Part XVI: SEC Enforcement Trends And Priorities, 2008

In the Spring 2007, the SEC’s Enforcement Division formed a subprime task force as the market crises deepened. Initially, Chairman Cox told Congress that the SEC is investigation whether sellers of portfolios of subprime mortgages packed into securities provided proper disclosure to buyers.

In February 2008, the Chairman again discussed the subprime task force with Congress. This time Chairman Cox stated that the Enforcement group was investigating several issues. Those include questions relating to securitization, as well as disclosure and valuation issues and sales to investors.

The SEC is coordinating its inquires with banking regulators as well as the International Organization of Securities Commissioners Subprime Task Force. The IOSCO has also formed a Credit Rating Agencies Task Force that Mr. Cox chairs.

To date, the most detailed description of subprime lending practices is contained in the 581 page reported prepared by investigators working for the Trustee of New Century, in In re New Century TRS Holdings, Inc., Case No. 07-10416 (Bankr. Del). The report details the manner in which the lender engaged in increasingly risky practices. It also discussed several improper accounting practices used by the lender.

Earlier this year it was reported that the SEC has approximately 36 open investigations in this area. “SEC Juggling Three Dozen Subprime Probes,” Financial Week (Mar. 27, 2008). Undoubtedly there are more by now.

To date, these investigations have resulted in one case: SEC v. Cao, Civil Action No. CV 06-1269 (C.D. Ca. Oct. 29, 2007). This is a settled insider trading case against a former vice president of Countrywide Financial Corp.

In the future, we can expect that there will be more cases brought. In view of the complexity of this area it may take some time for the Task Force to sort through these matters and start bringing enforcement actions.

Next: The conclusion to this series