WASHINGTON — A Columbia University expert in securities law urged Congress Tuesday to patch "a fundamental hole" in financial regulatory revamp measures by imposing a legal requirement that investment banks act in the best interests of their clients.
"Conflicts of interest played a key role in causing and intensifying the 2008 financial crisis," law professor John Coffee told a panel of the Senate Judiciary Committee chaired by Pennsylvania Democratic Sen. Arlen Specter.
Several other legal experts, however, argued that there is no need for such a standard, one cautioning that it could create enough uncertainty to hurt financial markets.
Specter, a recently converted Republican who's in a tightening Democratic primary race with Rep. Joe Sestak, is pushing legislation to deter the kinds of abuses blamed in the current crisis.
His amendment would impose a legal duty on broker-dealers or their agents to disclose all conflicts of interest when advising clients on the sale of securities, including exotic instruments, and establish maximum jail sentences of 25 years for willful violations.
To emphasize his concern about conflicts, Specter placed into the record a November 2009 McClatchy article describing how Goldman Sachs had sold more than $40 billion in risky mortgage securities in 2006 and 2007 while secretly betting on a housing downturn that would sink their value.
On April 16, the Securities and Exchange Commission filed a civil fraud suit accusing Goldman and one of its vice presidents of allowing a longtime client to rig an offshore deal and then reap $1 billion in profits by betting against it. Goldman has denied wrongdoing.
Witnesses Tuesday included Lanny Breuer, the chief of the Justice Department's Criminal Division, who voiced support for jail sentences to deter securities fraud, but didn't take a position on the bill. Pressed by Specter, Breuer couldn't offer examples of major criminal prosecutions of Wall Street figures in what led to the 2008 meltdown.
Barbara Roper, the director of investment protection for the Consumer Federation of America, and told the subcommittee that Goldman executives who testified last week before a separate Senate panel "seemed bewildered. In their world, it seems that customers who can't look out for their own interests are simply sheep waiting to be shorn."
Andrew Weissman, a New York-based partner in the law firm of Jenner & Block who previously headed a Justice Department task force that investigated massive fraud in the collapse of energy firm Enron Corp., said that willful misconduct could be prosecuted under existing laws. He said he's not convinced that "all — or even the core — of the conduct that we find most troubling on Wall Street" was systemic fraud or could properly be considered criminal.
Larry Ribstein, a University of Illinois professor, called the bill "the wrong tool" for addressing the problem, and J.W. Verret, an assistant professor at the George Mason University law school said it would "chill the securities markets ... at a time when they're under severe strain."
In response, Coffee dismissed what he called "a laundry list of Chicken Little reasons telling us that the sky will fall in if we mandate that you act in the best interests of the customer."
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