For decades, Wall Street and their servant, BigLaw, have owned the SEC. When banks and traders were charged with crimes, their BigLaw fat cat lawyers would sit down to “negotiate penalties” (how many average Americans get to negotiate penalties when they break the law?) with BigLaw fat cat wanna-be lawyers at the SEC and Justice Department. In exchange for treating the likes of J.P. Morgan and Goldman Sachs as privileged royalty, the ambitious young attorneys at SEC would be rewarded with jobs at the same BigLaw firms they were negotiating with. This is the same sleazy revolving door that has existed at multiple Federal regulators. The banks got off with “parking ticket” sized fines ($10 million is a Jamie Dimon dinner tip) and BigLaw made out every which way. 
So under both Democratic and Republican administrations, the US financial markets became more corrupt, more opaque, with more and more embedded undisclosed conflicts. And bigger, much much bigger. It’s amazing how much money you can make when you can repeatedly break the law and repeatedly get away with it.
The US financial sector is now three to four times larger as a percent of the economy than it was 50 years ago. The fact that Wall Street has largely had almost no real enforcement must be seen as a key factor behind its astonishing growth. The Wall Street “tail” was wagging the Main Street “dog” and treating white collar criminals as worthy of special consideration allowed it to happen.
And then Joe Biden won the Presidency. Who said elections don’t have consequences? Who said Biden is a disappointment? Not from where I sit. The folks that Biden has appointed to the SEC and Justice are finally standing up to Wall Street and their BigLaw consiglieres and are preparing to do much more. Long past time.
This piece from Bloomberg explains the shocking treatment of Bill Hwang of Archegos capital. Instead of meeting with Bill’s lawyers for the umpteenth time to have a civilized and cordial discussion (how’re the kids?) about eventually agreeing to a carefully negotiated “package” of fines, those nasty new kids just went right out and arrested him! I say, it’s just not civilized!
Wall Street Isn’t Ready for the Crackdown Coming Its Way
Bill Hwang’s lawyers couldn’t believe it.
The fallen billionaire investor was sitting in federal custody in Manhattan, less than 48 hours after his legal team had visited prosecutors to talk them out of criminal charges. The effort seemed to be going well until the feds scooped up Hwang at daybreak on April 27 to face 11 felony charges—and potentially, the rest of his life in prison. “In no event was an arrest necessary,” his attorneys said in a statement expressing frustration that morning, noting Hwang had been voluntarily answering the government’s questions for months.
All of Wall Street should pay close attention. The Hwang case marks an upswing of federal investigations into a slew of suspected trading abuses. Three other broad inquiries have emerged in recent months to examine so-called block trades, short sales, and well-timed wagers. They all center on the same question: Are markets rigged?Biden administration officials have spent the past year laying groundwork to pursue white-collar crime more aggressively, rolling out policy changes—some disclosed, some not—that will make probes easier to start, faster to finish, and more punishing. The U.S. Department of Justice has quietly ratcheted up pressure on big banks to look for market abuses and then turn in staff and clients, and there’s growing willingness among prosecutors to use tough federal laws against Wall Streeters that were designed to target gangsters. Meanwhile, there are signs that the Securities and Exchange Commission is seeking larger civil penalties. Senior leaders at the agency have stopped accepting ad nauseam meetings with defense attorneys looking to talk their clients out of trouble.
“There’s a perception that there are two sets of rules,” says Gurbir Grewal, head of the SEC’s enforcement division. “We want everyday Americans to have confidence when they invest in the market. They should have confidence knowing that there’s a dedicated group of professionals to deal with new threats, traditional frauds, making sure that their retirements are safe.”
Many Wall Street denizens don’t seem to grasp what’s afoot, even as Hwang’s treatment underscores the shift. For months his legal team made the case that his family office, Archegos Capital Management, acted lawfully as it built massive positions on a small number of stocks, driving their prices to record highs before they crashed. Archegos—and the banks that let it trade with borrowed money—lost billions of dollars.
