Is the SEC Covering Up Fraud at America's Biggest Banks?

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(List compiled by Becca Lipman. Data sourced from Finviz)

"By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG." - Matt Taibbi (pictured on the left)

Matt Taibbli's 5,000-word exposé, published in Rolling Stone, explores the allegations of whistle-blower Darcy Flynn, enforcement lawyer at the Securities and Exchange Commission.


The article accuses the SEC, whose purpose includes the policing of Wall Street, of halting investigations and destroying over 9,000 documents in cases connected to investigations of big banks.

According to Taibbli, in a convenient twist of fate, head officials at the SEC have a history of being offered highly paid and cushiony jobs with previously-accused banks, which they represent in future cases with the SEC. New SEC officials with solid investigations against the banks are then confronted with their former superiors/mentors, who have little problem persuading the SEC to back off.

Then, perhaps in a few months, the newer SEC official can take a cushy job at the bank too. The cycle continues. "Small wonder, then, that SEC staffers often have trouble getting their bosses to approve full-blown investigations against even the most blatant financial criminals."

Essentially, Taibbi argues, the "merry-go-round of current and former enforcement directors" has made the SEC so toothless against Wall Street that Big Banks can do all sorts of illegal things under the very nose of those who are supposed to regulate, all without fear of consequence. In other words, the cycles of power at the SEC have given Big Banks a big green light and an assurance of a blind eye.

"Somewhere along the line, those at the SEC responsible for policing America’s banks fell and hit their head on a big pile of Wall Street’s money – a blow from which the agency has never recovered."

More disturbing, and now the subject of investigation, is the SEC's alleged disregard for the regulations set by the National Archives and Records Administration, which stipulate that all investigative records must be maintained for 25 years. Instead, SEC allegedly decided to go ahead and wholly destroy all articles, tips, and evidence acquired during a preliminary investigation routine. Cases in this stage are known as MUIs, or "Maters Under Inquiry." Due to the power cycles mentioned earlier, MUIs against big banks are rarely pursued.

"Flynn soon learned that the records for thousands of preliminary investigations no longer existed. In his letter to Congress, Flynn estimates that the practice of destroying MUIs had begun as early as 1993, and has resulted in at least 9,000 case files being destroyed. For all the thousands of tips that had come in to the SEC, and the thousands of interviews that had been conducted by the agency's staff, all that remained were a few perfunctory lines for each case. The mountains of evidence gathered were no longer in existence."

Senior Republican Senator Chuck Grassley, who has been quoted in the article, issued a 325-word press release in which has asked the SEC to account for these allegations. “If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law.”

Furthermore, he encapsulates what any reader feels upon reading Taibbli's article: “If (the whistleblower’s) allegations are correct, the intentional destruction of at least 9,000 MUIs would appear to greatly handicap the SEC’s ability to create patterns in complex cases and calls into question the SEC’s ability to properly retain and catalog documents.”

Has the SEC shown itself incapable of performing its job? Perhaps more interestingly, if the allegations are true, what are the consequences for the banks that have been connected with the investigations?

To help you understand the names involved, we list below the banking firms addressed in Matt Taibbli's exposé along with some key financials.

The full and fascinating expose can be read here.

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1. American International Group, Inc. (AIG): Property & Casualty Insurance Industry. Market cap of $47.16B. Current price at $22.94. The stock is currently stuck in a downtrend, trading -13.12% below its SMA20, -17.42% below its SMA50, and -34.5% below its SMA200. The stock has had a couple of great days, gaining 12.24% over the last week. The stock has performed poorly over the last month, losing 10.84%.

2. Bank of America Corporation (BAC): Regional Banks Industry. Market cap of $75.73B. Current price at $7. This is a risky stock that is significantly more volatile than the overall market (beta = 2.23). The stock is currently stuck in a downtrend, trading -19.23% below its SMA20, -28.65% below its SMA50, and -42.75% below its SMA200. The stock has had a couple of great days, gaining 10.19% over the last week. The stock has performed poorly over the last month, losing 22.05%.

3. Citigroup, Inc. (C): Money Center Banks Industry. Market cap of $87.18B. Current price at $27.89. This is a risky stock that is significantly more volatile than the overall market (beta = 2.52). The stock is currently stuck in a downtrend, trading -19.81% below its SMA20, -25.88% below its SMA50, and -35.7% below its SMA200. The stock has performed poorly over the last month, losing 21.47%.

4. Deutsche Bank AG (DB): Foreign Money Center Banks Industry. Market cap of $41.14B. Current price at $39.94. This is a risky stock that is significantly more volatile than the overall market (beta = 2.23). The stock is currently stuck in a downtrend, trading -18.63% below its SMA20, -25.33% below its SMA50, and -28.97% below its SMA200. The stock has had a couple of great days, gaining 6.29% over the last week. The stock has performed poorly over the last month, losing 17.63%.

5. The Goldman Sachs Group, Inc. (GS): Diversified Investments Industry. Market cap of $59.30B. Current price at $113.09. The stock is currently stuck in a downtrend, trading -10.9% below its SMA20, -13.46% below its SMA50, and -25.54% below its SMA200. The stock has had a couple of great days, gaining 6.26% over the last week.

6. JPMorgan Chase & Co. (JPM): Money Center Banks Industry. Market cap of $142.59B. Current price at $34.97. The stock is currently stuck in a downtrend, trading -9.41% below its SMA20, -11.82% below its SMA50, and -17.29% below its SMA200. The stock has had a couple of great days, gaining 6.4% over the last week.

7. Morgan Stanley (MS): Investment Brokerage Industry. Market cap of $32.86B. Current price at $16.02. The stock is currently stuck in a downtrend, trading -20.91% below its SMA20, -25.29% below its SMA50, and -37.21% below its SMA200. The stock has performed poorly over the last month, losing 18.77%.

8. Wells Fargo & Company (WFC): Money Center Banks Industry. Market cap of $131.36B. Current price at $23.8. Might be undervalued at current levels, with a PEG ratio at 0.75, and P/FCF ratio at 4.71. The stock is currently stuck in a downtrend, trading -9.67% below its SMA20, -11.59% below its SMA50, and -18.64% below its SMA200. The stock has had a couple of great days, gaining 8.74% over the last week. The stock has performed poorly over the last month, losing 12.02%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: AIG , BAC , C , DB , GS , JPM , MS , WFC

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