[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

                      OF U.S. FINANCIAL REGULATORS 



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION


                              MAY 17, 2012


       Printed for the use of the Committee on Financial Services

                           Serial No. 112-128

                         U.S. GOVERNMENT PRINTING OFFICE 

75-734 PDF                       WASHINGTON : 2013 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 


                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois

           James H. Clinger, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    May 17, 2012.................................................     1
    May 17, 2012.................................................    57

                         Thursday, May 17, 2012

Alvarez, Scott G., General Counsel, Board of Governors of the 
  Federal Reserve System.........................................     6
Galvin, Hon. William F., Secretary, Commonwealth of Massachusetts    44
Khuzami, Robert, Director, Division of Enforcement, U.S. 
  Securities and Exchange Commission.............................     8
Osterman, Richard J., Jr., Deputy General Counsel, Federal 
  Deposit Insurance Corporation..................................    10
Painter, Richard W., Professor of Law, University of Minnesota 
  Law School.....................................................    46
Rosen, Kenneth M., Professor of Law, University of Alabama School 
  of Law.........................................................    48
Stipano, Daniel P., Deputy Chief Counsel, Office of the 
  Comptroller of the Currency....................................    11


Prepared statements:
    Alvarez, Scott G.............................................    58
    Galvin, Hon. William F.......................................    66
    Khuzami, Robert..............................................    74
    Osterman, Richard J., Jr.....................................    84
    Painter, Richard W...........................................    95
    Rosen, Kenneth M.............................................   101
    Stipano, Daniel P............................................   109

              Additional Material Submitted for the Record

Posey, Hon. Bill:
    Written responses to questions submitted to Richard J. 
      Osterman, Jr...............................................   122
    Written responses to questions submitted to Daniel P. Stipano   125
Watt, Hon. Melvin:
    Letter to Senator Jack Reed from SEC Chairman Mary L. 
      Schapiro, dated November 28, 2011..........................   127

                      OF U.S. FINANCIAL REGULATORS


                         Thursday, May 17, 2012

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, 
Manzullo, Garrett, Neugebauer, Campbell, McCotter, Pearce, 
Posey, Luetkemeyer, Huizenga, Hayworth, Renacci, Hurt, Dold, 
Schweikert, Grimm, Canseco; Frank, Waters, Maloney, Velazquez, 
Watt, McCarthy of New York, Miller of North Carolina, Scott, 
Green, Cleaver, Ellison, Himes, and Carney.
    Chairman Bachus. The committee will come to order.
    Today's hearing of the Financial Services Committee is 
entitled, ``Examining the Settlement Practices of U.S. 
Financial Regulators.'' Our first panel consists of: Mr. Scott 
Alvarez, General Counsel of the Board of Governors of the 
Federal Reserve System; Mr. Robert Khuzami, Director of the 
Division of Enforcement for the U.S. Securities and Exchange 
Commission; Mr. Richard Osterman, Deputy General Counsel of 
Litigation and Resolution for the Federal Deposit Insurance 
Corporation (FDIC); and Mr. Daniel Stipano, Deputy Chief 
Counsel of the Office of the Comptroller of the Currency.
    I would like to welcome all you gentleman, and we 
appreciate the good work you do on behalf of the United States.
    At this time, we are going to have our opening statements, 
and I will begin.
    Under our system, Federal agencies that initiate 
enforcement actions against alleged bad actors have the option 
of settling their cases before going to trial. Typically, these 
agencies elect a settlement in order to quickly impose a 
monetary fine or institute remedial action, rather than proceed 
with lengthy trials that can have unpredictable outcomes.
    Often, the fines and penalties assessed against the 
defendants are returned directly to the investors who have 
allegedly been harmed, sometimes months or years before any 
funds would have been distributed if the case had gone to trial 
    It is common practice at many Federal agencies, some of 
which are represented at today's hearing, to permit defendants 
to ``neither admit nor deny'' wrongdoing or liability when 
settling the government's claims. This allows the defendant to 
avoid providing ammunition to private plaintiffs in suits 
related to the same conduct at issue in the Federal case, and 
facilitates settlements where the government concludes that its 
interests are better served by avoiding the expense and 
uncertainty of lengthy legal proceedings.
    Late last year, their practice came under scrutiny when 
Federal District Judge Jed Rakoff rejected a $285 million 
settlement agreement between the SEC and Citigroup Capital 
Markets in a case involving Citi's marketing of certain 
mortgage-backed securities. In rejecting the settlement, Judge 
Rakoff stated that it was neither fair nor reasonable nor 
adequate nor in the public interest, because the proposed 
settlement did not include an admission of wrongdoing.
    The SEC and Citigroup jointly appealed this decision and in 
March of this year, the Second Circuit Court of Appeals 
temporarily stayed Judge Rakoff's order. The Court of Appeals 
stated that it had no reason to doubt the SEC's representation 
that the settlement it reached is in the public interest and 
that it was ``commonplace for settlements to include no binding 
admission of liability.'' It is not the function of Federal 
courts to dictate policy to executive administrative agencies. 
The appellate court concluded that, ``The SEC and Citigroup 
have a strong likelihood of success in their joint effort to 
overturn the district court's ruling.''
    While this is a complex issue, I believe that on balance, 
the appellate court's analysis was the correct one, a policy 
that has judges micromanaging Federal agencies' exercise of 
their enforcement authority and requiring the government to 
engage in lengthy and expensive trials in every instance would 
not serve the best interests of taxpayers or investors.
    As a former trial attorney, I can assure you that the 
results of a trial are never certain. They are also exhausting 
in both resources and energy. It therefore makes more sense, in 
my view, to leave the judgment of whether to try a case or 
attempt to settle it largely to the agency's discretion rather 
than shifting that responsibility to Federal judges.
    The agency is most knowledgeable about the merits, value, 
and difficulty of the case they are bringing. One can always 
second-guess but should do so with caution when second-guessing 
one in a better position to make that judgment call.
    Having said that, I realize that some have raised concerns 
about these settlement practices, and I am pleased we are able 
to examine this issue today in a bipartisan way. I thank the 
ranking member for working in a collaborative way to put this 
hearing together, and I will recognize him at a later time.
    But at this time, I will recognize Congresswoman Waters, 
the ranking member of the Capital Markets Subcommittee.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
this important hearing today.
    Last November, when Judge Rakoff rejected a negotiated 
settlement between the Securities and Exchange Commission and 
Citigroup, it captured the attention of the public and really 
focused us, in Congress, on just how frequently our financial 
regulators enter into ``neither admit nor deny'' settlements 
with the firms they regulate.
    These settlements, as you know, result in the defendant 
paying a fine but not admitting any wrongdoing. I understand 
that the Commission is constrained on how many cases they can 
prosecute because of budget concerns. I know that the SEC is 
often outgunned in terms of resources when they go up against 
the industry, and I know that Chairman Schapiro has advocated 
for legislative changes to empower the SEC to collect 
additional fines against recidivist offenders.
    Finally, let me be clear in saying that I will continue to 
fight for the SEC to have the resources it needs. But with that 
said, I remain concerned about the frequent use of the 
``neither admit nor deny'' settlements. While I know the SEC 
sometimes has a strong interest in settling cases quickly in 
order to get money into the hands of defrauded investors, the 
Commission also has a broader responsibility to enforce the 
rule of law.
    Settlements should never be viewed as just another cost of 
doing business, and I fear that could be the case. When no 
wrongdoing is admitted, it encourages repeat offenses. In fact, 
a recent New York Times analysis of enforcement actions brought 
by the SEC during the last 15 years found at least 51 cases in 
which 19 firms had broken antifraud laws they previously had 
agreed never to breach.
    Finally, to address our banking regulator settlement 
practices, let me note that I am concerned about the mortgage 
servicing concept orders the OCC and the Federal Reserve Board 
entered into with 14 banks and mortgage servicers, and I am 
eagerly anticipating the results of a GAO study that I 
requested on this topic.
    I look forward to exploring this topic more fully today and 
hearing our regulators' perspective on this important issue, as 
well as the views of the other witnesses, and I thank you.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Bachus. Thank you, Congresswoman Waters.
    At this time I recognize the chairman of the Capital 
Markets Subcommittee, Mr. Garrett, for 2 minutes.
    Mr. Garrett. I thank the chairman, and I thank the panel 
also for coming today. Although I will say this, I am a little 
bit skeptical as to what the actual motivation is for holding 
today's hearing. I understand that the Minority wanted to have 
this hearing to use it as a forum, if you will, to try and 
pressure the SEC not to exercise its legal discretion to enter 
into settlement agreements with banks because they think that 
those cases should be tried in court instead.
    This strikes me as nothing more than political opportunism, 
if you will, especially when one considers that these same 
individuals on the other side never miss a chance to voice 
their opposition when Republican bills try to curb any 
discretion by the SEC in the rulemaking process.
    Is this a double standard? I think it is. I think 
suggesting that Congress interfere with the SEC discretion to 
determine whether to spend taxpayer money on protracted 
litigation or to settle a case based on the facts that the 
lawyers in the Division of Enforcement have evaluated is 
    According to a Harvard Law School article, over 95 percent 
of lawsuits in the U.S. courts settle before they go to trial. 
Why is that? Because trials are time-consuming, expensive, 
risky, and unpredictable.
    The SEC understands this reality, and it acts in the best 
interests of investors and taxpayers when it settles those 
cases, despite what some other people might think. The fact 
that my colleagues on the other side of the aisle are even 
considering putting pressure on the SEC to use taxpayer money 
to go to trial instead of trying to reach settlements makes me 
question the actual motive, as I said at the start.
    Do they want to bleed the SEC of funds so that they can 
come back and justify spending more money elsewhere, or are 
they letting the trial attorneys know that, well, they haven't 
been forgotten. Or is this really some sort of a gimmick 
designed to appease the base of their party that blames all 
society's ills on the banks?
    Whatever the reason, the suggestion that this body should 
substitute its judgment for the judgment of the SEC lawyers who 
are privy to the facts and the circumstances of each individual 
case involving complex financial transactions, in my opinion, 
is completely misguided.
    With that, I yield back.
    Chairman Bachus. Thank you. Mr. Khuzami, since he has been 
in such a supportive mood of the SEC, you ought to the ask him 
for some more money.
    Mr. Khuzami. Can we have some more money?
    Mr. Garrett. You are doing such a good job in this area, I 
think that--
    Chairman Bachus. Thank you.
    I now recognize Mrs. Maloney, the ranking member of the 
Financial Institutions Subcommittee.
    Mrs. Maloney. Thank you, Mr. Chairman, and welcome to the 
witnesses today.
    While many agree that investors are entitled to restitution 
as a result of agency actions against institutions, there are 
still concerns about how to make those investors whole and how 
to ensure they help prevent future wrongdoing.
    One particular case has drawn the committee's attention to 
this issue and serves as the basis for this hearing, the 
rejection by the U.S. District Court of an SEC settlement in 
which there was no admission of wrongdoing. While I believe 
that admissions of guilt are more likely to be a deterrent, we 
must keep in mind the needs of investors who have been harmed 
in their ability to be made whole.
    Agency settlements return money to harmed investors quickly 
and allow the SEC to continue suits against individuals it 
believes have been fraudulent. However, I am sympathetic to 
Judge Rakoff's view that we do not want these settlements to be 
viewed as ``a cost of doing business,'' and that they have 
little impact on future behavior.
    There are many who believe we should follow Judge Rakoff's 
lead and require companies to admit wrongdoing in these cases, 
but I will be interested to hear from the witnesses today 
whether they believe this could lead to fewer settlements and 
could do a disservice to investors. The reality is that the 
budget this Congress has allotted the SEC is not enough to fund 
lengthy legal battles.
    Settlements, which happen much more quickly with an 
expenditure of fewer resources, are often the only available 
route for the Commission to take. And I would underscore that 
the SEC's budget has been cut and they have been given greater 
responsibilities under Dodd-Frank, and they have not even 
completed the rulemaking that they are required by law to do. 
So they definitely need more resources to handle the challenges 
ahead of them.
    I look forward to the perspectives of the witnesses today 
on this issue, and I thank you all for being here. And I thank 
you for calling the hearing, Mr. Chairman.
    Chairman Bachus. Thank you. At this time, I recognize the 
gentleman from Illinois, Mr. Dold, for 1 minute.
    Mr. Dold. Thank you, Mr. Chairman. I certainly appreciate 
it, and I want to thank the witnesses for your time, your 
testimony, and your experience. I appreciate that.
    To say the least, I think that most in the legal and 
regulatory community were surprised when the district court 
rejected the SEC settlement with Citigroup because Citigroup 
did not admit wrongdoing as part of the settlement. Of course, 
nearly all formal regulatory proceedings result in a voluntary 
settlement with the defendants not admitting to liability. So 
this district court ruling seems unprecedented.
    As I see it, a legal standard that requires wrongdoing 
admissions from the defendant as a condition of settling 
regulatory proceedings will diminish the number of settlements 
to something very close to zero. And the implications of a 
significant reduction in the number of voluntary settlements 
would seem to have some meaningful negative implications for 
all concerned: the victims; the taxpayers; the regulatory 
agencies; the courts; and the litigants themselves.
    So I look forward to hearing from our witnesses today as to 
what the implications are going to be.
    Mr. Chairman, I yield back.
    Chairman Bachus. Mr. Canseco for 1 minute.
    Mr. Canseco. Thank you, Mr. Chairman. Mr. Chairman, the 
mission of the SEC is to maintain fair, orderly, and efficient 
markets and to facilitate capital formation.
    Needless to say, there remains a serious question as to 
whether the agency settlement policies help fulfill this 
mission. Yet, there is a greater question about the direction 
the SEC has taken over the last several years. Almost half of 
the agency's budget goes towards enforcement and examination 
and, in turn, it appears that the agency believes pursuing 
headline-grabbing settlements is the best way to protect 
    The measure of a Federal agency's success should not be how 
much enforcement revenue it brings in after wrongdoing has 
already occurred; rather, in the case of the SEC, it should be 
whether fair, orderly, and efficient markets are being 
    And with that in mind, I look forward to hearing from our 
witnesses today on this matter.
    I yield back.
    Chairman Bachus. Mr. Green is recognized for up to 4 
    Mr. Green. Thank you, Mr. Chairman. I assure you I will not 
use the entire 4 minutes. I thank the ranking member as well. 
And I thank the witnesses for appearing.
    I think that we are at a point where we have at least one 
question that has to be answered: Are we going to allow 
megabusinesses to build into their bottom line acts that 
constitute violations of the law? A settlement is a good thing, 
but the question is, are we at a point now where businesses can 
simply sit and plan and conclude that we will have ``X'' number 
of settlements, ``X'' amount of damages possibly, and as a 
result, let's prepare for this knowing that we can cover and 
move on? There has to be some means by which businesses that 
settle these lawsuits also see themselves as being held 
accountable for wrongdoing. Wrongdoing cannot take place and 
become a part of a bottom line.
    I look forward to hearing the witnesses explain to us how 
we can prevent wrongdoing from being a part of the bottom line, 
and I yield back the balance of my time.
    Chairman Bachus. Are there any other Members on the 
Democratic side who wish to be recognized? If not, we will hear 
from our witnesses. Each of your written statements will be 
made a part of the record, and you will be recognized for a 5-
minute summary.
    We will begin with you, Mr. Alvarez.


    Mr. Alvarez. Thank you. Chairman Bachus, Congresswoman 
Waters, and members of the committee, thank you for the 
opportunity to discuss the Federal Reserve's enforcement 
    Authority to take enforcement actions is one of the 
important tools that Congress has provided the Federal Reserve 
to require financial institutions under its jurisdiction to 
address serious problems or risks and comply with the banking 
    The Federal Reserve employs a variety of formal and 
informal tools for addressing supervisory concerns found at 
financial institutions under our jurisdiction. The backbone of 
our supervisory tools is the examination process. Many problems 
are identified and corrected during the course of regularly 
occurring examinations while our examiners are still on-site at 
the institution.
    Improper conduct that cannot be immediately addressed may 
also be noted in the institution's examination report or in a 
supervisory letter as a matter that requires management's 
attention and corrective action. If a problem requires a more 
detailed resolution or is more pervasive at an institution, the 
Federal Reserve may enter into a memorandum of understanding in 
which the board of directors commits to specific corrective 
actions. These informal tools comprise the most common methods 
for identifying and addressing unsafe and unsound practices and 
correcting alleged violations of the banking laws.
    On occasion, the Federal Reserve has also confronted 
situations where financial institutions management refuses to 
correct an improper practice or to comply with applicable laws 
or where the practice or alleged violation is so serious that 
normal recourse to informal supervisory methods is not 
appropriate or sufficient.
    In these cases, the Federal Reserve will enter into a 
formal written agreement or impose a formal order directing the 
financial institution to cease and desist from engaging in the 
improper or prohibited conduct. These formal agreements and 
orders also require the institution to take specified 
corrective action and, where appropriate, to make restitution 
to third parties harmed by the wrongful conduct. We may also 
assess a civil money penalty against the offending party.
    Finally, the Federal Reserve may remove an individual from 
the banking institution and prohibit that individual from 
participating in banking at other financial institutions.
    Over the past 10 years, the Federal Reserve has taken 
nearly 1,000 formal public enforcement actions. This includes 
more than 600 written agreements and 100 cease-and-desist 
orders against institutions subject to our jurisdiction. It 
also includes the permanent ban of more than 80 individuals 
from the banking industry. More than 100 of these actions 
involved imposing civil money penalties and restitution 
payments totaling more than $1.2 billion.
    The vast majority of the Federal Reserve's formal 
enforcement actions are resolved upon consent. The Federal 
Reserve typically sets out summary recitations of the relevant 
facts in whereas clauses. However, like our fellow banking 
regulators, it has not been our practice to require formal 
admissions of misconduct.
    Requiring admissions of guilt as a condition of entering 
into a consent action we believe would have a deleterious 
effect on our supervisory efforts by causing more institutions 
and individuals to contest the requested relief in formal 
administrative proceedings, which typically take years to reach 
resolution. That would substantially impede and delay 
implementation of necessary corrective action and potentially 
harm the financial institution and the financial system.
    Moreover, safety and soundness concerns typically do not 
give rise to third-party claims. Thus, the effectiveness of the 
regulatory framework established for financial institutions 
does not depend on actions brought by third parties to enforce 
their rights under the regulatory scheme. In those few cases 
where an enforcement action cannot be resolved by consent, the 
Board may issue a formal notice of charges that sets forth the 
factual basis for the remedies sought by the Board.
    The respondents in these cases are then accorded the 
opportunity to request a formal trial-like hearing before an 
administrative law judge. Only 11 of the nearly 1,000 
enforcement actions taken by the Federal Reserve in the last 
decade were challenged by an administrative law judge. Only one 
of these actions has been contested in court.
    The Federal Reserve works closely with other Federal and 
State banking regulators as well as Federal and State law 
enforcement agencies on enforcement matters that raise issues 
that straddle our respective jurisdictions.
    We also refer matters to other appropriate Federal and 
State agencies, including law enforcement authorities. The 
Federal Reserve's enforcement authority is a critical component 
of our ability to encourage safe and sound banking practices in 
compliance with the banking laws, and I thank the committee for 
the opportunity to provide this information. I am happy to 
answer any questions.
    [The prepared statement of Mr. Alvarez can be found on page 
58 of the appendix.]
    Chairman Bachus. Thank you. Mr. Khuzami, before I call on 
you, let me say this: I am aware that we have a panel with 
three safety and soundness agencies and one disclosure agency. 
So there are some differences there. But while we are 
discussing this, there are also many similarities, so we have 
put the panel together but there are differences, which I 
    Mr. Khuzami?


