Wall Street Is Furious Over Rising Fines From SEC

Wall Street Is Furious Over Rising Fines From SEC
Wall Street Is Furious Over Rising Fines From SEC

Summary

Penalties for technical violations have exploded, prompting the high-speed trader Virtu to litigate rather than pay.

WASHINGTON—Wall Street is feeling the pain of inflation—at the tills of its regulators.

Big banks and brokerage firms are handing over bigger checks to settle regulatory investigations, including those that don’t result in losses for investors. U.S. market regulators are increasingly demanding tens of millions of dollars to settle technical violations that just a few years ago cost companies much less to resolve.

This past week, the Securities and Exchange Commission sued Virtu Financial, one of the biggest electronic traders on Wall Street, over claims that some employees could have improperly viewed its clients’ confidential trading information. The SEC didn’t allege that Virtu misused the data. The lawsuit noted that regulators couldn’t tell if the wrong traders ever saw the nonpublic records.

The SEC settles most of its enforcement cases, and Wall Street firms prefer to pay fines and avoid litigation that would put more heat on executives. But SEC officials under Chair Gary Gensler are seeking higher fines to settle, even if prior offenders paid less.

In the Virtu case, the SEC sought a fine of more than $25 million, people familiar with the matter said, multiples of what similar prior cases fetched for the agency. The fine would have represented about 5% of Virtu’s net income last year.

Virtu Chief Executive Douglas Cifu wrote in recent days on X, the platform formerly known as Twitter, that the SEC’s “offers to settle were not commercial" and he decided it was better to fight the regulator in court.

Cifu, who has clashed with Gensler over the regulator’s move to change how retail traders’ stock orders are filled, called the SEC’s lawsuit politically motivated in another recent post on X. Virtu and a few other companies dominate the business of filling small investors’ market orders and say they give the traders a better price than they would get on a stock exchange.

Tyler Gellasch, head of the Healthy Markets Association trade group, said Virtu occupies an essential position as a stock-market middleman, and keeping institutional investors’ trading data confidential is a core part of what it promises clients.

In its suit, the SEC alleged that Virtu had misled its institutional clients by failing to disclose the information-security gap. That claim, which the SEC calls negligent fraud, can result in steeper penalty demands.

Penalties for misrepresenting investor-protection policies, SEC Enforcement Director Gurbir Grewal said, need to be set “at a level where the cost of effecting a culture of compliance throughout an organization is cheaper than violating the federal securities laws."

Advocates of tougher financial regulation back Gensler’s strategy but also want the SEC to sue more individuals. “While big fines can serve an important purpose, big fines alone on big banks are paid by shareholders and will never be big enough to stop bankers from breaking the law," Better Markets President Dennis Kelleher said.

Banks whose brokers and traders used prohibited messaging tools such as WhatsApp have paid some of the biggest fines to Biden-era regulators. The probes were meant to stop traders from texting about their business on apps that banks’ compliance departments don’t monitor, although the SEC never sued individuals or alleged that they were texting to hide misdeeds.

The brokers had to settle with both the SEC and the Commodity Futures Trading Commission, which regulates futures and other derivatives. JPMorgan Chase, Goldman Sachs, Morgan Stanley and UBS Group each paid $200 million to the agencies.

About 20 years ago, some of the same firms paid a much smaller toll—$1.65 million each—for not keeping email that regulators needed for enforcement investigations.

In August, Wells Fargo became the latest big bank to pay a $200 million fine to resolve an investigation over its brokers’ chatting on iMessage and WhatsApp.

Defense lawyers and some legal scholars said Gensler’s SEC is levying fines beyond historical norms. That stance is generating some pushback among defense lawyers and conservative legal groups that are looking for ways to challenge the SEC’s civil-enforcement authority.

The law that authorizes the SEC’s penalty powers is broadly written, and the agency has stretched the language to negate the statutory limits on how much it can seek for a single case, according to a legal petition filed with the Supreme Court by the New Civil Liberties Alliance, a conservative legal group. The high court hasn’t said whether it will hear the case.

“There is no meaningful cap or calculation that ever really takes place," said David Rosenfeld, a law professor at Northern Illinois University and former senior SEC enforcement official whose work examining SEC fines was cited by the New Civil Liberties Alliance in its arguments to the high court. “They feel they have unfettered discretion, and so the penalty number is made up out of whole cloth."

The more than $25 million the SEC sought from Virtu is five times what Wells Fargo paid in 2014 to resolve similar claims. And in that case one of the bank’s brokers did something worse, according to the agency, illegally trading in the stock of a merger target he learned about through his work at the bank.

In 2020, the private-equity firm Ares Management paid $1 million over similar allegations, although no one was charged with insider trading.

“The SEC’s settlement offers lacked statutory grounding and were detached from the facts, the law and existing precedent," said Andrew Smith, a Virtu spokesman. “As fiduciaries, we have made the decision to contest this politically charged action based on our commercial judgment just as we would any other civil dispute."

Write to Dave Michaels at dave.michaels@wsj.com

Wall Street Is Furious Over Rising Fines From SEC
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Wall Street Is Furious Over Rising Fines From SEC
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