urgency as events of 

recent days have shown. 

2 
68 


75734.011

One of the priorities of the Securities Division is that firms and persons that have 

violated laws should be required to acknowledge what they have done. Permitting a firm 

to enter into a settlement where it pays a fine, but neither admits nor denies that it has 

done anything wrong, permits that finn to avoid basic culpability for its actions. In some 

instances, we have seen firms enter into regulatory settlements, pay large fines, and also 

issue press releases stating that the firm settled the matter in order to "avoid the 

distractions" created by prolonged litigation. Permitting firms to take this kind of posture 

allows the firms to avoid acknowledging their misconduct and permits such firms to 

publicly take the stance that such settlements are part of business as usual. 

Ifwe intend to reform the worst practices in the financial industry, then the firms 

that have violated the law must acknowledge that what they have done is wrong. 

The settlement of enforcement actions involves the evaluation and balancing of 

many factors. Settling a case is a dynamic process that requires considerable skill and 

persistence. In many cases, there is a thin line between arriving at a satisfactory 

settlement and failing to reach any settlement at all. 

In determining the resolution of any case, the Massachusetts Securities Division 

gives the highest priority to the protection of investors. We do not pursue or resolve 

cases to enhance our prestige. Acting in the public interest and protecting retail investors 

are our paramount concerns. 

Restitution and Other Remedies 

However, in many cases, the best resolution we can achieve is to require an issuer 

of securities or securities broker to repay defrauded investors and make them whole. 

3 
69 


75734.012

One of the greatest satisfactions of my role is getting restitution for investors, and 

preventing the operators of financial frauds from simply walking away from their victims 

with their ill-gotten profits. Obtaining such restitution for investors means that they will 

be able to recoup their financial nest eggs: they will be able to cover college costs, they 

will be able to fund their retirements, or they will have the funds needed to pay the costs 

of long-term care. When we have obtained restitution for investors, in many cases we 

have saved them from financial ruin. 

Our enforcement actions also seek other sanetions and remedies. We have 

imposed significant fines designed to deter future violations of the law and to serve as a 

warning to the industry that misconduct will not be tolerated. 

In 2011, the Division settled the Goldman Sachs "analyst huddles" case, which 

involved the practice of Goldman Sachs giving its best research recommendations to 

preferred customers in order to attract more business from those customers. This practice 

gave some Goldman customers unfair advantages over other customers. Goldman settled 

the case by agreeing to reform its practices and by paying a 10 million dollar fine. In the 

settlement, Goldman admitted the factual allegations in the Consent Order, which we 

believe will deter Goldman and other firms from engaging in the same sorts of conflicts 

in the future. 

Massachusetts participated in a national settlement of cases relating to improper 

sales of auction rate securities by three major brokerage firms. In that settlement we 

prioritized restitution: the firms neither admitted nor denied the facts that were alleged, 

but the firms agreed to repurchase those securities from investors, paying 19.6 billion 

dollars in restitution. 

4 
70 


75734.013

In the Securities Division's case against Fairtleld Greenwich, a Madofffeeder 

fund, the respondents did not admit or deny the facts that were alleged, However, in that 

settlement, Fairfield Greenwich again agreed to make full restitution to Massachusetts 

investors, We gave high priority to getting restitution for investors in order to protect 

their interests in a situation that was rapidly deteriorating. 

Between 2003 and 2012, total investor restitution of $404,037,375 was paid 

directly to investors in Securities Division cases. This does not include amounts paid in 

the multi-state settlement of the auction rate securities cases. 

We have also suspended or revoked the licenses of bad actors in the securities 

industry. We have required t1nns to adopt remedial measures and special supervision 

procedures to address compliance problems. 

Balancing Policy Factors in Settlements 

The Securities Division must consider an array of factors in negotiating the 

settlement of an enforcement action. 

The key factor is whether we can get restitution tor investors and the amount of 

that restitution. We also give high priority to requiring that the respondent broker or finn 

admit the wrongdoing that led to the enforcement action. 

We do consider other factors as well. Often, we can make a strong statement to 

the marketplace and deter others from violating the law if we ean settle a case quickly 

and decisively. Collecting signitlcant civil fines can affect the bottom lines of these finns 

and can deter other potential violators. Because our agency ha~ limited resources, a good 

settlement will free those resources to pursue other complaints. 

5 
71 


75734.014

In settlement negotiations, we always seek to settle on strong tenus and to make 

investors whole. 

The Massachusetts Securities Division analyzed the 82 Consent Orders 

(settlements) it has entercd into from 2003 to the present. 

Based on this analysis, the respondents admitted to the facts that the Securities 

Division alleged in its administrative complaint in more than 40% of the cases. 

The Securities Division places a high priority on getting restitution for defrauded 

investors. This results in a clear variation in the number of respondents who admit to 

facts in cases where restitution is paid, and in those cases where no restitution is paid. 

Restitution was paid in connection with 42 consent orders, a majority of settlements. In 

the cases where no restitution was paid, nearly half of respondents admitted to the alleged 

facts. 

Judicial Review 

While the courts play an important role in overseeing civil cases filed by the SEC 

and in approving settlements of those cases, the courts must not second guess SEC 

settlement policy. I have spoken out to urge the SEC to be more assertive in the area of 

requiring respondents to admit wrongdoing. I continue to believe this is a valuable tool 

to enforce the securities laws in a meaningful way. 

This hearing addresses the recent rejection of a proposed settlement between the 

SEC and Citigroup by Judge Rakoff, of the Southern District Court in New York. Judge 

Rakoff's rejection ofthe settlement is being appealed by both parties, and the District 

Court proceeding is stayed. Judge Rakoff raised important and valuable questions about 

the settlement. The Judge particularly questioned why Citigroup should be able to settle 

6 
72 


75734.015

very serious charges without any requirement that they admit what they had done. While 

many of the Judge's concerns were valid, by rejecting the settlement, he inappropriately 

substituted his own assessment of those issues for the assessment made by the SEC. 

The SEC must maintain its independence on these issues. Those who in this case 

champion this Judge's view of this settlement should remember that once SEC 

independence is compromised, a different Judge in another case could weaken SEC 

settlement tenns. As an executive agency, in the absence of obvious error, the SEC must 

be able to decide which matters to investigate, which cases to litigate, which charges to 

bring, and the tenus of any scttlements. 

As the head of a sccurities regulatory agency, I understand the complex factors 

that go into the terms of a settlement. Thesc include: limited agency resources, the 

anticipated testimony of witnesses, potentially uncertain issues of case law, the potential 

dissipation of funds available for restitution, and the activity of other regulators. 

Weighing these factors is the particular province of a regulatory agency -it will not serve 

the public interest or protect investors to permit courts to reject regulatory settlements 

based on ajudge's sense that he would not have made the decisions that the regulatory 

agency made. 

The Value of Requiring Admissions 

Through my past public statements and through the way that the Massachusetts 

Securities Division handles its cases, my Office has taken a strong stand that persons and 

companies that have violated the law should admit what they have done. Dealing with 

other people's funds is a position of trust. Anyone who violates that trust should expect 

to be appropriately punished for violating the law this includes a requirement to admit 

7 
73 


75734.016

those violations. Requiring such admissions is a powcrful tool to correct past bad 

conduct and to deter future violations. This requircment is absolutely in thc public 

intercst and promotes the protection of investors. 

Thank you for this opportunity to testify. I will address any questions you have. 

8 
74 


75734.017

Testimony on "Examining the Settlement Practices of U.S. Financial Regulators" 

by 

Robert Khuzami 

Director of the Division of Enforcement 

U.S. Securities and Exchange Commission 

before the 

Committee on Financial Services 

U.S. House of Representatives 

May 17,2012 

Chairman Bachus, Ranking Member Frank, and Members of the Committee: I appreciate 

the opportunity to testify on behalf of the U.S. Securities and Exchange Commission regarding 

the Commission's practices concerning settled enforcement actions. 

While numbers alone do not capture the breadth of the Commission's work, the SEC's 

enforccment program is achieving significant results. During FY 2011, the Commission filed 

735 enforcement actions more than the SEC has ever filed in a single year. In addition, the 

SEC obtained orders in FY 2011 for $2.8 billion in penalties and disgorgement. During the same 

period, the SEC filed 146 enforcement actions related to investment advisers and investment 

companies, a single-year record and a 30 percent increase over FY 2010. Also in FY 2011, the 

SEC filed 57 insider trading actions, a nearly eight percent increase over last year's total. And 

lastly, the SEC in FY 2011 brought 112 enforcement actions related to broker-dealers, a 60 

percent increase over the prior fiscal year. Cases arising out of the financial crisis have been a 

particular priority of the Enforcement Division: to date, we have filed actions against 102 

individuals and entities, naming 55 CEOs, CFOs, and other senior corporate officers, and 

obtaining orders for $2 billion.! Of course, statistics are just onc consideration regarding the 

efficacy of an enforcement program, and one must also consider various qualitative factors as 

well. More significant than the number of cases filed is the fact that numerous cases filed by the 

Enforcement Division from FY 2009 t11rough the present involve highly complex financial 

products, market practices, and transactions where the investor harm is great, the investigatory 

hurdles are significant, and the perpetrators most elusive. 

As set forth more fully below, the SEC's settlement policies, like our Enforcement 

program more broadly, help protect investors. These policies, including the practice of 

'Additional information concerning the SEC's financial crisis-related enforcement actions is available at 

http://www.sec.gov/spotlightlenf-actions-fc.shtml. Additional information concerning SEC enforcement actions 

filed in FY 2011 is available at http://www.sec.gov/news/press/2011/20J 1-234.hlm ("SEC Enforcement Division 

Produces Record Results in Safeguarding Investors and Markets") and D!!Q.:llwww.sec.gov!ahout/secpar20LLillltml 

("SEC FY 20 II Performance and Accountability Report"). 
75 


75734.018

pennitting defendants in appropriate circumstanees to settle matters on a "neither-admit-nordeny" basis, are common not just across federal financial agencies, but across federal agencies 

more generally, and they serve the critical enforcement goals of accountability, deterrence, 

investor protection, and compensation to hanned investors. It is for these reasons that federal 

courts across the country have repeatedly approved settlements including "neither-admit-nordeny" provisions. 

The SEC's Approach to Settlement 

Under existing policy, the Division of Enforcement recommends that the Commission 

settle a case only when our infonned judgment tells us that the settlement agreement is within the 

range of outcomes we reasonably can expect if we litigate through trial. In making that 

detennination, we take into accowlt many factors, including: 0) the strength of the evidence and 

the potential defenses, including the possibility that the Commission might not prevail at trial, or 

prevail but be awarded less than the proposed settlement achieves; (ii) the delay in returning 

funds to harmed investors caused by litigation; and (iii) tile resources required for a trial, 

including, most importantly, the opportunity costs oflitigating rather than devoting those 

resources to investigating other cases. 

This approach to settlement serves the important goals of accountability, deterrence, 

investor protection, and compensation to harmed investors. With respeet to accountability, 

before the Division recommends an enforcement action, Enforcement staff spends months or 

years building a case by gathering evidence, analyzing relevant documents, interviewing 

witnesses, and assessing possible defenses. In addition, potential defendants have the 

opportunity to present their defenses to the Commission in the fonn of a Wells Submission. 

Thus, the decision by the Commission to initiate an action settled or litigated is made with 

the benefit of a comprehensive evidentiary record and a full and fair opportWlity to evaluate the 

risks of bringing the action. Moreover, SEC settlements are accompanied by a civil Complaint 

or an administrative Order Instituting Proceedings where the facts painstakingly gathered by thc 

SEC staff - facts that reveal both the wrongdoing and the wrongdoers are set forth in great 

detail. Through this process, we ensure that the decision to settle is an infonned one; that 

wrongdoers are held accountable through the public dissemination of infonnation about their 

misconduct; that, where appropriate, private litigants are able to utilize the SEC's detailed 

allegations to assist their own cases; and that the public sees that wrongdoers suffer penalties, 

bars, and other sanctions at a point in time when the misconduct is still fresh in their minds. 

The immediacy of sanctions offered by a settlement also sends a strong message of 

deterrence. Quick action by law enforcement communicates to other potential wrongdoers that 

those who violate the law face swift and certain sanctions. Conversely, the longer the passage of 

time between misconduct and sanctions, the more diluted the deterrence message becomes. 

Similarly, appropriate settlements provide investors with greater protection, since 

violators are more quickly sanetioned in a manner that decreases the likelihood that they will 

commit future violations. This minimizes the ehance that other investors will be victimized. 

This is particularly true where the settlement includes associational bars prohibiting violators 

2 
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75734.019

from continuing to work in the securities industry or from serving as an officer or director of a 

public company. 

Lastly. settlements return funds to harmed investors with increased spced and certainty. 

Even the strongest case can suffer unexpected outcomes in litigation, creating risk and 

uncertainty. The risks include not just a potential negative outcome at trial, but also the 

possibility that the SEC obtains lesser rcmedies after a successful trial than those being offered in 

a negotiated settlement. Settlement avoids these risks, and allows for a more expeditious 

distribution offunds to harmed investors, since the delay inherent in litigation is avoided. Such 

delays can be quite substantial, given the huge backlog of civil cases awaiting trial in federal 

courts. Indeed, the most recently available statistics indicate that the median time interval for 

disposition of civil cases across all U.S. federal district courts ranges from 19 months to 44 

months. 2 

We recognize that to achieve appropriate settlements satisfying all four of these goals, 

potential defendants need to know that we are prepared to litigate cases in the event an 

appropriate settlement cannot be obtained. For that reason, the Enforcement Division has 

improved its capacity to bring cases to trial, and stands ready ill1d willing to file our cases 

unsettled where settlement terms are unsatisfactory. For example, 75 percent of the SEC's 

financial crisis-related cases filed against individuals, including CEOs, CFOs and other highranking executives of companies, were filed as litigated actions. The fact that such a high 

percentage of cases are in litigation strongly suggests that some number of settlements were 

available but rejected by the SEC as inadequate. And when the Commission does litigate, our 

trial teams are largely successful. Our record of litigation victories we have prevailed against 

defendants in 84 percent of our trials since the beginning of fiscal year 2010 sends a strong 

message to defendants and those who may contemplate securities Jaw violations in the future. 

This approach seems to be working. A recent independent study by NERA Economic 

Consulting concluded that the median monetary value of the Commission's settlements in fiscal 

2011 was at or near its highest levels since the enactment of the Sarbanes-Oxley Act in 2002. 3 

All of the above mctrics more litigated cases, more trial victories and higher monetary 

settlements - support the conclusion that we settle a case when it makes sense to do so, and 

litigate when it does not. 

Many other federal agencies also resolve cases through negotiated settlements and 

consent judgments. 4 For example, in recent years, the EEOC resolved 80 percent of its cases and 

2 Statistics identifYing median time intervals from filing to disposition of civil cases by district and method of 

for the 12-month period ending March 31, 2011 available at 

3 Gulker, Buckberg and Overdahl, SEC Settlement Trend,: 20 11 Update, NERA Economic Consulting, January 23, 

2012, available at ht1p:llwww.securitieslitigationtrends.com/PUB SEC Trends 2Hl1 01 P.pdf. 

, Negotiated settlements submitted to a court for approval and entry of a judgment, such as those entered into by the 

SEC and other federal agencies, are called consent judgments or consent decrees. Consent judgments are unique 

forms of settlement because they possess "attributes both of contracts and of judicial decrees." United States v. fIT 

Continental Baking Co., 420 U.S. 223, 236 n.lO (1975). Fundamentally, consent judgments "embod[y] a 

3 
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75734.020

the FTC resolved 80 percent of its antitrust actions by consent judgment. 5 The "vast maJority" 

of civil antitrust cases brought by the Department of Justice are resolved in this fashion. 