    Mr. Khuzami. Thank you, Chairman Bachus, Ranking Member 
Waters, and members of the committee. Thank you for the 
opportunity to testify on behalf of the United States 
Securities and Exchange Commission on the subject of our 
settlement practices.
    The Division of Enforcement recommends a settlement to the 
Commission only where we believe the settlement agreement that 
we have negotiated after months or years of painstakingly 
detailed investigative work is within the range of outcomes 
that we reasonably could expect if we litigated the case. In 
making that decision, we consider many factors, including the 
strength of the evidence and the potential defenses, the delay 
in returning funds to harmed investors caused by protracted 
litigation, and the resources required for trial, including the 
opportunity costs of litigating rather than using those 
resources to investigate other cases and protect other victims.
    This approach serves the goals of the Commission's 
enforcement program by first protecting investors, by returning 
their money with increased speed and certainty, and by more 
quickly getting bad actors out of the business by imposing bars 
that prohibit them from continuing to work in the industry or 
serving as an officer or director of a public company.
    Second, it enhances deterrence and accountability because 
we outline publicly in detail both the wrongdoer and the 
wrongdoing, which the wrongdoer is prohibited from denying, by 
obtaining large sums of money in disgorgement and penalties, by 
frequently barring wrongdoers from working in the industry, and 
by imposing, where appropriate, business reforms to prevent 
companies from engaging in future wrongdoing, all accomplished 
while the misconduct is fresh in the public's mind as opposed 
to years later after a trial.
    This package of sanctions leaves little, if any, doubt in 
the public's mind that the securities laws have been violated 
and that other would-be violators should think twice before 
crossing the line. In our view, going the further step of 
requiring admissions of liability in every case from defendants 
would come at a high cost of delay: delay in bringing 
wrongdoers to justice; delay in returning funds to harmed 
investors; and delay in investigating other frauds and 
protecting other victims, all for a purported benefit that we 
believe is largely already achieved through our settlements.
    For example, in the Citigroup settlement, the Commission 
obtained most of what it could have obtained after a successful 
trial, including injunctive relief, business reforms, charges 
against the person responsible for the transaction, and a $285 
million payment to be returned to harmed investors, an amount 
which represented 81 percent of what we could have gotten in 
the best case had we prevailed at trial and been awarded full 
    And the bank issued a statement in connection with the 
settlement saying, in effect, that, ``We hope to be a stronger 
bank with better risk management controls in the future.'' 
Given that statement and given the totality of the settlement, 
it is not clear to me what an admission would add or whether it 
would be worth the cost of delay and resources.
    Nonetheless, the district court rejected our proposed 
settlement because it claimed we lacked facts obtained by 
admissions or by trial. But in granting our motion to stay the 
proceedings, the court of appeals ruled that it knew of no 
precedent for requiring admissions, that the SEC correctly 
considered the value of the settlement, the perceived 
likelihood of obtaining a still better settlement, the prospect 
of coming out better or worse at a trial, and the resources it 
would need to be expended in that attempt, and that it saw no 
reason to doubt that the Citigroup settlement was in the public 
    Whether in the Citigroup case or in any of our other 
financial crisis cases, where today we have filed actions 
against 102 individuals and entities, including 55 CEOs, CFOs, 
or senior corporate officers, and we have obtained orders of 
more than $2 billion in disgorgement, penalties, and monetary 
relief, we will recommend a settlement only where it makes 
sense and it serves the public interest, not because we lack 
    If the settlement doesn't reach our standards, we will not 
recommend it or the Commission will simply reject it. In either 
case, we will litigate.
    In our financial crises cases, 75 percent of our cases 
against individuals were filed as litigated matters. Since June 
2011, our trial unit in Washington has seen an increase of over 
50 percent more actively litigated matters.
    And when we litigate, we typically prevail. Our record in 
litigation victories--we have prevailed in over 80 percent of 
our trials since the beginning of Fiscal Year 2011--sends a 
strong message to defendants and enhances our settlement 
negotiating posture.
    However, litigation requires resources. The cost of trials, 
both in terms of the thousands of staff time hours and other 
out-of-pocket costs such as expert witnesses, can be 
exorbitant. That is why we believe it is wiser to save our 
resources by demanding settlements approximating what we could 
expect to achieve at trial and spending those saved resources 
on fighting other frauds or litigating when a settlement does 
not meet our standards. With this approach, more investors get 
more protection more of the time.
    Thank you, and I would be happy to answer any questions.
    [The prepared statement of Mr. Khuzami can be found on page 
74 of the appendix.]
    Chairman Bachus. Thank you. And let me apologize, I am 
always calling you ``Khuzami,'' instead of ``Khuzami,'' and my 
staff corrects me every time. Obviously, it didn't do any good. 
I will practice in front of a mirror before the next hearing.
    Mr. Khuzami. That is all right. It happens a lot.
    Chairman Bachus. Mr. Osterman?


    Mr. Osterman. Good morning, Chairman Bachus, Congresswoman 
Waters, and members of the committee. Thank you for the 
opportunity today to testify on behalf of the Federal Deposit 
Insurance Corporation about our settlement practices.
    In my testimony today, I will discuss the FDIC's approach 
to enforcement and the tools we have available, as well as the 
public interests benefits derived from our enforcement policies 
and procedures. The core mission of the FDIC is to maintain 
stability and public confidence in the Nation's banking system.
    As recent events have reminded us, the financial condition 
of banks influences the economy in direct, substantial, and 
often immediate ways. Mindful of this, the FDIC's supervision 
of insured depository institutions focuses on promptly 
correcting unsafe and unsound practices, violations of law, and 
breaches of fiduciary duty.
    Among the banking regulators, the combination of FDIC's 
responsibilities as supervisor, insurer, and receiver is 
unique. As supervisor, the FDIC is the primary Federal 
regulator for approximately 4,100 State nonmember banks, as 
well as over 400 State-chartered savings associations, and 
ensures the FDIC has backup enforcement authority for the rest 
of the over 7,000 FDIC-insured depository institutions.
    In addition, the FDIC acts as receiver for all failed 
insured depository institutions, and under Dodd-Frank we have 
substantial responsibilities for large, complex financial 
companies that may pose a systemic risk to our financial 
system. The FDIC, like the other Federal banking agencies, has 
been given very strong enforcement powers under Section 8 of 
the Federal Deposit Insurance Act. These powers are used when 
corrective action is needed to protect the public interest.
    The vast majority of our cases are resolved through 
stipulated settlements which achieve our statutory 
responsibilities and protect the public interest without 
admissions of liability. Indeed, requiring a respondent to 
specifically admit the alleged conduct in a settlement may have 
the unintended consequence of delaying prompt relief and 
corrective action.
    One of the corrective actions Congress has granted the 
agency is the authority to remove and prohibit individuals from 
banking when warranted under statutory authority. Under this 
authority found in Section 8(e) of the Federal Deposit 
Insurance Act, the agency has issued hundreds of removal and 
prohibition orders against insured affiliated parties who were 
determined to have dishonestly or recklessly engaged in 
violations of law.
    An AE order prohibits the individual from participation in 
any manner in banking under a lifetime industry ban. This 
powerful tool serves to address past conduct while also 
protecting the industry as a whole. Furthermore, a person 
subject to stipulated removal and prohibition is precluded from 
participating in banking immediately upon the order's issuance.
    Stipulated civil money penalty orders often accompany 
removal and prohibition actions as a means of further 
deterrence. The FDIC uses its enforcement authority to assess C 
and Ps against institutions and institution-affiliated parties 
where we have found violations of law and unsafe and unsound 
practices or breach of a fiduciary duty, under a progressive 
increase in the penalty amount based on the egregiousness of 
the conduct involved.
    Cease-and-desist orders are used as another enforcement 
tool for corrective action. For example, when banks are in 
troubled conditions, such orders allow us to quickly implement 
a detailed corrective program, which serves as a virtual 
roadmap for the institution to follow to correct practices and 
to raise capital to return the institution to a safe and sound 
condition. We believe that prompt action in such cases is 
essential to avoid loss to the insurance fund and cost the 
communities into the economic system as a whole that arise when 
a bank fails.
    Additionally, we have the power through cease-and-desist 
actions to order affirmative relief, including ordering an 
institutions or an institution-affiliated party who has 
unjustly been enriched to make restitution. And the power to 
seek restitution can be particularly important when an 
institution or institution-affiliated party violates consumer 
protection laws and regulations.
    In these consumer cases, orders for restitutions are 
vehicles for consumer redress and the FDIC has an interest in 
issuing such orders as quickly as possible.
    The FDIC also brings professional liability cases as a 
receiver for banks that have been closed by Federal or State 
regulators where our investigations uncover facts that support 
such actions. These cases, which promote good corporate 
governance and discipline, serve a very different purpose than 
the enforcement cases that I have addressed thus far.
    The professional liability cases are civil tort and 
contract actions and are intended to maximize recoveries for 
the receivership at stake in keeping with the statutory 
priorities set out by Congress.
    In conclusion, we believe the FDIC's process accomplishes 
its statutory responsibilities and purpose while ensuring that 
actions it takes serve the public interest promptly and 
    We would be happy to answer any questions. Thank you.
    [The prepared statement of Mr. Osterman can be found on 
page 84 of the appendix.]
    Chairman Bachus. Thank you.
    Mr. Stipano?


