|By PETER J. HENNING|
But just as important as looking at the dollar amount is examining whether any federal securities laws were violated.
Doing a bad job of managing risk does not violate securities laws. The rules do not require that investments be good — only that they are properly disclosed. It is the job of the board to ensure the firm is properly managed.
The impact of the trading loss on
The type of hedging transactions the bank engaged in might have violated the proposed Volcker Rule, which is intended to limit proprietary trading by banks. But that Volcker Rule is merely a proposal, so it cannot be the basis for an enforcement action by the
The transactions were not the work of a rogue trader, as happened in recent years at UBS and Société Générale, generating billions in losses from unauthorized transactions. When a rogue trader is involved, there are usually false entries in the bank's records to cover up the trading, but that does not appear to be the case at
Federal securities laws prohibit a company from making false or misleading statements that involve material information. There is no obligation for a company to disclose every bit of information that investors might want to know, and the
The problem for
Neither comment was clearly wrong, or even misleading, when they were made in April. But over the last few weeks, those reassuring statements may have given an increasingly false sense of security to investors about
The question the S.E.C. will have to ascertain is one asked in almost investigation involving corporate disclosure: "What did you know, and when did you know it?" Therefore, the S.E.C. will be determining when the bank's management became aware of the mounting losses, and the point at which the losses reached the level of being material so as to require public disclosure in light of the previous statements disclaiming any problems from the hedging.
In the past, the S.E.C. has pursued enforcement actions based on public statements by corporate management that were considered misleading. In
The question of when a company has to disclose information is a gray area in the federal securities laws because there is no fixed rule for when information is material and should be made public. Companies have a measure of discretion on the issue, and prefer to delay revealing negative information as long as possible while the S.E.C. pushes for early disclosure.
Another important issue for any enforcement action is whether the S.E.C. can prove intent to commit securities fraud. The primary weapon used in disclosure cases is the agency's Rule 10b-5, which requires proof of the legal term "scienter" – meaning a subjective intent to defraud or at least recklessness. This can be a demanding standard, and it may prove to be a stumbling block to bringing a fraud case against
The S.E.C. can also pursue charges under Section 17(a) of the Securities Act of 1933, which only requires proof of negligence. This provision has been used in recent cases against Goldman Sachs and
A benefit to the S.E.C. from the Dodd-Frank Act is that it can pursue a case, including a settlement, in an administrative proceeding. That means it could avoid the
While the S.E.C. may be able to build a case against
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|Source:||New York Times Digital|