Transparency, Accountability and Stability in Financial Markets: The Evolving Post-Crisis Anti-Fraud Regime and the Declining (?) Structural Power of Major Financial Institutions

The past few years have seen a apparent reversal in the direction of the anti-fraud regime governing the conduct of actors in financial markets in the United States.  After allowing the 5-year statute of limitations for securities fraud to run on pre-crisis abuses, federal securities regulators have since 2013 obtained tens of billions of dollars in additional settlements from major banks by invoking the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a little-known anti-fraud statute passed in the wake of the savings and loan collapse that has an unusually long statute of limitations (10 years).  Regulators have also become more aggressive about demanding admissions of liability in settling fraud cases and, in 2015, the Department of Justice issued the so-called “Yates Memorandum,” which directs front-line prosecutors to demand that companies and their outside investigators identify “all relevant facts about the individuals involved in the corporate misconduct” in order to assist with building criminal cases before the government considers giving a company credit for cooperating with its investigation.

The federal securities laws were enacted in the wake of the Great Crash of 1929 as part of the New Deal with the purpose of imposing disclosure requirements on companies in order to protect investors and reduce what we might now call information asymmetries in financial markets and to expose corporate wrongdoing.  Focusing on the enforcement of these laws by the Securities and Exchange Commission and the Department of Justice in the post-crisis period provides an opportunity to study the interplay of politics and legal institutions in the critical arena of financial regulation.  This paper will use the experience of regulators “getting tough” during the latter part of the post-crisis period to illustrate the power of the anti-fraud laws that have been on the books since long before the 2008 crisis, a topic that is well-understood by attorneys who practice in this area but perhaps less so among many social scientists and the general public.  It will also provide some preliminary thoughts on what might explain this new posture on the part of the enforcement agencies.  On the one hand, it may be a sign of the declining structural power of financial institutions in the face of continuing public attention.  On the other hand, the SEC and DOJ are lawyer-dominated agencies and organizational factors, such as knowledge regimes (e.g., the declining purchase of arguments about the efficacy of self-regulation), professional norms (e.g., how the private bar will view actions by enforcement attorneys) and bureaucratic politics (e.g., prominent judges criticizing settlements they are asked to approve for being too lenient), may also matter.