    Mr. Stipano. Thank you, Mr. Chairman, and members of the 
    I welcome the opportunity to appear before you today to 
discuss the OCC's supervisory and enforcement authorities and 
    The OCC vigorously uses its authorities to protect the 
safety and soundness of national banks and Federal savings 
associations and to ensure fair treatment of customers. The OCC 
and the other Federal bank agencies have a broad range of 
supervisory and enforcement tools to achieve this purpose.
    My written statement today covers the OCC's activities and 
perspectives on enforcement in three areas. The first is our 
overall approach to enforcement. The OCC's enforcement process 
is intertwined with our supervision of the institutions we 
regulate. These institutions are subject to comprehensive, 
ongoing supervision that, when it works best, enables its 
examiners to identify problems early and obtain corrective 
actions quickly.
    Once problems or weaknesses are identified, we expect 
management and the board of directors to correct them promptly, 
and institutions usually take the corrective steps necessary to 
address problems or weaknesses before they develop into more 
serious issues problems that adversely affect their financial 
condition or their responsibilities to their customers.
    That is not always true, however, and in some cases the 
seriousness of the problem requires a heightened enforcement 
response. In those circumstances, we have a range of 
enforcement tools at our disposal, from informal enforcement 
actions such as a commitment letter or memorandum of 
understanding to formal enforcement actions such as a formal 
agreement, cease-and-desist orders, or removal and prohibition 
    We use all of these tools, depending on the circumstances, 
to swiftly and forcefully require correction of unsafe or 
unsound practices and violations of law. These include actions 
taken to address a wide range of issues including capital 
adequacy, managerial competency, asset quality, earnings, and 
fair treatment of customers.
    The second part of my testimony describes the process we 
employ to initiate and resolve enforcement actions. When 
circumstances warrant enforcement actions, it is important that 
the OCC take such actions as soon as practical. Prompt and 
effective action is critical to ensuring that institutions take 
immediate corrective and remedial measures to ensure safety and 
soundness and protect depositors and customers. The OCC follows 
a well-established process for initiating and resolving 
enforcement actions that promotes its supervisory goals.
    In resolving cease and desist, civil money penalty, and 
removal in prohibition actions, it is the OCC's long-standing 
practice to present the actions in the form of a proposed order 
or a proposed order and stipulation in the case of C&D. A 
proposed order or stipulation includes the Comptroller's 
findings supporting an action and a statement that the 
institution or individual neither admits nor denies wrongdoing.
    In the vast majority of cases, OCC enforcement actions are 
resolved by consent. However, in those relatively rare cases 
where a negotiated settlement cannot be reached, the OCC will 
initiate an administrative proceeding by serving a notice of 
charges on the institution or individual.
    Permitting the institution or individual to settle the case 
without admitting or denying wrongdoing facilitates the 
imposition of an enforceable order at a point where, in many 
instances, the problems are still manageable and can be 
    If the OCC were to insist on an admission of wrongdoing, it 
would prolong settlement negotiations and increase the number 
of respondents who choose to litigate the merits of the action. 
Even if the OCC is successful in litigation, it could be 
several years before an order is issued.
    In the meantime, the institution's condition could continue 
to worsen and the institution might ultimately fail if the 
institution continues to engage in unsafe or unsound practices, 
or in a consumer protection case restitution owed to victims 
could be substantially delayed while new victims arise each day 
that the violation goes uncorrected.
    In either case, resources of an institution that could have 
been used to fix the problem are instead diverted to financing 
    The third part of my statement describes how the OCC 
coordinates with State and Federal regulatory agencies and with 
law enforcement agencies in enforcement cases. As further 
explained in my statement, the OCC coordinates closely with 
many Federal agencies and regularly shares information with 
State and Federal agencies pursuant to interagency information-
sharing agreements.
    Thank you very much. I will be happy to answer any 
questions you may have.
    [The prepared statement of Mr. Stipano can be found on page 
109 of the appendix.]
    Chairman Bachus. Thank you. I would like to compliment the 
entire panel for your opening statements. I thought they were 
very educational.
    Mr. Khuzami, can you give me an estimate of the length of 
time between bringing an action and a consent settlement and 
then the amount of time between bringing an action and, if it 
is litigated, and the final judgment?
    Mr. Khuzami. The time from opening an investigation to 
completing it and coming to a settlement is largely a function 
of the complexity of the case. But leaving aside those matters 
that we bring on an emergency basis to halt ongoing fraud or 
wrongdoing, it is typically in the 1- to 3-year range, I would 
    If you file it as a litigated case, the time from that 
point through trial, I think that we are in the range of the 
general stats for civil cases generally, which tend to be more 
in the 2- to 4-year range, which does not include appeals.
    Chairman Bachus. And with the appeals, how much does that 
prolong recovery by the investors?
    Mr. Khuzami. If the appeal was taken, that typically can be 
another year to 3 years as well.
    Chairman Bachus. So the investor recovers much quicker in 
the case of a settlement, consent settlement, in most cases, in 
two comparable cases in complexity?
    Mr. Khuzami. That is absolutely right.
    Chairman Bachus. How about the cost of enforcement or the 
cost of obtaining a consent settlement as opposed to the cost 
of litigating just in two similar cases?
    Mr. Khuzami. Obviously, you would have to spend the 
resources to get the settlement, but if you didn't, you chose 
to litigate rather than settle, we don't quantify it in that 
way, but I can tell you that it is thousands of hours of staff 
time in a complicated matter, expert witness fees, which are 
just one expense in the litigation, particularly in complicated 
financial transactions. It is not unusual for that to cost 
seven figures, and I can tell you that there are probably 
better metrics on the defense side where I have seen statistics 
that indicate the defendants can spend $5 million or $10 
million or $15 million litigating a case. So it is a 
considerable expenditure of resources. If it is a small case 
with half a dozen witnesses in a 3-day trial, obviously it 
would be less.
    Chairman Bachus. What are the factors in deciding whether 
to settle an enforcement action or procedure?
    Mr. Khuzami. As I indicated, it really comes down 
fundamentally to whether we can get in a settlement everything 
that we reasonably could hope to get if we were to go to trial 
and win, taking into account, as we must, the strength of the 
evidence, the defenses, the judge and all the other factors. 
And it is only when we meet that standard, really, do we settle 
a case.
    If we don't meet that standard, we will litigate, because 
obviously if you don't have a legitimate trial threat, if you 
don't communicate to the targets of your investigation that you 
are prepared to go to trial, then you can be exploited, 
defendants will simply hold off for a softer settlement and not 
fear the alternative. But in our case, we are fully prepared to 
litigate, and we are doing more of it.
    Chairman Bachus. All right. Thank you. Congresswoman 
    Ms. Waters. Thank you very much, Mr. Chairman.
    Mr. Khuzami, I would like to ask you about the Residential 
Mortgage-Backed Securities Working Group. There is some more 
information in the newspapers, I guess as of today, where 
Elizabeth Warren expresses no confidence in the current bank 
accountability measures. On April 26th, I led about 40 Members 
of Congress in writing to you and the other co-chairs of the 
Residential Mortgage-Backed Securities Working Group about my 
concerns that this important task force was stalled, that you 
didn't have the resources you required, and about the need for 
a strong executive director, to be clear. Does the RMBS Working 
Group have the resources you need to carry out your mission?
    Can you tell me as part of this RMBS task force work what--
can you say whether if SEC will enter into these ``neither 
admit nor deny'' settlements. With the firms you are 
investigating, I believe that it is important for the SEC to 
litigate some of these cases under the umbrella of this task 
force, given the commitment to justice and the promises that 
were made about this task force when the President made his 
State of the Union Address.
    Are you concerned that the task force still has not 
appointed an executive director? When can we expect an 
announcement on this? Your budget justification requested a 
total of 56 new full-time equivalent provisions in your 
Enforcement Division. Are any of these positions being 
specifically assigned to this task force and are any of the 
existing SEC employees being shifted to exclusively work on 
this task force?
    The reason I am pressing on this is that we have had this 
subprime meltdown in this country which created this recession. 
We have all of these foreclosures, and we don't have loan 
modification standards that services are employing. We are 
trying to keep homeowners in their home. We want to know what 
went wrong in many of our financial institutions.
    We have been making a lot of promises. What is happening 
with this task force? Is it working? Where is the executive 
director? Can you explain to me what is going on?
    Mr. Khuzami. Sure, Congresswoman. First, from the 
Securities and Exchange Commission's perspective and, as you 
see from our statistics, we have brought a significant number 
of financial crisis-related cases, 101 entities and 
individuals, 55 high-ranking CEOs and officer--
    Ms. Waters. Yes, but now you are part of a task force.
    Mr. Khuzami. Understood. I just want you to know that there 
is a record of productivity.
    Ms. Waters. Yes, but I want you to know I only have so much 
    Mr. Khuzami. Okay. With respect to the task force, we have 
a significant amount of resources. The five agencies that make 
up the task force have all contributed significant resources. 
We have a 40 to 50 member Structured and New Products Group, 
large portions of which are dedicated to these cases. Resources 
are being supplied by the Department of Justice and the New 
York State Attorney General. We have just hired a coordinator 
to help coordinate some of this activity. There is a lot of 
activity, a lot of investigation.
    Ms. Waters. What is happening with the executive director? 
Do we have one coming soon?
    Mr. Khuzami. Congresswoman, I think we are preparing a 
draft to respond to a letter that you sent. We hired a 
coordinator, but most of the investigative work being done here 
is not really being done by a staff that belongs to the task 
force; it is being done by the individual investigative groups 
that make up the task force.
    Ms. Waters. So, are you going to proceed with some 
investigating that is going to lead to some litigation, or are 
you going to continue to work in ways that will allow those who 
are being accused to ``neither admit nor deny'' and just keep 
settling and settling and settling as usual?
    Mr. Khuzami. Like I said, if we get offered a settlement in 
this or any other case that comes close to what we could hope 
to get in the best-case scenario at a trial, then I think we 
would be unwise not to settle under those circumstances. If we 
don't, then those cases will be litigated. We will follow the 
same procedures in all of our cases that we do for the RMBS 
task force, at least as far as the SEC is concerned. The other 
agencies may take a different view.
    Ms. Waters. Since you are here today, for all of the others 
who are involved in the task force, I think it would be wise to 
share with them that a lot of people are watching to see what 
is happening with this widely announced task force that is 
supposed to do all of these investigations and bring about some 
justice for many of these homeowners who got into mortgages 
they couldn't afford because they were all exotic and they were 
products that really could lead only to disaster.
    But let the task force know. We anxiously await what they 
are going to be able to accomplish and we think it is taking 
too long for them to get up and going and showing us what they 
can do.
    I yield back the balance of my time.
    Mr. Garrett [presiding]. The gentlelady yields back. The 
gentleman from Texas is next, I believe, for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. I think one thing 
that is obvious is that if this proposal actually becomes 
policy to force those subject to enforcement actions into 
admissions, there will be an explosion of litigation, civil 
litigation, litigation by our regulatory agencies.
    So when I first heard of this proposal, knowing that the 
Administration, both the worst employment record since the 
Great Depression, my immediate thought was, well, this was a 
trial attorney's relief act and that maybe this is another 
failed jobs program so that we can somehow reemploy trial 
    But, Mr. Chairman, as I look before me and I see the 
representatives of these agencies, I believe the head of every 
agency has either been appointed or reappointed by the 
President, in which case that is clearly a false conclusion 
because what I think I heard from all four witnesses and on 
behalf of their agencies, is they would oppose this policy.
    Mr. Chairman, I think I have just a few simple questions to 
make sure what I thought I heard, I actually heard, and so the 
first question I have for our panelists is, in your 
professional opinion, on behalf of your agency, will 
enforcement be more effective or less effective if you are 
forced in your enforcement actions to have parties admit guilt?
    Mr. Alvarez, less effective or more effective?
    Mr. Alvarez. I think it would be less effective.
    Mr. Garrett. Mr. Khuzami?
    Mr. Khuzami. I agree.
    Mr. Garrett. Mr. Osterman?
    Mr. Osterman. It would definitely be less effective.
    Mr. Hensarling. Mr. Stipano?
    Mr. Stipano. I agree with my colleagues.
    Mr. Hensarling. Okay. Well, then, my ears did not deceive 
    The next question I have is, in your professional opinion, 
would investors that you consider to have been wronged--do you 
believe if this becomes policy, that investors would end up 
with more resources or fewer resources to redress their 
grievances? Do you have an opinion on that, Mr. Alvarez?
    Mr. Alvarez. Sir, of course, the banking agencies look at 
things not from the investor point of view, but from the safety 
and soundness of financial institutions, so we are considering 
customers of the banks, depositors of the banks, the taxpayers 
who stand behind the deposit insurance.
    Mr. Hensarling. Let's go to the SEC, then. Mr. Khuzami.
    Mr. Khuzami. I think that while there might be some cases 
where they would get marginally more, that it would come at the 
cost of delay and at the cost of our inability to investigate 
other cases and bring money back to other victims.
    Mr. Hensarling. Let's go back, Mr. Alvarez, to safety and 
    My guess is that, again, those who are being asked to admit 
to guilt, frankly, are going to be very loath to do so in an 
enforcement action.
    I think what I heard in your testimony, and I don't wish to 
put words in your mouth, is that--and I think I might have 
heard it from you, too, Mr. Osterman, that in enforcement 
actions, particularly dealing with safety and soundness, that 
it is quite often important to move quickly. Litigation is 
something that doesn't move quickly historically.
    So will our financial system be more safe and sound or less 
safe and sound? Should this policy be enforced upon you to 
require parties in enforcement actions to admit wrongdoing? 
Greater safety and soundness or less safety and soundness?
    Mr. Alvarez.
    Mr. Alvarez. Oh, I think our system would be safer and 
sounder if we had the flexibility--
    Mr. Hensarling. If you had the flexibility. Therefore the 
flip side of the coin is less safe, less sound if you did not 
have the flexibility.
    Mr. Alvarez. I think that is correct.
    Mr. Hensarling. Mr. Khuzami, same question.
    Mr. Khuzami. Yes.
    Mr. Hensarling. Which of the two, since Mr. Alvarez kind of 
restated it?
    Mr. Khuzami. Again, we are less about safety and soundness 
than we are about investor protection. But if we were required 
to have the admissions, I do think that we would have more 
delay and fewer victims would get their money back.
    Mr. Hensarling. Mr. Osterman?
    Mr. Osterman. Yes, I think the system would be less safe 
and sound if we required an admission of liability, because we 
wouldn't be able to take the corrective actions as quickly.
    Mr. Hensarling. Mr. Stipano, take a full 12 seconds to 
answer the question.
    Mr. Stipano. I have the same view. If we required an 
admission of wrongdoing, that would delay the imposition of an 
enforcement action that could adversely affect safety and 
    Mr. Hensarling. Thank you, gentlemen. I yield back my 1 
    Mr. Garrett. The gentleman yields back. Mrs. Maloney is 
    Mrs. Maloney. Thank you, Mr. Chairman.
    Mr. Khuzami, you said in your testimony that your decision 
to settle is based on whether or not you believe the settlement 
is equal to what you would achieve with a trial.
    I would like to ask you to elaborate on how the 
appropriations process and your funding level impacts on your 
decision, and would you be more likely to initiate more actions 
if you had independent funding and more resources similar to 
other banking regulators?
    Mr. Khuzami. Oh, I think independent funding would help us 
greatly across the Enforcement Division. We would be able to 
litigate more cases. We would be able to investigate more 
cases. We would be able to have better technology which would 
make us more efficient, and more trial lawyers. It would help 
us across-the-board.
    Mrs. Maloney. One of the persistent criticisms is that many 
people belief that the SEC's penalties do not deter bad actors. 
And one of the criticisms is that the settlement penalties 
amount to pocket change or, as the judge said, ``the cost of 
doing business.'' And how does such a penalty deter bad actors?
    Mr. Khuzami. Congresswoman, candidly, I don't agree with 
those assessments at all. Within the statutory limits that we 
have with respect to penalties, we impose significant and 
substantial penalties.
    The Goldman Sachs case was identified as one where the 
penalty was deemed to be insufficient. In fact, the company 
paid 37 times what they expected to make in a fee for that 
single transaction and a penalty.
    So our penalties are substantial, they send a strong 
message, but they are limited by the transaction at issue. When 
we impose a penalty for financial crisis-related conduct, we 
can't assess a penalty based on all the wrongs arising out of 
the financial crisis. It has to be based on the evidence of the 
particular transaction at issue.
    And second of all, we can't get investor losses as a 
penalty. We are limited to disgorgement, which is the amount 
the company earned on the transaction and a penalty equal to 
the amount of the disgorgement. We can't get the investor 
losses. So if a company only earned $20, we can get that $20 in 
disgorgement and another $20 in penalty, but we can't get the 
$100 that the investors might have lost. That is why Chairman 
Schapiro has written Congress and asked for expanded penalty 
    Mrs. Maloney. Okay, so basically you are limited by 
statute, the penalty that you can charge, is that correct, you 
are limited, and it is outlined? So would you describe some 
legislative changes that would permit the SEC to levy larger 
    Mr. Khuzami. Chairman Schapiro proposed that we have 
various penalty mechanisms. The first is sort of a tiered 
approach, and Tier 3 is the most substantial penalty category. 
It currently is $725,000 per violation, per institution. She 
proposed that it be increased to $10 million.
    She also asks that we could use investor loss as a gauge to 
measure penalty or 3 times the gain. And that is really for 
those situations--it wouldn't come into play in every case, but 
there are some cases where the investor loss so dwarfs the 
amount of disgorgement and the gain that we could get that you 
would like some more authority.
    We also asked for authority to add additional penalties in 
the case of recidivists, those who have been previously 
convicted of a criminal violation or an SEC order or decree and 
those who violate injunctions. Those remedies would help us a 
great deal.
    Mrs. Maloney. Thank you. And the bank regulators--in one of 
your testimonies, you noted that consent agreements allow the 
banking regulators to enforce compliance with banking rules and 
make corrections that can prevent a bank failure.
    So if the banking regulators were prevented from allowing 
the defendant of an enforcement order to ``neither admit nor 
deny'' the allegations in the order, how would enforcement 
change for the banking regulators?
    Any banking regulator who wants to answer?
    Mr. Alvarez. Congresswoman, as I mentioned in my statement, 
I think that it would substantially delay our ability to get 
effective changes at the organization and put in jeopardy, 
then, the safety and soundness of the institutions themselves, 
and put the taxpayers at greater risk.
    Mrs. Maloney. Would anyone else like to add anything?
    Mr. Osterman. I would just add that we do have several 
tools in our arsenal on the enforcement front, including 
removal and prohibition. So if we do see continuous action or 
egregious action, we actually can remove the individuals from 
banking, which doesn't require them to admit or deny any 
    Mr. Stipano. The only think I would add is just that the 
consequence, the primary consequence of requiring admission is 
delay. So our enforcement documents, which are remedial 
documents in nature, they are designed to rehabilitate the 
institution, would not get in place very quickly or as quickly 
as they do now, and that could affect the safety and soundness 
of the institution.
    Mr. Garrett. Thank you. The gentlelady's time has expired. 
The gentlelady yields back. I recognize myself.
    First of all, just very quickly, Mr. Khuzami, with regard 
to the practices and enforcement and settlement practices that 
you are talking about today, these are current practices that 
you are discussing?
    Mr. Khuzami. That is correct.
    Mr. Garrett. But these are also longstanding practices at 
the SEC as well?
    Mr. Khuzami. The ``no admit, no deny policy'' goes back to 
the 1970s.
    Mr. Garrett. So if the SEC had been funded at the level 
that the President has requested in Fiscal Year 2013, would 
these longstanding practices change in any way, shape or form?
    Mr. Khuzami. With respect to ``no admit, no deny'' in 
    Mr. Garrett. Yes.
    Mr. Khuzami. The practices wouldn't change, we just would 
be able to bring more cases.
    Mr. Garrett. Did the SEC enforcement actions change? Did 
the practices themselves change or were they any different when 
the Democrats controlled the House?
    Mr. Khuzami. No. We had the same policies in place.
    Mr. Garrett. Thanks. So what we are talking here in general 
is about enforcement of when financial institutions are accused 
of breaking specific rules and regulations. So maybe I was 
going to go a little bit off from that but just talk about some 
of the new rules and regulations that are currently being 
proposed and developed out there.
    Mr. Alvarez, I will turn to you on that. One is in the area 
of money market funds. There are new proposals to deal with 
them and it is in summary reports, in the paper, that if the 
SEC fails to act in this regard, to provide additional 
regulations with regard to money market funds, the Fed, FSOC, 
may step in and engage in that process and supersede the SEC's 
regulatory authority and basically exert its authority over the 
industry individually or designate the entire industry as 
systemically important.
    When I read those reports, one of the things that came to 
mind, and what I have seen in some of the papers on this, is 
that regulating the money market funds would be one way to 
basically put money market funds effectively out of business 
and then to have the funds in that segment of the economy flow 
from them, and where else would they go but to the banking 
institutions, which would be a way for them to backfill some of 
the banks that are out there, which would be a way to then 
provide for additional capital for them to make them more safe 
and sound, which of course is what you have been saying is, 
rightly so, the responsibility of the Fed.
    Is that the avenue or the approach that the Fed takes to 
this regulation?
    Mr. Alvarez. Sir, I read a lot of things in the newspaper, 
too, and sometimes I believe them and sometimes I don't.
    Mr. Garrett. So I shouldn't believe any of those reports?
    Mr. Alvarez. I think that the FSOC has made clear that 
money market mutual funds are an area that requires attention. 
That was in the report issued last July. The FSOC made some 
recommendations in that area, and the SEC is moving forward on 
taking steps to improve the safety and soundness and the 
strength of money market mutual funds, and we all, I think, 
await the SEC's action on that. That is as far as the Federal 
Reserve has made any statements or participation at this point.
    Mr. Garrett. Let's look at one other area. The area of risk 
retention which Dodd-Frank talked about, but outside of Dodd-
Frank and some of the proposals that are out there that was not 
contemplated in Dodd-Frank is the PCCRA, which is the Premium 
Capture Cash Review Account, many people state, again in 
reports but I agree with these reports, that if this is 
implemented, it would basically put capital on the sideline, it 
would freeze up the markets, the securitization markets which 
are already frozen and basically keep the Federal Government on 
the hook as far as providing financing for the marketplace, the 
housing marketplace. Mark Zandi estimates that the cost of this 
would be 1 to 4 percent in additional financing costs for 
consumers, which I have read and agree with.
    Now, Chairman Bachus and myself have written to the Fed 
twice asking, are those numbers correct, or more specifically, 
has the Fed done a cost-benefit analysis or any analysis on the 
cost? I think my last letter was back around March 26th. So I 
will ask you a couple of questions along those lines. Has the 
Fed done such an analysis? Does the Fed intend to reply to 
either one or both of the letters that Chairman Bachus and 
myself sent to the Fed inquiring about this?
    Mr. Alvarez. Obviously, we will reply to your letter.
    Mr. Garrett. That is good.
    Mr. Alvarez. The question of premium capture--as you 
recall, the risk retention rule is not a Federal Reserve rule 
alone. This is a multiagency rule.
    Mr. Garrett. My time is short. What is the Fed doing? Will 
you reply? And will you reply with an analysis?
    Mr. Alvarez. We will reply as best we can during the 
comment period. We have gotten a lot of comments on the premium 
capture accounts and the concerns people had with how the 
proposal was designed. And so we are analyzing your comments, 
as well as other comments.
    Mr. Garrett. Have you done an analysis yet?
    Mr. Alvarez. We are in the process of doing an analysis.
    Mr. Garrett. And when is the completion date on that 
supposed to be?
    Mr. Alvarez. We are working on that as best we can.
    Mr. Garrett. Do you have an estimate on the completion date 
on that?
    Mr. Alvarez. I do not.
    Mr. Garrett. Like this week? This month? This year after 
the elections?
    Mr. Alvarez. It will not be this week. I am sorry, 
Congressman. That is the best I can do at this time.
    Mr. Garrett. It will be done before the rule goes out?
    Mr. Alvarez. Absolutely.
    Mr. Garrett. We will be anxious, I think the chairman and I 
will both be anxious to hear back to either one or both of our 
    With that, I yield back. And I recognize Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Osterman, the U.S. District Court for the Southern 
District of New York rejected a proposed settlement between the 
SEC and Citigroup and specifically criticized the SEC policy in 
consent judgment, stating the policy does not serve any 
interest other than those of the party. How would the FDIC's 
enforcement and compliance process be affected if you were 
prevented from allowing institutions to enter into consent 
decrees without having to admit or deny any allegation?
    Mr. Osterman. I think the decision would have a negative 
effect on our ability to carry out our statutory functions. As 
has been discussed by several of the panelists, if we were 
required to get an admission or denial of liability, the other 
side is quite likely not going to agree to that without a long 
litigation and possibly until after a judgment has been 
entered. They may not agree to it at all. And so, we could be 
talking about rather than getting the corrective action taken 
care of within a matter of months or a shorter period of time, 
looking at years.
    Ms. Velazquez. How do you address the troubling aspect for 
average Americans who are watching this proceeding, and how 
would you discourage or be a deterrence if people know that 
they don't have to admit guilt?
    Mr. Osterman. I think the process actually has been 
working. The fact is we have been able to effectively police 
the industry and to make corrective actions through this 
policy. If you look at our actions in the last 5 years, we have 
brought over 2,000 enforcement actions, and we have removed 377 
individuals from banking who had engaged in improper 
activities. We have issued over 753 civil money penalty orders.
    And so, I think the process is working as it is. We are not 
afraid, and we are certainly ready to litigate if that is 
necessary. But one of the things about our powers is that our 
process works through administrative process, so when we issue 
the order, it is effective immediately.
    Ms. Velazquez. So what is the criteria for you to determine 
when it is necessary?
    Mr. Osterman. The criteria is, has our statutory mission 
been achieved? Has the action that was improper been corrected?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Garrett. And the gentlelady yields back. Mr. McCotter 
is recognized.
    Mr. McCotter. Thank you, Mr. Chairman, I have a couple of 
questions. I hope that they are not repetitious. If they are, I 
    When structuring a settlement, do we address the concerns, 
as colleagues like my colleague Representative Green have 
raised, where you make sure that an entity that is entering a 
settlement does not net out a profit despite the fact of the 
payment? Because you would hate to have a situation where 
someone is engaged in an act that you have taken them to court 
over, and at the end of the settlement process, the bad act 
still nets out a gain for the entity? Is that something you 
factor into when deciding how the settlements go?
    Mr. Khuzami. From the SEC's perspective, the first thing we 
are entitled to obtain in a settlement or in a trial is 
disgorgement, which means all of the ill-gotten gain can be 
obtained by us. So if you get all of the ill-gotten gain, then 
you have eliminated that issue, and then you get a penalty on 
top of that. That way, you make sure that it is not a wash from 
the defendant's point of view. These are additional amounts 
that they are paying to be punished, if you will, for engaging 
in the misconduct.
    Mr. McCotter. So on your part you do consider that a 
    Mr. Khuzami. Yes.
    Mr. McCotter. You want to make sure they don't net out at 
the end of the day the cost of business argument?
    Mr. Khuzami. That is correct.
    Mr. McCotter. Where does the money--would anybody else like 
to address that? You all do the same thing?
    Mr. Alvarez. At the Federal Reserve, we do the same thing 
with one variation. We don't have express authority to achieve 
disgorgement of the profit. We have a specific statutory 
schedule of fines that we are allowed to impose, but we take 
into account the amount of the profit that is made in assessing 
how to employ those fines and we do the best we can to ensure 
that there is no profit-taking from illegal activity.
    Mr. McCotter. Where do the proceeds of the settlement go, 
again? I am sure it was asked and I might not have been 
