In one of the SEC's rare prosecutions of the shenanigans leading up to the financial crisis, the SEC extracted compensation from banks that hoodwinked investors into buying "acution-rate securities" by promising that they were liquid and safe. But only for retail investors, i.e., investors rich enough to trade on their own accounts. The rest of us -- anyone with a pension fund or 401(k), got screwed:
But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their “best efforts.”Perhaps the SEC was hoping the pension funds would fulfill their fiduciary duties and sue these banks themselves for securities fraud. We should look forward to a wealth of new caselaw in the coming years.
This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Mr. Alvarez declined to comment, through a spokeswoman.
