Speech by SEC Chairman:
Remarks at the American Securitization Forum
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Grand Hyatt Hotel
New York, New York
June 7, 2006
Thank you, Cam, for that kind introduction. And thank you all for inviting me to speak to you at the American Securitization Forum.
As you may know, I'm waging a campaign for plain English in every aspect of securities regulation. So naturally I wanted to come to talk to any group whose name requires six syllables.
Obviously you all know what you mean by "securitization." But have you ever asked a normal person what they think your name means? I did. On the train on the way up here, I asked several of the passengers what they thought "securitization" means.
The first one asked me to repeat it. Not once but three times. Each time I'd say "securitization" he'd say ... "What?" Then I offered to help him. I said, "You know, ABS." And he said, "Well, you're full of BS."
I asked an intelligent looking woman what she thought securitization meant. She gave it some thought before saying, maybe it meant ... contracting out prison facilities? Or possibly home security systems? When I gave her a hint that it had something to do with the Bond Market Association, she got very close. She said "I know! It's the process of turning bonds . . . into securities!"
I asked her if that was her final answer. And she asked me why I was so interested ... what did I do for a living? I told her I was the Chairman of the Securities and Exchange Commission. And she said, "Oh, I get it -- you're the head of the securitization organization!"
It's perhaps fortunate for all of you that I'm not. And even if the ASF of the BMA which focuses on ABS could use a little plain English, the plain truth is that your industry holds the key to our nation's dreams.
Any American with a home, a car, or a child in college - that is to say, millions of Americans - depend on what you do. Homes, cars, and college tuition, like so many other things we need, are more often than not financed with loans. And the chances are good that when we finance these necessities, our loans are securitized. It's also very likely that had they not been securitized, many of these loans could never have been extended in the first place.
The increased liquidity that securitization brings means lower credit costs - and that's good for everyone. That's why it doesn't come as a surprise that asset-backed securities are now the largest segment in all of fixed income. Last year, they surpassed U.S. Treasury debt, even in a year with runaway deficit spending.
So there's no doubt that every consumer in America depends on you, and benefits from your work - even if they've never heard of you. Perhaps you should take a cue from the Chairman of the SEC, and get a name like mine, with just one syllable.
Then maybe the same thing will happen to you that happened to me at a crowded football stadium in Los Angeles last fall. I was at the SC-UCLA game at the Coliseum for a tailgate party before the kickoff, talking with a group of friends, when a woman walked up to me and said: "Excuse me, are you the new Chairman of the SEC?"
I said, "Yes, I am." And she said, "Really?" And I said "yes, really." So then she asked, "Will you autograph this ball for my son?" And I said sure. And I watched as she took the ball back to her son and said, "You'll never believe it! I just got the autograph of the new Chairman of the Southeastern Conference!"
Well, there's nothing like a reality check now and then.
So don't feel too bad if a lot of people can't use "securitization" in a sentence. All they see is a record-breaking increase in home ownership. Or auto loans that are easier to afford. Or a healthier economy that produces more jobs. Just take it in stride that they almost certainly don't know what role you've played in it.
The same may be said for the Securities and Exchange Commission, and its law enforcement role in our markets. Main Street investors may not know about all the cases we bring. But they do know that their retirement savings, their future health care, and their college plans all depend on healthy capital markets.
So just like all of you, I won't mind if the Commission and its talented staff aren't center stage, so long as our markets are working efficiently and investors are confident that they'll be treated fairly.
That, of course, is a lot easier said than done. In recent years, our nation has faced some of the biggest scandals in American corporate history. That gave rise to some of the most important SEC enforcement actions in our agency's 72-year history. In the days since Enron, often working in tandem with the criminal authorities, the SEC has brought cases that have resulted in more than $7.5 billion in civil penalties and other monetary relief to investors.
My message to you here this afternoon is: we won't let up.
The coming years are going to be a time of continuing aggressive enforcement - because the continued health and prosperity of our markets depends on it. As the SEC has always done, we will constantly adjust and refine our priorities and our focus to meet changing market conditions. But the overall theme is exactly the same: the market cop is on the beat.
To illustrate some of the current trends in enforcement, I'd like to share with you some of the recent cases we are bringing, and the reasons we've done so.