cognizant of it. Generally, where do they go?
    Mr. Khuzami. From the SEC's perspective, we obtained the 
so-called Fair Fund authority under Sarbanes-Oxley, so we are 
now able to take the disgorgement and the penalties and return 
them to harmed investors.
    If there are no harmed investors, or more amounts are 
obtained than there is harm, then it goes to the U.S. Treasury.
    Mr. McCotter. Does that hold true with everything else?
    Mr. Alvarez. For the Federal Reserve, we are required by 
law to provide the fine portion of an assessment directly to 
the Treasury. However, we also have authority to require 
restitution to customers, and we do that as well.
    Mr. McCotter. The reason I ask this is, and maybe this is 
not necessarily in your instance but there have been reports of 
other instances where you have had bad acts reported by an 
entity, voluntarily, prior to the government being aware of 
them. They would then go into a settlement with the agency they 
were involved with, and the money would remain within the 
agency's budget.
    I am not saying, and again, I take you at your word, I 
believe you that yours is not the agency I am discussing. So I 
am just glad to see that from you individuals and from your 
agencies' entities that we have not gone from a point where 
these banks are no longer just too-big-to-fail; they have 
become ``too-big-to-jail.'' And I thank you for that.
    I yield back.
    Mr. Garrett. The gentleman yields back.
    Mrs. McCarthy is recognized for 5 minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman, and I 
thank the panel. It has been very interesting clarifying--I am 
one of those who, over the years when I would read in the paper 
about the settlements, and to be very honest, why didn't 
somebody go to jail? I have a better understanding from all of 
your testimony. I just want to follow up because I have almost 
the same question as Mr. McCotter.
    On the Citi settlement, it was $285 million. So no money 
went back to your agencies to pay for what it cost to bring the 
settlements to that point?
    Mr. Khuzami. We have absolutely no ability to use the money 
that we obtain in fines, penalties, or any other monetary 
sanctions and use that money for our own purposes. It either 
goes to investors or it goes to the Treasury.
    Mrs. McCarthy of New York. So technically, the American 
taxpayer is paying you to go against the bad guys, but we don't 
get any money back.
    Mr. Khuzami. The Treasury gets money back but we--the SEC 
does not. We then get appropriations, obviously.
    Mrs. McCarthy of New York. What does the Treasury do with 
the money?
    Mr. Khuzami. I am not quite sure. You would have to ask 
    Mrs. McCarthy of New York. Obviously, we are not sure 
    And one other question to you, after settlement and after 
the court cases but before the Second Circuit came to their 
decision, on January 7, 2012, you modified settlement language 
by bringing in language for cases involving criminal 
convictions where a defendant has admitted violations of the 
criminal law, and if the defendant has been convicted in a 
parallel criminal proceeding, the SEC will no longer allow that 
defendant to settle the SEC enforcement action without 
admitting wrongdoing.
    Could you explain that a little bit more to me on how that 
works and how is that going to affect what you said earlier in 
your testimony and from the beginning of this hearing that 
sometimes it is better to settle than to prosecute?
    Mr. Khuzami. Sure. We constantly review all of our 
policies, and that change was a result of our review, and those 
circumstances are where there is a parallel criminal case, and 
in the criminal case, the defendant has either pled guilty or 
been convicted at a trial. So there already exists, if you 
will, an admission, and then he or she settles the SEC civil 
case. Under those circumstances, extracting the admission makes 
perfect sense because the admission has already been obtained, 
and by us demanding the admission we are not causing delay or 
more litigation or any of the other evils that we are trying to 
prevent through the ``no admit, no deny policy.'' So it just 
makes sense because the admission has already been obtained. It 
doesn't apply in that many cases because there are not criminal 
convictions or criminal pleas in a large majority of our cases.
    Mrs. McCarthy of New York. Okay. And just one more question 
to all of you, when proceeding with enforcement action against 
an institution engaging in wrongdoing, is there ever a time 
when ``neither admit nor deny'' is not an option?
    Mr. Khuzami. The whole range of options are already there. 
We can choose to stray from our policy and demand admission. It 
is our view that the best approach is to use the ``no admit, no 
deny'' approach for the reasons I have stated today. But it is 
not a law that we are required to use; it is an informed policy 
that we choose to use.
    I will also say that, just to keep in mind for ``no admit, 
no deny,'' everyone focuses on the ``no admit,'' but there is 
also a ``no deny'' aspect, which means in our settlements, 
individual entities can't then after the settlement get on the 
courthouse steps and say, ``We deny liability.'' There are 
other Federal agencies including the FTC, the Department of 
Justice--the FTC just settled cases with Facebook and with 
Skechers yesterday, I think, and DOJ settled a civil case with 
Countrywide and Fair Lending where it is only a ``no admit'' 
policy, which means the defendants can deny liability. We do 
not permit that, and we monitor that very closely because we 
think that would undermine the integrity of the process and the 
deterrent impact.
    Mrs. McCarthy of New York. Thank you, and I yield back the 
balance of my time.
    Mr. Garrett. I thank the gentlelady, and I thank you for 
that point. I had not ever recognized that.
    Mr. Posey is recognized for 5 minutes.
    Mr. Posey. Thank you very much, Mr. Chairman. I dDefinitely 
believe there is a place for consent decrees, no doubt about 
it, but I think when we have consent decrees where nobody 
admits any guilt and they only pay a relatively minor fine, 
that it will not change bad behavior.
    I think when you prosecute people and the penalty is 
severe, that changes behavior. Under the RICO laws, you don't 
just fine the company $40 million for $40 million worth of bad 
behavior. You fine them $80 million for $40 million worth of 
bad behavior, you take the Mercedes, you take the office 
building, you take the Rolex watch, and that changes behavior. 
The only way you change behavior more than that is when you put 
somebody in jail. That really is a game changer. I don't see 
anybody going to jail. With all the criminal activity we have 
seen from Wall Street, I just see a real lack of accountability 
and prosecution.
    I don't expect any of you to be able to answer this today, 
so with the chairman's permission and the other Members' 
permission, I would like to ask each of you to please submit in 
the next week information to us about how many criminal 
prosecutions for wrongdoing you have actually pursued and how 
many convictions you have. We have some notations in here. Some 
of you submitted that but they didn't get that explicit.
    I would like to know how many stipulated settlements you 
have had, I would like to know the amount of the settlements, 
and also the amount of damages that the settlement was 
pertaining to or been established. Please do not send me any of 
those stupid brochures that the public relations department 
does for you guys that talks about how great you are and just 
highlights a couple of wonderful things that you did. All I 
want is the facts, simple, pure, nothing more, nothing less and 
nothing else. I think the other Members would appreciate that 
    Mr. Stipano, I think overregulation is a problem. I think 
when your regulators go into a bank and they say, we are going 
to put this loan on nonaccrual because the parents made the 
payments while the kids were unemployed, I think that is 
improper. When they say, we are going to put this loan on 
nonaccrual because it was modified, it was renewed, and the 
interest rate was changed, I think that is bad behavior. The 
most egregious thing I have ever heard is when your regulators 
go into the bank and say, we don't think these people should be 
able to make their payment given this economy even though the 
loan has been in existence for 7 years and they have never been 
more than one minute late, they found a way to make the 
    I think it is egregious when your regulators break the 
rules provided by the Fed that says you shouldn't mark down a 
loan or put a loan on nonaccrual just because the appraisal is 
upside down. We have a lot of bad behavior by regulators, too, 
and I would like to know who holds them accountable? The old 
appeal used to be to their boss. But I want to know if there is 
an outside agency that objectively looks at abuse by 
regulators, because I think that is happening. We have talked 
about it in here. We have nodding of heads from the Secretary 
of the Treasury, the Chairman of the Federal Reserve, and the 
former Chairwoman of the FDIC. So this is not something that we 
are all imagining up here. That is just the reality outside the 
Beltway where a lot of people in the real word have to live and 
make a living every day despite what is happening in 
    So I would like to know if any of you have investigated any 
investigations or compensation committees who have awarded the 
prima donna CEOs multimillion dollar bonuses as they have the 
helm of the sinking ship all at the stockholders' expense. I 
think it was Andrew Jackson who said something to the effect 
of, it should be a crime when people profit by investors' money 
and gobble up the proceeds in their own bonuses and then turn 
around and stick the stockholders, the investors with the 
losses. They don't count those.
    And I would like to know, also put in your reference to us, 
how many compensation committees you have investigated for 
impropriety in abusing stockholders' money.
    I have actually been involved once with a false charge, and 
the other side attempted to intimidate me, so that even though 
it may have been wrong, it would cost me so much in legal fees, 
and for 25 percent of that, they would be glad to settle. And I 
basically told them, at the end of the day you are going to own 
everything I have or you are going to have nothing, and they 
didn't have a good enough case to pursue it. But I can't think 
that I am an exception to the rule; I am sure there are a lot 
of people being shaken down across America every day, 
wrongfully shaken down. I want to see some wrongdoers go to 
prison. I think it is an obligation of yours to see that 
happens because it is the best way, the surest way we are going 
to change the process, we are going to change the paradigm, we 
are going to change the behavior of people who have been 
getting away with wrongdoing for way too long in this country.
    And I thank you, Mr. Chairman.
    Mr. Khuzami. If I could just respond briefly, we will pass 
your request along to the Department of Justice but we don't 
have criminal authority; we can't put anyone in jail and I 
don't believe my colleagues here can, either. That is the 
province of the Department of Justice, but I will be happy to 
pass along your request.
    Mr. Posey. Mr. Chairman, I have asked the Department of 
Justice for the exact same information I have asked you for, 
and I am having difficulty getting it from the Department of 
Justice. So you should know what referrals you have given to 
the Department of Justice and what the outcome of that referral 
is. And I should be able to get that information from you even 
if the Department of Justice has not been that forthcoming so 
    Thank you.
    Mr. Garrett. The gentleman yields back.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Khuzami, I think you said all the right things about 
the decision to settle cases. And I know just about every 
lawyer who actually goes into court says that a bad settlement 
is usually better than a good trial.
    But you also said the right thing, that if your reputation 
is of being unwilling to try cases, you will never get a decent 
settlement, and that was also my observation in practicing law.
    It is hard to measure, it is really hard from our 
perspective, without being submersed in the facts of the law as 
you are, which obviously cannot possibly happen to decide, to 
determine whether you are settling cases on the right basis or 
settling for enough or going after the right people.
    The Inspector General of the FHFA, the Federal Finance 
Housing Agency, reviewed the settlement of Freddie Mac with 
Bank of America and Countrywide, it has probably been a year, 
and issued a very critical report that they had settled too 
cheaply, they had settled on the wrong basis for the wrong 
reasons, their emails suggested that they wanted to protect the 
business relationship with Bank of America and pushing too hard 
might damage their relationship, like they aren't the entire 
market for buying mortgages. Is there anyone who can review or 
has reviewed your settlements?
    Do you have an Inspector General? Is there some third party 
who can review the settlements that you have entered into?
    Mr. Khuzami. We do have an Inspector General. The position 
is currently vacant. But we will have one shortly. There hasn't 
been an overall review of settlements. Settlements have been 
reviewed, I think, episodically. But I will tell you there is a 
great deal of scrutiny and review within the Commission, not 
just from the Enforcement Division. When we investigate a case 
and come up with a recommendation, that recommendation is the 
defense counsel gets all the opportunities to put all their 
    Mr. Miller of North Carolina. But the idea behind an 
Inspector General, which I have come to admire, is that there 
is an independent watchdog within agencies that have Inspectors 
General that report to the head of the agency and to Congress, 
and I think they give a slight headstart to the head of the 
agency, but they report both to Congress and the independent 
agency. So, they have an open transom for any employee to tell 
them about things at that agency that someone should look at, 
and it is a pretty useful management tool both for Congress and 
for the executive agencies, and it was certainly very useful, I 
think very useful, that the IG at the FHFA is examining their 
litigation to make sure that they are not being settled too 
cheaply or not being pursued as vigorously as they should be, 
and they are independent.
    I understand that you have a lot of eyes within the SEC 
looking at these cases, but do you have anyone independent, who 
will provide a fresh set of eyes that may be critical?
    Mr. Khuzami. No. There is no ongoing general review of 
    Mr. Miller of North Carolina. Okay. And I know that you do 
not have criminal authority, but--and a lot of the calls for 
putting people in jail have sounded like Judge Roy Bean, the 
Old West judge, who said, ``We'll give the man a fair trial, 
and then we'll hang him.'' I understand that there is due 
process. But I think there has only been one criminal 
prosecution for conduct that was really part of the financial 
crisis. I am not talking about prosecuting a homeowner or a 
broker for exaggerating income on their application, but I am 
talking about actually in the securitization process, and those 
are the two guys at Bear Stearns, which resulted in an 
    Have there been others? And there have been referrals from 
the Levin commission, the Levin committee, to the Department of 
Justice, the Financial Crisis Inquiry Commission also made 
criminal referrals. Do you know if anything has come of those 
and have you made other criminal referrals?
    Mr. Khuzami. There have been some other prosecutions. There 
are indictments of high-ranking traders at Credit Suisse for 
mismarketing their subprime portfolio. There was successful 
prosecution of Colonial Bank for mortgage-related fraud. We 
have made referrals and, look, I was with the Department of 
Justice for 11 years as a prosecutor in New York. I can tell 
you the Department is focused and committed to these cases and 
is looking very hard at them. They are challenging criminal 
cases to make for a variety of reasons, primarily because the 
securities laws are premised on disclosure, and if you sell a 
RMBS security or a CDO and it has dozens of pages of risk 
disclosures and someone buys it nonetheless, you have to be 
able to prove that what was concealed from an investor was 
something that was not disclosed.
    They are just challenging cases to make for a variety of 
reasons, but that shouldn't be taken as evidence of a lack of 
commitment on the Department of Justice, from what I see.
    Mr. Garrett. The gentleman's time has expired. Mr. Dold is 
recognized for 5 minutes.
    Mr. Dold. Thank you, Mr. Chairman, and I certainly want to 
thank you all again for your time and your testimony today. I 
just have a series of questions and it should be pretty quick. 
For the entire panel, what percentage of your case load is 
settled before trial? Just a rough idea, just a quick--
    Mr. Alvarez. About 99 percent.
    Mr. Dold. About 99 percent. Mr. Khuzami?
    Mr. Khuzami. I think about one-third of them are litigated, 
so about two-thirds are settled.
    Mr. Dold. So 66 percent. Mr. Osterman?
    Mr. Osterman. High 90 percent.
    Mr. Stipano. Ninety-eight, 99 percent.
    Mr. Dold. If this policy is put in place where it is 
required that wrongdoing must be determined or admitted in a 
settlement, do you think the percentage of settlements is going 
to go up or down?
    Mr. Alvarez?
    Mr. Alvarez. The percentage of settlements would definitely 
go down.
    Mr. Khuzami. They would go down.
    Mr. Osterman. They would go down.
    Mr. Stipano. Fewer settlements.
    Mr. Dold. I have put in my opening statement that I think 
it is going to go down significantly.
    Does anybody think it is not going to go down 
    Mr. Khuzami. I think they will go down significantly. I 
think what you also would see is settlements may eventually 
happen, but there would also be a significant amount of delay 
even if they ultimately settle.
    Mr. Dold. In your various agencies, will you be able to 
handle more cases or less cases if this policy were to be put 
in place?
    Mr. Alvarez?
    Mr. Alvarez. We would likely require much more staff to 
handle the same amount of cases.
    Mr. Dold. So, ultimately, if you had the same amount of 
staff you have right now, you would be able to handle less 
cases, right, is that right?
    Mr. Alvarez. I think that is right.
    Mr. Khuzami. I think that is right, fewer cases.
    Mr. Osterman. It definitely would tie up staff, and we 
would be able to handle fewer cases.
    Mr. Stipano. We would operate less efficiently, we would 
need more staff.
    Mr. Dold. Less efficiently, fewer cases. Okay. So will 
victims, the taxpayers, the litigants themselves be better of 
or will they be set back if this policy were to go into place?
    Mr. Alvarez?
    Mr. Alvarez. Sir, I think from our perspective, the 
taxpayer and the depositors' financial institutions would be 
less safe and sound than they are under the current policy.
    Mr. Khuzami. I think the investors would receive not as 
much by way of funds in exchange for their losses, and they 
would get it on a much delayed basis.
    Mr. Osterman. Institutions and depositors would be much 
less safe and sound. We wouldn't be able to take as many 
    Mr. Stipano. The safety and soundness of our institutions 
could be compromised. Also, I think there would be substantial 
delays in some cases, and less restitution paid to consumers 
who are victims.
    Mr. Dold. And I certainly agree with my good friend and 
colleague that we are looking to make sure that those who have 
done illegal things, we want to make sure that they are held 
accountable, that they are put away, in those instances going 
to jail, because I do think that does send a shock wave in 
terms of wrongdoing.
    Another question for the panel is, do you think you have 
competent staff attorneys who work for the agencies?
    Mr. Alvarez. Absolutely.
    Mr. Khuzami. I think they are highly professional and 
competent and dedicated, and I am proud to be associated with 
    Mr. Dold. I am glad to hear that.
    Mr. Osterman. Yes.
    Mr. Stipano. Yes, sir.
    Mr. Dold. So good, competent staff attorneys. In your 
opinion, do you think they understand the complexities in the 
implications of settlement?
    Mr. Alvarez. Yes, I think we do.
    Mr. Khuzami. Yes.
    Mr. Osterman. Yes.
    Mr. Stipano. Absolutely.
    Mr. Dold. Are you forced, does anybody force your staff 
attorneys to take a settlement? So in the implication, you say, 
you know what? We really want to take this one to trial, this 
is a big case, we have to take this to trial. Is anybody 
forcing them to take the settlement if it is not the right mix 
or it is not right for the agency?
    Mr. Alvarez. No, we only settle cases in the way that we 
think is appropriate for the action and gets the kind of 
remedial action that we think is appropriate.
    Mr. Khuzami. No, we have internal debates and discussions 
about the strength of the evidence and evaluate the case, but 
no one is forcing a settlement.
    Mr. Osterman. No one is forcing a settlement. We look at 
the merits of the case and decide to go forward where it is 
    Mr. Stipano. No, we only settle cases when it achieves our 
supervisory goals.
    Mr. Dold. And so, at least I am glad that I heard you all 
properly. I thought that was the case, and so I am just trying 
to get a better handle on the policy.
    If this policy were to move forward, it seems to me that we 
are going to take an enormous step backwards, a step backwards 
for the taxpayers, for the litigants, for everyone. And we have 
competent staff attorneys out there who are weighing the pros 
and cons and whether they want to settle. I certainly 
appreciate your comments here today, and I hope that we have 
shed a little clarity for those who are watching all across the 
    Mr. Chairman, I yield back.
    Mr. Garrett. The gentleman yields back. The gentleman from 
Massachusetts is recognized for 5 minutes.
    Mr. Frank. Thank you, Mr. Chairman. I apologize, I had a 
previous engagement that I had to deal with at the World Bank. 
And I am grateful to Chairman Bachus. I had asked him if we 
would have this hearing because this is a case where there are 
important public policy questions that needed to be addressed. 
And I apologize if I am being--I will try not to be repetitive.
    I will say once again, and I gather my colleague Mrs. 
Maloney asked Mr. Khuzami about this, given the Federal budget, 
the enormous amount that is spent in so many other areas, I 
think it is deeply regrettable that fiscal constraints drive 
some of this, and when people are critical of the agencies they 
ought to factor in what is inadequate funding on the part of 
the Congress. Money is a lot or a little depending on the 
context. When we talk about hundreds of millions of dollars for 
the Securities and Exchange Commission or the Commodity Futures 
Trading Commission, which isn't represented here, for their 
carrying out law enforcement, we sometimes call that a lot of 
money. Of course in another context, specifically JPMorgan 
Chase, with $2 billion, we are told there is nothing to worry 
about, and I think maybe there is a happy medium there.
    Mr. Khuzami, I take it you have said that one of the things 
you have to factor in, in deciding whether to prosecute or 
settle is financial constraints, is that correct?
    Mr. Khuzami. That is correct. If you are doing case ``A,'' 
you are not doing case ``B,'' and so there are opportunity 
costs with everything.
    Mr. Frank. There obviously is not an infinite amount of 
money, but I think there is more money out there that we should 
make available to the SEC. I think if in fact we were to make 
some more money available, even an increase of a couple hundred 
million dollars, which again in the context of--we are talking 
about the defense budget today. I read a New York Times article 
the other day that said a $500 million investment in teaching 
Iraqis how to be policemen turns out to have been largely 
wasted and it is going to be aborted. That is, of course, far 
more in total than the budget of the CFTC, and half of that 
would have gone a long way in enforcing this.
    The other question I have is--and again if it has been 
asked, just tell me that, and I will apologize, but one of the 
things that has frustrated people is seeing people promise not 
to do it again for the second, third, fourth or fifth time. Is 
there reasonable doubt, the three strikes and you are out rule, 
not out but three strikes and you can't settle again, and how 
do you address all of those who are frustrated by the repeat 
offenders who for the fifth time say, I am sorry, I won't do it 
again, and that is the end of it?
    We will start with you, Mr. Khuzami.
    Mr. Khuzami. I would say first that our recidivism rates 
for individuals are extremely low. That is anecdotally, just 
based on cases that I see, but there are very few repeat 
offenders who are individual persons, and when they do, those 
are most often the ones that we would work closely with the 
Department of Justice--
    Mr. Franks. What about entities?
    Mr. Khuzami. Institutions are a different story. Although 
even then, to understand whether or not an institution that has 
had more than one violation deserves a higher sanction because 
of the second violation, it is a little--
    Mr. Frank. You make a distinction there that some people in 
our society don't accept; you are distinguishing between 
individuals and institutions. But there are those who believe 
that corporations are people, in which case the distinction you 
are making wouldn't hold. But, please continue.
    Mr. Khuzami. I understand. All I am saying is if in year 1, 
you had a mortgage violation in Seattle in an institution, and 
in year 3, you had a currency violation with the peso in Mexico 
in year 3, whether or not that is deemed to be a recidivist 
institution, you have to look to see whether or not there are 
common links between the misconduct there. But your point is 
well-taken. That is why Chairman Schapiro has asked for 
additional penalty authority for recidivists.
    Mr. Frank. Do we have to give you that? Is that statutory?
    Mr. Khuzami. Yes.
    Mr. Frank. I hope we will take that up. And then let me say 
finally, I understand that if it is a different part of the 
entity, it is a different type of thing, it is not 100 percent 
repeat, but neither is it zero. And an institution that does 
one thing wrong in one place one year and 2 years later does 
another thing wrong in another place, that ought to be at least 
a percentage; the recidivism shouldn't be all or nothing. But I 
appreciate that and I will be working with the staff on our 
side and will be talking to the chairman. I would hope that 
people who have been at all critical of you would agree that 
giving you the power to increase the penalty for recidivism, 
appropriately defined, would be a very important thing to do.
    Thank you.
    Mr. Garrett. The gentleman yields back. Mr. Luetkemeyer for 
5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I am just kind of curious, gentlemen, whenever your agency 
is proposing new rules, do you do a cost-benefit analysis on 
each one of those rules?
    Mr. Alvarez?
    Mr. Alvarez. Yes, we do. There are certain kinds of cost-
benefit analysis that we are required to do by statute, the 
Regulatory Flexibility Act for example, the Paperwork Reduction 
Act we do particular analysis there, but in addition to that as 
part of our rulemaking process, we consider various alternative 
approaches to implementing the rules and the relative costs and 
benefits of those different alternatives.
    Mr. Luetkemeyer. Mr. Khuzami?
    Mr. Khuzami. Congressman, in the Enforcement Division we 
really don't have rules, in Dodd-Frank we had--
    Mr. Luetkemeyer. I understand. I have someplace to go with 
    Mr. Khuzami. Okay.
    Mr. Luetkemeyer. Generally, you don't, though?
    Mr. Khuzami. We don't. We have the whistleblower rule in 
Dodd-Frank. That was it.
    Mr. Osterman. We do consider the costs and benefits in 
looking at--we are statutorily required to do so.
    Mr. Luetkemeyer. For every rule?
    Mr. Osterman. We do look at alternatives and the way things 
can be done, yes.
    Mr. Stipano. I am not normally involved in the rulemaking 
function at my agency, but my understanding is that we do 
consider the costs and burdens to the industry of specific 
    Mr. Luetkemeyer. Quite frankly, I sit on this committee, I 
have been here a long time now, and all of your colleagues have 
been coming through here, and I have gotten different answers 
from them on that particular issue. And it is disturbing 
because you can do a cost-benefit analysis on your cases to 
decide when you need to go, when you don't need to go, who you 
need to go after, when you need to settle. So you can do it, 
but you don't do it on every single rule that you promulgate. 
That is a problem, and I am frustrated with that because quite 
frankly especially with the smaller institutions, they can't 
survive with this continued onslaught of rules and regulations 
that you are promulgating that are really not necessary and yet 
they are costing them an arm and a leg to comply with. And I am 
frustrated with that.
    But moving on, I am just kind of curious. You believe that 
each one of you has enough authority, I know, Mr. Khuzami, you 
have mentioned a few things already that you would like to see 
more flexibility with and more things.
    What about the other three of you? Do you see some things 
that you would like to see where you would have more tools in 
the toolbox to be able to go after the bad guys spoke, so to 
    Mr. Alvarez. No, I think at this point we think Congress 
has already addressed many of the concerns we have had.
    Mr. Luetkemeyer. Mr. Osterman?
    Mr. Osterman. I would agree. We have quite a few tools in 
the toolbox, which we talked about in our testimony.
    Mr. Stipano. At this stage, it is a very big toolbox.
    Mr. Luetkemeyer. It is a very good toolbox. Thank you. I 
think you are doing a good job. I don't have a problem with 
what you are doing I am just a little frustrated with some of 
the other things.
    Do you believe that by having all the tools that you have, 
that your enforcement presently is adequate, or do you need to 
do more or do less? Are you okay where you are at? What do you 
think? Do you think that--as we go through and somebody has a 
problem, like JPMorgan lost some money the other day but 
obviously a bank is in business to take risks. And the first 
thing everybody does is run out and ask, has somebody done 
something wrong? Is the penalty too far? Are we doing enough 
investigation? What do you think?
    Mr. Alvarez. During the 4\1/2\ years of the financial 
crisis, beginning in 2008 up to the present, we have done 3 
times more formal enforcement actions than the 5 years prior to 
that. And that is driven, I think, a lot by the behavior of the 
institutions and the concerns that are raised at the 
    My hope is not so much that we will raise the number of 
enforcement actions to try to achieve a certain number, but 
that the industry will get back to a better, more coherent and 
more safe and sound and compliant mode.
    Mr. Luetkemeyer. Mr. Khuzami?
    Mr. Khuzami. I think we could certainly use more. We 
understand the importance of using what we have efficiently and 
appropriately because it is taxpayer money. But having said 
that, the SEC oversees 35,000 registrants, investment 
investors, broker dealers, public companies, transfer--
    Mr. Luetkemeyer. You think we need to go after more people?
    Mr. Khuzami. I think we need to be able to investigate and 
survey the landscape more thoroughly and bring more cases.
    Mr. Luetkemeyer. Mr. Osterman?
    Mr. Osterman. You can always improve processes but I think, 
as with my colleague at the Fed, our enforcement actions have 
increased substantially. I think that is as a result of what 
has been happening in the industry, but I think we do have the 
tools necessary to address these issues that we are doing.
    Mr. Luetkemeyer. Mr. Stipano?
    Mr. Stipano. The OCC has taken about 2,200 enforcement 
actions in the last 4 years. We think that those actions, 
coupled with our supervision, our supervisory actions, help 
promote the safety and soundness of the system and improve 
compliance with the law.
    Mr. Luetkemeyer. Thank you all for trying to squeeze in one 
more question quickly. With regards to Mr. Osterman, one of the 
things that the FDIC has is an insurance fund to back up and 
pay for some of the wrongdoings or the misgivings of some of 
the institutions. Right now, the investment banks are being 
merged into the depository banks. Do you feel that is a threat 
to the insurance fund?
    Mr. Osterman. It is certainly something that we would need 
to look at very carefully. To any extent that you have exposure 