The availability of settlements or consent judgments is crucial for agencies and courts. In 

1973, at a time whcn the SEC brought far fewer enforcement actions than it currently does, the 

Second Circuit Court of Appeals recognized that the Commission "can bring the large number of 

enforcement actions it does only because in all but a few cases consent decrees are entered." 7 

Courts also beneflt because consent judgments conserve judicial resources, which is a primary 

reason for the "strong federal policy favoring the approval and enforcement of consent decrees."s 

By "lessening docket congestion," consent decrees "maker] it possible for the judicial system to 

operate more efficiently and more fairly while affording plaintiffs an opportunity to obtain relief 

at an earlier time. ,,9 

"Neither-Admit-Nor-Deny" Settlements are Both Common and Sound Public Policy 

The SEC, like many other federal agencies without criminal prosecution authority, settles 

cases and obtains consent judgments on a "neither-admit-nor-deny" basis. This means that, 

while a defendant is not required to admit to the SEC's allegations of wrongdoing, it also is not 

pennitted to deny the factual allegations in the SEC's Complaint or Order Instituting 

Proceedings as part of a negotiated settlement or consent judgment. 

Consent judgments in which "none of the issues are actually litigated" because the 

defendants do not admit, or outright deny, the factual allegations or liability are the nonn.1O As 

one leading legal treatise states, the "central characteristic of a consent judgment is that the court 

has not actually resolved the substance of the issues presented."" 

compromise." United States v. Armour & Co., 402 U.S. 673, 681 (1971) that, like any settlement, reflects a 

"balance of advantages and disadvantages." SEC v. Clifion, 700 F.2d 744, 748 (D.C. Cir. 1983). 

5 U.S. EEOC, Office of the General Counsel Fiscal Year 2009 Annual Report, at 62 (2009); U.S. FTC, The FTC in 

2010, at 2 (2010). 

6 Acting Principal Deputy Assistant Attorney General 101m M. Nannes, Termination. Modification. and Enforcement 

of Antitrust Consent Decrees, 15 ANTITRUST 55, 55 (2000). 

7 SEC v. Everest Mgmt. Corp., 475 F.2d 1236, 1240 (2d Cir. 1973) (emphasis added). 

8 Wang, 944 F.2d at 85; Anita Foundations. Inc. v. ILGWU Nat 'I Retirement Fund, 902 F.2d 185, 190 (2d Cir. 1990) 

(settlements "represent compromise and conservation of judicial resources, two concepts highly regarded in 

American jurisprudence"). 

9 Evans v. Jeff D., 475 U.S. 717, 760 n.15 (1986). 

10 RESTATEMENT (SECOND) OF JUDGMENTS § 27 (1982). 

II 18A Wright and Miller, FEDERAL PRACTICE AND PROCEDURE § 4443, at 256-57 (2d ed. 2002). 

4 
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75734.021

The Supreme Court has recognized that defendants enteling into injunctive consent 

judgments "often admit to no violation of the law." 12 In describing one consent decree, which 

stated that nothing in the decree was "intended to constitute an admission of fault," the Supreme 

Court stated that it was "customary" that "the consent decree did not purport to adjudicate" thc 

plaintiffs claims. 13 Indeed, the Supreme Court has discussed consent judgments containing 

similar provisions without any suggestion that they are unfair, unreasonable, inadequate, or not 

in the public intcrest. 14 

Many federal agencies negotiate settlements in federal court and administrative 

proceedings containing "no admit" provisions. Several recent examples include: 

• A settlement between the CFTC and Goldman Sachs Clearing & Execution, L.P. 

announced on March 13,2012 where Goldman Sachs agreed to pay a $7 million fine 

for supervision failures and the settlement documents stated that "[wJithout admitting 

or denying any of the findings or conclusions herein, Goldman Sachs Execution and 

Clearing, L.P. consents to the entry of this Order ... ,,15 

• A settlement between the FDIC and certain directors and of1icers of Washington 

Mutual announced on December 15,2011 where the settlement documents provided 

that it "shall not be deemed to constitute an admission by Defendants offault, 

liability, or wrongdoing ... ,,16 

• A consent order imposed by the Federal Reserve against Morgan Stanley announced 

on April 3, 2012 to address a pattern of misconduct and negligence in residential 

mortgage loan servicing and foreclosure practices at its subsidiary, Saxon Mortgagcs 

Services, Inc. where the consent order states that "without this Order constituting an 

admission by [Morgan Stanley], Saxon, or their subsidiaries of any allegation made or 

implied by the Board of Governors in connection with this matter ... " 17 

I2 lTTContinental Baking, 420 U.S. at 236 n.l0. 

n Maher v. Gagne, 448 U.S. 122, 126 n.8 (1980). 

14 See, e.g., Swift & Co. v. United States, 276 U.S. 311 (1928) (refusing to vacate consent judgment in which 

defendant denied allegations of complaint); United States v. Armour & Co., 402 U.S. 673 (1971) (addressing same 

consent judgment); accord Arizona v. California, 530 U.S. 392, 414 (2000); Suter v. Artist M, 503 U.S. 347, 354 

n.6 (1992); Firefighters Local Na. 1784 v. Stotts, 467 U.S. 561, 565, 577 (1984); United States v. Atlantic R~fining 

Co., 360 U.S. 19,23 & n.3 (1959); United States v. Paramount Pictures, Inc., 334 U.S. 131, 141 n3 (1948). 

15 Available at 

16 Available at http;!!www.fdic.gov!news!news!press!201IlprI1192.html. 

17 Available at http;llwww.federalreserve.gov!newsevents/press/enforcementl20120403b.htm 

5 
79 


75734.022

In addition, while the SEC does not permit denials of wrongdoing by defendants in its 

settled enforcement actions, some federal agencies do pernlit such denials in the context of 

settlements. Recent examples include: 

• A civil settlement with Bank of America annonnced by the Department of Justice 

on December 21,2011 in which Bank of America agreed to pay $335 million in a 

fair-lending settlement concerning Countrywide's loan practices where the 

settlement documents provided that "the Defendants deny all ()f the allegations 

and claims of a pattern or practice of discrimination in violation of the FHA and 

ECOA as set forth in the United States' Complaint.,,18 

• A settlement with Facebook announced by the FTC on November 29, 2011 in 

which Facebook agreed to settle charges that it "deceived consumers by failing to 

keep privacy promises" where the settlement documents provide that 

"Respondent expressly denies the allegations set fortb in the complaint, except for 

the jurisdictional facts." 19 

Indeed, the SEC goes one step further and not only prohibits defendants from denying 

wrongdoing in a settlement, but has demanded a retraction or correction on those occasions when 

a defendant's post-settlement statements are tantamonnt to a denial. 20 

There is little dispute that if"neither-admit-nor-deny" settlements were eliminated, and 

cases could be resolved only if the defendant admitted the facts constituting the violation, or was 

found liable by a court or jury, there would be far fewer settlements, and much greater delay in 

resolving matters and bringing relief to harmed investofs. The reality is that many companies 

likely would refuse to settle cases if they were required to affirmatively admit unlawful conduct 

Of facts related to that conduct. This is because such admissions would not only expose them to 

additional lawsuits by private litigants seeking damages, but would also risk a "collateral 

estoppel" effect in such lawsuits. This means that a defendant could, as a result of the admission 

in the SEC settlement, be precluded from challenging liability in the private civil litigation. In 

addition, and most significantly, such an admission can help to establish elements of criminal 

liability, since many federal securities laws provide for both civil and criminal liability for the 

same violation. At a minimum, the risks of increased civil and criminal liability that flow from 

an admission in an SEC action are sufficiently real iliat defendants are highly unlikely to settle, if 

at all, until those risks have passed or are quantified and deemed acceptable. 

I' Available at http://www.justice.gov/ert/aboutlhce/documents/coun!IYwidesettle.pdf. 

19 Available at http://fte.gov/opa/201Iill/privacysettlement.shtm. 

20 For example, in April 2003, after participating with several Wall Street firms in an global settlement with the 

Commission and state regulators, Morgan Stanley, through its CEO, Phillip Purcell, downplayed the seriousness of 

the charges against it and attempted to characterize itself as less culpable than other settling firms. In response, SEC 

Chairman Donaldson sharply rebuked Purcell, reminding him that "the [Clomission would regard a violation [of the 

duty not to deny the Commission's findings] as seriously as a failure to comply with any other tenn of the 

settlement." Purcell then issued a letter expressing regret and stating that the firm would not deny the allegations. 

See Floyd Norris, Morgan Stanley Draws SEC's Ire, THE NEW YORK TIMES, May 2, 203, Section A., Col. 1, 

BusinesslFinancial Desk p. 1. 

6 
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75734.023

To be clear, the Commission has no sympathy for alleged securities law violators, or for 

the increased legal risks those companies or other defendants may face if required to admit 

wrongdoing as a condition of settlement. While some assert admissions may provide marginally 

increased accountability, the fact is that requiring admissions as a condition of settlement would 

likely result in longer delays before victims are compensated, dilution of the deterrent impact of 

sanctions imposed because of the passage of time, and the expenditure of significant SEC 

resources that could instead be spent stopping the next fraud. All of these are the very real costs 

of refusing (0 settle cases where we otherwise have obtained most or all of the sanctions and 

other remedies available to compensate and protect harmed members of the public. 

The Commission discussed these costs, as well as the other factors that the Commission 

considers when deciding whether to settle any particular case, as part of its filings in the 

Citigroup case, which is currcntly on appeal before the United States Court of Appeals for the 

Second Circuit. The Commission charged Citigroup with violating the Securities Act of 1933 

and simultaneously entered into a proposed consent judgment with Citigroup that resolved tl1ese 

charges. Through (he consent judgment, which contained "neither admit nor deny" language, the 

Commission obtained most of what it could have obtained after a successful trial, including 

injunctive relief and $285 million in disgorgement, interest, and penalties. The district court 

rejected the consent judgment because, in the district court's words, it was not based on "facts, 

established by admissions or by trials." 

The Commission appealed to the Second Circuit. To avoid wasting resources on a (rial 

that would not occur if the district court's ruling were reversed, the Commission sought to stay 

tbe district court proceedings pending appeal. The Second Circuit granted tbe Commission's 

request on March 15,2012. In its stay order, wbich is not dispositive, the Second Circuit held 

that the Commission had "made a strong showing of likelihood of success" on the merits, stating 

that it knew "of no precedent" supporting the proposition that admissions are a precondition for 

tbe approval of a consent judgment and finding it "doubtful" that the district court properly 

deferred to the Commission's judgment tbat tbe settlement was in tbe public interest. 

The Second Circuit's preliminary decision also acknowledged the "numerous factors" 

tbat inform the Commission's exercise of this judgment, explaining tbat these factors "include 

the value of the pmticular proposed compromise, the perceived likelibood of obtaining a still 

better settlement, the prospects of coming out better, or worse, after a full trial, and the resources 

that would need to be expended in the attempt." The Commissiou's decision to settle also 

features "an assessment of bow the public interest is best served," and the Second Circuit saw 

"no basis to doubt that tbe SEC's decision was in the public interest." Indeed, the Commission 

takes seriously its responsibility to assess wbether a proposed settlement serves the public 

interest and in our view we exercise this authority with due consideration. 

The reasons described above are among the factors weighed by the Commission when 

resolving cases though negotiated settlements and consent judgments on a "neither-admit-uordeny" basis. And these reasons are among the reasons why federal courts across the country 

bave time and again approved settlements by federal agencies containing "neither-admit-nordeny" terms, or terms providing for the outright denial of allegations. In enforcing tbe 

7 
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75734.024

seeurities,21 antitrust,22 environmental,13 consumer protection,24 public health,25 and civil rights 

laws,26 federal courts have entered consent judgments in actions resolved by federal agencies 

21 Nearly all of the largest injunctive consent judgments proposed by the Commission and approved in federal eourt 

in 2010 and 2011 contain "neither-admit-nor-deny" clauses. See, e.g, SEC v. Alexander (E.D.N.Y. Nov. 30,2010) 

($54 million) http://sec,gov/litigalion/litreleases/2010/Ir21753,htm; SEC v. JP Morgan Secs, LLC, (D,N,J, Jul. 7, 

20 II) ($51 million) http://sec,gov/litigation/litreleases/2011lIr2203 Lhtm; SBC v, Johnson & Johnson, (D,D.c' Apr. 

13,2011) ($49 million) http://sec,govllitigationilitreleases/20Illlr21922.htm; SBC v, UBS Fin. Servs" (D,NJ. May 

6, 20 II) ($47 million) l1Jtp:l~£,g,QYl!i!igillion!lltreleases/20 1I/Ir21956,/11m; SEC v, Alcatel-Lucent, SA, (S, D. Fla, 

Dec, 30, 2010) ($45 million) http://sec,gov/litigationilitreleasesl20101Ir21795,htm; SBC v, EN!, SpA, (S,D, Tex, 

1u!' 20, 2010) ($125 million) http://sec,gov/litigation/litreleases/20101Ir21588,htm; SBC v, Technip, (S.D. Tex, JuL 

9,2010) ($98 million) bttp:llsec,gov/litigation/litreleases/2010/Ir21578,htm; SEC v, Citigroup Inc., (D,D,C, Oct 8, 

2010) ($75 million) http://sec,gov/litigation/litreleases/2010/Ir21605.htm; SBCv, ABS Ltd, (D,D,C, Oct 12,2010) 

($39 million) http://sec,govllitigationllitreleasesI2010/lr21673.htm; SBC v. Diebold. Inc., (D,D,c'lun, 14,2010) 

($25 million) http://sec,gov/litigation/litreleases/20JOllr21543,htm;SBCv,GeneraIEiee,Co,, No, (DD.c' Jui. 30, 

2010) ($23 million) http://sec,gov/litigation/litreleases/2010/Ir21602,htm; SEC v, Pequot Capital Mgmt" (D, Conn, 

Jun, 2, 2010) ($23 million) http://sec.gov/litigation/litreleases!2010!lr21540,htm, 

22 Antitrust consent decrees in which a defendant does not admit or outright denies liability or the allegations in the 

complaint have restructnred entire industries, significantly alfecting the economy, RICHARD A, EPSTEIN, ANTITRUST 

CONSENT DECREES IN THEORY AND PRACTICE I (2007), In United States v, Microsoft, the Department of Justice 

used the "not uncommon technique" of entering into a consent decree to resolve allegations that Microsoft 

unlawfully monopolized the market for operating systems for IBM-compatible PCs, 56 F.3d 1448, 1451-52 (D,C, 

Cif. 1995). The district court rejected the proposed consent decree and criticized the absence of an admission, The 

D,C, Circuit reversed, holding that the judge'S "criticism of Microsoft for declining to admit that the practices 

charged in the complaint aetually violated the antitrust laws" was "unjustified," Id In addition, "no admit" clauses 

were central to consent decrees that fundamentally altered the meatpacking industry, Swift, 276 U,S, at 320; that 

dismantled AT&T, one of the world's largest corporations at the time, United Siaies v, AT&T, 552 F, Supp, 131, 143 

(D,D,C, 1982) (decree "would not constitute any evidence against, an admission by, or an estoppel against AT &T"), 

a/I'd sub nom, Marylandv, United States, 460 U.S, 1001 (1983); that forced IBM to license its patents and spin off 

its service business, Uniled States v, IBM Corp" No. 72-344 (S.D,N.Y, Jan, 25, I 956)(consenting to judgment 

"without any admission by either party with respect to any such issue"); and that resolved charges of price fixing 

asserted against six American airlines, United States v, Airline Tariff Publ 'g Co" 1994 U.s. Dis!. Lexis 11904 

(D,D,C, Aug, 10, 1994) (consent judgment would "not be evidence against or an admission by any party with 

respect to any issue offact or law"), 

See, e,g, Uniled States v, American Bieclrie Power Serv, Corp., No. 99-1250 (S.D, Ohio Dec, 10,2007) (In this 

largest consent judgment in EPA history (measnred by the cost ofthe injunctive reliet), the defendant, which denied 

that it violated the Clean Air Act or was liable "for civil penalties or injunctive relief," agreed to spend 

approximately $4,6 billion to cut emissions and to pay a $15 million penalty); Uniled States v, BP Prod" North 

America Inc" No, 4:10-cv-3569 (S,D. Tex, Dec. 30, 2010)(BP resolved charges that it violated the Clear Air Act in 

connection with the Texas City refinelY explosion, which killed 15 people and injnred 170, by entering into a 

consent judgment that ordered it to undertake an array of remedial measures and pay one of the largest civil 

penalties ever assessed for Clean Air Act violations at an individual facility, BP consented "without the 

adjudication or admission of any issue of fact or law" and did "not admit any liability to the United States arising out 

of the allegations in the complaint"); Uniled Slates v, Massey Energy Co" No, 07-2999 (SD. W,Va. Apr. 9,2008) 

(defendants, who did "not admit any liability," agreed to undertake various remedial measures and pay a $20 million 

penalty, one of the largest ever penalties for wastewater discharge violations); United Stales v, Caterpillar, Inc" No, 

98-02544 (D.D,c'lu!. I, 1999), cited by United States v, Caterpillar, Inc., 2002 U,S, Dis!. Lexis 468, at *7 (D,D,C, 

Jan, 17,2002) (a group of defendants, which denied violating the Clean Air Act, agreed to spend nearly $1 billion 

dollars in remediation and pay a $83.4 million penalty); Unifed Slates v, Koch Indus" No, H-95-1118 (S,I), Tex, 

Mar, 7, 2000) (defendant, which did "not admit to any liability," resolved claims related to over 300 oil spills by 

agreeing to clean up the spills and pay a $30 million penalty, one of the largest penalties ever imposed upon a single 

company). 

