Why Fraudsters Should Applaud the SEC

Why Fraudsters Should Applaud the SEC

Mary Jo White began her tenure as chairman of the Securities and Exchange Commission this year with a promise: The agency would require more fraudsters to confess what they did, as opposed to the SEC’s usual practice of letting them pay fines without admitting anything. Judging from the case of Ebrahim Shabudin, the fulfillment of that pledge is off to a poor start. Shabudin, 65, is one of the few high-ranking bankers to be indicted over conduct related to the financial crisis. The San Francisco lender where he served as chief operating officer and chief credit officer, United Commercial Bank, failed in 2009, costing the Federal Deposit Insurance Corp. about $1.2 billion. Shabudin held the same positions at the bank’s publicly traded parent company, UCBH Holdings Inc. The government says he and other senior executives deliberately delayed recognizing loan losses.Before it filed for bankruptcy, UCBH received almost $300 million in bailout cash from the Treasury Department’s Troubled Asset Relief Program — all of which was lost. In 2011, a federal grand jury in San Francisco indicted Shabudin on charges of fraud, conspiracy, falsifying records and lying to the company’s auditor, KPMG LLP. He and a co-defendant have pleaded not guilty, and prosecutors are on track to bring the criminal case to trial.

SEC Settlement

The SEC, however, isn’t waiting to see if the criminal charges stick. Instead, in a settlement last month that went largely unnoticed, it allowed Shabudin to pay a $175,000 fine without admitting or denying its civil claims, which make essentially the same allegations as the criminal charges. He also was barred from serving as an officer or director of a public company, although there isn’t much risk that anyone would hire him as one now.

This would seem like exactly the sort of case White was talking about when she first described the agency’s policy change. The story has everything: big losses for investors and taxpayers, plus accusations of accounting fraud.

“There may be particular individuals or institutions where it is very important it be a matter of public record that they acknowledge their wrongdoing, and if not you go to trial,” White said in June when she described the policy shift. Factors would include the amount of harm done to investors and how egregious the fraud was, she said.

Yet the SEC isn’t going to trial against Shabudin, even though the standard of proof for its claims — a preponderance of the evidence — is lower than that for criminal charges, which must be proved beyond a reasonable doubt. Shabudin is entitled to a presumption of innocence, of course, especially now that the SEC has let him go without copping to anything.

If there were good reasons for the no-admit approach, the SEC isn’t saying what they were. The lead attorney on the case, Lloyd Farnham of the SEC’s San Francisco office, declined to comment on the settlement. So did John Nester, an SEC spokesman in Washington. An attorney for Shabudin, James Lassart of the San Francisco law firm Murphy Pearson Bradley & Feeney, didn’t return phone calls.

White and her staff made a big to-do in June when they unveiled their policy shift, and so did the financial press. The SEC has been catching flak over its no-admit deals for many years, notably from U.S. District Judge Jed Rakoff of Manhattan. So far, the new tactic has been unsatisfying. Rather than showing a commitment to be tough, it has put a spotlight on the SEC’s extreme reluctance to ever insist on admissions of liability.

Acting ‘Recklessly’

In its first major settlement testing the new approach, the SEC last month required hedge-fund manager Philip Falcone to admit to a long list of facts. He agreed, for instance, that he “improperly borrowed $113.2 million” at an unusually low interest rate from one of his hedge funds to pay personal tax bills, then didn’t disclose the loan to investors for about five months. He also admitted to acting “recklessly.” He and his firm also agreed to pay more than $18 million.

Yet Falcone didn’t have to admit liability for violations of any specific rules or laws. Nor was he barred from being an officer or director of a public company — which is how he was able to stay on as chairman and chief executive officer of Harbinger Group Inc. (HRG), even though he was banned from the securities industry for five years. The SEC in its news release said Falcone admitted “wrongdoing,” a term that has no particular meaning.

So see if this makes sense to you. Falcone, who hasn’t been accused of any crimes, was required to acknowledge a bunch of awful facts without admitting legal liability. Yet Shabudin, who was charged criminally over a bank collapse that cost taxpayers hundreds of millions of dollars, was allowed to cut a deal with the SEC without admitting anything at all. Here’s how to describe this newfangled policy in two words: ad hoc.

(Jonathan Weil is a Bloomberg View columnist.)

To contact the writer of this article: Jonathan Weil in New York at jweil6@bloomberg.net.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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