WASHINGTON D.C. (CN) – Linda Thomsen, the Director of the Division of Enforcement for the Securities and Exchange Commission, appeared before the House of Representatives late last week in what may have been an effort to pre-empt blame for the precursor to the ongoing financial market turmoil the Auction Rates Securities Freeze in February which left tens of thousands of investors holding over $40 billion in illiquid securities.
“While ARS and subprime issues related to the recent market turmoil have captured significant attention over the past year, the SEC’s enduring mission in securities law enforcement is to be vigilant in addressing the broadest possible range of potential violations at all times” said Thomsen.
The SEC would not say why Thomsen was invited in front of the Committee of Financial Services, although she may have spoken to protect the SEC from blame regarding the ARS freeze and the limping U.S. economy in general.
Thomsen underlined the regulatory efforts of the SEC when she announced that the SEC and the Department of Justice are expected to file a record number of enforcement actions this year.
In ARS, an investor places his shares in an auction when he wishes to sell them. ARS are usually touted as being highly liquid since an investment bank typically bids on its own behalf when there is not enough demand for the shares.
In February 2008, firms stopped supporting auctions, allowing securities to go unsold. Unable to sell their shares, tens of thousands of investors were left holding billions in illiquid securities.
In response, the SEC opened an investigation into possible securities-law violations, listened to complaints, and ultimately pursued the two largest ARS participants, Citibank and UBS.
It was found the companies misrepresented ARS as safe and liquid investments, despite their knowledge that the growing ARS market was outpacing the amount of bidding customers, and that the sub-prime mortgage and credit crisis restricted the firms’ ability to pick up the slack.
Since then, the SEC has settled with Citibank, UBS, Wachovia, and Merrill Lynch to restore the $40 billion in liquidity to the ARS market, as well as interest payments for the time the securities were illiquid.
Apart from highlighting the agreements to refinance $103.7 billion of the $166 billion in ARS debt after the crash of the ARS market, and its pursuit of a variety of fraud from ponzi schemes to money laundering to insider trading cases, Thomsen applauded the shift of the SEC’s targeting from corporations to individuals. “Individual accountability provides an additional and powerful deterrent” she said.