8 
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75734.025

through negotiated settlements that may require the payment of significant penalties, imposition 

of substantial injunctive relief: and a prohibition against future violations of the law, among other 

things, but in which a defendant does not admit, or outright denies, factual allegations. 

Recent Modifications to "Neither-Admit-Nor-Denv" Resolutions are Narrow in Scope 

As noted, federal agencies commonly nse, and federal courts commonly approve, 

settlements of civil enforcement actions on terms that do not require admissions, all to sound 

public policy effect. In light in the special situation wherc an SEC civil action may also involve 

a parallel criminal action, senior officials in the Division of Enforcement recently undertook a 

review of the "neither-admit-nor-deny" settlement policy. While reaffimling the policy more 

generally, as a result of this review, the Division, after consulting with the Commission, 

moditied its policy to eliminate "neither-admit-nor-deny" language that could be construed as 

inconsistent with admissions or findings made in a parallel criminal proceeding.27 In other 

words, it seemed unwarranted for there to be a "neither-admit-nor-deny" provision in those cases 

where a defendant had already admitted to, or been criminally convicted of: conduct that formed 

the basis of a parallel civil enforcement proceeding. 

As a result of this change, the SEC will no longer include "neither-admit-nor-deny" 

language in those settlements where there is a parallel criminal conviction (by plea or verdict) 

involving factual or legal elaims that overlap to some degree with the factual or legal claims set 

out in the Commission's Complaint or Order Instituting Proceedings. This change will only 

affect a minority of cases, and does not afIect our traditional "neither-admit-nor-deny" approach 

24 FTCv. Countrywide Home Loans, No. 10-4193 (C.D. Cal. Jun. 15.2010) (Countrywide Home Loans, "without 

admitting any of the allegations" that it overcharged 500,000 borrowers, entered into a consent judgment in which it 

agreed to be enjoined from engaging in certain conduct, to change its lending practices, and to pay $108 million); 

Uniled States v. Choicepoint, Inc., No.1 :06-cv-0 198 (N.D. Ga. Feb. 15,2006) (ChoicePoint, a data broker accused 

of unlawfully disclosing the records of nearly 200,000 consumers, agreed to injunctive relicf and payment of the 

largest-ever civil penalty imposed by the FTC as part of a consent judgment that stated, "Defendant makes no 

admissions to, and denies, the allegations in the complaint."). 

25 Consent decrees between the FDA and biomedical finns accused of violating the Food, Drug, and Cosmetic Act 

contain similar disclaimers of admissions and liability, In one consent judgment, Abbott Laboratories agreed to pay 

a $100 million fine and to cease manufacturing over 50 diagnostic products "without admitting the allegations of the 

Complaint." United States v. Abbott Laboratories, No. 99 C 7135 (N.D. Ill. Nov. 2, 1999). Schering·Plough paid a 

$500 million fine-the largest at the time-and halted production of nearly 75 drugs "without admitting or denying 

the allegations ofthe Complaint and disclaiming any liability in connection herewith," Uniled Slates v. ScheringPlough Corp" No. C 02-2397 (JAP) (D.N.J. May 20, 2002). 

26 The approval of consent judgments that order significant injunctive relief without admissions by defendants----{)r 

with outright denials by defendants-also occurs with great frequency in the civil rights context. As just one 

example among many, slate and municipal law enforcement agencies have altered lheir policing practices as a result 

of approved consent judgments in which the law enforcement agencies denied allegations of unconstitutional 

conduct by police officers. E.g., United States v. City olLos Angeles, No. 00-11769 GF (C.D. Cal. Jun. 15,2001) 

("defendants deny the allegations in the complaint"); Uniled Slates v. New Jersey, No. 99-5970 (D.N.J. Dec. 30, 

1999) (the State "denies" the allegations), 

27 January 7. 2012 statement by Robert Khuzami on this policy change available at 

http://www.sec.gov/news/speech/2012/spchOI0712rsk.htm 

9 
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75734.026

in settlements that do not involve criminal convictions or admissions of criminal law 

violations. 28 

Conclusion 

In sum, settling enforcement actions in appropriate circumstances allows the 

Commission to advance its investor protection mandate effectively and efficiently. We agree to 

settlements when the terms reflect what we reasonably believe we could obtain if we litigate 

through trial without the risk of delay and uncertainty that comes with litigation. Equally 

important, this settlement approach provides public accountability closer in time to securities 

laws violations with a detailed SEC Complaint or Order outlining the facts developed through a 

comprehensive investigation and identifying the wrongdoers by name. Settlements result in the 

prompt payment of disgorgement and penalties (which can bc returned to injured investors), and 

the timely imposition of industry bars or other appropriate relief on wrongdoers, which protects 

investors and sends a strong deterrent message to the public. Our approach also preserves 

resources that we can use to stop other frauds and protect other victims. This approach, like the 

approach of other federal agencies, may require some measure of reasonable compromise, but is 

calibrated to redress wrongs committed by securities law violators, preclude wrongdoers from 

working with the investing public in the future, refonn company practices, deter similar 

misconduct by others, and return funds directly to hanned investors in a timely manner. 

Thank you for the opportunity to he here today. I am happy to answer any questions. 

28 A respondent in an SEC action recently admitted limited fdctual findings that were admitted for the purpose of a 

state civil enforcement consent order, while otherwise neither admitting nor denying the SEC's findings. See 

http://www.sec.gov/news/press/20l2/20l2-61.htm (press release describing SEC action against Goldman Sachs & 

Co charging that Goldman lacked adequate policies and procedures to address the risks posed by research "huddles" 

with a parallel action by the Massachusetts Securities Division). 

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EMBARGOED UNTIL DELIVERY 

STATEMENT OF 

RICHARD J. OSTERMAN, Jr. 

DEPUTY GENERAL COUNSEL 

FEDERAL DEPOSIT INSURANCE CORPORATION 

on 

EXAMINING THE SETTLEMENT PRACTICES 

OF U.S. FINANCIAL REGULATORS 

before the 

COMMITTEE ON FINANCIAL SERVICES 

May 17, 2012 

2128 Rayburn House Office Building 
85 


75734.028

Chairman Bachus, Ranking Mcmber Frank, and members of the Committee, 

thank you for the opportunity to testifY on behalf of the Federal Deposit Insurance 

Corporation (FDIC) about our settlement practiccs. In my testimony, I will discuss the 

FDIC's approach to enforcement and the tools we have available, as well as the public 

interest benefits derived from our enforcement policies and practices. 

The core mission ofthe FDIC is to maintain stability and public confidence in the 

nation's banking system. As recent events havc reminded ns, the financial condition of 

banks influences the economy in direct, substantial and often immediate ways and, 

mindful of this, the FDIC is robust in its supervision of insured depository institutions 

and in correcting unsafe and unsound practices, violations oflaw, and breaches of 

fiduciary duty. 

Among banking regulators, the combination of the FDIC's responsibilities as 

insurer, supervisor, and receiver is unique. As supervisor, the FDIC is the primary 

federal regulator for state banks that are not members of the Federal Reserve System, as 

well as state chartered savings associations. Presently, the FDIC directly supervises 

4,115 insured state nonmember banks and 444 insured state-chartered savings 

associations, and by statute, in its role as insurer, has back-up enforcement authority for 

the rest of the over 7,000 FDIC-insured depository institutions. In addition, the FDIC 

acts as receiver for all failed insured depository institutions and, under the Dodd-Frank 

Act, has substantial responsibilities for large complex financial companies that may pose 

a systemic risk to the financial system. 

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The FDIC, like the other federal banking agencies has been given strong 

enforcement powers under section 8 of the Federal Deposit Insurance Act (FDI Act). 

These powers are used by the FDIC when corrective action is needed to protect 

consumers, the banking industry, and the financial institution itselftl·om harm. 

The FDIC's highly-trained examiner corps regularly examines FDIC-supervised 

depository institutions to ensure they arc operated in a safe and sound manner in 

compliance with state and federal banking laws and regulations, including all consumer 

protection laws. When FDIC examiners find violations of law, breaches of fiduciary 

duty, or unsafe and unsound practices, including mismanagement and insider abuses, the 

FDIC requires corrective action, notably through removal and prohibition orders, the 

assessment of civil money penalties or cease-and-desist orders which may also include 

restitution. 

From 2007 through 2011, the FDIC issued approximately 1,000 Cease-and-Desist 

Orders and 377 Removal and/or Prohibition Orders, as well as 753 Civil Money 

Penalties. These individual enforcement actions were based on a wide range of harm or 

risks caused to insured depository institutions and consumers. 

Enforcement Process 

Many of the FDIC's enforcement orders are issued based upon a stipulation 

between the FDIC and the respondent in which the respondent neither "admits nor 

2 
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denies" the allegations. Such consent orders are issued only after a thorough evaluation 

of the pertinent evidence to ensure that the FDIC's case against the respondent meets all 

of the statutory factors required to initiate an action and sustain a prima facie case. 

Consideration is given, among other things, to the particular facts and evidence in the 

case, the likelihood of success should the case proceed to litigation, the best way to meet 

our objectives and obtain the recommended relief, as well as how long it would take to 

get relief if the case did not settle. 

The timefranle from obtaining the stipulation to issuance of an order is relatively 

quick, and the resulting final agency order is usually effective and enforceable 

immediately. Some stipulated orders, particularly eease-and-desist orders that seek quick 

correction of bank practices, are issued pursuant to delegated authority by appropriate 

managers in the FDIC's regional and area offices. Those involving restitution, civil 

money penalties, and removal and prohibition actions against individuals are carefully 

reviewed for both legal sufficiency and nationwide consistency, and then issued by the 

Washington office pursuant to delegated authority. 

Should a respondent choose not to stipulate -- in other words, agree -- to an 

action, the FDIC prepares a Notice of Charges to initiate a case. While Notices of 

Charges seeking cease-and-desist orders are normally issued by the FDIC's Regional 

Offices under delegated authority, Notices to remove an individual from banking, require 

restitution, or impose civil money penalties are reviewed by the FDIC's Case Review 

Committee! before being issued. Once a case is filed, the procedures are governed by tile 

I The Case Review Committee is a standing committee of the FDIC Board, and serves to 

review in advance and approve the initiation under delegated authority of certain 

3 
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FDIC's formal Rules of Practice and Procedure. Specifically, a hearing is held before an 

administrative law judge (AU) and the AU's recommended decision is reviewed by the 

FDIC's Board of Directors which then issues a final decision and order. Stipulated final 

orders and those entered after a hearing are both published, which provides notice to the 

industry and to the public of a bank's practices and individuals' misconduct and its 

consequences. 

Removal and Prohibition and Civil Money Penalty Orders 

As noted earlier in the testimony, one of the corrective actions for which Congress 

granted the FDIC authority is the removal and prohibition from the business of banking, 

found in section 8(e) of the FDI Act. The FDIC has issued hundreds of removal and 

prohibition orders against institution-affiliated parties who were determined to have 

dishonestly or recklessly engaged in violations oflaw, unsafe or unsound practices or 

breaches of fiduciary duty and caused losses to the institution they were meant to serve or 

benefited themselves at the institution's expense. An 8(e) order prohibits the individual 

from participation in any marmer in banking under a lifetime, industry-wide ban. This 

powerful tool serves to address past conduct whilc also protecting the industry as a 

whole. 

Appropriately, the statutory requirements to bring a removal or prohibition action 

are quite stringent. The FDIC must determine that the respondent has engaged in 

violations oflaw, unsafe or unsound practices or breaches of fiduciary duty that resulted 

enforcement actions. 

4 
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in a benefit to them or a loss to the institution or prejudice to depositors. In addition, the 

FDIC must determine that the conduct involved personal dishonesty or willful or 

continuing disregard for the safety and soundncss of the institution. 

Although most FDIC removal and prohibition action orders are issued on consent, 

the orders specifically state that a determination has been made by the agency that a 

respondent's actions meet each of the foregoing statutory elements. Thus, while a 

respondent who stipulates to an order does not technically admit the conduct, it is clear to 

the public and the industry that the FDIC has dctermined it can make a primajacie case 

that the respondent has engaged in egregious actions that the FDIC believes warrant the 

imposition of a very severe and immediate remedy-a lifetime bar from banking. 

In the context of removal and prohibition, stipulated orders serve the public 

interest in several ways. Our experience has been that the time between initiation of the 

case and the final decision effecting a remedy is often two to three years, given the time 

frames for response, discovery and litigation of a contested case before an ALJ, including 

review of the AU's recommended decision by the FDIC's Board of Directors and 

issuance of a tinal decision and order. During this time, respondents still employed in the 

banking industry may remain in their positions with the possibility of committing more 

harm. In contrast, a person subject to a stipulated removal and prohibition order is 

precluded from participating in banking immediately upon the order's issuance. 

The FDIC believes that requiring a respondent to specifically admit the alleged 

conduct in a settlement may have the unintended consequence of frustrating its goals. 

Many respondents would be hesitant to admit the conduct, and respondents' attorneys 

5 
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75734.033

cannot reasonably support settlements that require admissions if their clients are 

potentially exposed to additional civil liability, or criminal action. Thus requiring 

admission of liability is likely to reduce the number of settlements, and to push the parties 

in remaining cases toward settling based on admission of the absolute minimum 

necessary to sustain a case. Furthenllore, insisting on an admission ofliability is likely to 

result in protracted negotiations regarding settlement, thus precluding a principal benefit 

of settlement--obtaining prompt relief. Additionally, given finite agency resources, if 

there are fewer settlements it would mean that, in total, we would be able to pursue fewer 

cases overall. 

Stipulated civil money penalty orders often accompany removal and prohibition 

actions, as a means of further detelTence. The FDIC uses its enforcement authority to 

assess civil money penalties against institutions and institution-affiliated parties when we 

have found violations oflaw, unsafe or unsound practices or breaches of fiduciary duty, 

with a progressive increase in penalty amount as the egregiousness ofthe conduct 

increases. In considering the civil money penalty amount, the FDIC must take into 

account statutorily-mandated factors, including the size of the financial resources and 

good faith of the respondent, the gravity of the violation, and the history of previous 

violations. Civil money penalties collected are paid to the U.S. Treasury. 

Cease-and-Desist Orders 

Cease and desist orders are used by the FDIC as an enforcement tool for 

cOlTective action in several significant contexts. One of those contexts is when banks are 

in a troubled condition. As noted, since 2007, the FDIC has issued approximately 1,000 

6 
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75734.034

cease-and-desist orders to halt and correct violations of law and unsafe or unsound 

banking practices and to strengthen the capital position of the institutions it supervises, 

and thus to achieve better health of the industry overall. Most of these are orders against 

institutions that are in troubled condition, with many of them posing an elevated risk of 

failure if their problems are not corrected. Such orders set forth a detailed corrective 

plan, a virtual "road map" for the institution to follow to correct practices and to raise 

capital to return the institution to a safe and sound condition. While the institution 

neither admits nor denies the unsafe or unsound practices or violations that are the subject 

of the cease and desist order, the order does recite that the FDIC has reason to believe the 

requisite statutory elements2 are present, and each corrective action that is ordered is 

based upon a specific examination finding. 

