EthicsBite™

A year ago we posted a number of predictions for 2013 and many proved accurate. One area in particular may be taking a significant turn for the better.

Our predictions for 2013 were:

“Rebekah Brooks will go to trial. JPMorgan will further increase its reserve for bad trades by “The Whale.” No one in the investment banking industry will go to jail for anything other than insider trading. Goldman Sachs will continue to be bad. The global economy will continue to improve. Slowly. More dirt will come out regarding Walmart’s non-US operations. Somewhere in the US a bank will go under.

And there will be at least one big sex scandal.”

What Did We See In 2013?

I missed on Walmart’s non-US operations and a big sex scandal.

Yet the most significant change by far in terms of the financial industry is that the SEC, under new leadership, appears to have become more dedicated to putting some people in jail.

At the end of November 2012, SEC chairwoman Mary Schapiro left that office and was replaced in mid December 2012 by Elisse Walter, an SEC commissioner. Walter was an appointment by the president, who then nominated Mary Jo White as the chair. White was confirmed by the Senate and was sworn in on April 10, 2013.

Chairwoman White lost no time in tackling the challenge of prosecuting people in the financial industry. On April 22nd she named George Canellos and Andrew Ceresney Co-Directors of the agency’s Division of Enforcement. Canellos had been Deputy Director and then Acting Director of the division. Per the agency’s press release, Ceresney “served as a Deputy Chief Appellate Attorney in the United States Attorney’s Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. As a prosecutor, Mr. Ceresney handled numerous white collar criminal investigations, trials and appeals, including matters relating to securities fraud, mail and wire fraud, and money laundering.”

In particular White appears not interested in settlements that involve a fine with no admission of wrong doing. On her way in the door she got the board of the SEC to overturn a settlement with a hedge fund manager that included a no admission of wrong doing. Soon after, the individual involved signed a new settlement in which he admitted to most of the agency’s charges.  Later in the year, JPMorgan Chase reached its first settlement under the new leadership and it too included an admission of violating certain securities laws.

An article by Sheelah Kolhatkar in Bloomberg’s Business Week in mid October recaps this sea change and quotes Mr. Dennis Kelleher, president of Better Markets. “Mary Jo White has clearly changed the tone, and what she’s had to say is encouraging to anybody who wants the SEC to not only be successful, but be restored to its storied place as a protector of investors and markets.”

That’s the real story for investors coming out of 2013 and we look forward to more significantly stronger settlements in the year ahead.

Why this is important

Readers of this blog know that when it comes to ethical business behavior there is one key element that so often is overlooked to our detriment: the impact of corporate and industry culture on individual behavior. In the investment banking industry we have seen a cross company, industry level trading culture that has not only violated any sense of fair play and decency but has had tremendous real dollar impact on the global economy and investors’ trust. Alleged collusion on Libor rates was topped by collusion on foreign currency exchanges. Highly risky collateralized debt obligations were packaged and sold while the bankers made mockery of their  clients and customers. Massive bets were placed on global interest rates in a game of “top gun” between traders in different organizations.

This environment at an industry level makes it difficult for a CEO such as Jamie Dimon to totally manage his organization’s (and shareholders’ and customers’) risk. Mr. Dimon is doing all the right things in coming to relatively quick settlements and pledging to install new processes and oversight within his bank. I respect what he is doing. Yet until the industry as a whole changes its macho/top gun culture we global citizens are  not safe.

If there is one way to change that macho/top gun culture it is to prosecute, convict and sentence to jail a sufficient number of egregious individuals that the investment banking and trading community sobers up.