I am quite sure that most, if not all, of you in this room have followed the Commission's investigation of Fannie Mae. The initial results were announced two weeks ago. We filed a case alleging several serious violations of Generally Accepted Accounting Principles by Fannie Mae over the seven years between 1998 and 2004. Together with Fannie's regulator, the Office of Federal Housing Enterprise Oversight, we obtained a penalty of $400 million.
Fannie Mae is an important instrument of national policy, with a job similar to yours - helping to make the goal of home ownership possible for millions of Americans. Fannie is invested with a public trust. The Commission's action, and the highly critical investigation report by OFHEO, exposed a breach of that trust.
Our case against Fannie was based on evidence that convinced us that this congressionally-chartered organization engaged in a number of fraudulent accounting practices to enhance its bottom line, meet earnings projections, and trigger higher bonuses for management. In certain cases they did so with the apparent approval and even participation of senior management.
Fannie's penalty - and its significant size, $400 million - may be old news to you. But you may not know that as a result of a new provision of the Sarbanes-Oxley Act, most of that substantial penalty will be returned to investors through what is known as a FAIR Fund.
This creation of the 2002 Sarbanes-Oxley Act is designed to see to it that SEC penalties go directly to benefit the investors who were harmed. This is an important point: we are no longer simply sending corporate fraud penalties to the Treasury. We are in the business of getting them back into the pockets of the people who were hurt by the fraud in the first place.
To date, we have collected some $5.7 billion in Fair Funds. And we're working aggressively to distribute those funds to harmed investors. For example, just a few weeks ago, we received judicial authority to distribute to investors $150 million in penalties from the Bristol-Myers Squibb accounting case.
While I'm on the subject of penalties, I want to draw attention to the fact that the Commission - acting unanimously - has issued a comprehensive set of guidelines on when and how corporate penalties will be imposed. These guidelines set forth a number of factors, including the benefit to the company that acted unlawfully, the level of the company's intent, and the need for deterrence. They're meant to give both law enforcement authorities and potential defendants a clear, reliable picture of what to expect. They represent an essential element of our enforcement mission: clear rules, clearly enforced.
Clarity and consistency in law enforcement, and the reduction of uncertainty for shareholders and the market, are hallmarks of good government. And they are a cornerstone of our work at the SEC.
Since the Commission issued these guidelines, we've had a number of occasions to test them. In three recent cases alone - our actions against AIG, Tyco, and McAfee - we have imposed a combined $200 million in penalties. Each of these decisions has been unanimous. And the results send a clear message: civil penalties are an important part of our enforcement arsenal - not just in theory, but in practice.
Another principle of our approach to enforcement is cooperation with other levels of government and other authorities.
From federal and state criminal authorities to our counterpart securities regulators in the states, we've got to share intelligence and exploit our respective strengths in order to achieve the maximum level of investor protection. For this reason, we're working closely with the blue sky authorities in the 50 states and territories, including your Attorney General's office here in New York, and with every federal and state department and office that's concerned with business and finance.
One of our most important cooperative ventures is our joint initiative, announced last month, with the North American Securities Administrators Association, to curb fraud against America's senior citizens. This is going to be a comprehensive program including on-site examinations of firms that target senior citizens with often deceptive sales pitches. We're also stepping up information-sharing with state agencies, and intensifying our focus on investor education.
With NASAA's help, we can reach into every state to protect our burgeoning population of older Americans. This is an exceptionally vulnerable subset of investors who far too often are the targets of scammers' come-ons. An illustration of what I'm talking about is a civil action the SEC has brought against a company called ETS Payphones, and against its principal, Charles E. Edwards.
We alleged that ETS was a massive seven-year Ponzi scheme involving the sale and leaseback of pay telephones. It defrauded some 12,000 investors, many of them seniors, of around $370 million.
Sales pitches in frauds like ETS promise higher rates of return than CDs or other traditionally safe investments. These pitches can be particularly tempting to elderly investors who may be struggling to get by on a fixed income. Most of you probably know someone in this predicament.
Sadly, some 90-year-olds had to go back to work because of their ETS investment losses. I am sure you can appreciate how much this galls me. These are members of the Greatest Generation, the people who saved the world from the evils of Nazism, Fascism, and Communism. Now, in the twilight of their lives, they are being swindled out of their lives' savings. Surely there's a special place in hell for those who prey upon our nation's seniors.