Prompt action in such cases is essential to avoid the loss to the insurance fund, 

and the cost to communities and the economic system as a whole, that arise when a bank 

fails. Without the ability to settle a case quickly, the length of time to obtain relief in a 

contested case could, in many cases, render the relief ineffective. Additionally, the FDIC 

has the power through cease-and-desist actions to order affirmative relief, including 

ordering an insured depository institution or institution-affiliated party who was unjustly 

enriched to make restitution. 

2 Cease-and-desist actions require that the FDIC have a reason to believe that an 

institution or institution-affiliated party is engaging or has engaged, or is about to engage, 

in unsafe or unsound practices; or is violating, has violated or is about to violate law, rule 

or regulation, or any condition imposed in writing by the agency in couneetion with any 

action on an application, notice or other request, or any written agreement entered into 

with the agency. For restitution, the FDIC must prove the party was unjustly enriched in 

connection with such violation or practice or acted in reckless disregard of the law, 

applicable regulations or prior order of the agency. 

7 
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75734.035

The power to seek restitution can be particularly important when an institution or 

institution-affiliatcd party violates consumer protection laws and regulations, such as 

Section 5 of the Federal Trade Commission Act (prohibiting unfair or deceptive acts and 

practices), the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement 

Procednres Act, among others. Where material violations of these consumer protection 

provisions are identified, FDIC seeks remedies that typically include cease-and-desist 

orders as well as restitution and civil money penalties. Depending on the severity of the 

violation and the extent of consumer harm, the amount of restitution sought for 

consumers can be substantiaL In these consumer cases, orders for restitution are vehicles 

for consumer redress. Therefore, the FDIC has that additional interest in issuing such 

orders as quickly as possible. 

Additionally, when violations involve fair lending laws, such as the Equal Credit 

Opportunity Act and the Fair Housing Act, the FDIC first determines whether the 

institution or institution-affiliated party engaged in a "pattern or practice" violation. If 

so, the FDIC will refer the case to the United States Department of Justice. If the 

violation is not a pattern or practice violation, or if the Department of Justice returns a 

case to the FDIC, the FDIC can pursue the enforcement remedies outlined above, 

assuming the statutory elements are met. 

Professional Liability Cases 

The FDIC also brings professional liability cases on behalf of the receiver of 

banks that have been closed by federal or state regulators. These cases serve a vety 

different purpose than enforcement cases brought by the FDIC and the other banking 

8 
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75734.036

agencies. Professional liability cases are civil tort and contract actions that seek recovery 

for damages caused to failed banks by their of1icers and directors, and by professionals 

working for the failed banks such as lawyers and accountants. Recoveries are used to pay 

claims against the receivership estate in accordance with statutory priorities set out by 

Congress, which provide first fur payment of the receiver's administrative expenses, 

second for any deposit liability and third for general creditor claims. 

The FDIC, consistent with its responsibilities as receiver, uses the most costeffective approach available to obtain the maximum monetary relief in professional 

liability cases, whcthcr this proves to be litigation or settlement. The FDIC has litigated 

certain cases for many years, including through appeal, when it has determined that it is 

cost-effective to do so. But most professional liability cases-like most civil litigation by 

other parties-settle, and the money is paid to the FDIC without a concession by the 

defendant regarding culpability. 

SEC v. Citigroup Global Markets 

The FDIC is aware of both the District Court and the Second Circuit decisions in 

the Us. Securities & Exchange Commission v. Citigroup Global Markets, Inc. case. The 

FDIC is not a party to the case, docs not have all of the facts, and thus is not in a position 

to express an opinion regarding the merits of the decisions. In response to the 

Committee's request for comment on the matter, we would note that the case is still 

before the Second Circuit, and that the Circuit has stayed the proceedings below, pending 

a decision on appeal regarding the order rejecting the settlement. 

9 
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75734.037

By statute, FDIC administrative enforcement actions, if not settled, proceed to 

hearing before an administrative law judge, and ultimately to final decision and order by 

the FDIC's Board of Directors, rather than trial in district court. As a consequence, we 

are very unlikely to be in the same position the SEC is in the Cifigroup case. As 

indicated elsewhere in our testimony, it has been our experience that we are better able to 

accomplish the purposes of our statute by agreeing to 'neither admit nor deny' language 

in our settlements, which ultimately results in our imposing regulatory consequences on 

respondent's actions without the delays, resource costs, and litigation risks that would be 

involved if we insisted on admissions of liability as a condition to accepting a settlement. 

Conclusion 

In conclusion, we believe that the FDIC's process accomplishes its statutory 

responsibilities and purpose, while ensuring that the actions it takes serve the public 

interest and are prompt, effective and cost-efficient. 

10 
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75734.038

Testimony of Richard W. Painter 

Before the United States House of Representatives Committee on ,Financial Services 

10:00 AM Thursday May 17,2012 

Hearing on Examining the Settlement Practices of U.S. Financial Regulators 

I have worked in private practice in New York and Connecticut for five years and taught 

securities law for seventeen years. For two and half years I served as the chief ethics 

lawyer for the White House under President Bush. I am familiar with the S.E.C. 

enforcemcnt regime and private litigation that often grows out of S.E.C. enforcement 

actions. I have testified several times before the House and Senate on class action securities 

litigation and other aspects of federal securities law. 

I agree with the Second Circuit's opinion in SEC v. Citigroup Global Markets Inc. 1 The 

S.E.c. needs discretion to decide how limited enforcement resources should be used in a 

way that maximizes investor protection. Federal courts should not define the way the 

S.E.C. litigates and settles cases. Congress also should resist the temptation to 

micromanage S.E.C. decision making in specific cases or even in broad categories of cases. 2 

Specific areas of concern include the following: 

1 After investigating Citigroup's marketing of collateralized debt obligations, tbe S.E.c. sued 

Citigroup in the Southern District of New York for negligent misrepresentation. The S.E.C. and 

Citigroup then proposed a consent judgment under which Citigroup would pay $285 million to 

compensate investors, be eujoined from violating the securities laws, and establish procedures to 

prevent violations. Citigroup, however, did not admit auy liability. The district court rejected this 

settlement as "neither reasonable, nor fair, nor adequate, nor in the public interest" and criticized 

the S.E.C.'s policy of "allowiug defendants to enter into consent judgments without admitting or 

denying the underlying allegations." Tbe district court ordered the case to go to trial. Upon appeal 

by both parties, the Second Circuit grauted a stay of this order until a separate panel of the Second 

Circuit could decide the merits. The Secoud Circuit found that Citigroup and the S.E.C. were 

likely to prevail and observed that "the scope of a court's authority to second-guess an agency's 

discretiouary and policy-based decisiou to settle is at best minimal." 

2 Congressional policy determinations, if too rigid, can prevent the S.E.C. from responding to 

rapidly changing, and even dangerons, market conditions. For example in 1999 Congress provided 

that security based swap agreements caunot be regulated as securities. See e.g. 1933 Act Section 2A 

(providing in part that "The Commission is prohibited from-A. promulgating, interpreting, or 

enforcing rules; or B. issuing orders of general applicability; under this title iu a manner that 

imposes or specifies reporting or recordkeeping requirements, procedures, or standards as 

prophylactic measures against fraud, manipulation, or iusider trading with respect to any sccuritybased swap agreement .... "). The debacle of 2008 showed that this policy decision may have been 

unwise, but regulators could do relatively little about it until Congress reversed course aud 

regulated security based swaps in the Dodd-Frank Act of 201 O. 

1 
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75734.039

First, the S.E.C. has a limited budget and often must decide betwecn competing priorities 

in both its investigations and enforcement actions. The S.E.C. cannot be everywhere all of 

the time. S.E.C. resources are sometimes better spent investigating potential wrongdoing 

than on litigating over wrongdoing that has already been investigated and exposed. At 

other times the S.E.C. should follow through with aggressive litigation, but only up to a 

point where alleged wrongdoers agree to compensate investors for losses and to take steps 

that prevent future wrongdoing. Making alleged wrongdoers "admit" they violated the law 

need not be part of such a settlement. If requiring such an admission discourages 

settlement, the S.E.C. will be forced to litigate cases it would rather not litigate, and often 

against defendants with far greater resources for Iitigatiou. 

Second, large monetary settlements - such as the $285 million in the Citigroup case - make 

it clear to most observers that defendants did something wrong. The settling defendants at 

a minimum are guilty of careless business practices, most likely tainted with elements of 

"sharp dealing." The financial services industry is driven by business reputation, and 

monetary settlements, coupled with consent decrees prohibiting future violations, send a 

clear message that conduct was wrong. An admission to violating a specific law is not 

needed to get the point across to the public and to other industry participants. 

Third, because of the way the securities laws are written and interpreted by the courts, 

legal liability may be an open question, even whcre defendants violatcd the spirit of the law. 

For example, it may not be clear whether a sale of securities took place inside or outside the 

United States, even if it is clear that the transaction was fraudulent. If the securities 

transaction took placc outside the United States, the federal securities laws do not apply.3 

Rather than litigate over the location of the transaction, and thus over whether United 

States securities laws were violated or the laws of some other country were violated instead, 

both the S.E.C. and the alleged wrongdoer may prefer an injunction against future 

violations coupled with compensation of investors and/or a monetary penalty. 

Another area of ambiguity is the difficulty in some cases of proving a defendant's intent or 

recklessness, as opposed to mere negligence, which is a critical issue in securities fraud 

claims under Section lO(b) of the Exchange Act.4 Rather than litigate over whether the 

3 See Morrison v. National Anstralia Bank, 130 S. Ct. 2869 (2010). Section 929P of the Dodd-Frank 

Act gives federal courts jnrisdiction over S.E.C. and Department of Justice enforcement actions in 

connection with some securities transactions taking place outside the United States if the fraudulent 

conduct took place inside the United States. 

4 Misrepresentation claims under Section 17(a) of the 1933 Secnrities Act do not require a showing 

of the defendant's intent or recklessness, but claims under Section 1 O(b) of the 1934 Securities 

Exchange Act do require a showing of intent or recklessness. Section 17 is available to the S.E.C. in 

cases involving misrepresentation in the offer or sale of securities, but not for cases involving the 

defendant's misrepresentation in a pnrchase of securities, including insider trading. In these cases 

the S.E.C. often sues under Section 10(b) and must establish the defendant's scienter. 

2 
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75734.040

defendant was intentional, reckless or negligent in a Section IO(b) case, both the S.E.c. and 

the defendant may choose to settle on a consent decree, payment of a monetary penalty and 

no admission or denial of an actual violation. 

Yes more areas of ambiguity include whether a particular financial instrument falls under 

the statutory definition of a "security" and whether fraudulent conduct was "in connection 

with" a securities transaction within the meaning of the statute. In each factually or 

legally ambiguous case, the S.E.C. and the defendant must weigh the risks of litigating and 

losing. For the S.E.C. the risks of losing a case include the loss of a monetary settlement for 

defrauded investors and the loss of an opportunity to enjoin future violations and to 

require specific steps that prevent violations. Another even greater risk is that a judicial 

opinion could respond to confusing facts with overly broad language that undermines the 

S.E.C.'s interpretation of the law in other cases. Confusing fact patterns often make for 

bad case law. The S.E.c. thus has good reason to settle such a case rather than litigate and 

lose not only that particular case but an entire category of related cases that could have 

been won later. 

In sum, for the S.E.C. to litigate and lose a case with potential weaknesses can wreak havoc 

on the enforcement regime. The outcome may encourage wrongdoing by others who will 

see the S.E.c.'s loss as an opportunity to violate the same or related provisions of law with 

apparent impunity. 

Finally, the expansive private plaintiffs' litigation regime in the United States, particularly 

the potential for class action lawsuits, makes it extremely unlikely that a defendant that has 

any decent legal defense will agree to settle a S.E.C. enforcement action when the 

settlement requires an admission of wrongdoing. Private plaintiffs' lawyers ride on the 

coattails of enforcement actions, seeking monetary damages that often exceed by many 

times the monetary payments specified in S.E.C. consent decrees. Admitting to a violation 

particularly violation of a statutory provision for which courts have implied a private 

right of action - is an invitation to private suits. 5 Corporate defendants will instead take 

their chances litigating with the S.E.C., hoping that their enormous litigation resources will 

beat back the S.E.c. and also deter private plaintiffs. The S.E.C. rather than achieving a 

partial victory (inclnding a monetary penalty and injunction) will thus be pulled into, and 

be forced to bear the brunt of, the defendant's battle with the plaintiff.~' bar. In cases 

5 Even an admission to violation of a provision for which there is no implied private right of action 

can be an invitation to lawsnits. For example, a defendant who admits to a violation of Section 

17(a) of the Securities Act has for practical purposes admitted to most of the elemeuts to a violation 

of Section 1 O(b) of the Exchange Act, with the exception of the requisite state of miud under Section 

10(b). If a defendant has admitted to a violation of Section 17(a), a plaintiffs' lawyer thus is more 

likely to sue than if there is no snch admission. The defendant knows this and will refuse to settle 

with the S.E.C. if admission of a Section 17 violation is required. 

3 
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where the S.E.C. wins, plaintiffs' lawyers will take advantage of the S.E.C.'s expenditure of 

taxpayer funds for proving key elements of the violation. In cases where the S.E.C. loses, 

and cases which the S.E.C. may not bring at all because it knows there is no realistic chance 

of settlement, investors lose if defendants get away with conduct that still violates the 

securities laws. 

In addition to these issues that arise in the Citigroup litigation I will point out two other 

issues to this Committee. 

First, consent decrees - even if they do not involve admission of wrongdoing - often mean 

disqualification of the settling party from certain regulatory advantages for a period of 

time. These advantages include liberalized public offering rules for Well Known Seasoned 

Issuers and the Regulation A mini-registration regime that after the JOBS Act of 2012 will 

be made available for offerings up to $50 million. These regulations contain "bad boy" 

disqualifier provisions that make the exemption unavailable to issuers that have recently 

entered into consent decrees in SEC enforcement actions. 

The S.E.C. sometimes agrees to waive these disqualification provisions when a defendant 

issuer settles an enforcement proceeding - in other words the issuer is permitted to 

continue to take advantage of one or more liberalized regulatory regimes intended only for 

issuers who have not recently been accused of violating the securities laws. 

Waivers of these provisions should be evaluated carefully by the S.E.C. before they are 

granted as part of a settlement. They should not be routine. These waivers also should be 

explained carefully to the parties in the case and to the investing public. A common 

justification for such waivers is that the settling party committed the alleged violation in 

connection with securities other than its own, and that therefore its own investors were not 

harmed by the violation and do not need the added protection that is achieved by 

disqualifying the issuer from regulatory exemptions. This may be true in some cases, but 

in other cases, particularly if an issuer is in the business of buying and selling other issuers' 

securities, the issuer's conduct could have a direct effect upon its own investors. In 

retrospect after 2008 we know that some issuers such as Lehman Brothers, Bear Stearns 

and Merrill Lynch were not as well known or as seasoned as investors thought they were. 

Investors in many otber investment banks lost a lot of money as well. 

Second, I am concerned that we rely too much on regulation and enforcement to solve 

problems. The 1933 and 1934 Acts and SEC regulations apparently were not enough to 

prevent Enron and Worldcom, so we got the Sarbanes-Oxley Act in 2002. That did not 

prevent the disaster of 2008, so we got the lengthy Dodd-Frank Act in 2010 and dozens of 

new regulations from many federal agencies. 

I am not opposed to regulation - sometimes we need it. But so far regulation has not 

compelled people who run financial institutions to make responsible decisions about risk. 

4 
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Regulation alone probably cannot accomplish this. Bankers need a reason to make 

responsible deeisions on their own - not because government tells them what to do. 