of the insurance fund, it creates a risk. And so, it is 
something that we would have to be concerned about.
    Mr. Luetkemeyer. I see my time is up. Thank you very much. 
Thank you, Mr. Chairman.
    Mr. Garrett. And the gentleman yields back.
    Mr. Watt is recognized for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman. I had to step out, and I 
lost my place in the queue.
    Mr. Garrett. So, never step out is the rule.
    Mr. Watt. Don't ever step out of the room, that is the 
lesson to be learned from that. But in a sense I am kind of 
glad I did because I had the opportunity to hear Mr. Posey's 
line of questions and was relieved that he blew up the theory 
that Mr. Garrett had advanced that this was somehow; this 
hearing was somehow a Democratic conspiracy and that there is 
somehow some partisan position on this issue.
    This is a very difficult issue, the extent to which we 
require people to litigate or settle, or oversee settlements. 
My views on this are informed by 22 years of practice of law, I 
guess, in which I both litigated numerous cases and settled 
numerous cases and never walked away from a case not having 
second thoughts about whether I did the right thing or the 
wrong thing whether I litigated it or settled it. It is a very 
complex set of things that go into that, having to do with the 
cost of litigation, the prospects of winning or losing, the 
whole myriad of issues. And I don't think there is any partisan 
position on that, as Mr. Posey has in his comments indicated.
    Mr. Alvarez, you were kind enough to make the distinction 
between your job as the Fed's job is protecting the safety and 
soundness of institutions versus protecting customers, which is 
a lot different, I take it, from what the SEC's responsibility 
is, and I appreciate you making that distinction.
    Mr. Khuzami, you mentioned that the SEC has the right to 
require disgorgements of profits that were obtained improperly, 
but there are some limitations on the extent to which you can 
recover lost investor investments as a result of wrongdoing. 
Can you elaborate on that and tell us a little bit more about 
the request that the SEC has made for additional authority in 
that area?
    Mr. Khuzami. Certainly. We are entitled to obtain 
disgorgement, which is ill-gotten gains, plus a penalty equal 
to the amount of that disgorgement. And so, to take a simple 
    Mr. Watt. Tell me what you are not entitled to do.
    Mr. Khuzami. What we can't do is look at how much the 
investors lost in a transaction and get that amount as a 
    Mr. Watt. And can you give any of that disgorgement or the 
penalty back to investors?
    Mr. Khuzami. We can give it all back, but there are cases 
where it falls short of what they lost.
    Mr. Watt. Okay, and so what is the remedy, the additional 
authority that you have requested?
    Mr. Khuzami. Chairman Schapiro has requested that our 
penalty authority be increased in a couple of different ways; 
one, just using up to the amount of the investor loss as an 
amount that we can obtain in a penalty. As an alternative, to 
get 3 times the gain as a penalty if it turns out that that 
amount might be greater than the investor loss and it would be 
appropriate to get it. And third, to increase the tiers, which 
are the statutory ways that we can get penalties on an 
alternative calculation.
    Mr. Watt. And to complicate this even further, that would 
be as an alternative to some kind of private right of action in 
which individuals would be able to go in and do their own 
enforcement actions, I take it, is that correct?
    Mr. Khuzami. That is correct, although a private plaintiff 
who won at trial and lost $100, if they had received $50 of it 
from the SEC as part of our distribution presumably would only 
be entitled to get the remaining $50 in the private litigation.
    Mr. Watt. My time is about up. But I will just say that 
this is a very tricky area here that we are dealing with and if 
there is some partisan Republican position on this, I hope you 
will communicate it to your colleagues on the Judiciary 
Committee because they have been all over the lot on whether 
settlements are appropriate, regulatory enforcement is the 
appropriate remedy, private rights of action they hate with a 
passion, I don't know how they sit on the Judiciary Committee 
and take that position, but posturing this as a partisan issue 
is I think not a good thing to do, Mr. Garrett. I am directing 
that comment to you.
    Mr. Garrett. And I appreciate that.
    The gentleman's time has expired.
    The gentlelady from New York is recognized.
    Dr. Hayworth. Mr. Chairman, I am happy to yield to 2 
minutes to you or--
    Mr. Garrett. I appreciate that. I won't use all that. Just 
two quick points. Mr. Khuzami, during the panel you mentioned 
on at least a couple of occasions with regard to the issue of 
civil penalties and the potential for changing that--my 
understanding is that Chairman Schapiro has written to Congress 
on that suggesting that it should be done, but the request on 
that letter has only gone to the Senate and has not been 
directed to the chairman of the committee or myself, is that 
true? And if so, is there a reason why we are not in the loop 
on this?
    Mr. Khuzami. I believe that is the Senate--the letter was 
addressed to Senator Reed. I am sure we would be happy to send 
it along here as well.
    Mr. Garrett. The ranking member brings it up, and others 
have brought it up as well, but if it is a legitimate position 
that the agency is looking for, we would certainly like to be 
included on that.
    And the second point is with regard to the funding issues 
and what have you. I just remind--the ranking member is not 
here on this--but I believe Chairman Schapiro asked for a 
funding level at $1.6 billion, but for some reason the 
Administration came in at $1.5 billion. So if the issue were, 
as the other side argues, one of funding, then you would think 
that they would be asking for the complete funding that 
Chairman Schapiro was asking for. I am mindful of the fact that 
the President's budget, of course, has come through both Houses 
now and apparently has not received a single vote in either 
House, so that may be part of the rejection from both, from the 
other side of the aisle, that they disavow anything to do with 
what the Administration is suggesting in their funding for this 
program and other programs as well.
    And with that, I yield back to the gentlelady from New 
    Dr. Hayworth. Thank you, Mr. Chairman. And I thank our 
panel for the most informative perspective on challenges you 
face in cost-effectively and efficiently enforcing the law 
without unnecessarily disrupting the services that the American 
public needs.
    With that, I think just summing up what we have been 
talking about, the American public needs assurance that your 
approach is working and that you are not missing out on 
appropriate deterrent measures, which is what punishment is 
supposed to be, in order to expedite processes.
    If each of you could in about 30 seconds, and I apologize 
for the restriction, but just give the best argument that we 
can give to the American public for continuing to pursue 
enforcement under the methodology that you have now?
    Mr. Alvarez?
    Mr. Alvarez. It allows us to most quickly and efficiently 
require institutions to change their behavior and to provide 
resources to customers who have been harmed.
    Dr. Hayworth. Mr. Khuzami?
    Mr. Khuzami. I think if you look at the entire package of a 
settlement, which is a substantial financial penalty, a 
detailed complaint laying out the allegations, business reforms 
where appropriate, individuals charged, people barred, all of 
the legal costs, reputational damage, client concerns, 
shareholder concerns, everything that is packaged up in a 
settlement both as a result of the agency's action as well as 
simply the consequence of the wrongdoing, all told it really 
has a powerful deterrent message.
    Mr. Osterman. It allows us to accomplish the purposes of 
our statute and meet the public interest in an efficient and 
effective way and avoids protracted long-term litigation which 
may actually lead to less effective regulation.
    Mr. Stipano. We have taken a large number of enforcement 
actions in recent years. It is really only a small part of what 
we do when you consider the corrective action that is obtained 
through the examination process. And once we put an action in 
place, we are not done. Our examiners monitor for compliance 
through the exam process, and if those actions are violated, we 
can take progressively severe actions against the institutions.
    Dr. Hayworth. Thank you. Mr. Chairman, could I possibly ask 
for 1 additional minute? I have one more question.
    Mr. Garrett. You still have time.
    Dr. Hayworth. Would each of you tell us, is there some 
modification you might make, if possible, that would be even 
more productive in terms of the way in which you pursue your 
protective actions for the public?
    We will start with Mr. Alvarez.
    Mr. Alvarez. Our policy is to not require admission of 
guilt. In some cases more recently, we have also prohibited 
folks from denying guilt. That is a practice the SEC does 
regularly, and we are considering whether we should adopt that 
    Mr. Khuzami. For us, it is more about resources and the 
enhanced penalty authority.
    Dr. Hayworth. Thank you.
    Mr. Osterman?
    Mr. Osterman. We believe our practices are working quite 
    Dr. Hayworth. Thank you.
    Mr. Stipano. We are comfortable with our present approach.
    Dr. Hayworth. Thank you all. And thank you, Mr. Chairman.
    Mr. Garrett. And I thank the gentlelady very much.
    Mr. Scott is recognized for 5 minutes.
    Mr. Scott. Thank you very much. First, let me yield 10 
seconds to the gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Mr. Chairman, I just wanted to ask unanimous 
consent to put into the record a copy of the letter that was 
written by the SEC to Jack Reed, the chairman of the committee 
and in it, in the first paragraph, it does say why it is 
addressed only to the Senate as opposed to the House, because 
it was in response to a hearing that was being held there and 
was requested by the Senate.
    Thank you.
    Mr. Garrett. Thank you. Without objection, it is so 
    Mr. Scott. Thank you, Mr. Chairman. Let me ask a question 
about the investors, when they can and cannot bring a lawsuit. 
Mr. Khuzami, does an SEC settlement preclude or not preclude an 
investor from bringing action against a defendant?
    Mr. Khuzami. It does not preclude.
    Mr. Scott. And would you please describe how the SEC's 
settlement does not preclude that?
    Mr. Khuzami. An injured investor or a shareholder is 
entitled to bring their own private cause of action 
irrespective of what the SEC does.
    Mr. Scott. And what are the types of cases where the SEC 
can bring a case against a defendant?
    Mr. Khuzami. All sorts of accounting violations, disclosure 
violations, registration violations, everything that is 
actionable under the securities laws, the Foreign Corrupt 
Practices Act violations, et cetera.
    Mr. Scott. And in such cases, does the fact that an 
investor cannot bring an additional action change the decision-
making process for determining whether it is appropriate or not 
to settle with the defendant?
    Mr. Khuzami. No. In general, we are going to follow the 
same guidelines that I outlined previously.
    Mr. Scott. Okay, and let me ask you about repeat offenders. 
Are they treated differently? How does the SEC identify and 
pursue repeat offenders?
    Mr. Khuzami. With respect to individuals, if we see repeat 
offenders, that is more likely to result in a criminal referral 
and us working with criminal authorities to bring criminal 
sanctions to bear on the individual. Otherwise, we take past 
violations into account in setting our penalties. We have the 
same ceiling that I described earlier, but within that ceiling 
we have discretion, and it would be standard and appropriate 
for us to extract higher penalties for recidivists.
    Mr. Scott. And does the SEC consider previous settlements 
by a defendant with either the SEC or another regulator when 
considering bringing an enforcement action against a defendant?
    Mr. Khuzami. We would consider the previous violation, not 
necessarily the settlement. If we knew that somebody had 
violated the law, particularly in a similar way to what we are 
currently looking at, we would most assuredly take it into 
    Mr. Scott. Would an admission of guilt in a previous 
settlement or a trial change how the SEC considers future 
actions against defendants?
    Mr. Khuzami. No, not necessarily. No, I don't think it 
would because when we conduct our investigations and arrive at 
a settlement, our view is that what we have found in that 
investigation is accurate and correct and true, as a result of 
months, if not years of investigations.
    So we settled the prior violation. Even without an 
admission, we know what that person or that entity did 
previously, and we take that into account.
    Mr. Scott. And do you believe that the infrastructure that 
you have in place now, the process, the procedures, is this 
sufficient moving forward to protect the markets, to protect 
investors, to protect everyone? In other words, do you feel you 
have all the necessary tools that you need or is there 
something else we need to do here in Congress to help you do a 
better job?
    Mr. Khuzami. From the enforcement perspective, we did the 
largest restructuring in the history of the Division of 
Enforcement in 2009 and 2010, created specialized units, cut 
out a layer of management, created a COO, upgraded tips and 
complaints, did a lot of things, but still, we have a strong 
need for IT resources so that we can better collect all of the 
information we get and search it, better monitor our cases.
    We need additional trial lawyers, and we need additional 
private sector experts to help us in very technical fields, so 
it is really those kinds of resources that would be most 
helpful to our effort.
    Mr. Garrett. I thank the gentleman. The gentleman's time 
has expired. The gentleman from Arizona is recognized for 5 
    Mr. Schweikert. Thank you, Mr. Chairman, and as you always 
worry sometimes when you see the empty chairs, understand you 
are never not in front of a television camera, so when we are 
running between offices, you are on all these screens around 
the building.
    In the types of--let's just take a year's worth of 
different settlements for the last couple of years. Would I 
ever find a case where the decision was bifurcated, where the 
firm entered into a settlement agreement and said, we are going 
to change our practices, but an individual in the firm was 
referred to criminal action?
    Are there any cases like that, where it has provided you 
flexibility to even sort of break up saying, I have an 
individual bad actor over here but the firm didn't have certain 
control mechanisms and that was their failure. That was more 
worthy of a settlement, this needed a criminal referral?
    Mr. Khuzami. Yes. There are many cases where the entity may 
settle the matter. The individual employee may continue to 
litigate with us and may be referred to criminal authorities as 
    Mr. Schweikert. And do your settlements always cut off 
private rights of action?
    Mr. Khuzami. No, they don't cut off private rights of 
action at all.
    Mr. Schweikert. Okay, I am sorry, that was partially 
because I heard--I may have misheard. I thought I heard someone 
on my other side say that, so I wanted to come back to you.
    Mr. Khuzami. There are some laws that we can proceed under 
that private plaintiffs can't, but our actions don't cut them 
off. In fact, our actions help them because when we file a 20- 
or 30-page complaint laying out all of our evidence and emails 
and meetings, plaintiffs can use that.
    Mr. Schweikert. And, Mr. Chairman, this would be for 
whoever would have this expertise. Okay, you do a settlement. 
How much of the discovery work of that settlement is public?
    Mr. Osterman. When we do a settlement, all of our orders 
and settlements are public. They are required to be, under the 
    Mr. Schweikert. So in that case, you have actually done 
much of the research for--if there was some private right of 
action, you have actually done much of the work for it.
    Mr. Osterman. The work that has been done internally would 
be our work product. But in terms of the actual settlement 
itself, it is a public document. It has to be published.
    Mr. Schweikert. I am just sort of curious, and this one I 
probably shouldn't go to, but how much of the work product goes 
immediately public and how much of it is discoverable, either 
through a Freedom of Information request or other court action?
    Mr. Stipano. I think one problem for us as bank supervisors 
is that our enforcement actions are really based on findings of 
our examinations, which by regulation are confidential.
    Mr. Schweikert. And if you were to think about it, over the 
last 12 months, how many settlements have there been, and I 
won't hold you to an exact number.
    Mr. Khuzami. In Fiscal year 2011, we filed 735 cases. About 
two-thirds eventually settled, some before litigation, some 
during litigation.
    Mr. Schweikert. If you were to take a sort of a guess, how 
many of those, from both rumor to facts--and I am not going to 
hold you to a number--do you think also had other legal actions 
moving either after or in parallel? And I know that is a little 
    Mr. Khuzami. That is speculation.
    Mr. Schweikert. Okay, jump on to another one. How many of 
those did you have, my sort of earliest scenario, which is sort 
of a bifurcation, where a bad actor was referred to either 
criminal or other types of litigation where the firm was 
separated out with a settlement to clean up its practices?
    Mr. Khuzami. Again, I would have to--I don't know off the 
top of my head.
    Mr. Schweikert. Okay, but it is a scenario that does 
    Mr. Khuzami. Yes, although candidly, most of the time, if, 
because, because corporations have liability because of the 
acts of their employees, if the company is under scrutiny and 
the individual is under scrutiny, it is likely to be both under 
criminal scrutiny and SEC scrutiny. It is not so often that one 
would go to one place and one would go to the other. Because if 
the individual engaged in something that might be criminal, the 
criminal authorities are also going to be interested in the 
    Mr. Schweikert. Okay, and I note in my last 14 seconds, and 
you have already touched on this once before, okay, 700-some 
cases last year, if you were in an environment where you had to 
litigate everything, what happens to you? What happens to 
compliance, what happens to the mechanics out there?
    Mr. Khuzami. I think you have to shift a substantial amount 
of your resources from your investigative staff to your trial 
staff, which means investigations are not getting done, which 
means there are a lot of people who did bad things who are 
running around out there who are not being caught, and a lot of 
investors lost money who are not being compensated.
    Mr. Schweikert. Thank you. Thank you, Mr. Chairman.
    Mr. Garrett. Thank you. Mr. Ellison is recognized.
    Mr. Ellison. Thank you, Mr. Chairman. And let me thank the 
panel. There has been some questioning around what would happen 
if you had to try every case or what would happen if no 
settlement could include a nonadmission provision. Has there 
been such a proposal made as that?
    Is there an existing proposal, are there agencies that 
offered a proposal which said you must try every case, or if 
you do settle a case, it can only be settled with an admission 
of responsibility or guilt?
    So this discussion that we have had about not being able to 
settle cases, while interesting, doesn't really bear out any of 
the proposals that you all have made. Am I right about that?
    Mr. Khuzami. Not in our proposal, and other than Judge 
Rakoff's opinion, which has now been questioned by the Second 
Circuit, there is no proposal that I am aware of.
    Mr. Ellison. Yes, okay, okay. Because I am an old trial 
lawyer myself, and I can't imagine a situation where you could 
make a prophylactic rule prohibiting nonadmission clauses. I 
think these things have to be done on a case-by-case basis.
    But here is another question related to that, and this is a 
question that I know comes with some risk for anybody who 
answers it perfectly candidly, but I am just going to throw it 
out there anyway. Do you believe, based on resource issues or 
lack of resources, that you have had to settle cases that you 
would rather have gone forward and prosecuted, or do you 
believe you have settled cases that should have included some 
admissions but didn't simply because it would just cost too 
much and take too much time and energy and resources to demand 
that you would get results? Do you understand my question?
    Mr. Khuzami. The resource issues don't dictate whether or 
not we require admissions. We have a policy that I have 
described, and we follow it regardless.
    The lack of resources can affect cases in a more indirect 
way. There is some category of cases that you are going to 
pursue to the ends of the Earth, regardless. There are others 
where maybe you are going to narrow the theories, so you don't 
need an expert witness, or you are going to maybe charge only 
two defendants rather than four.
    Mr. Ellison. Yes.
    Mr. Khuzami. And more, it manifests itself more in those 
kinds of decisions.
    Mr. Ellison. Mr. Stipano, do you want to address that?
    Mr. Stipano. The only thing I would add is that we don't 
initiate cases that we aren't prepared to litigate, and I think 
if we departed from that we would have a much harder time 
settling cases. I think one of the reasons why we are able to 
settle them so efficiently is that the respondents on the other 
side of the case know that we are prepared to litigate it all 
the way through the Court of Appeals if necessary.
    Mr. Ellison. Exactly, and it is those other cases that I am 
worried about. For example, there are numerous companies 
existing in America today who can drown you guys. They can just 
drop buckets of interrogatories, requests for admissions, 
depositions, et cetera. I know you can imagine that there are 
some corporations it would be tough to tangle with. Can you 
imagine a scenario where you wouldn't charge them because even 
though you think they are wrong, you just can't handle them?
    Mr. Khuzami. We punch above our fighting weight.
    Mr. Ellison. Okay. I like to hear that. That is the right 
spirit, Mr. Khuzami. Thanks.
    Mr. Alvarez. The other thing the banking agencies have that 
helps us quite a lot is we examine the institutions that we 
regulate on a very regular basis.
    Mr. Ellison. Okay, so you walk in there with a certain 
    Mr. Alvarez. Yes.
    Mr. Ellison. In terms of discovery?
    Mr. Alvarez. And they know they have to deal with us on a 
regular basis.
    Mr. Ellison. Yes, right.
    Let me ask you a few questions that kind of have something 
to do with the whole JPMorgan thing. I just want to get your 
views on it. I am asking you because I want you to know what I 
am getting at, as if it wouldn't be obvious, but I am not 
asking you specifically about that case. So I am not asking 
about that case, but my motivation for asking you is because of 
that full disclosure, okay?
    And let's start with you, Mr. Stipano.
    If a federally-insured bank was investing in credit default 
swaps that could result in them losing as much as 3 months of 
profit, would you expect that to be disclosed to investors?
    Mr. Stipano. I think that is really a question that 
involves interpretation of the Federal securities laws, and I 
am not in a position to answer that.
    Mr. Ellison. Okay. Does anybody want to answer that? No? 
    Mr. Khuzami. There are various rules that require 
disclosures of various kinds and various risks, so it would 
depend on the other variables as to whether or not that was the 
    Mr. Ellison. So, if a federally-insured bank, again we are 
talking about federally-insured money, the public's money, 
would you expect that if such a bank was invested in CDS, that 
could result in the loss of 3 months of profit that regulators 
would be informed that these trades were going on, or do you 
think you are regulating to a degree that you would know that 
this was going on?
    Again, I am not asking, I am not trying to pin anybody here 
with any wrongdoing. I am just asking theoretically, what kind 
of activity, when we are dealing with federally-insured money 
needs to be disclosed to either investors or regulators?
    Mr. Stipano. We should know about it. Under our exam 
authority we have access to all the books and records of the 
    Mr. Ellison. Okay. My time has expired. Let me say thank 
you to all of our witnesses and good luck on all your work.
    Mr. Schweikert [presiding]. Mr. Ellison, I would never 
think of you as an old trial attorney. I recognize Mr. Carney 
for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman. And thank you to the 
panelists. When you get to me, you know it is almost done, you 
have 5 minutes left. I want to thank you for all the 
information that you have provided us with today, your answers. 
You have obviously done a good job of explaining the rationale 
for your settlement practices.
    And I think there is really kind of a fundamental 
disconnect. The reason, I suspect, that gave rise to this 
hearing today was the perception that people who have done 
wrong, who created a very serious financial crisis in our 
country is that there hasn't been adequate accountability. I 
think I heard my colleague from the other side of the aisle say 
that people didn't go to jail, and we have heard that from a 
number of Members.
    And I agree with Mr. Watt that this isn't a Democrat 
concern, a Republican concern, whatever. I hear it from 
Democrats, Republicans, and Independents in the district I 
represent, which is in the State of Delaware.
    You talk about your responsibility--and I am not a lawyer, 
so I have learned a lot today about legal processes--and you 
don't have the authority to put anybody in jail; is that 
    Mr. Khuzami. That is correct.
    Mr. Carney. So that really maybe we got the wrong panel 
this morning. Maybe we should have DOJ up here, because I think 
that is what people really are focused on and concerned about.
    Is part of your consideration, prudential regulators, it is 
safety and soundness, Mr. Khuzami, it is investor protections 
or recovery, is deterrence or punishment part of your 
consideration in these actions and enforcement actions to take? 
If you would just go right down the line, starting with Mr. 
    Mr. Alvarez. Yes, certainly deterrence is and punishment is 
as well a concern for us. Most importantly, it is correcting 
the problem that we have observed, and that is our first 
priority. But we have a variety of ways of ensuring deterrence 
and getting the policies and procedures out to the world, 
informing the world of the kinds of judgments that we want to 
    Mr. Carney. But correcting the problems for the safety and 
soundness of the institution is primary?
    Mr. Alvarez. It is the first priority.
    Mr. Carney. Mr. Khuzami?
    Mr. Khuzami. Yes, deterrence is a strong part of what we 
do. You are much better off preventing the wrong before the 
fact rather than trying to pick up the pieces afterwards.
    Mr. Osterman. Yes. Deterrence is certainly a big part of 
what we are doing in terms of the enforcement.
    But as my colleague at the Fed said, we are really focused 
on safety and soundness of the banking industry. In terms of 
punishment, we do have powers through civil money penalties to 
seek penalties and we do that quite often when it is 
    Mr. Stipano. As my colleagues said, the primary focus of 
our enforcement action is remedial in nature. We are trying to 
address unsafe and unsound practices and violations of law that 
we find in the institutions. We do think there is a deterrent 
effect to our actions, both for the institution or the 
individual involved, as well as for others in the industry.
    Mr. Carney. The perception that we are dealing with is that 
these perpetrators haven't been punished adequately. Do you 
believe that what you have done in these settlements--part of 
the problem is just the ``no admit, no deny policy'' just 
sounds pretty soft to me, and I know it sounds pretty soft to 
my constituents.
    I understand your explanations completely and how you get 
to the settlements and it helps you achieve your objectives. 
But do you feel like what you have gotten in these settlements 
actually accomplishes what your considerations are for 
punishment and deterrence, again starting with Mr. Alvarez?
    Mr. Alvarez. Yes, I do. I think we have been able to be 
more effective in improving the safety and soundness of 
institutions. But, remember, that also means that we are 
protecting depositors and taxpayers. We have had a number of 
actions that provide restitution to customers, so it is a 
broader array of folks that we are trying to deal with and 
punishment or retribution is not as high a priority.
    Mr. Carney. Mr. Khuzami?
    Mr. Khuzami. For the SEC, I think our record in financial 
crisis cases is strong, as I said earlier--over 100 entities 
and individuals, 55 CEOs and CFOs, I think sends a strong 
    Mr. Carney. By the way, I don't know in the context whether 
those numbers are impressive or not. It sounds pretty big, but 
I don't know relative to who might have committed these 
    You specifically, though, have asked for higher penalties, 
so that suggests that you are not completely satisfied with the 
punishment aspect of it.
    Mr. Khuzami. What it means is there are some circumstances 
where more authority would be appropriate.
    Mr. Carney. Fair enough. I only got a--
    Mr. Osterman. And I think we--the deterrent factor is 
definitely there. As we said before, we are there in the 
institution supervising it. We have cease-and-desist order 
authority, which we use quite often to address and remediate 
issues, and we do have civil money penalty authority to 
actually penalize.
    And the ultimate penalty, frankly, is the removal and 
prohibition authority. We can remove an individual from banking 
for life, and we have done that.
    Mr. Carney. It is a pretty big stick, I would say.
    Mr. Osterman. Yes.
    Mr. Stipano. Rich just made the point I wanted to make. But 
I think the broader point is that when we take enforcement 
actions, they are often part of a broader package. So civil 
money penalties, for example, may be coupled with restitution 
action, may be coupled with a removal and prohibition. There 
could be an action on an institution as well. And I think 
together, when it is viewed that way, it is very effective.
    Mr. Carney. Again, thank you very much, and thank you for 
fighting above your weight class.
    Mr. Schweikert. Thank you, Mr. Carney.
    All right, I think we are out of questions.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    With that, this panel is dismissed. Thank you, gentlemen.
    Will our second panel please be seated?
    Welcome, gentlemen, and, actually as a courtesy, Mr. Frank 
would like to make an introduction.
    Mr. Frank. Thank you, Mr. Chairman. I want to introduce a 
man who has been before this committee before at my request, 
the Secretary of the Commonwealth of Massachusetts, William 
Galvin. By virtue of being elected Secretary of the 
Commonwealth of Massachusetts, he is our securities regulator 
and he has used that power--and it hasn't always been used by 
the incumbent in that office--in a very creative way and he is 
a good example of how you can use the prosecutorial authority, 
the civil prosecutorial authority, which he has, effectively. 
And, there are sometimes complaints that people who bring these 
charges, particularly those in an elected office, grandstand 
from time to time. Mr. Galvin has a long record of bringing 
enforcement cases, and I can't think of a time when he was 
repudiated by a higher authority, by judicial authority, or 
whether he--no accusation of overreach has come forward. So I 
am very pleased that he accepted our invitation to come here, 
because he is somebody who does this very well.
    He also is a reminder that the administration of the 
securities laws and protection of the investors, protecting the 
stability of the economy is like other things in this country a 
shared Federal-State responsibility. And I have always tried 
to, as a member of the committee, be fully protective, frankly, 
of the role of the States when there have been some who wanted 
to make them go away.
    And Mr. Galvin and others--and in a bipartisan way, because 
I think he is here--I don't know if he is here on behalf of the 
North American Securities Administrators, which is a very 
effective American-Canadian agency of State and provincial 
authorities who have been very helpful to us. So I thank you 
for that opportunity.
    Mr. Schweikert. Thank you, Mr. Frank. Actually with that 
glowing introduction, how can it get any better. Mr. Galvin?