Then, on the very day Hwang’s lawyers thought they were to have a further productive meeting with U.S. investigators, prosecutors filed a sealed indictment against him and Archegos’s chief financial officer, Patrick Halligan, that included a charge under the Racketeer Influenced and Corrupt Organizations Act, known as RICO. Authorities alleged that the pair lied to banks and manipulated stock prices. When officers pulled up to their homes without warning two days later, Halligan was already on his train commute into Manhattan. His mobile rang: Agents were outside his front door, looking to arrest him. Halligan grabbed a taxi back to meet them.
Deputy Attorney General Lisa Monaco commended Manhattan investigators on the speed of their 13-month investigation—unusually fast on Wall Street, where targets often have the best lawyers money can buy. “This is exactly the kind of criminal case that the Department of Justice should prioritize,” she said at a press conference. Then came a hint: “And we will continue to do so.”
Behind the scenes, the feds have been gathering information on dozens of banks, investment firms, and their executives as part of other sweeping probes. Many elements of these inquiries—as well as the tactics the government is using—were described by U.S. officials, industry professionals, and lawyers who asked not to be named because they weren’t authorized to talk publicly.
The first sign of trouble beyond Archegos came in November, when Morgan Stanley abruptly placed on leave a key executive handling large transactions known as block trades. It later emerged that the Justice Department and SEC were digging into communications among a roster of Wall Street firms and executives, checking whether any bankers tipped off hedge funds to deals that were big enough to move prices. Morgan Stanley has said it’s cooperating. Neither the bank nor the executive has been accused of wrongdoing.
Then in December, Bloomberg broke the news on a probe into the who’s who of the short-selling world. In that case, the Justice Department has been amassing a trove of information on dozens of investment and research firms, plus some of their executives, as investigators try to map alliances and determine whether anyone manipulated stocks or engaged in insider trading.
Last month, Bloomberg reported that the SEC is digging into a pattern of well-timed bets in a more arcane corner of Wall Street. Those inquiries focus on stock warrants issued by an army of special-purpose acquisition companies, or SPACs, that have flooded into markets in recent years in search of private companies to buy. A Bloomberg Businessweek analysis showed that in dozens of cases, big spikes in warrant trading preceded announcements by SPACs that they had reached an agreement to buy a business, sending their shares—and the warrants—soaring in value. The agency has yet to accuse anyone of wrongdoing.
All of those probes have something in common: They poke into corners of the market that historically haven’t faced much scrutiny, potentially leaving legal gray areas. Some traders are now worried they’ll get swept up in what critics call “rule-making by enforcement,” in which authorities such as the SEC define what kind of behavior is acceptable or fraudulent by bringing lawsuits. Agency officials maintain that they simply bring cases when firms break rules.
Crackdowns on Wall Street are somewhat cyclical. Some of the seeds for this one were planted in fall 2021 when Monaco, the Justice Department’s No. 2 official, gave a speech to white-collar defense lawyers, saying prosecutors will lean harder on banks and other companies to inform the government of wrongdoing within their ranks or among their customers. To a degree, that’s what banks have always been expected to do. But Justice Department officials have gained more leverage in recent years. A number of banks entered into settlements known as non-prosecution or deferred-prosecution agreements that let them avoid criminal convictions, but with a catch. The deals require banks to “cooperate” with ongoing and future probes—which has long meant responding quickly to requests. To the Justice Department, it now also means acting as a market informant.
Around the time of Monaco’s speech, the Justice Department warned a handful of firms that they were at risk of breaching deferred-prosecution agreements. That included Deutsche Bank AG for not alerting prosecutors to allegations made by a potential whistleblower that its asset management arm had exaggerated the environmental or social credentials of some its ESG-labeled investment products.