One solution is for investment banks to return to a particular aspect of the successful 

business model that prevailed for decades until the 1980's: the personal liability of senior 

investment bankers for the debts of their firms. 

My grandfather, Sidney Homer, Jr. was a bond market dealer with his own two-man firm 

from the 1930's through 1943 when he went to work for the Treasury Department's effort 

to impose an economic blockade on Germany. He left his partner in charge ofthe business. 

The partner took risky bets and the business failed. My grandfather, after he finished his 

government service, went back to New York and worked to pay his firm's creditors over 

five years. He did not ask the Treasury Department for a "bailout" and he did not hide 

behind the mantra of limited liability. He paid the money back. 

In 1960 he joined Salomon Brothers as head of bond market research. That firm also was 

a partnership where each partner was liable for the debts of the firm. The same was true 

at Lehman Brothers, Morgan Stanley, Goldman Sachs and many other investment banks. 

These firms were capitalized with the partners' money, which they were paid gradually 

after they retired. If these firms failed the partners' other assets also would be at the 

creditors'disposal. It is no surprise that most investment banks were relatively 

conservative in the risks they took both with customers' money and their own. 

Beginning in the 1980's many of these investment banks became corporations. For 

Salomon Brothers it happened in 1981, with a merger into Phibro Commodities. The era 

of Liar's Poker -- Michael Lewis's famous book about Salomon Brothers in the 1980'shad begun. The culture of cven the most cautious investment banks changed quickly. 

Lewis told the story of how traders placed big bets and became instant heroes, boasting not 

only of their new riches but also the size of their male anatomy. Potential downsides from 

risk taking were an afterthought. There were Wall Street trading scandals throughout the 

1990's and early 2000's, but each time investment bankers and regulators assumed that the 

industry as a whole was under control. Then eame the debacle of 2008. And even now we 

still do not have the situation under eontrol, as shown by the failure ofMF Global and the 

$2 billion trading loss that ,J.P. Morgan announced last week. 

If is for this reason that I have worked with Professor Claire Hill, also of the University of 

Minnesota law faculty, to propose in an article6 and a forthcoming book that some measure 

6 See Claire A. Hill and Richard W. Painter, Berle's Vision Beyond Shoreholder Interests: Why 

Investment Bankers Should Have (Some) Personal Liability, 33 SEATTLE LAW REVIEW 1 (June 2010) 

(symposium on AdolfBerle) 

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of personal liability for firm debts be imposed upon the most highly paid officers of 

investment banks and some other financial institutious. We do uot insist upon the 

unlimited liability that characterized Salomon Brothers before 1981 or Lehman Brothers 

in the days when its prudence and solvency were beyond dispute. We do, however, suggest 

that creditors and shareholders of large financial institutions should demand personal 

accouutability of high ranking exccutives that goes beyond loss of payor even employment. 

People who make risk decisions for financial institutions, and are paid enormous amounts 

when those risks payoff, should be required to put a significant portion oftheir personal 

assets at the disposal of firm creditors in the event the firm fails. 

I do not suggest that Congress take steps now to implement such a rule. The private sector 

has the means at its disposal. Personal guarantees of corporate indebtedness are a common 

phenomenon in the financial sector and indeed bankers often insist upon them before 

advancing loans to corporate customers. A financial institution should do the same for 

itself and identify who among its leaders is willing to stand personally behind the 

institution's solvency. Shareholders and creditors should insist that it do so. 

Personal responsibility of financial services executives is a more general topic than the 

specific focus of today's hearing settlement of S.E.C. enforcement actions. Nonetheless, 

we have learned in many contexts, including at this hearing, that there is only so much the 

S.E.C. can accomplish in enforcement actions and settlements, particularly on a limited 

budget. There is only so much that the S.E.c., or even Congress, can do to prevent 

financial failures by imposing new regulations. The financial services industry will become 

safer and sounder when the industry norm is once again that people, not just institutions, 

are held accountable. 

6 
101 


75734.044

Testimony before the 

Committee on Financial Services 

United States House of Representatives 

"Examining the Role of Settlements in the Enforcement Process by Financial Regulators: 

The Example ofthe United States Securities and Exchange Commission" 

Thursday, May 17,2012 

Kenneth M. Rosen I 

Chairman Bachus, Ranking Member Frank, and Members of the Committee: 

I appreciate the opporttmity to testify on the important matter of the use of settlements by 

financial regulators as part of the process of enforcing the laws within their jurisdictions. 

Settlements constitute a crucial part of the enforcement process, especially as regulators seek to 

allocate limited resources in fulfilling their missions. Accordingly, it is critical that regulators 

retain flexibility to settle the cases that they pursue. My testimony will focus on the practices of 

the United States Securities and Exchange Commission ("SEC" or "Commission"), where I 

previously served as a Special CounseL However, the issues and concerns that I raise also might 

prove relevant to the enforcement efforts of other regulators, even though the details of their 

enforcement processes may vary. 

The Use of Settlements 

Settlements constitute a longstanding part of the enforcement process. Their use by the 

SEC are neither novel nor without a place in the broader context of the agency's overall mission. 

While its focus is on the securities markets, the SEC's mission in addressing those markets is a 

multi-faceted one. Federal financial regulators like the Commission are charged with 

encouraging quality markets, informing the public on tinancial issues, helping to shape 

regulations, monitoring compliance with those rules, and enforcing those rules. Those 

enforcement efforts might be in administrative proceedings be fore the Commission or in federal 

court. And, SEC enforcement efforts might be taken in parallel or in conjunction with actions by 

other federal ofticials, such as the United States Department of Justice as it prosecutes criminal 

violations of the federal securities laws. SEC enforcement efforts also exist side by side with 

private rights of action. The key here is that SEC enforcement actions, and the settlement of 

some of them, should be viewed as part of a complex system of market regulation developed 

over many years. 

As a general matter, settlements are seen in private and public actions. Driving 

settlements are calculations by litigants abont their potential to win and lose cases, awards that 

, Associate Professor of Law, 111e University of Alabama School of Law. 
102 


75734.045

might be associated with particular outcomes, and the costs of continuing to pursue litigation 

rather than bringing it to a conclusion. Put another way, settlements are a form of risk 

management, where parties attempt to calculate the likelihood and ramifications of winning or 

losing a case. In this regard, settlements can be viewed as a mutual recognition by opposing 

parties that cessation of litigation with particular conditions may serve both of their interests. 

Thus, settlements enjoy a certain resonance as a reflcction of the calculation of interests by the 

parties to the litigation themselves. That is not to say that settlements are perfect calculations. 

At times, they may reflect erroneous valuations of parties' interests. Nor are parties left entirely 

to their own devices in the settlement process as courts often must approve a settlement 

agreement reached by the parties. 

The nature and value of settlements expressed above can apply both to private litigation 

and actions brought by public officials. Indeed, the value of a cessation of litigation even 

reaches the world of criminal law as ref1ected in the acceptance, for instance, of the legitimacy of 

plea bargaining. Not surprisingly, financial regulators like the SEC similarly have accepted the 

usefulncss of settling litigation when such settlement includes an assessment that the costs of 

further litigation outweigh the benefits. Settlement in such instances may be especially attractive 

when the alleged violator of the law accepts conditions that give the agency comfort in ceasing 

litigation. Items providing such comfort, for example, might include acceptance by the alleged 

violator of monetary penalties or acquiescence to requirements related to future behavior. The 

SEC's decision to pursue settlements is particularly understandable given the nature of the 

securities laws. Although securities fraud and other important securities law violations find their 

foundations in statutes that date back to the I 930s--almost 80 years ago--parties continue to 

debate the exact meaning of those statutes. The United States Supreme Court's multi-decade 

securities law docket attests to the fact that law remains unsettled in this area and that litigants 

continue to face the real risk of not knowing exactly how courts will apply the relevant legal 

provisions. 

Faced with the general uncertainty associated with all litigation, and the particular 

uncertainty of securities litigation, the Commission has utilized flexibility afforded to it in the 

enforcement process and actively has pursued settlement with alleged wrongdoers. When 

actions are settled, consequences are not necessarily insignificant. For instance, in its 2011 

Performance and Accountability Report, the SEC emphasized multiple actions resulting in 

settlements that led to millions of dollars being paid by alleged violators.2 In that same Report, 

the Commission also noted non-monetary consequences of settlements, such as consent to 

permanent injunction from violation of the federal securities laws' anti-fraud provisions and 

officer and director bars? Of course, requisite for successful settlement negotiations is that 

notwithstanding such serious consequences, the alleged offenders also view it in their best 

2 See, e.g., Securities and Exchange Commission, 2011 Perfonnance and Accountability Report, at 14-15 (available 

at http://sec.gov/aboutisecpar2011.shtml). 

3 See, e.g., id at 190-91. 
103 


75734.046

interest to settle. Possible motivators for such action might be how exactly the language of 

settlements is phrased, especially as it relates to acknowledgement oflegal violations, as well as 

calculations of the costs of continuation of an enforcement action and the possibility of more 

severe consequences were the alleged violator to lose in extended litigation. 

Recent Controversy 

Notwithstanding the tradition of settlements in securities law cases and settlements' 

potential attractiveness to both the Commission and alleged securities law violators, such 

settlements are not without controversy. Action in the federal courts of the Southern District of 

New York as well as the United States Court of Appeals for the Second Circuit recently has 

drawn attention to settlement practices. 

Last November, in SEC v. Citigroup Global Markets inc. ,4 United States District Judge 

Jed Rakoff of the Southern District of New York rejected the Commission's effort to settle a case 

arising out ofa multi-year investigation of the defendant's alleged activities related to the market 

for collateralized debt obligations ("CDOs,,).5 When the Commission filed its complaint 

claiming that Citigroup had engaged in negligent misrepresentation, it also submitted a proposed 

consent judgment with Citigroup; that "settlement provided in essence the following: Citigroup 

agreed (1) to pay $285 million into a fund, which the SEC. may distribute to investors in a pool 

of CDOs marketed by Citigroup in compensation of their losses, (2) to the entry of an order 

enjoining it from violating certain sections of the Securities Act of 1933, and (3) to undertake to 

establish procedures to prevent future violations and to make periodic demonstrations of 

compliance to the SEC."" Judge Rakoffrefused to approve the eonsentjudgment and instead 

ordered that the case move to trial. 7 

The SEC staff quickly disagreed with the Distriet Court's apparent eonclusions as to the 

proposed consent judgment's fairness, adequacy, reasonableness, and consistency with the public 

interest.s The SEC moved to stay the District Court proceedings pending determinations on the 

SEC and Citigroup's interloeutory appeals and a petition tor a writ of mandamus; in considering 

that request, a panel of the Second Circuit usefully summarized what it perceived to be the 

4 No. II Civ. 07387 (JSR), _ F. Supp. 2d_, 2011 WL 5903733 (S.D.N.Y. Nov. 28, 2011)(available at 

http://www.nysd.uscourts.gov/cases/show.php?db~spccial&id~ 138) ("District Court Opinion"). 

5 See SEC v. Citigroup Global Markets Inc., 673 F.3d 158 (2d Cir. 20(2) (available at 

http://v.'Ww.ca2 . uscourts.gov Idecisions/isysquery 193261288-c6b0-40b6-a898-85cbe8c8b3 f7/ I Idoc/ll5227 _ opn.pdf#xml~http://www.ca2. useourts.gov Ideeisions/isysqueryI93261288-c6bO-40b6-a898-

85cbe8c8b3 f7 II !hilite/). 

6 See 673 F.3d at 161. 

7 See District Court Opinion, supra note 4. 

8 See Robert Khuzami, Public Statement by SEC Staff: Court's Refusal to Approve Settlement in Citigroup Case, 

http://www.sec.gov/newslspeechl2011lspchI1281Irk.hlm (Nov. 28, 2011). 
104 


75734.047

District Court's main objections to the consent judgment as the District Court found it to be 

unreasonable, inadequate, and not serving the public interest: 

First, the [district] court expressed strong disapproval of what it ealled 

"the S.E.C's long-standing policy--hallowed by history but not by reason--of 

allowing defendants to enter into Consent Judgments without admitting or 

denying the underlying allegations." Without the defendant's admission, such a 

judgment would have "no collateral estoppel effect" in another litigation brought 

against the defendant by victims of its alleged wTongdoing. ,·[It] ... leaves the 

defrauded investors substantially sholi-changed ... [as theYI c,mnot derive any 

collateral estoppel assistance from Citigroup's non-admission/non-denial oflhc 

S.E.C.'s allcgations." The cOUli found it "hard [ 1 to discern ... what the S.lI.C. is 

getting from this settlement other than a quick headline." Because it "does not 

involve any admissions and ... results in only very modest penalties [described by 

the court as "pocket change to an entity as large as Citigroup,"], [such a consent 

jUdgment] is just as frequently viewcd, particularly in thc business community, as 

a cost of doing business." The court also found that the settlcment "without any 

admissions [of liability by Citigroup] serves various narrow interests of the 

parties," but not the public interest. 

The second reason given by the court for rejeeting the consent judgment 

was its perceived unfairness to the defendant, Citigroup. 

[The settlement] is not reasonable, because how can it ever be 

reasonable to impose substantial relief [on Citigroup] on the basis 

of mere allegations? It is not fair, bccause, despite Citigroup's 

nominal consent, the potential for abuse in imposing penalties on 

the basis of facts that are neither proven nor acknowledgcd is 

patent. 

The court's third reason for concluding that the consent judgment was not 

in the public interest was that, without admission of liability, a consent judgment 

involving only modest penalties givcs no "indication of where the real truth lies." 

[The settlement] is not adequate, because, in the absence of any 

facts, the Court lacks a framework for determining adequacy. And, 

most obviously, the proposed Consent Judgment does not serve the 
105 


75734.048

public interest, because it asks the Court to employ its power and 

assert its authority when it does not know the facts. 

An application of judicial power that does not rest on facts is worse 

than mindless, it is inherently dangerous. The injunctive power of 

the judiciary is not a free-roving remedy to be invoked at the whim 

of a regulatory agency, even with the consent of the regulated. J f 

its deployment does not rest on facts-cold, hard, solid facts, 

established either by admissions or by trials-it serves no lawful or 

moral purpose and is simply an engine of oppression9 

Judge Rakoffs opinion at least raises questions about whether the District Court went beyond 

reviewing the consent judgment in the more traditional fashion to perhaps substituting some of 

its own judgments for that of the parties in assessing the relevant interests. While leaving the 

underlying legal issues of the appeal open to determination by the merits panel, in granting the 

SEC's motion for stay, the Second Circuit panel made somc important observations. First, the 

panel recognized the significance of the issues raised by the District Court's order. Those issnes 

"include[d] the division of responsibilities as between the executive and the judicial branches 

and the deference a federal court must give to policy decisions of an executive administrative 

agency as to whether its actions serve the public interest (and as to the agency's expenditure of its 

resources) [as well as] a court's authority to reject a private party's decision to compromise its 

case on the ground that the court is not persuaded that tbe party has incurred any liability by its 

conduct.,,10 

Second, the Circuit Court rightly recognized that the District Court appeared to reach too 

hasty a judgment that the defendant misled investors and that the Commission could prove the 

defendant's liability at trial. The panel took notice of litigation risks sccmingly overlooked by 

the District Court, including the chance that maybe the defendant did not mislead investors, that 

the SEC might lose at trial, and that the defendant might not consent to settlement if forced to 

admit liability. I I The panel seems directly aligned with the realities that often drive settlements. 

Parties often settle when they see uncertain results in continuing litigation and the ability to 

secure important concessions in ceasing litigation early. 

Third, the panel properly warns that the District Court seemed to encroach on the realm 

of policy judgments traditionally reserved to administrative agencies. The Circuit Court notes 

'673 F.3d 161-62 (citations omitted). 

10 ld. at 160. 