    Mr. Galvin. Thank you, Chairman Schweikert. And Ranking 
Member Frank, thank you very much for those kind words.
    Thank you for this opportunity to discuss regulatory 
settlements in the financial services industry. As you now 
know, I am Bill Galvin, Secretary of the Commonwealth and the 
chief securities regulator of Massachusetts.
    Regulation without effect of enforcement makes such 
regulation little more than political rhetoric and, worse, 
leads to a false sense of financial security for our citizens.
    We are not here today to compare bureaucracies or records 
of bureaucracies. I believe we all share a common goal of 
restoring confidence in the financial marketplace. For too many 
Americans, their recent experiences in the market have 
consisted of shattered retirement plans, broken promises, and 
broken dreams. They cannot understand and will not accept a 
regulatory system that holds none of the major actors 
    My Securities Division carries out an active program of 
civil enforcement in order to detect and stamp out securities 
fraud. These enforcement actions have returned over $400 
million directly back to defrauded investors in Massachusetts. 
I have long spoken out against the established pattern in 
Federal settlements of allowing respondents to enter into 
settlements where they ``neither admit nor deny'' the 
allegations in the administrative complaint for the enforcement 
    In 2003, I had the opportunity to testify before a 
subcommittee of the United States Senate on Government Affairs. 
I said at that time, that too often the guilty ``neither admit 
nor deny'' any wrongdoing and routinely promise not to cheat 
again until they come up with a more clever method to do what 
they just said they would not do again.
    I repeat those words today with an even greater sense of 
urgency as events of recent years and days have shown. One of 
the priorities of my Securities Division is the firms and 
persons who have violated the law should be required to 
acknowledge what they have done. Permitting a firm to enter 
into a settlement where it pays a fine but ``neither admits nor 
denies'' that it has done anything wrong permits that firm to 
avoid basic culpability for its actions.
    In some instances, we have seen firms enter into regulatory 
settlements, pay large fines, and also issue press releases 
saying the firm settled the matter to avoid the distractions 
created by prolonged litigation. Permitting firms to take this 
kind of posture allows the firm to avoid acknowledging any 
misconduct and permits such firms to publicly take the stance 
that such settlements are part of business as usual.
    If we intend to reform the worst practices in the financial 
industry, then the firms that have violated a law must 
acknowledge what they have done is wrong. In many cases there 
is a thin line between arriving at a satisfactory settlement 
and failing to reach any settlement at all.
    I think it is very important that the most important aspect 
of a settlement, and in many cases the best resolution, is to 
require an issuer of securities or securities broker to repay 
defrauded investors and make them whole. One of the greatest 
satisfactions of my role is getting restitution for investors 
and preventing the operators of financial fraud from simply 
walking away from their victims with their ill-gotten profits.
    Our enforcement actions also seek other sanctions. We have 
imposed significant fines, we have also served as a warning, we 
have secured agreements about future practices. For instance, 
in 2011 my Securities Division settled the Goldman Sachs 
``analyst huddles'' case which involved the practice of Goldman 
Sachs giving its best research recommendations to preferred 
customers in order to attract more business from those 
customers, while denying it to others.
    Goldman Sachs settled this case by agreeing to reform its 
practices and by paying a $10 million fine. In the settlement, 
Goldman Sachs admitted the factual allegations in the consent 
order, which we believe will deter Goldman and other firms from 
engaging in the same sort of conflicts in the future.
    Between 2003 and 2012, total investor restitution of $404 
million was paid directly to investors in Massachusetts 
securities cases, and this does not include auction rate 
security cases. We have also suspended the local licenses of 
many bad actors.
    The Massachusetts Securities Division analyzed the 82 
consent orders it has entered into since 2003, and based on 
that analysis, the respondents admitted to the facts alleged in 
the administrative complaints in more than 40 percent of the 
cases. The Securities Division has placed a high priority on 
getting restitution for the defrauded investors and sometimes 
that results in a variation. So when you do get restitution you 
may well not get an admission, but the goal should be to try to 
get an admission.
    Much of the testimony I have heard here today suggests that 
these are opposite goals. They are not. If the system was 
working so well over the last 9 years, I don't think we would 
be seeing the repeat offenders we have seen over and over 
again. Much of the testimony I have heard today suggests that 
these are two unachievable goals. I disagree.
    I believe that it is important that regulators ought to 
seek admissions if they can get them and certainly should not 
be required to get them if they can get a better result for 
investors, but at the same time the idea that somehow we should 
defer all results and avoid getting any admissions is a far too 
cosy relationship that has not protected the American people 
and has not led to a safer and better system for our country.
    And so I hope that as a result of this hearing, and some of 
the changes I have heard discussed here this morning, there may 
well be a change of heart on this issue.
    Thank you for this opportunity.
    [The prepared statement of Secretary Galvin can be found on 
page 66 of the appendix.]
    Dr. Hayworth [presiding]. Thank you, Mr. Secretary. Next, 
Mr. Richard Painter, professor of law at the University of 
Minnesota Law School.