While it’s not clear it’s related to deferred-prosecution agreements, other firms that have reached such deals have been going to lengths to help authorities in recent months. JPMorgan Chase alerted authorities to possible insider trading by prominent clients just ahead of Microsoft’s acquisition of Activision Blizzard in January, a person familiar with the matter said. A month later, Credit Suisse Group AG—one of the biggest losers in the Archegos collapse—gave federal prosecutors in Manhattan a presentation pointing out issues related to the incident, potentially helping investigators as they look into how rival banks make market-moving trades, people familiar with the matter have said.
Monaco also said that for some firms, it may be more difficult to avoid convictions in the future. The department will consider a company’s entire rap sheet—criminal, civil, and regulatory—when deciding whether to accept agreements to resolve new misconduct, a departure from past practice that mostly looked at recent or related behavior.
The Justice Department’s use of RICO was long focused on taking down Mafia bosses and drug gangs. It was used sparingly in prominent Wall Street cases in 1989 and the early 1990s, and then it seemed to be off the table. In 2019, Washington prosecutors dusted off the law to use against bank employees, accusing members of JPMorgan’s precious metals trading desk of operating a criminal enterprise with transactions designed to deceive other market participants. To settle its part of that case, JPMorgan reached a deferred-prosecution agreement for wire fraud. The decision to wield the statute again so soon—this time over Archegos—shows the Biden administration sees it as useful.
JPMorgan recently stumbled onto a different policy shift, this time inside the SEC. Late last year the bank found itself unexpectedly cornered. The SEC was demanding that JPMorgan pay dearly to settle an investigation into the company’s failure to archive business-related communications, a duty that’s bedeviled Wall Street firms for ages. Old emails, memos, and texts can often provide crucial evidence for the SEC, and the lapses hindered investigations, according to the agency. JPMorgan’s attorneys arrived at a meeting in December armed with a list of past precedents, pointing out that the heftiest penalty ever levied was less than $20 million. Shoving that aside, the SEC demanded more than $100 million.
The confrontation says a lot about the newly energized SEC under Chair Gary Gensler, who arrived just over a year ago. After the comparatively lax Trump years, the agency’s enforcement division is seeking larger penalties and in some cases, outright admissions of wrongdoing, according to interviews with more than a half-dozen defense attorneys, who asked not to be named discussing negotiations with the regulator.
Grewal, the division’s new head, told JPMorgan he wasn’t budging because past fines apparently hadn’t caused banks to take their record-keeping obligations seriously, according to people familiar with matter. In December, JPMorgan paid $125 million, a record penalty, and made a rare admission that it had broken laws by failing to capture employee communications on Whatsapp and personal email and text messages from January 2018 to November 2020. The Commodity Futures Trading Commission imposed an additional $75 million fine, bringing the total to $200 million.
Those deals stunned many white-collar defense attorneys because regulators typically extract far less for negligent or nonfraudulent conduct. The SEC is investigating whether more banks, including Goldman Sachs Group Inc. and Citigroup Inc., committed similar lapses. “It’s a different tone at the top,” says James Cox, a professor at Duke University School of Law, who’s an expert in securities regulation. “The staff feels the chair has their back. It’s a pro-regulatory, pro-enforcement environment.”
The agency has been focused on speeding up inquiries. Measures include shortening the so-called Wells Notice process wherein the regulator informs an individual or company that it plans to sue, giving defense counsel a chance to present an argument heading it off. Under past administrations, there were no time constraints on how long this process might go on. Now, the agency is pushing to decide within six months whether to sue or drop a case.
Some outside lawyers are advising clients to be prepared for court battles that could last years. The SEC is preparing, too. It seeks to add more than 30 people to its litigation group in the coming fiscal year, according to the agency’s annual report. “Gensler is an aggressive regulator,” says Liz Davis, who worked at the CFTC when he ran that agency and is now in private practice as chair of
McGonigle, a boutique law firm. “Investigations are moving faster, subpoenas are being issued earlier, and there’s an increase in penalties.”