II See id. at 163-65. 
106 


75734.049

that "[wJhile we are not certain we would go so far as to hold that under no circumstances may 

courts review an agency decision to settle, the scope of a court's authority to second-guess an 

agency's discretionary and policy-based decision to settle is at best minimal.,,12 The Circuit 

Court's concern that the District Court may have failed to exercise proper deference to the SEC 

seems consistent with broader notions of prosecutorial discretion often seen, for instance, in the 

criminal law context. Government authorities pursuing supposed wrongdoers must harness 

limited resources to pursue an agenda that is fair to the parties involved and that secures both 

goals of punishment and deterrence of future violations by the alleged violator and others who 

might violate the law. 13 The calculation of how best to serve the public interest is a difficult one, 

and great deference to the agency seems merited as it pursues its mission. 

That is not to say that courts must rubber stamp all settlements without reflection on their 

contents. Courts can, and as this case illustrates do, ask tough questions about settlements. 

However, courts also must remember the importance of deference and be mindful of other 

branches of government's role in the policy-making process. If such deference is not givcn on 

settlements, one wonders whether officials with discretion on whether or not to pursue violators 

in the first instance will simply refuse such pursuit given lack of control at the settlement stage of 

litigation. 

In the wake of the financial crisis, one can understand frustrations of members of the 

public, including those who might happen to serve in the judiciary. However, great difficulties 

may attach to regulating within what might be temled the cmcible of scandal. 14 Ultimately, 

"regulation" involves those who make laws and rules, those who administer them, and those who 

judge their application. All must be careful to respect their particular roles. The enforcement 

process certainly remains subject to possible improvements. However, the more transparent and 

ultimately more effective way to improve that process is by addressing its components in a direct 

way. If enforcement efforts seem inadequate at times, then one should focus on the effectiveness 

of efforts to detect wrongdoingI5 and the actions of ofticials actually charged with pursuing 

12 See id. 

13 Although a District Court might view settlements as "pocket change" to large financial institutions, others 

certainly could view payment of hundreds of millions of dollars as significant, and as a punishment for potential 

future violators to avoid. It also seems usefhl to note that avoidance of an admission of guilt in a settlement does not 

necessarily equate to avoidance of reputational harm for the institution that settles. Indeed that type of reputational 

harm may be significant to entities seeking to convince others to allow them to handle their money and investments. 

14 See Kenneth M. Rosen, Mickey. Can You Spare a Dime? DisneyWar, F..xeculive Compensation. Corporate 

Governance, and Business Law Pedagogy, 105 MICHIGAN LAW REVIEW 1151,1166-68 (2007). 

15 For the SEC, this might, for instance involve operations of the Office of Compliance Inspections and 

Examinations. 
107 


75734.050

wrongdoers. Review of settlements in individual cases seems a second-best solutionl6 that is a 

less likely vehicle for change in how the enforcement processes generally operates. 

The Continued Need for Agency Discretion 

Although fi-ustration with thc economic crisis might lead some to seek more restrictions 

on financial agencies' ability to enter settlements, discrction to settle remains an important 

regulatory tool. Indeed, at a time of rapidly shifting regulatory landscapes in light of the crisis, 

such discretion might be more important than ever. 

Informing an agency's decision to consider settlement might be genuine concern about 

the general level of understanding of what constitutes a violation as rules rapidly change. 

Settlement may permit agencies to ameliorate the consequences of contusion during regulatory 

transitions. This may be especially significant as agencies under modem financial legislation 

increasingly must implement new regulatory rule requirements with specific content under tight 

time frames, leaving them with little discretion in the rulemaking contcxt. I7 Discretion in the 

enforcement context may help agencies at the margins to avoid some unintended consequences 

of new rules as the agencies may work on their own and with Congress to adjust such 

regulations. While some might seek rigid outcomes on issues, like imposition of particular 

language in settlements related to new rule violations, efforts to impose such rigidity might 

incentivize odd results. Agencies might opt out of pursuing violations in the first instance when 

results would be dictated in the settlement process related to such violations. This might further 

fray investor confidence. 

As previously mentioned, enforcement is only one of a modem financial agency's many 

difficult tasks. As limited resources are taxed by those same schedules of rulcmakings and other 

legislatively mandated actions, agencies may by necessity have to pull back on some 

enforcement efrorts. Settlements likely will remain a vital tool for agencies to have some 

regulatory impact without expending the full resources involved with taking all enforcement 

actions to trial or administrative completion. That is not to say that less enforcement is a good 

result, but rather that it might be the only practical option under the circumstances. To the extent 

that is disturbing, all branches of the government will need to work together to revisit the issue of 

how to prioritize the use of limited regulatory resources. 

In considering the case for continued agency discretion, one should not neglect the fact 

that such discretion, as long has been the case, will not be absolute. One way to interpret the 

events of the Citigroup situation is that the system on some level works. Federal judges actually 

do examine settlements. But as the Second Circuit implied, they must do so with great care. 

Moreover, agencies themselves can and do engage in self-reflection of their settlement practices. 

16 C[ Jill E. Fisch & Kenneth M. Rosen, Is There a Rolejor Lawyers in Preventing Future Enrons?, 48 VILLANOVA 

LAW REVIEW 1097 (2003). 

17 See Kenneth M. Rosen, "Who Killed Katie Couric?" and Other Tales from the World of Executive Compensation 

R~rorm, 76 FORDHAM LAW REVIEW 2907 (2008); see also http://sec.gov/spotlightidodd-frank.shImI. 
108 


75734.051

Of note, the Commission actually has initiated its own analysis of how it gocs about scttlements 

in some circumstances. IS In its oversight role, Congress should monitor these efforts. More 

generally, it should continue to seek more data, like the Commission provides in its annual 

reports, to help evaluate objectively to what extent tools like settlement are used and more 

generally the effectiveness of financial regulators' enforcement programs. 

The challenges are great for such programs, and the success of these programs are critical 

to the investor confidence that helps drive capital formation and economic growth. While it 

might be attractive to promulgate many new rules, actual enforcement of existing rules may 

drive public eonfidence as well. Now is a time for a comprehensive and vigorous dialogue on 

issues like limited resource allocation prioritization as it relates to enforcement. And, as 

financial instruments and markets become more complex-and frauds and other problems 

associated with those instruments and markets become more ditlicult to address-more 

regulators at all levels of government, local, state, and federal, likely will be drawn into the battle 

against financial irregularities. Coordinating those efforts will be critical. 19 Task forces and 

joint efforts already are underway, but potentially significant legal issues will continue20 These 

important issues also deserve attention. 

Conclusion 

Thank you again for the opportunity to share my insights on the use of settlements. 

welcome the chance to answer your questions. 

18 See Robert Khuzami, Public Statement by SEC Staff: Recent Policy Change, 

http://sec.gov/news/speechl2012/spch010712rsk.htm (Jan. 7, 2012) (noting adjustment to policy on "'neither admit 

nor deny' language" in cases involving certain parallel criminal matters). Moreover, agency operations may be 

monitored by an inspector general. 

19 This likely will lead to tbe revisiting of settlement issues as well in a world of additional universal settlements 

involving multiple regulators. 

20 For example, access to information and documents produced by a government agency in one investigation may 

raise issues about access to those materials in other matters. 
109 


75734.052

For Release Upon Delivery 

10 a.m. May 17,2012 

TESTIMONY 

OF 

DANIEL P. STIPANO 

DEPUTY CHIEF COUNSEL 

OFFICE OF THE COMPTROLLER OF THE CURRENCY 

BEFORE THE 

COMMITTEE ON FINANCIAL SERVICES 

OF THE 

U.S. HOUSE OF REPRESENTATIVES 

May 17, 2012 

Statement Required by 12 U.S.C. § 250: 

The views expressed herein are those of the Office of the Comptroller of the Currency and do 

not necessarily represent those of the President. 
110 


75734.053

INTRODUCTION 

Chainnan Bachus, Ranking Member Frank, and members of the Committee, I welcome this 

opportunity to discuss the OCC's supervisory and enforcement authorities and process. In the letter 

of invitation, the Committee expressed interest in how the OCC has used its enforcement powers to 

initiate and settle actions against financial institutions and individuals. 

The DCC uses its supervisory and enforcement authorities to ensure that national banks and 

federal savings associations ("hanks") operate in a safe and sound manner and in compliance with the 

law. As described below, the DCC and the other federal banking agencies ("FBAs") have a broad 

range of supervisory and enforcement tools to achieve this purpose. However, the FBAs are not law 

enforcement agencies, and do not have authority to conduct criminal investigations or to prosecute 

criminal cases. Rather, the PBAs ensure that suspected criminal activity is referred to the appropriate 

criminal authorities for prosecution. 

The Committee's interest spans a broad range of topics, involving different types of financial 

finns and different regulatory regimes. My testimony covers the DCC's activities and perspectives 

on enforcement in three key areas: I) our approach to enforcement and how we use different types of 

enforcement actions; 2) the process we employ to initiate, settle, or litigate enforcement actions; and 

3) how we coordinate with other state and federal regulatory agencies and law enforcement agencies. 

In the course of describing the DCC's settlement practices, I also will address the OCC's practice of 

allowing a party to settle an enforcement action without admitting or denying wrongdoing. 

I. THE OCC'S ENFORCEMENT PHILOSOPHY, AUTHORITY, AND APPROACH 

The DCC's enforcement process is integrally related to our supervision of banks. The DCC 

addresses operating deficiencies, violations oflaws and regulations, and unsafe or unsound practices 

at banks through the use of supervisory actions and civil enforcement powers and tools. The heart of 
111 


75734.054

our enforcement policy I is to address problems or weaknesses before they develop into more serious 

issues that adversely affect the bank's financial condition or its responsibilities to its customers. 

Once problems or weaknesses are identified and communicated to the bank, the bank's management 

and board of directors are expected to correct them promptly. 

In addition to the nature and severity of the conduct at issue, the cooperation and capability 

of bank management in addressing problems is an important factor in determining if the oee will 

take enforcement action and, if so, the severity of that action. Banks are subject to comprehensive, 

ongoing supervision that, when it works best, enables examiners to identify problems early and 

obtain corrective action quickly. Because of our regular, and in some cases, continuous, on-site 

presence at banks, we have the power and ability to promptly halt unsafe or unsound practices or 

violations of law, in many cases without having to take an enforcement action. This approach 

permits most bank problems to be resolved through the supervisory process of continual comment by 

the oee and response by the bank. Relevant wTitten supervisory actions include the issuance of 

comprehensive Reports of Examination, supervisory letters, and Matters Requiring Attention 

("MRAs") tailored to the specific problems existing at the bank. 

When the normal supervisory process is insufficient or inappropriate to effect bank 

compliance with the law and the correction of unsafe or unsound practices, or circumstances 

otherwise warrant a heightened enforcement response, the oee has a broad range of potent 

enforcement tools. For less serious problems, the oce begins at one end of this enforcement 

spectrum with informal enforcement actions. Informal actions typically take the form of a 

1 ace's Enforcement Action Policy, which was publicly released as acc Bulletin 20] 1·37, provides for consistent 

and equitable enforcement standards for national banks and federal savings associations and describes the acc's 

procedures for taking appropriate administrative enforcement actions in response to violations oflaws, rules, 

regulations, final agency orders, and unsafe or unsound practices or conditions. 

2 
112 


75734.055

memorandum of understanding ("MOU") or a safety and soundness compliance plan. 2 In situations 

where the OCC determines that significant risks are present that could adversely affect the adequacy 

of the bank's capital, the OCC may estahlish an Individual Minimum Capital Ratio ("IMCR") 

requiring the hank to achieve and maintain capital levels higher than regulatory minimums and to 

submit a capital plan when the bank's capital levels are below the levels required by the IMCR. 

These informal actions frequently involve specific and detailed steps the bank must take 

before the action is terminated. Informal enforcement actions deal with all aspects of bank 

operations, ranging from asset quality and credit administration to loan review, underwriting, and 

consumer compliance. Specific arcas that affect a bank's safety and soundness are often addressed 

through infonnal actions including articles relating to: loan documentation, credit underwriting, 

interest rate exposure, capital adequacy, asset quality, earnings, managerial competence, internal 

controls and management information systems, audit systems, and employee training and staffing. 

Informal enforcement actions also often address issues relating to compliance with laws in all areas 

of bank operations, such as disclosure ofloan tClms and protection of consumer financial 

information. Informal actions also can provide for restitution and other relief for bank customers 

affected by the practices at issue. In the OCe's experience, banks usually go to great lengths to take 

the corrective steps necessary to achieve compliance with informal enforcement actions. 

In some circumstances, however, informal action is not appropriate, such as when the bank 

has serious problems coupled with less than satisfactory management; there is uncertainty about the 

ability or willingness of management and the board of directors to take corrective measures; or the 

underlying problem is severe and there is a strong agency interest in formalizing the remedial actions 

required. In such cases, the OCC can and will take fonnal enforcement action. Unlike informal 

actions, formal actions are both public and directly enforceable. Section 8 of the Federal Deposit 

2 Upon detennination and notification of a bank's failure to meet safety and soundness standards, a bank is required 

to submit a safety and soundness compliance plan to correct the deficiencies. See 12 U.S.C. § 1831p-l, 12 CPR 30 

and 12 CFR 170. 

3 
113 


75734.056

Insurance Act ("FDI Act"), 12 U.S.C. § 1818, gives the FBAs power to take formal enforcement 

actions to require correction of unsafe or unsound practices and compliance with any law, rule, or 

regulation applicable to banks. 

For example, in the safety and soundness context, the OCC may issue a Fonnal Written 

Agreement or a Cease and Desist Order ("C&D") requiring the bank to take appropriate corrective 

actions. These may include raising capital, increasing liquidity, improving internal controls, 

divesting troubled assets, or restricting the payment of dividends or bonuses. Similarly, in the 

consumer protection context, the OCC may issue a Formal Written Agreement or a C&D requiring a 

bank to cease engaging in the activities at issue, and to provide restitution to affected consumers. 

When the bank does not consent to these actions, the OCC will file· a Notice of Charges seeking 

issuance of a C&D. Where a bank's capital is impaired, the OCC also may issue a Capital Directive 

or a Prompt Corrective Action ("PCA") Directive, 3 when authorized by law. 

OCC also may impose civil money penalties ('"CMPs") on banks and institution-affiliated 

parties ("IAPs,,). 4 CMPs may be imposed independent of, or in conjunction with, other supervisory 

or enforcement actions. In addition, we have the powerful tool of removing and prohibiting 

individuals from serving as directors, officers, or employees of federally insured depository 

institutions. Removal and prohibition ("R&P") authority is our most effective tool in dealing with 

serious cases of insider abuse and self-dealing because an R&P order is effectively a lifetime ban on 

the individual working in the banking industry. 

3 Under 12 U.S.c. § 18310, 12 CFR 6, and 12 CFR 165 (Prompt Corrective Action or PCA), insured banks are 

subject to various mandatory and discretionary restrictions and actions depending upon the bank's PCA capital 

category. Mandatory restrictions and actions are effective upon the bank being noticed that it is in a particular PCA 

category. Discretionary restrictions and actions are imposed on the bank through the issuance of a PCA Directive. 

4 Pursuant to 12 U.S.c. § 1813(u), an lAP includes directors, officers, employees, or controlling shareholders of, or 

agents for, an insured depository institution; any other person who has filed or is required to file a change in bank 

control notice; any shareholder, consultant, joint venture partner, or any other person who participates in the conduct 

of the affairs of an insured depository institution; and any independent contractor who knowingly or recklessly 

participates in any violation of law or regulation, breach of fiduciary duty, or wlsafe or unsound practice, which 

caused or is likely to cause more than a minimal financial loss to, or significant adverse effect on, the insured 

depository institution. 

