Roosevelt Institute | Cornell University

Securing the Scandalized: How Regulators and Prosecutors have responded to a year of financial law breaking

By Austin OpatmyPublished May 1, 2013

In the United States, two main fields have dominated news headlines: insider trading, and foreclosure violations. There have recently been multiple prosecutions for insider trading. SAC Capital, faced with two separate allegations of insider trading, has paid over $600 million in fines, a record-breaking amount.

By Austin Opatmy, Published 5/1/13

Over the past year, we have seen an explosion in high profile scandals surrounding the financial services industry. These scandals have touched all segments of financial services: SAC Capital insider trading, Libor fixing by many market participants, JPMorgan’s London Whale, HSBC drug money laundering and Bank of America’s Robo Signing, to
name a few. As a result of the Troubled Asset Relief Program of 2008 (commonly known as the Bank Bailout) and the general financial crisis, financial services already carry an albatross of poor public perception. With the explosion of scandals this year, we have seen a new range of regulations and increased prosecution of lawbreakers. From Switzerland’s newly voted cap on executive compensation to an increased focus on insider trading by the Securities and Exchange Committee, regulators are already reacting. What further global action might we see?
United  States
In the United States, two main fields have dominated news headlines: insider trading, and foreclosure violations. There have recently been multiple
prosecutions for insider trading. SAC Capital, faced with two separate allegations of insider trading, has paid over $600 million in fines, a
record-breaking amount. Since October 2009, the US Attorney for New York City has charged 69 people with insider trading. Sixty-three have been convicted, five are pending and one defendant is still at large. This represents a substantial increase in prosecutions, which mirrors national

In addition to insider trading, foreclosure practices have been under investigation. The five largest mortgage servicers have been accused of engaging in Robo Signing (automatic generation of foreclosure documents) and other improper foreclosure practices, and have agreed to pay as much as $25 billion in direct payments to states, as well as to distressed borrowers in the states who signed on to the settlement. As a result of these investigations, the newly created Consumer Financial Protection Bureau has created new regulations that have increased protections for borrowers, reduced surprises, and eliminated bureaucratic redundancies. Forty-four states have some form of new foreclosure legislation pending. As foreclosure was of the main manifestations of the financial crisis, lenders will likely continue to face increased regulatory scrutiny. 


In Europe, the Libor-fixing scandal has dominated the news. The LIBOR rate determines the rate of interest paid by borrowers in the United Kingdom, and was established by an average of reported interest rates by lenders. While concern over the subjective nature of the LIBOR rate had been voiced over several years, it was only in June 2012 that criminal prosecution began. Banks colluded to move the LIBOR rate in advantageous directions to bolster their balance sheets. Barclays was fined more than $400 million, and UBS later agreed to pay regulators more than $1.5 billion in fines. Multiple other industry players have also been fined for their involvement. In addition to these fines, the oversight and mechanism of the LIBOR will be completely revamped in a careful, transparent manner, as the LIBOR is the basis for over $300 Trillion in assets.

Additionally, substantial losses by traders at JPMorgan, UBS, and RBS have captured headlines for the failure of internal safeguards to prevent huge monetary losses. The London operations of JP Morgan and UBS have lost $6 billion and $2 billion respectively, due to the actions of one or two individuals. RBS, which is majority-owned by the British government, had a net loss of $9 billion in 2012.These losses were derived partially from normal operations, and also from certain funds set aside to compensate clients for improperly sold insurance products (£2.2 billion) and small businesses who were improperly sold interest-rate hedging products (£700 million). All of these substantial losses have come after post-2008 financial regulation, including the Dodd-Frank Act in the USA. As a result, regulators will seek new ways to further reduce risk-taking in “too big to fail firms.” Already, the UK is creating changes,
with the UK Financial Services Authority to be replaced with two new agencies: a consumer-focused watchdog and a financial regulator that will be integrated with the Bank of England. 

Executive  Compensation

Across the world, the high level of executive compensation has drawn increased scrutiny by the public, especially for firms that have performed poorly or have required government assistance. The Securities and Exchange Commission has thus taken steps to increase transparency in the compensation process. Similarly, compensation was limited in the UK for firms such as RBS, which saw its departing 50 year old CEO Fred Goodwin given an annual pension of £693,000 when the firm lost £24 billion the same year. Voters in Switzerland have recently approved a law that will allow shareholders to make binding resolutions on overall pay packages for executives. The impact on business of such regulation remains to be seen, but if regulation on compensation proves successful, it could serve as a model for other countries.

Derivatives Fixing

The most recent investigation by the US Department of Justice and the European Commission focuses on the market for derivative contracts, a market controlled by a small group of major banks. The investigation is specifically on a type of derivative known as credit default swaps, which is when companies across multiple industries hedge against potential losses. The banks have allegedly colluded with the International Swaps and Derivatives Association, a trade organization for market participants, to delay the establishment of a transparent independent market mechanism for the derivatives. The results of the investigation are still pending, but the creation of new regulations focused on derivatives trading could follow, as well as huge monetary penalties for violators. 

All of these scandals have reinforced the “bankster” image, which is critical of the cozy relationship between bankers and regulators. As the European Union continues to face their sovereign debt crisis and enact measures like Cyprus’s bank deposit levy, they will have to justify their actions to an increasingly skeptical and populist public. The success of Beppe Grillo, a comedian, in the Italian elections is just one indication of the increasingly disenchanted and frustrated outlook of the common man. This carries through in the United States, where bankers continue to face criticism for perceived benefits and perks. If the financial services industry wishes to avoid even more restrictive regulations, it needs to start cleaning up its act internally. 
Drug Money and Terrorism – The Perils of International Expansion
2012 saw a flood of cases involving prominent banks violating international money laundering and anti-terrorism laws, mainly through recently acquired international subsidiaries. HSBC was fined $1.9 billion for lax internal controls that allowed its Mexican subsidiaries to launder hundreds of billions of narco-dollars from Colombian and Mexican drug distributors, as well as Saudi terrorists. Between 2007 and 2008 alone, HSBC Mexico shipped $7 billion in cash to its US unit, a volume that only makes sense if they included illegal drug proceeds. Many have criticized this settlement, as no criminal charges were made, while small time non-violent dealers in the United States are routinely given life sentences. ING and Standard Chartered paid $619 and $327 million respectively to compensate for decades-long violations of US sanctions against countries like Iran, Cuba and Myanmar. Standard Chartered hid more than 60,000 transactions worth $250 billion over a decade.  Again, these organizations received only monetary sanctions, rather than criminal
prosecution of specific individuals. Lawmakers have expressed frustration over the lack of criminal prosecution, and may make changes to the legal language used.