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Whose Side Are They On? A Judge Stops the SEC From Harming Investors

Overhyped IPOs were one of main drivers of the dot-com bubble. Major investment banks, looking to get business down the road, had their research analysts write "fraudulent research reports" that contained "exaggerated or unwarranted claims about the covered companies and/or contained opinions for which there were no reasonable bases," according to the Securities and Exchange Commission.

To address this problem, the SEC entered into a 2003 settlement with 10 investment banks, among them Goldman Sachs (GS), Morgan Stanley (MS), the Merrill Lynch unit of Bank of America (BAC), and the since-deceased Bear Stearns and Lehman Brothers. The settlement included both monetary penalties and structural reforms.

The settlement's structural reforms were all aimed at insulating the research analysts from the investment bankers in order to promote accurate research. The "firewall" the reforms created was the core protection for investors going forward. On August 3 of last year, however, the SEC and the banks asked District Court Judge William H. Pauley III to modify the settlement in several ways, including tearing down the firewall. While granting most of the proposed modifications, Judge Pauley refused to go along with the firewall deconstruction, noting, "it would be . . . contrary to the public interest."

As the Wall Street Journal's reported, the SEC and the banks claim that the Financial Industry Regulatory Authority, FINRA, has enforced sufficiently protective rules that the firewall part of the agreement is no longer needed. The problem with that argument is that FINRA is a regulator set up and run by the firms it regulates, and it has already been criticized for failing to catch problems like Madoff's Ponzi scheme and for uneven enforcement within its own ranks. Unlike a government regulator, FINRA can change its regulations with relative ease, and its enforcement of them is not subject to significant public oversight. Plus, FINRA's chief enforcer has just resigned!

With all the recent news of the SEC's failure to defend investors -- whether it's about the SEC's role in "regulating" Lehman, or Federal District Court Judge Jed Rakoff's rejection and ultimately reluctant approval of a settlement between the SEC and Bank of America, or this recent situation -- taxpayers and investors have to wonder what's going on.

And in the Business of Law:

The SEC takes enforcement action, accusing a South Carolina Lawyer of fleecing his clients of $35 million.

The Department of Justice does, too, prosecuting 40 people -- including two Texas lawyers -- in a $20 million mortgage-fraud case.

Cadwalader, Wickersham & Taft picked up three partners from Proskauer Rose.

Another lawyer leaves practice for baking, though this time it's for "Caveman Cookies" instead of cupcakes.

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