4 
114 


75734.057

Most bank supervisory issues are resolved informally so the number of formal enforcement 

actions reported on the OCC's Web site reflects a minority of all types of corrective actions we take. 5 

The following chart renects the number offormal and informal enforcement actions brought by the 

OCC against institutions and individuals during the past several years: 

OCC Enforcement Actions 

Type of Enforcement Action FY2008 FY 2009 FY 2010 FY 2011 

Bank: 

Cease and Desist Orders 20 41 61 45 

Bank Civil Money Penalties 10 II 9 8 

Formal Agreements 58 93 118 59 

Prompt Corrective Action Directives I 5 2 3 

Capital Directives 0 2 5 3 

Bank Individual Minimum Capital Ratio Letters 15 132 130 50 

Memoranda of Understanding 17 53 38 16 

Commitment Letters 10 15 7 3 

Safety and Soundness Plans 6 10 10 3 

Personal: 

Personal Cease and Desist Orders 16 15 6 16 

Personal Civil Money Penalties 27 17 43 32 

RemovallProhibition/Suspension Orders 33 27 26 36 

Notifications of Prohibition, Following Conviction for 211 254 152 142 

Crimes of Dishonesty 

Letters of Reprimand 19 20 23 23 

Totals 443 695 630 439 

The list ofOCC enforcement actions in recent years illustrates the OCe's ability and 

willingness to take formal actions when warranted to require correction of unsafe or unsound 

banking practices and violations of law. As the above chart indicates, during the past four years, the 

OCC has taken over 2200 enforcement actions against banks and their lAPs. These actions address a 

wide range of issues relating to unsafe or unsound practices or conditions, including capital 

adequacy, liquidity, asset quality, earnings, loan portfolio management, information technology, 

audit procedures, internal controls, managerial competence, books and records adequacy, as well as 

violations oflaw. During the last several years, the OCC has taken a large number offormal actions 

5 Formal enforcement actions taken by the oee are published on a monthly basis pursuant to 12 U.S.c. § 1818(u). 

5 
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75734.058

to specifically address the deteriorating financial condition at some banks; to remedy weaknesses to 

hank programs, operations and perfonnance; to require qualified management; to ensure that bank 

management follows safe and sound banking practices; and to address unfair treatment of bank 

customers. 

II. ENFORCEMENT ACTION PROCESS 

When circumstances warrant enforcement action, the OCC follows a well-established process 

for initiating and resolving such actions through either settlement or litigation. Through this process, 

the OCC ensures that its bank supervision and enforcement authorities are applied efficiently, 

effectively, and consistently, and respect the due process interests of respondents. Our process, in 

particular our practice ofrcsolving enforcement actions with the consent of the bank or individual. 

promotes the OCC's supervisory goals. The OCC is best able to address bank operating deficiencies, 

noncompliance with laws and regulations, unsafe or unsound practices, and unfair treatmcnt of bank 

customers, at an early stage hefore those weaknesses or problems become unmanageable and 

potentially adversely affect the bank's depositors and customers or the deposit insurance fund. 

In the initial stages of the cnforcement decision-making process, examiners work with legal 

staff to detennine whether there is a legal basis for an enforcement action to address supervisory 

concerns, unsafe or unsound practices, noncompliance with laws or regulations, or breaches of 

fiduciary duty. In cases where CMPs are heing considered, the appropriate supervisory office issues 

a "IS-day letter" to the bank or individual notifying them that the OCC is considering assessing 

CMPs and is providing them an opportunity to respond with infonnation pertinent to the OCC's 

evaluation of the appropriateness of the penalty. In each case, the supervisory office and legal staff 

prepare a case presentation memorandum with staff recommendations for enforcement action for 

consideration by an appropriate Supervision Review Committee CSRC,,).6 The appropriate SRC 

6 The OCC has several Supervision Review Committees. The Washington Supervision Review Committee 

("WSRC") is responsible tor reviewing all proposed enforcement actions against non-delegated banks and their 

6 
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75734.059

reviews the supervisory and legal support for all proposed enforcement actions and makes a 

recommendation to tbe appropriate decision maker. 

Once tbe appropriate decision maker has authorized tbe enforcement action, it is important 

that the OCC take enforcement actions as soon as practicaL For example, in a case where a bank is 

engaging in unsafe or unsound practices, or bank customers have suffered hann as a result of the 

practices at issue, a C&D can require the bank to immediately cease engaging in these practices and 

take affinnative action to correct the conditions resulting from such practices. To the extent that it is 

appropriate to assess CMPs against a bank, members of the board of directors, or senior 

management, assessment ofCMPs also encourages the immediate correction of these practices. 

CMPs serve as an important deterrent to future violations of law, regulation, orders, and conditions 

imposed in writing, unsafe or unsound practices, and breaches of fiduciary duty, both by the person 

or bank against which the CMP is assessed and by other bankers and banks. 

Recognizing the need for prompt and effective action to ensure that banks take corrective and 

remedial measures to ensure safety and soundness and protect depositors and consumers, Congress 

granted the FBAs broad authority to pursue administrative enforcement remedies. In effectuating the 

intent of Congress, the OCC has an established practice of attempting to resolve enforcement actions 

with the respondent's consent, usually before the need to serve a Nntice of Charges. Fonnal 

enforcement actions are ultimately resolved by either the consent of the bank or individual to the 

enforcement action, or througb litigation. The vast majority of OCC enforcement actions are 

resolved by consent. 

lAPs and all non-delegated enforcement actions, and making recommendations to the appropriate agency decision 

maker. WSRC also considers and makes recommendations on all proposed referrals to other federal agencies, 

including the Department of Justice ("Do1"), the Department of Housing and Urban Development ("HUD") , and 

the Securities and Exchange Commission ("SEC"). The Midsize Supervision Review Committee and the District 

Supervision Review Committees review and make recommendations on delegated and non~delcgated enforcement 

actions against delegated banks and their lAPs to the appropriate decision maker. 

7 
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75734.060

In the process of resolving C&D, R&P, and CMP actions, the OCC communicates each 

approved enforcement action to the respondent bank or lAP and affords a period for settlement 

negotiations, The oce s practice is to present the proposed formal action in the form of a draft order 

and, in the case of C&Ds, a draft order and a stipulation and consent to the issuance of an order, for 

consideration by the bank or individual, The OCC's standard fom1 of enforcement order typically 

contains a plain statement of the Comptroller's factual contentions supporting the action and provides 

that the bank or lAP does not admit or deny wrongdoing. Once the document has been presented to 

the respondent, the OCC is willing to consider proposed changes, for example, in the wording ofthe 

document or the time frames for compliance, in order to obtain a negotiated settlement. 

In those relatively few cases where a negotiated settlement cannot be reached, the OCC 

initiates an administrative hearing process by filing a Notice of Charges with the Office of Financial 

Institution Adjudication notifying banks or individuals of charges lor issuance of a C&D, issuance of 

a R&P order, or assessment of CMPs. Litigants are then afforded an adjudicatory hearing on the 

merits. The FBAs have an established procedure for conducting adjudicatory proceedings pursuant 

to Uniform Rules of Practice and Procedure. 7 This procedure affords the bank or individual with 

extensive due process, including an opportunity to respond to the notice, conduct pre-hearing 

discovery, and present evidence at the hearing before an administrative law judge ("AU"). 

Following the issuance of a recommended decision by the AU, the Comptroller issues his final 

decision and order based on the entire record of proceeding, which is subject to limited review by an 

appropriate court of appeals. This entire process typically can take anywhere from two years to five 

years to complete. 8 

7 See, e.g., 12 CFR Part 19, Subpart A. 

8 The OCC also is authorized to issue interim orders (Temporary Cease and Desist Orders and Suspension Orders) to 

impose measures that are necessary to protect the bank against ongoing or expected hann during the pendency of an 

administrative proceeding. An interim order is immediately effective and remains in place until a final order is 

issued or an appropriate U.S. district court decides to set aside, limit, or suspend the order pending completion of the 

administrative proceeding. Interim orders require satisfaction of a heightened legal standard and, because they are 

8 
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75734.061

The longstanding practice of permitting the bank or individual to neither admit nor deny 

wrongdoing allows the oee to get an enforceable order in place at an early stage of the proceeding, 

and encourages compliance with the enforcement action and immediate correction of any 

deficiencies that need to be addressed, Because consent orders are made available to the public, 

requiring an admission of wrongdoing would prolong settlement negotiations and increase the 

number of respondents who choose to litigate the merits of the action, Given the corrective action 

and reI ief that the oee obtains through the settlement, the oee has viewed such a statement as a 

useful factor in obtaining prompt remedial action, and as essentially extraneous to the supervisory 

objectives that the oee is able to promptly achieve, 

The effectiveness of the oee's approach can best he illustrated in the context of achieving 

the agency's primary supervisory goals in dealing with problem banks, In these situations, our 

primary supervisory goal, which is achieved for most problem banks, is rehabilitation and return to 

non-problem status, Obtaining an institution's consent to an immediately etlective order helps 

ensure that its problems are addressed at a stage when rehabilitation is still possible, thus helping the 

bank avoid failure, Where a bank's problems have proved insurmountable, as when the bank has 

been unable to attract additional capital from private investors, our enforcement actions are designed 

to prepare the bank for resolution through receivership at the least possible cost to the deposit 

insurance fund, In these cases, obtaining the bank's consent can be critical to minimizing further 

losses, Requiring an admission of wrongdoing from an institution will significantly delay the 

imposition of an order and jeopardize the achievement of these goals, 

During the recent economic downturn, the oee used a combination of enforcement tools to 

correct problems that resulted in deteriorating financial conditions at banks, Our actions are designed 

to remedy various unsafe or unsound practices including inadequate capital and liquidity, 

almost immediately subject to judicial review, it can also take an extended period of time to resolve these types of 

enforcement actions. 

9 
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75734.062

inappropriate growth, inadequate loan underwriting, a lack of appropriate internal policies and 

controls, and ineffective management. The various corrective measures incorporated into our 

enforcement actions have included requiring the bank to raise additional capital, restrict borrowings, 

eliminate certain activities and even entire business lines, adopt appropriate underwriting standards 

and policies to govern lending activities, remove senior officers and members of the board of 

directors, limit the transfers of assets, and eliminate payments of bonuses or dividends. 

We have used a variety of enforcement tools, including Formal Agreements, MOUs, IMCRs, 

and C&Ds to achieve these remedies. Each action has been crafted to deal with the specific 

problems existing at each bank. In some cases, we have issued multiple enforcement actions to a 

single bank. 

In some problem bank cases, we have used PCA authority in addition to other enforcement 

tools. PCA capital categories and the restrictions associated with those categorics, including the use 

of PC A Directives, are driven primarily by a bank's capital levels. Because depletion of capital 

usually occurs as a result of other deficiencies, capital is often a lagging indicator of problems. 

Consequently, the OCC generally places a problem bank under an enforcement action well in 

advance of a decline in capital that could trigger either the issuance of a Notice of Intent to Issue a 

PCA Directive, or a PCA Directive itself. In addition, Formal Written Agreements and C&Ds often 

contain more restrictions and affirmative obligations than would be prescribed in a PCA Directive. 

In many cases, a bank's compliance with a Formal Written Agreement or C&D negates the 

need for additional enforcement actions while addressing the underlying concerns. In an effort to 

comply with the enforcement action, banks frequently adopt, fully implement and adhere to all of the 

required corrective actions set forth in the agreement or order within assigned time frames. In such 

cases, once sufficient time has passed and the OCC examiners have verified through the examination 

process that the corrective actions are effective in addressing the bank's problems, the enforcement 

10 
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75734.063

action may be terminated. The decision to tenninate is subject to the same review and approval 

process as is applicable to new enforcement actions. 

III. OCC COORDINATION WITH OTHER REGULATORY AND LAW 

ENFORCEMENT AGENCIES 

The FBAs regularly share supervisory infolmation and undertake coordinated enforcement 

actions. As an example. when the OCC issues a remedial enforcement action against a bank. the 

Federal Reserve Board often will take a complementary action with respect to the bank's holding 

company. Pursuant to an interagency agreement, the FBAs regularly exchange documents and 

infonnation concerning unsafe or unsound practices or violations of law and notify each other of 

significant enforcement actions against banks and individuals. 

We also coordinate extensively with other regulatory agencies and with law enforcement 

authorities. OCC has entered into infonnation sharing agreements with virtually all of the state 

banking agencies and all 50 state insurance departments, and we regularly share infonnation with the 

SEC and other Federal agencies. We make enforcement referrals to all of these regulators, as well as 

to state licensing boards and state professional ethics and responsibility boards, with respect to 

misconduct by attorneys, accountants, real estate agents, appraisers, and other professionals. We also 

make enforcement referrals and cooperate in investigations conducted by other Federal agencies, 

including, for example, the Financial Crimes Enforcement Network ("FinCEN"),9 the Department of 

Labor, the Internal Revenue Service, HUD, the Federal Election Commission, the Federal Trade 

Commission, and the Consumer Financial Protection Bureau, with whom OCC recently entered into 

an infonnation-sharing agreement. 

When we find suspected criminal violations, including evidence offraud, we ensure that such 

matters are referred to the DoJ. We often coordinate with and assist the DoJ, the Federal Bureau of 

9 Pursuant to an interagency agreement, OCC provides information to FinCEN concerning all significant violations 

of the Bank Secrecy Act ("BSA") detected during our examinations. In addition, the two agencies coordinate 

enforcement efforts, and often take simultaneous actions against a bank to impose appropriate eMPs for BSA 

violations. 

11 
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75734.064

Investigation, and the Secret Service in their investigations and prosecutions of fraud and other 

financial crimes, as appropriate, by providing documents and information to those agencies and, in 

some cases, by making OCC examiners available to serve as special agents to the grand jury and as 

expert banking witnesses for the prosecution at trial. 

OCC is a member of the Financial Fraud Enforcement Task Force and several of its 

subgroups. We are an originalmembcr of the National Interagency Bank Fraud Working Group 

C'BFWG"), which is chaired by DoJ, and we participate in various BFWG subgroups such as those 

covering Mortgage Fraud and Payment Processor Fraud. Additionally, the OCC is a member of the 

Bank Secrecy Act Advisory Group chaired by the Department of the Treasury. 

CONCLUSION 

The OCC's enforcement authority is an integral part of our comprehensive bank supervision 

process. The primary goal of our enforcement actions is to ensure that national banks and Federal 

thrifts under our supervision operate safely and soundly, and in compliance with all applicable laws. 

The OCC has broad and comprehensive enforcement authority to achieve these goals. We also have 

a well-established process for taking administrative enforcement actions that provides for swift and 

forceful corrective action at an early stage, while taking into account the due process rights of 

respondent banks and individuals. 

12 
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75734.065

Response to questions from the Honorable Bill Posey 

hy the Federal Deposit Insurance Corporation 

Please provide the following data on your agency's settlement practices. Should your 

agency lack the authority to pursue criminal prosecutions, please tell me what referrals 

related to the questions posed your agency has given to the Department of Justice and the 

outcome of those referrals. 

Ql: Number of criminal prosecutions pursued 

Q2: Number of convictions arising from those prosecutions 

Al&2: As you are aware, banks and their institution-affiliated parties who violate federal or 

state criminal statutes can be prosecuted by the United States Department of Justice (DOJ) or 

criminal prosecutors in the various states. The FDIC has no authority to pursue criminal 

prosecutions against banks and bankers, but it does play an important role in ensuring that 

information about suspected crimes is brought to the attention of criminal prosecutors, as do 

other federal and state regulators. 

The FDIC has promulgated a regulation, 12 C.F.R. Part 353, that requires an insured state 

nonmember bank to file a Suspicious Activity Report (SAR) when the bank detects a known or 

suspected criminal violation of federal law or a suspicious transaction related to a money 

laundering activity or a violation of the Bank Secrecy Aet. SARs are filed with the Financial 

Crimes Enforcement Network (FinCEN) of the United States Department of Treasury. When 

FDIC examiners discover suspicious activity and the bank has not filed a SAR, the FDIC will 

file a SAR with FinCEN. The FDIC 2011 Annual Report indicates that for the years 2009, 2010, 

and 2011, a total of 128,973,126,098, and 125,460 SARs, respectively, were filed regarding 

open and closed FDIC supervised insured depository institutions. Of this total of380,531 SARs 

filed, 301 were filed by the FDIC and the rest by banks the FDIC supervises. Law enforcement 

SAR review teams, made up ofDOJ attorneys and agents from the Federal Bureau of 

Investigation, access and analyze the data collected by FinCEN for purposes of pursuing criminal 

investigations and possible criminal prosecutions and refer cases for prosecution to the 

appropriate United States Attorney. 

