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SEC Rolls Out New Legal Tactics Targeting Civil Suits

""The Securities and Exchange Commission"":http://www.sec.gov/ recently announced a new game plan when it comes to targeting companies and individuals under fire for allegations stemming from the mortgage meltdown. The SEC will now change up its enforcement procedures and says it plans to focus on filing more civil cases.

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Moving away from difficult to prove filings that are geared to prove purposeful wrongdoing, recklessness, or fraud, the SEC will reduce its burden with civil cases that require only proof of negligence. Previously, the SEC has utilized similar tactics as as supplement to more intensive accusations, occasionally settling with companies facing charges by reducing the offenses to negligent, as opposed to engaging in a court battle with the entities on more serious allegations.

Negligent acts traditionally carry fewer penalties than other forms of accusations, and for many, the lesser fines and reduced risk of banishment from practicing in the financial industry are a strong motivator. The most recent example of the SEC's shift in tactics is contained within its civil lawsuit against Edward Steffelin. The former executive for GSC Capital Corp. saw civil

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charges brought against him for lack of disclosure to investors related to the firm's assets under management for ""JPMorgan Chase & Co"":http://www.jpmorganchase.com/corporate/Home/home.htm.

JPMorgan has already paid $153.6 million to settle its SEC civil-fraud charge concerning the transaction in question, but Steffelin is still preparing to fight the allegations directed toward him. Based on a $1.1 billion deal gone bad in 2007, the Steffelin's lawyer has already filed a motion to dismiss the SEC's civil case, citing the SEC's own negative headlines during recent months.

Ken Lench is leading the SEC's charge toward investigations of mortgage-bond investments, which are pinned as the crux of the financial crisis, and he recently commented to the _Wall Street Journal_ on the strategy maneuver, saying, ""Simply avoiding Ponzi scheme-style outright fraud is not enough to avoid enforcement action. Firms and executives have a duty of care. Failure to check properly that investors are being provided with fair and accurate information could, under some circumstances, be a breach of that duty, even if there's no intent to defraud them.""

Despite tough criticism, the SEC has continued to advance its look into misconduct related to mortgage-bonds, and it has filed an estimated 70 civil lawsuits against financial firms and individuals. Lench has also noted the civil filings' advantages as a way to avoid legal wrangling on the part of companies and lawyers alike, removing a defendants ability to rely on paper-trail tactics conducted with in-house lawyers.

Bottom line - filing civil cases relieves the SEC's need to prove intent to harm and purposeful fraud. Individuals being charged civilly need only to have acted without ""reasonable care"" to be pursued, and that might mean brining higher numbers of those related to the mortgage collapse to some version of justice.

About Author: Abby Gregory

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