                    OF MINNESOTA LAW SCHOOL

    Mr. Painter. Thank you very much, Madam Chairwoman and 
Ranking Member. I have worked in securities law, I have taught 
securities regulation for almost 2 decades, and for 2\1/2\ 
years I was the chief ethics lawyer for the White House under 
President Bush.
    I agree with the Second Circuit's view on the settlement in 
the Citigroup case, and that is for several reasons.
    One, the SEC has very limited resources, as we all know, 
and, by the way, I would strongly urge Congress to seriously 
consider an increase in the budget of the SEC. I think it would 
be a good investment. But that being said, they have a very 
limited budget, and they need to be able to make the 
enforcement and investigation decisions.
    And every time they investigate a case, they don't 
investigate another. Every time they litigate a case, they may 
have to spend resources there that could have been spent 
investigating other frauds, and they need the discretion to 
decide how to spend those resources.
    Second, when you have a large settlement, such as you did 
with Citigroup, there is a clear message they did something 
wrong--$285 million is a lot of money. We all know they did 
something wrong. Exactly what they did wrong, which statute 
they violated, may not be so clear, but they clearly did 
something wrong.
    Third, there often is legal ambiguity.
    For example, Goldman Sachs--there was a settlement of a 
case with Goldman Sachs that involved securities that may not 
have been sold in the United States. And after the Supreme 
Court's decision in Morrison v. National Australia Bank, it 
might very well be the case that some of those transactions 
might not even be covered under the Federal securities laws.
    There is ambiguity on that question. And the SEC settled 
that case with Goldman Sachs and then ran into that very 
ambiguity in litigation against an executive of Goldman Sachs, 
Fabrice Tourre, in the Southern District of New York. So there 
is often a reason to settle in order to not have to deal with 
legal ambiguity with respect to interpretation of statutes, 
even though there is clearly a situation of where the company 
did do something.
    And the SEC sometimes will have a situation where if they 
take an ambiguous case into the courts and get a disfavorable 
decision and they lose, they not only lose that case, but bad 
facts make for bad case law, which could frustrate the SEC's 
enforcement agenda in other areas and a range of other cases.
    Now, that being said, I do have two concerns that I want to 
express to this committee. One is that some of these 
settlements also involve waivers of specific regulatory--
specific rules that provide that lenient regulatory treatment 
in a range of areas is not provided to entities that have 
entered into these types of settlements and SEC consent 
decrees. And what the SEC does is then goes and waives those 
provisions so that favorable regulatory treatment intended for 
companies that have been behaving themselves is still given to 
those companies that have not, and this is in a range of 
different areas that I have discussed in my written testimony.
    I do not categorically disagree with those waivers, but I 
think that serious thought needs to be given to whether 
companies that have not complied with the law ought to be 
permitted, for example, to take advantage of favorable 
regulatory treatment given to so-called well-known seasoned 
issuers: Lehman Brothers; Bear Stearns; and Merrill Lynch; all 
well-known seasoned issuers--perhaps not as well-known and as 
seasoned as we thought.
    And my last concern is that we need to focus on the 
individuals who are responsible for the conduct, not just the 
institutions. If $285 million, which might not mean a lot to 
Citigroup, but if that money were taken out of the bonuses of 
the individuals, not only who were responsible for the conduct 
but who supervised the entity, we might get a very different 
result with respect to repeat conduct.
    And for this reason, I have suggested that we need to go 
back, in the investment banking area we need to go back to the 
system of personal liability of senior investment bankers for 
the debts of their firms, and that is the way it was when 
Salomon Brothers, Lehman Brothers, Goldman Sachs, Morgan 
Stanley--those were general partnerships and they were jointly 
and severally liable for the debts of their firms, and they did 
not take the types of risks that those firms take today.
    My grandfather was an investment banker. He had a small 
shop, it folded, and he paid back the creditors. He paid back 
every single penny. And then when he was a partner of a larger 
firm, the same thing. They were jointly and severally liable, 
and they didn't behave the way they do today.
    And that is why I proposed in some materials described in 
my written testimony that we need to take very seriously the 
need for personal responsibility, and that may mean personal 
liability for the people who are in charge.
    [The prepared statement of Professor Painter can be found 
on page 95 of the appendix.]
    Dr. Hayworth. Thank you, sir. And now Mr. Kenneth Rosen, 
professor of law at the University of Alabama School of Law.