While SARs are a critical tool in detecting and prosecuting crimes against financial institutions, 

they are only reports of suspected criminal activity, not evidence of a crime. Prosecutors at DO] 

must decide whether to prosecute based on the facts, seriousness of the alleged crime, and 

available resources. Thus, while many SARs result in criminal prosecutions and convictions, 

many do not. While prosecutors may communicate informally with the FDIC in individual 

cases, any comprehensive statistics regarding prosecutions and convictions would have to come 

directly from DOJ. 

The Office ofInvestigations of the FDIC's Office ofInspector General (OIG) works closely with 

the supervisory side of the FDIC to identify and investigate financial institution crime, especially 

various types of fraud. The OIG works cooperatively with U.S. Attorneys throughout the 

country and those efforts have resulted in the prosecution of numerous individuals for financial 
123 


75734.066

institution fraud and mortgage fraud schemes. Highlights of the cases pursued by the OIG are 

detailed in its semiannual reports to Congress, which can be found on its website 

www.fdicig.govunder the "Publications" tab. In addition, the following is a summary of the 

volume and outcome of Office ofInvestigations' cases during and following the most recent 

banking crisis. 

Office of Investigations Open/Closed Cases Statistics 

Fiscal Year ending 9/30 

2008 2009 2010 2011 2012' 

Total Cases Opened 79 83 79 75 36 

Open Banks 41 33 23 36 25 

Closed Ban ks 26 36 43 30 10 

Total Cases Closed 53 48 38 52 34 

Judicial Actions 

Indictments/Informations 123 137 169 184 53 

Bank Officers/Directors 11 17 17 23 5 

Convictions 103 100 109 168 46 

Bank Officers/Directors 14 14 8 25 5 

Arrests 44 84 98 112 27 

'First half of FY 2012, ending 3/31112 

Additional information regarding these investigative activities can be obtained from the FDIC 

Inspector General at (703) 562-2166. 

Q3: Number and amount of stipulated settlements (and the total amount of damages to 

which the settlement pertains 

A3: As FDIC witness, Richard Osterman noted in his May 17 testimony, with regard to open 

banks, most enforcement orders are issued based upon a stipulation with the respondent. From 

2007 through 2011, the FDIC issued approximately 1,000 Cease-and-Desist Orders, 377 

Prohibition Orders and 753 Civil Money Penalties (CMPs). To provide more detail on the CMPs 

assessed following the banking erisis of 2008, we reviewed all CMPs issued from 2009 through 

2011. Excluding the CMPs assessed for inaccurate Home Mortgage Disclosure Aet reporting 

and for Flood Disaster Protection Act violations, in 2009 the FDIC issued 33 CMPs with 

assessments totaling $1,371,500. In 2010, the FDIC issued 59 CMPs with assessments totaling 

$3,970,900. Finally, in 2011 the FDIC issued 49 CMPs with assessments totaling $14,566,500. 

With respect to consumer enforcement cases where there is evidence of significant consumer 

harm, the FDIC typically seeks restitution for the benefit of aggrieved consumers. During the 

period 2009 through 2011, the FDIC issued 14 restitution orders against banks. Collectively, 

those orders resulted in $65 million of restitution for consumers. 

Q4: Number of compensation committees examined for impropriety 
124 


75734.067

A4: While the FDIC incorporates review of executive compensation as a matter of course in 

every safety and soundness examination, most of the financiaI institutions supervised by the 

FDIC are smaIler community banks that do not have dedicated compensation committees. For 

these smaller institutions, executive compensation generally is addressed by the bank's board of 

directors or perhaps by an executive committee of the board. In examining for executive 

compensation, where the level of compensation does not match the duties and responsibilities of 

the office or is inconsistent with peer group comparison, FDIC examiners will further investigate 

the situation. In most cases where compensation irregularities are discovered, the institution will 

voluntarily address and correct the situation. In rare cases, the FDIC has been forced to pursue 

formaI enforcement actions such as Cease-and-Desist Orders requiring correction and 

reimbursement of excessive compensation previously paid. 
125 


75734.068

c) 

Comptroller of the Currency Administrator of National Banks 

Washington, DC 20219 

July 27, 2012 

The Honorable Bill Posey 

Committee on Financial Services 

United State House of Representatives 

Washington, DC 20515 

Dear Congressman Posey: 

This responds to your letters dated July 10 and June 14, and to the questions that you 

asked at the May 17, 2012, hearing before the House Committee on Financial Services regarding 

enforcement actions taken by the Federal banking agencies and the Securities and Exchange 

Commission. You requested information concerning the number of criminal prosecutions 

pursued and the number of criminal convictions resulting from those prosecutions, and number 

and amount of stipulated settlements reached as a result of wrongdoing related to the 2008 

financial crisis. In addition, you requested information concerning our examinations ofthe 

compensation committees of the financial institutions that we supervise. 

As I mentioned in my written statement, the Federal banking agencies are not law 

enforcement agencies, and do not have statutory authority to conduct criminal investigations or 

to prosecute criminal cases. Rather, the Office of the Comptroller of the Currency (OCC) and 

the other Federal banking regulators ensure that suspected criminal activity is referred to the 

appropriate law enforcement authorities for investigation and possible prosecution. The OCC 

examines financial institutions within our jurisdiction to ensure that they have appropriate 

processes in place to detect and file suspicious activity reports (SARs) with the government 

identifying transactions involving possible violations of law or regulation. I State and Federal 

criminal investigative agencies and prosecutors have direct electronic access to the SAR database 

in order to assist in their investigations and criminal prosecutions. 

The OCC supervises more than 2,000 national banks and federal savings associations. 

Since the financial crisis of2008, these institutions have filed more than 1,800,000 SARs 

involving suspected criminal wrongdoing. In addition, the OCC has contacted the Department of 

Justice and other federal law enforcement authorities to draw their attention to specific SARs or 

particular circumstances involving potential, serious wrongdoing. When requested, we also 

provide assistance to criminal investigative authorities hy providing requested documents, 

making exam staff available for interviews and, on occasion, assigning examiners to serve as 

agents for grand juries or to testify at trial on behalf of the United States. However, the decision 

I Sec 12 C.F.R.§ 21.11 (2012). 
126 


75734.069

to file criminal charges is entirely within the discretion of the Department of Justice or other 

federal agencies with authority to pursue criminal prosecutions. 

I also noted in my written testimony that the OCC has issued more than 2,200 

administrative enforcement actions against financial institutions and associated individuals sincc 

fiscal year 2008. The chart on page 5 of my written testimony lists the different types of 

enforcement actions taken by the OCC during the past four years, which address a wide range of 

issues relating to unsafe or unsound conditions and violations of law, including actions to 

address wrongdoing by employees, officers and directors of financial institutions. The total 

amount of restitution ordered by the OCC to be paid to harmed customers and depositors in these 

enforcement actions exceeds $300 million. In addition, during this same period of time, the 

OCC has assessed more than $225 million in civil money penalties, payable to the U.S. Treasury, 

against financial institutions and individuals related to various wrongdoing and unsafe or 

unsound practices. 

On June 30, 2010, the OCC and the other Federal banking regulators issued Interagency 

Guidance on Sound Incentive Compensation Practices.2 This guidance, which OCC proposed in 

October 2009, sets clear expectations for banking organizations concerning their incentive 

compensation arrangements and related risk-management, control, and governance processes. 

For example, we expect financial institutions will establish and implement incentive 

compensation arrangements that do not encourage employees to expose their organizations to 

imprudent risks. In addition, incentive compensation policies must be compatible with effective 

controls and risk management. Each institution's board of directors or, in appropriate 

circumstances, its compensation committee, must actively oversee and approve the firm's 

incentive compensation policies and understand and evaluate the internal controls and risk 

management processes related to compensation. Review of a financial institution's 

compensation practices, and the control and oversight exercised by a compensation committee of 

the board of directors, is a regular part of OCC periodic examinations to review an institution's 

safety and soundness and compliance with laws and regulations. 

I hope this information is helpful. If you have any questions concerning this matter, 

please do not hesitate to contact me or Carrie Moore, Director, Office of Congressional Liaison, 

at 202-874-4844. 

2 25 Fed. Reg. 122 (June 25, 2010). 

~ Daniel P. Stipano r 

Deputy Chief Counsel 

-2-
127 


75734.070

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON. D.C. ;20549 

The Honorable Jack Recd 

Chairman 

November 28. 2011 

Subcommittee on Securities. Insurance and Investment 

Committee on Banking. Housing and Urban Affairs 

United States Senate 

534 Dirksen Senate Office Building 

Washington. DC 205l0-3903 

Dear Chaim1an Reed: 

Thank you t'Or the recent opportunity for senior staff of the Securities and Exchange 

Commission to appear before the Subcommittee on Securities Insurance and Investment (0 

discuss our progress regarding management and structural reforms at the agency. During the 

hearing. our Director of Enforcement identified statutory limitations on our abilit)· to pursue 

penalties and factors that influence the structure of our settlements. This letter provides 

additional infonnation regarding these issues. and some suggested legislative solutions.} 

As you know. the Commission has worked to streamline and strengthen its enforcement 

program and in so doing has achieved outstanding results. The agency filed a record 735 

enforcement actions in fiscal year 20! 1. including many cases involving highly complex 

products, transactions, and market practices. More than $2.8 billion in penalties and 

disgorgement was ordered in Commission enforcement actions in fiscal year 2011. In the area of 

tinancial crisis related actions, the Commission has charged more than 80 individuals and 

entities. including approximately 40 CEOs, CFOs and senior officers. 

Notwithstanding these impressive results, the Commission's statutory authority to obtain 

civil monetary penalties with appropriate deterrent effect is limited in many circumstances. As 

described below, certain statutory chaoges would further enhance the effectiveness of the 

Commission's enforcement program by expanding the Commission's authority to seek monetary 

penalties for the most serious securities law violations. The changes would increase the statutory 

limits on civil monetary penalties, more closely link the size of monetary penalties to the scope 

of harm to investors and associated investor losses, and substantially raise the linancial stakes lor 

securities law recidivists. 

The views expressed in this letter ~lre mine and do not necessarily represent the views of the fuIi 

Commission. 
128 


75734.071

The Honorable Jack Reed 

Page 2 

Imposing Appropriate Monetary Penalties for Serious Violations 

The federal securities laws authorize the Commission to obtain monetary penalties in 

both federal court actions and administrative proceedings. These laws generally set forth two 

alternative methods for calculating the maximum amount of penalties. The first method, 

applicable in both civil cases and administrative actions, permits a per "violation" calculation, 

the amount of which increases by tier based on the seriousness of the misconduct. Currently, the 

highest tier (tier three) - available for violations with the most substantial consequences to 

investors - is capped by statute at $150,000 per violation for individuals and $725,000 per 

violation for entities. The second calculation method provided by statute permits imposition of a 

penalty equal to "the gross amount of pecuniary gain" to the defendant "as a result of the 

violation." See Securities Act of 1933 § 20(d)(2); Securities Exchange Act of 1934 § 

21(d)(3)(B); Investment Company Act of 1940 § 42(e)(2); Investment Advisers Act ofl940 § 

209(e)(2). This second calculation method can only be used to determine the maximum penalty 

amount in a federal court action and is not available in administrative proceedings. 

In many cases, these provisions impose substantial constraints on the peualties that a 

court or the Commission can assess because the gross amount of the pecuniary gain to a 

defendant may be small relative to the seriousness of the violation and the resulting harm to 

investors. For example, many frauds involving misrepresentation ofa public company's 

financial condition may result in a relatively small pecuniary gain to the company itself or the 

corporate managers who committed the fraud. Yet such frauds often result in enormous losses to 

innocent investors. In those cases, the maximum penalty available to the Commission may not 

adequately reflect the seriousness of the violation or the impact on victims of the fraud. 

Three targeted changes would increase the size of the civil penalties available under both 

existing calculation methods, provide a new calculation method intended to tie the size of a 

penalty to the amount of associated investor losses, and make the same calculation methods 

available in both civil and administrative actions. 

I. The first proposed statutory change would increase the per violation cap applicable to 

the most serious violations (i.e .. tier three) to $1 million per violation for individuals 

and $10 million per violation for entities. That would help to ensure that a third tier 

penalty has an appropriate deterrent effect on both individual and corporate violators, 

and is not viewed as just a cost of doing business. 

2. The second proposed statutory change would amend the maximum tier three penalty 

to authorize penalties equal to three times the "gross amount of pecuniary gain" to the 

defendant and make a calculation method based on "gross amount of pecuniary gain" 

available in administrative proceedings for all violations. That would allow the 

Commission to address situations where the actual pecuniary gain to the violator is 

relatively small compared to the nature or magnitude of the wrongdoing, and would 

eliminate the current disparity between the penalty relief available in district court 

and administrative proceedings. 
129 


75734.072

The Honorable Jack Reed 

Page 3 

3. The third proposed statutory change would authorize a calculation method for tier 

three penalties based on the amount of "investor losses" incurred as a result of a 

defendant's violation that would be available in both civil and administrative actions. 

That would allow the Commission to take into account more directly the harm 

inflicted on investors in seeking appropriate penalties.2 

Together, these changes would provide the Commission with greater flexibility with 

regard to monetary penalties in cases where the misconduct is very serious, repeated, or involves 

substantial investor losses, but the current statutes do not allow for an appropriately significant 

penalty. 

Authorizing Greater Penalties for Recidivists 

As the Committee is aware, the Commission sometimes is confronted with individuals or 

entities that have violated the securities laws repeatedly. In some instances, such defendants' 

subsequent misconduct violates the federal securities laws and/or a federal court injunction or a 

bar previously obtained or imposed by the Commission. Current law does not provide the 

Commission with adequate tools to deter this category of violators. Two statutory changes 

would provide new sources of penalty authority that would explicitly increase the cost of repeat 

offenses. 

1. The Commission should be authorized to seek a penalty enhancement in the current 

action equal to three times the otherwise applicable penalty cap if within the 

preceding five years a defendant has been criminally convicted for securities fraud or 

become subject to a judgment or order imposing monetary, equitable, or 

administrative relief in any SEC action alleging fraud. That would enable the 

Commission to seek monetary penalties against recidivists that are over-and-above 

the limitations described previously, regardless of the calculation method used. 

2. The Commission should be authorized to seek a civil penalty if an individual or entity 

has violated an existing federal court injunction or a bar obtained or imposed by the 

Commission. That would include officer and director bars (imposed under Sections 

8A(f) or 20(e) of the Securities Act or Sections 21(d)(2) or 21C(f) of the Exchange 

Act), penny stock bars (imposed under Section 20(g) of the Securities Act or Sections 

IS(b)(6) or 21(d)(6) of the Exchange Act), and other equitable disqualifications 

ordered by a court (under Section 21 (d)(S) of the Exchange Act). This approach 

would be more efficient, effective, and flexible than the limited and cumbersome civil 

contempt remedy. Such authority also would be comparable to the Commission's 

existing ability to obtain civil penalties for violations of its administrative Cease and 

Desist orders. See Securities Act of 1933 § 20(d)(I); Securities Exchange Act of 

1934 § 21 (d)(3 )(A); Investment Company Act of 1940 § 42( e)( I); Investment 

Advisers Act of1940 § 209(e)(l). 

Implementing the change may require the Commission to expend significant additional resources to 

determine and prove the amount of investor losses in particu lar cases - for example, to conduct event studies or to 

retain expert witnesses to evaluate and opine on such losses. 
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75734.073

The Honorable Jack Reed 

Page 4 

Conclusion 

The statutory changes proposed above would substantially enhance the effectiveness of 

the Commission's enforcement program by addressing existing limitations that have resulted in 

criticism regarding the adequacy of Commission actions against those who violate the securities 

laws. I have asked my staff to prepare draft legislative language for these five proposals that we 

will provide shortly under separate cover. We would welcome the opportunity to work with the 

Subcommittee and its staff to address these limitations on penalty authority by further 

developing the proposals discussed above. 

cc: Ranking Member Mike Crapo 

o 

Sincerely, 

Mary 

~~~ L. Schapiro 

Chairman