In the District Court, ETS was ordered to disgorge $190 million in illicit profits. But that result was overturned when the 11th Circuit Court of Appeals ruled that the sale/leasebacks were not "securities" under applicable federal law. It took a ruling of the U.S. Supreme Court - unanimous, I might add - to uphold the Commission's reading of the law, that the agreements were indeed securities.
Part of the Court's rationale was that investments like the ones ETS used were "particularly attractive to individuals more vulnerable to investment fraud, including older and less sophisticated investors."
This case continues today, and we won't give up. It's just one more example illustrating some key principles: seeing the job through, fighting on the side of our most vulnerable investors, and leveraging our resources through interagency cooperation.
I shouldn't fail to mention that the Commission worked closely with the Justice Department on the ETS prosecution. Just a few months ago, in February, Edwards was sentenced to a 13-year prison term and $320 million in restitution. In the future, the only phone he'll be worrying about is the one in the prison visiting room.
But seniors aren't the only vulnerable investors. Which brings me to the Anticevic insider trading case, which originated right here in Manhattan, and spun a web of deceit across the globe.
In that action, we sued a current and a former Goldman Sachs employee, along with a host of tippers and tippees, in a complex insider trading scheme. That scheme resulted in at least $6.7 million in illegal profits from trading in 26 stocks. We alleged that the two architects of the scheme illicitly obtained inside information from a diverse range of sources, including investment bankers at Merrill Lynch, a postal worker serving on a grand jury, and even workers at Business Week magazine's printing plant.
That court case is interesting for a number of reasons. It's a vivid illustration of how securities fraud can reach from Wall Street to Main Street. It highlights our willingness to work with foreign regulators (in this case, securities regulators in Denmark, Austria, Croatia, and the United Kingdom) and also our commitment to extending the reach of the securities laws to violators no matter where they hide.
In this case and in others, we're going to do everything we can to keep ordinary investors on a level playing field. That means cracking down on those who steal and misuse corporate information; stringently upholding the accuracy and completeness of corporate disclosure; simplifying public disclosure documents; and - eventually - creating an online resource that will permit investors to make meaningful comparisons between issuers with the click of a mouse.
The overriding end of all securities regulation is to promote investor confidence in financial markets. Of course, public trust and investor confidence can't be the responsibility of the SEC alone. Nourishing public trust is also the responsibility of every market professional - of every one of you in this room.
Yes, our capital markets are big. Indeed they're global. And it would be very easy to look at your role as an often anonymous participant in these enormous, faceless financial markets, and to conclude that you don't have any responsibility to consider the consequences of your actions on the market as a whole - or to believe that because you are but one player, surely those consequences are trivial. You might even rationalize absolving yourself altogether of any responsibility for integrity in the markets, on the grounds that whatever else might come of your actions, you're playing by the rules.
But if you look at what would happen if most others in your position took that same view - what would happen to the market, and more importantly, to the society that depends upon it - you've got to conclude that you simply can't ignore the bigger picture. The truth is, unless we all think of the bigger picture, not only the rule of law but the entire notion of free, fair, and competitive markets will be at risk.
I sincerely hope this appeal to the better angels of our nature will be a powerful force in our society. But of course, as Madison so famously said, "if men were angels, then no government would be necessary." For the less angelic among us, there is the Enforcement Division of the SEC.
First and foremost, the SEC is a law enforcement agency. When you buy or sell in the marketplace, you have every right to expect honest dealings. To be sure, with trillions of dollars, marks, pounds, euros, francs, and yen changing hands every day in our fast-moving capital markets, it's no surprise that sharks swim beneath the surface. But if trading securities in today's complex markets won't ever be a day at the beach, neither should it be a rerun of Jaws.
Just like Sheriff Brody in Amity, the SEC's sworn duty is to keep the financial waterfront safe. It's our job to help the unsuspecting, the honest, and the innocent stay afloat in the often rough seas of finance. And every once in a while, we blow up a vicious Great White that threatens to destroy the very confidence on which markets - and beach communities - depend.
It's a warm summer day here in New York, and the weekend's just a few days away. So as you head to the beach, and call out to your family and friends - "C'mon in, the water's fine!" - keep in mind that beyond the sunshine and warm water that nature provides, the cop on the beat helps make your holiday possible.
And if you see any sharks in the water, fire up your Blackberry and send a tip to firstname.lastname@example.org.
Thank you for inviting me to speak to you here today. And thank you for everything you do to uphold the integrity of our markets, and to make our economy and our country better. All of us at the SEC are proud to be your partners.