                     ALABAMA SCHOOL OF LAW

    Mr. Rosen. Thank you, Madam Chairwoman, and Ranking Member 
Frank. I appreciate the opportunity to testify on the use of 
settlements by financial regulators.
    Settlements constitute a crucial part of the enforcement 
process, especially as regulators seek to allocate limited 
resources in fulfilling their missions. Accordingly, it is 
critical that regulators retain flexibility to settle the cases 
that they pursue.
    My testimony will focus on the practices of the United 
States Securities and Exchange Commission, where I previously 
served as a Special Counsel. However, the issues and concerns 
that I raise also might prove relevant to enforcement efforts 
of other regulators.
    Settlements constitute a longstanding part of the 
enforcement process. Driving settlements are calculations by 
litigants about their potential to win and lose cases. For 
regulators, settlements may be especially attractive when the 
alleged violator of the law accepts conditions that give the 
agency comfort in ceasing litigation. When actions are settled, 
monetary and nonmonetary consequences may be significant. Of 
course, requisite for successful settlement negotiations is 
that notwithstanding such serious consequences, the alleged 
offenders also view it in their best interests to settle. 
Possible motivators for such action might be how exactly the 
language of settlements is phrased, especially as it relates to 
acknowledgment of legal violations.
    Notwithstanding the tradition of settlements, settlements 
are not without controversy. Last November, in SEC v. Citigroup 
Global Markets Inc., a United States District Judge rejected 
the Commission's efforts to settle a case and sought to proceed 
to trial. In granting the SEC's motion to stay the proceedings 
below, the Second Circuit rightly recognized multiple flaws 
with the District Court's opinion.
    The Second Circuit warned, ``the scope of a court's 
authority to second-guess an agency's discretionary and policy-
based decision to settle is at best minimal.''
    The Court's observation is wise because government 
authorities pursuing supposed wrongdoers must harness limited 
resources to pursue an agenda that is fair to the parties 
involved and that secures both goals of punishment and 
deterrence of future violations. The calculation of how best to 
serve the public interest is a difficult one, and great 
deference to the agency seems merited as it pursues its 
    Although a District Court might view individual settlements 
as ``pocket change'' to large financial institutions, others 
certainly can view payment of hundreds of millions of dollars 
as significant, and as a punishment for potential future 
violators to avoid.
    It also seems useful to note that avoidance of an admission 
of guilt in a settlement does not necessarily equate to 
avoidance of reputational harm for the institution that 
    Although frustration with the economic crisis might lead 
some to seek more restrictions on financial agencies' abilities 
to enter settlements, discretion to settle remains an important 
regulatory tool. Indeed at a time of rapidly shifting 
regulatory landscapes in light of the crisis, such discretion 
may be more important than ever.
    Informing an agency's decision to consider settlement might 
be genuine concern about the understanding of what constitutes 
a violation as rules rapidly change. Settlement may permit 
agencies to ameliorate the consequences of confusion during 
regulatory transitions. While some might seek rigid outcomes or 
language in settlements related to new rule violations, efforts 
to impose such rigidity might incentivize odd results. Agencies 
might opt out of pursuing violations when results would be 
dictated in a settlement process related to such violations. 
This might further fray investor confidence.
    The enforcement process certainly remains subject to 
possible improvements. However, if enforcement efforts seem 
inadequate, one should focus on the effectiveness of efforts to 
detect wrongdoing and the actions of officials actually charged 
with pursuing wrongdoers. Review of settlements in individual 
cases seems a second-best solution for changing how the 
enforcement process generally operates.
    Moreover, enforcement is only one of a modern financial 
agency's many difficult tasks. As limited resources are taxed 
by other legislatively mandated actions, agencies may, by 
necessity, have to pull back on some enforcement efforts. 
Settlements likely will remain a vital tool for agencies to 
have some regulatory impact without expending the full 
resources involved with taking all enforcement actions to trial 
or administrative completion.
    Thank you again for the opportunity to testify, and I 
welcome the chance to answer your questions.
    [The prepared statement of Professor Rosen can be found on 
page 101 of the appendix.]
    Dr. Hayworth. Thank you, sir. The Chair yields 5 minutes to 
    Secretary Galvin, the recidivism rate that you would cite 
would be what, roughly?
    Mr. Galvin. I think in terms of the firms, many of the 
large firms are constantly coming in with different types of 
violations. I think more than the firms themselves, the 
fundamental problem that we keep seeing reappearing is 
treatment of customers unfairly in different ways. For 
instance, in my testimony I cited the settlement we just 
reached last year with Goldman Sachs on the so-called huddles, 
where, in effect, they were distinguishing between their 
preferred customers, giving them better information than their 
other customers.
    Go back to 2003 when we had the market timing on mutual 
funds. It was really the same thing.
    Dr. Hayworth. Okay, but--
    Mr. Galvin. So essentially, the firms are doing the same 
thing. They see no deterrent in having paid fines and being 
caught doing it before.
    Dr. Hayworth. But would you say it is occurring at a rate 
of more than 50 percent?
    Mr. Galvin. I would say so, yes. We don't find, very 
rarely--I have a wide range of entities that are licensed, 
obviously many smaller ones who are less likely to return 
because the effect of this would be much more damaging to them 
if they have to pay damages. But the larger firms frequently 
are coming back with situations.
    And the attitude doesn't change. That is the problem. That 
is my concern about the idea that they admit or deny is 
something that is acceptable.
    Dr. Hayworth. Or perhaps the nature of the penalties could 
change or, as Mr. Painter says, joint and several liability 
mechanism might be appropriate.
    Mr. Galvin. I agree with him.
    Dr. Hayworth. But another question, do you think in terms 
of the whole issue of admission--and this is for each of you, 
maybe we will start with you, Professor Rosen, since there is 
this question of secondary lawsuits or proceedings, civil 
liability that might be crippling, do you think that would act 
as a deterrent from admitting wrongdoing and thereby prolong a 
process that might lead to litigation instead of settlement?
    Mr. Rosen. Yes, I think that is really a concern. It is 
interesting if you look at the text of Judge Rakoff's opinion. 
One of the things that seems to give him great concern about 
the language is the fact that when one puts that language in, 
one doesn't essentially estop future use of that particular 
case from private litigations; but ultimately, that might make 
it attractive to the defendant in the SEC's case to engage in a 
    Once you take that away, you are starting to limit the 
upside. And, again, settlement has to be viewed as something 
that is mutually recognized by both parties to be in their 
    Dr. Hayworth. Right, and it is essentially. It is a 
compromise, as we have said in the Second Circuit's opinion and 
that makes sense. Professor Painter?
    Mr. Painter. Right. An admission of guilt is an admission 
to plaintiff lawsuits, and that is one of the biggest problems 
I have with requiring the SEC to insist on an admission of 
guilt. It drags the SEC into a battle between the large banks 
and other defendants and the plaintiffs' bar. And it is a 
battle that is extremely expensive and the SEC has very limited 
resources to deal with it. The defendants will dig their heels 
in, and they will burn up the SEC's resources fighting these 
    Dr. Hayworth. And Professor Painter and Professor Rosen 
have both mentioned SEC resources in specific ways, if you 
will, Professor Painter, with regard to funding, you feel that 
the level of funding is not adequate to cover what the SEC 
needs to do in this world, and Professor Rosen, you have said 
we need better detection.
    So do you think that if we could devote resources to 
detection, certainly it comes into play. And when we think 
about the eponymous law for our ranking member, many people 
have said if we had better detection and enforcement of 
antecedent law prior to Dodd-Frank, then we might have been 
able to deter some of the consequences that some of us fear 
from that law.
    Your comments, Professor Rosen?
    Mr. Rosen. Yes, I think that detection is really such a 
critical thing in this particular instance. In fact, one of the 
things that was interesting in the prior panel of looking at 
the different types of regulators, is that the SEC versus the 
prudential-type regulators, the SEC actually has a compliance 
office as well, OCIE, which conducts examinations and thinking 
about those issues is important.
    I would be worried that in some ways, our focus on the 
exact language of settlement becomes a distractor to try to 
better address those kinds of inspections issues and also the 
issues with enforcement at the Enforcement Division, which as 
Mr. Khuzami pointed out has really changed how it goes about 
enforcement quite drastically in the last year or so.
    Dr. Hayworth. And our technology keeps changing so we have 
better tools. I yield to the ranking member.
    Mr. Frank. Thank you. Let me ask, obviously you have a 
decisionmaking any given day and then you have to look at the 
whole system. Sometimes you may decide to try to change the 
behavior--even if it would be a cost in the short term--
basically what I have in mind is what would you guys all think 
about, in one egregious case where the SEC was pretty sure to 
respond--in the case of bankers you are exactly right, you 
don't want to bring a case that is going to set you a bad 
precedent, that is very clear--but what about in a very clear 
case if they are recalcitrant, go after them. Let them sue if 
you think you can win, and that might be setting a precedent 
for the future, that is, is there something to be said for 
picking a very strong case in where you can't get what you 
think you should get, including admissions, I think an 
admission--and I understand the points about reputation, but 
the admission can be very important. What about saying to the 
SEC, look, pick a strong case and make an example of somebody, 
not in a negative way, because you wouldn't do it unless you 
had a strong case and they had done things wrong and they were 
significant--what about that kind of approach? Say, yes, we 
know it is going to cost us something, but we think if we can 
bring this strong case and win, that can have a good impact on 
potential settlements going forward.
    Mr. Galvin?
    Mr. Galvin. I definitely think so. One of the concerns I 
have, and this goes to the prior question from the lady from 
New York, I believe, I think the system is inverted when it 
doesn't put the investors first. In other words, I heard the 
testimony of Mr. Khuzami about how they used some of the 
results of the settlements. I think the SEC needs more 
authority to put money directly back in the hands of the 
investors. I don't think the experience with the so-called fair 
funds event have been that effective.
    Secondly, as far as the financing of the agency, I would 
also suggest that the SEC should be able to retain some of the 
revenue that they get as a result of fines and employ--put 
costs on some of these they have to pursue. Why shouldn't the 
violators pay for some of the costs of enforcement? It seems to 
    Mr. Frank. Let me respond to that. The SEC, of course, does 
levy fees and they make money for the Federal Government. I 
appreciate, Professor Painter, your point about raising the 
fee. But I would say to the Secretary, he will know, when I 
talk about New Bedford, that our problem with some of that is, 
if you give an enforcement agency the ability to levy fines and 
then spend some of them, I do worry about the incentive in that 
    Mr. Galvin. With scrutiny.
    Mr. Frank. Let me add--Professor Painter, I very much agree 
with--let me ask, what about the scenario of saying okay, this 
is a strong case, and we are going to take it and we understand 
it is going to spend some resources, but we think winning this 
case will be helpful in the future in terms of their attitude?
    Mr. Painter. I think they should do that. When they have a 
strong case, they should fight that case and win when they are 
very confident they can do that. But there are a number of 
these cases where there are ambiguities.
    Mr. Frank. I agree with that. Mr. Rosen--
    Mr. Painter. But the second point I want to make clear is 
that they need to hold the individuals responsible. For 
Citigroup shareholders to pay $285 million may not be what we 
need to do. We need to take it out--
    Mr. Frank. Let me ask you and then I will go to Professor 
Rosen, because on that point, I very much appreciate your 
testimony. The waiver point is a very strong point, and I 
intend to write to the SEC and say they ought to be very strict 
about the waivers. I appreciate that. That is one of those 
things where experts help us.
    On the individual responsibility, I very much again 
appreciate that point. I note you say in the testimony--and I 
would ask you not to do anything right now--I would ask you to 
take a look at this, not off the top of your head.
    We did include in the financial reform bill a provision 
that instructed every regulator of the financial institution to 
require that they have compensation practices that had good 
facts, that said that you would end the situation of a bonus in 
which heads, I win, and tails, I break even.
    Is there some way to use that authority not to prescribe 
anything by the Federal Government but for the regulators to 
give a very strong incentive to the institutions to do the kind 
of individual responsibility. That is, is there some way to say 
under that authority you should say in the compensation package 
that an individual executive or a group who are responsible for 
that kind of a serious loss ought to bear some of the financial 
pain themselves?
    Mr. Painter. I believe to some extent they could if it is a 
claw back of the bonus that is covered by the specific 
provision that you are talking about. My concern is that may 
not be enough and, as I said, these investment banks in the old 
days were general partnerships.
    Mr. Frank. I appreciate that, and that might be a start on 
that and I think that might be--Professor Rosen, what about the 
scenario of saying, ``Okay, this is one strong case, so we are 
going to fight you, we are going to spend a little money, but 
we think that may help for the future?''
    Mr. Rosen. Yes, I don't disagree with that. In fact, in 
talking today about the need for the discretion of the SEC and 
other regulators to settle, I think they also need the 
discretion to go forward with cases where they see they are 
relevant, and, in fact, I think that having served at the 
Commission, the folks who are there are very strategic in 
making those decisions and trying to get those proper 
precedents out there.
    Mr. Frank. I think we all agree that greater resources 
would give them the flexibility to make that kind of a 
    Mr. Schweikert [presiding]. Thank you, Ranking Member 
    Mr. Rosen, can I come straight to where you just--doesn't 
the SEC still have that discretion to pursue a settlement or to 
say, this one is so egregious that we are going after them 
    Mr. Rosen. Yes, absolutely. I guess the point--
    Mr. Schweikert. It was just your tone, I just wanted to 
make sure I wasn't--not being burdened with a law school 
    Mr. Rosen. Sure. I think that sometimes, like I said, the 
danger of this discussion of the settlements is it is almost a 
distractor from everything else that is out there and it is 
important to remember that discretion as well, to actually 
bring the cases when necessary.
    Mr. Schweikert. Thank you. For anyone on the panel, have 
any of you engaged in a case over the last couple of years 
where there was settlement action at the SEC level but from a 
State level or an individual actor that the decision was we are 
going to go after them either civilly or criminally on a 
separate track?
    Mr. Galvin?
    Mr. Galvin. We often work with the SEC. Usually, we try to 
coordinate our activities and we do, but sometimes we choose to 
go on cases that the SEC has passed on or perhaps has not 
gotten to yet. I can think of a number of instances where we 
initiated an issue and the SEC later joined in.
    So I don't think it is always necessarily that--the range 
of possibilities is broad. As I said in my formal testimony, we 
try first and foremost to get restitution for our investors who 
have been defrauded. We do try to get an admission, and we 
succeed in many instances. We would sacrifice an admission if 
we thought it would help get restitution, so it is not a hard 
and fast rule.
    My concern, and I voiced this earlier, was that to the 
extent that the discussion seemed to be with the earlier panel 
that there were alternatives that could not be mixed, I 
disagree with that. I think no one is suggesting, at least I am 
not suggesting, and I don't know of anyone who is suggesting, 
that in every case the SEC must get an admission; that is not 
the issue. The issue is, in my opinion, the that this has been 
too easy in denying admissions or seeking admissions.
    Mr. Schweikert. Mr. Painter, your observations of what you 
have experienced?
    Mr. Painter. I have seen cases pursued by the State that 
are not pursued by the SEC. Often, they involve a smaller 
number of investors, and I believe that the State enforcement 
is critical, a critical supplement to what the SEC is doing. 
And in Minnesota we benefit from what Secretary Galvin is doing 
in Massachusetts. It is important to the whole country that 
there be effective State enforcement.
    Mr. Schweikert. Mr. Rosen?
    Mr. Rosen. Yes, I will go a little bit into professorial 
mode here.
    Mr. Schweikert. Uh-oh.
    Mr. Rosen. And one of the things that I stress in my course 
in securities regulation is not to forget the States. I think 
sometimes folks become so fixated on the Federal regulatory 
system that they forget that the States do have this authority, 
particularly as it relates to antifraud actions.
    Mr. Schweikert. Your specialties and what you see happening 
from an academic standpoint and what is actually happening in 
the States, Mr. Galvin, I almost heard you sound as if 
sometimes you will do a triage decision, saying, look, the SEC 
is doing this, they are not pursuing this person, you are going 
to go after this bad actor. Was I reading more into what you 
were saying?
    Mr. Galvin. No, it may be the same, it could be multiple 
companies or multiple entities doing the same thing. They may 
choose to go after a large national company, we may choose to 
go after local actors. Obviously, the trigger for us is that in 
general our State, investors from our State have been affected. 
But in working with the other State regulators, we often 
trigger national efforts. For instance, I mentioned the auction 
rates securities matter, which is more a matter of liquidity 
than anything else, but it was the States that really led the 
way there in terms of taking action to get liquidity for its 
    The SEC was very helpful because you do need a national 
regulator. I am a firm, I am very concerned about the SEC's 
ability to do what it needs to do. I think that is very 
important. States can't substitute themselves for the SEC. On 
the other hand, the States can be supplementary, and I think in 
many instances, we are.
    Mr. Schweikert. Mr. Painter?
    Mr. Painter. I strongly agree.
    The work at the States is very important, particularly in 
light of the restricted budget of the SEC.
    Mr. Schweikert. But my scenario, we know the SEC is going 
after these national players, you may have someone who has 
committed similar acts. Will you sort of triage who you pursue 
and say, look, they are going after them, I have other States 
and we have the same player. I am just sort of trying to 
understand the decisionmaking at the State level.
    Mr. Painter. I think that is the approach, and it would 
make sense to have coordination. The problem is a lot of 
different factors may feed into whether a State decides to 
pursue actions or the SEC, so you may have both at the same 
time. You may have overkill in some cases and in other cases 
nothing happens.
    Mr. Schweikert. With unanimous consent, I am going to give 
myself another 2 minutes.
    No one argued.
    I have two other questions. Forgive me for keeping you 
longer. How often will a decision to pursue at the State level 
be because you see coordinated action amongst a number of 
States or States within a certain region? Particularly for 
where you are, if your neighboring States are pursuing 
something, will that often be what draws you in?
    Mr. Galvin. Not necessarily. Usually, it is an investor 
from Massachusetts or a case we become aware of.
    Mr. Schweikert. You beat me to the second half and that was 
how often will it be an investor or private action taking place 
that hits your radar that also draws you in?
    Mr. Galvin. It is primarily, sometimes it is our national 
practice we become aware of, like I mentioned, the auction rate 
securities situation. However, most often, it is an individual 
investor who comes to us with a specific issue or complaint.
    We also do books and records examinations of companies. So 
we do some additional work where we discover things in the 
course of our books and records examinations as well that lead 
us to investigations.
    Mr. Schweikert. Mr. Painter?
    Mr. Painter. I do not know specifically what is being done 
in the States on that, but I believe that what Secretary Galvin 
is saying seems consistent with what I have heard is happening 
in other States.
    Mr. Schweikert. Mr. Rosen, your perception from even some 
of the research and things that hit your desk, is it because 
they see motion in other States or there is a complainant or a 
filed complaint at the State level? What do you see draws much 
of the State regulators in?
    Mr. Rosen. Again, on some levels, it is sort of more 
speculation, not actually sitting in the offices with those 
regulators, but I think that what Mr. Galvin is saying makes 
sense and I think all of the above really can come into play. I 
think that as a typical matter, when regulators decide to 
pursue issues, some of those issues are ones that they generate 
through their own investigation, which is why I think that 
investigation is so important, but others are where they read 
the Wall Street Journal also and find it. And particularly now 
that we see a movement towards greater I think situations of 
universal settlements and so forth, once the bandwagon starts 
rolling along, there might be more prominence given to what is 
going on in particular litigation that might attract attention 
from other State regulators.
    Mr. Schweikert. Gentlemen, I have to say ``thank you'' to 
you and to the previous panel. This actually has turned out to 
be a much more interesting day than I ever expected it to be. 
So I have learned some things.
    Now, I have to read the script.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    And with that, this hearing is adjourned. Thank you 
    [Whereupon, at 1:05 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              May 17, 2012