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Investor Protection Policies

Assignment 1

One of the more predominant investor protection policies in the literature is that of the Investor Protection Act of 2009 that was passed by the United States Congress in response to the massive financial crisis of 2008. While the 2008 financial crisis was largely precipitated by the housing market crisis and a proliferation of sub-prime mortgage loans which failed, the disaster also uncovered quite a bit of chicanery, deceit, and corruption within the United States financial sector. For instance, one of the more visible investor fraud scandals was that of the infamous Ponzi scheme that was perpetrated by Bernie Madoff, who was convicted of investor fraud in 2009. In addition to the Madoff scandal, it became clear that there was a general culture of deceit and venality within the American financial sector, and Congress quickly enacted this legislation in an effort to prevent the future occurrence of another financial crisis.

Typical Investor

In summary, the Investor Protection Act of 2009 was an extensive revision of the Investor Protection Act of 1970. The 2009 version of this act granted expanded powers to the Securities and Exchange Commission to conduct investigations, and also granted expanded protections to whistleblowers who wished to report any suspected wrongdoing at their firm. Further, the Investor Protection Act of 2009, and also incorporated the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009, which included multiple protections for the average American credit consumer. Overall, on paper, the Investor Protection Act of 2009 appears as though it should have been quite effective in protecting investors, but in reality, these objectives do not seem to have actually materialized, given what is taking place in the United States economy at the time of this writing. This paper will more closely analyze the Investor Protection Act of 2009, and will argue that further protections must be enacted to rein in the corruption and inequity that currently plagues Wall Street.

Literature Review

A 2011 analysis of the Investor Protection Act by Joo found that, by and large, the main effect of this Act was to encourage securities firms to engage in the orderly liquidation of assets if they began to suspect that they were facing financial trouble or insecurity. Prior to the passage of the Investor Protection Act of 2009, one of the favored maneuvers by many American securities firms in these instances was to simply file for Chapter 11 bankruptcy, which enabled them to easily reorganize, restructure, and start afresh while retaining many of their own assets. However, in the bankruptcy regime, both the investors and the main creditors of the firm are essentially left holding the bag whenever any securities firm filed for such bankruptcy protection. Clearly, such a regime would strongly encourage irresponsible risk taking and reckless behavior on the part of various securities and investment firms, as their leadership was quite aware that there would be an easy way out of trouble. However, Joo (2011) found that the Investor Protection Act of 2009 appeared, at the time, to be reining in this tendency.

A 2009 examination of the Investor Protection Act by Burke argues that the primary protection that this Act provides to investors is increased federal protection and insurance against losses if an investment or securities firm goes under, or is found to have engaged in deceptive behavior. According to Burke (2009): "In the US the Securities Investor Protection Act of 1970 provides retail investors with protection against losses incurred in the event of insolvency of a brokerage firm, missing securities, or theft up to an amount of $500,000 through the Securities Investor Protection Corporation (SIPC)" (p. 16).

Ulen, in his 2012 analysis of the Investor Protection Act of 2009, determined that the major benefit of this act was to strongly influence the behavior of those working within the financial sector. Ulen (2012) argues that the previous issues on Wall Street cannot simply be reduced to that of pathological levels of greed or of the outsized actions of a few "bad actors," but that the prior regime had actually encouraged all within the investment and securities sector to behave in this manner. Essentially, Ulen (2012) treats the majority of investment and securities professionals as "rational economic actors," and argues that, without specific laws and regulations preventing them from engaging in deceptive or questionable practices, it made perfect sense for them to engage in the seemingly destructive actions that they took prior to 2009. Ultimately, Ulen (2012) argues that the primary benefit and strength of the Investor Protection Act of 2009 was to provide a new set of behavioral incentives for financial managers to behave in a more responsible and upstanding manner, by creating restrictions and visible penalties for deceptive or overly risky behavior.

A 2009 examination of the general behavior of United States hedge funds by Shadab finds that it is not necessarily expanded regulation that serves to protect investors, but rather innovation on the part of hedge funds. In other words, Shadab (2009) argues that the general climate that existed within the United States financial sector prior to the 2008 crisis tended to discourage innovation, as simply engaging in the same routine behaviors tended to be extremely rewarding for financiers and investment professionals. However, Shadab (2009) observes that the hedge funds which emerged relatively unscathed by the 2008 crisis, in terms of both financial considerations and public scandal, were those who had voluntarily engaged in innovative behaviors. As such, Shadab (2009) appears to strongly suggest that additional regulation and oversight of the United States securities and investment market will not be effective in protecting against another financial crisis.

A 2012 analysis of the Dodd-Frank section of the Investor Protection Act of 2009 by Frankel argues that, by and large, the requirement of this section for full disclosure to investors, as well as credit consumers, has been a failure. The aspect of this act with which Frankel (2012) takes the most umbrage is that its wording only requires the broker to disclose the risks of the investment itself, rather than the risks that are to be undertaken by the intermediary or by the investor themselves. As such, Frankel (2012) disagrees with the potential of the Investor Protection Act of 2009 to provide any great measure of security to investors, and to some intermediaries, within the United States for the foreseeable future.

A 2012 overview of the Investor Protection Act, as well as similar investor protection policies that were passed across multiple nations during this period by Sevcik argues that: "An important and novel feature of the model is that the dynamics of macroeconomic variables and investor protection are endogenously determined. The macroeconomic dynamics depend on the evolution of investor protection policy, which is chosen by voting on the current level of investor protection in every period. The political preferences of agents are in turn linked to current and expected future macroeconomic conditions. Hence, the model presents itself as a first step toward a formal political economy theory of the joint determination of investor protection and economic development" (p. 164). Clearly, any investor protection policy, in the Unites States or elsewhere, must take the larger issue of economic development into account, and this may well account for the reasons that the Investor Protection Act of 2009 does not seem to have had much appreciable impact on the behavior of the investments and financial sector within the United States.

It's important to note that investor protection policies are often dependent on strategies used by traders, including banks, investment firms, and hedge funds. Established traders aim to protect investors' capital by a reliable risk management system. Without a proper balance between risk and potential gain, no investor can be safe. (Price Action Help, PPRS System).

Assignment 2


In order to properly assess the motives behind the creation of the United States Investor Protection Act of 2009, as well as any precipitating events that informed this policy, this paper will use a qualitative, in depth, case study methodology in order to better understand the reasoning behind this policy. As such, the research made use of multiple primary and secondary documents related to one of the major financial scandals of the "aughts" in United States history which drew attention to the major moral and behavioral issues within the financial sector of that nation: the Enron scandal. In addition to the close analysis of primary and secondary documents related to the Enron energy scandal, the researcher also consulted with several individuals who have expertise on this matter.

Brief Explanation of Data

In order to obtain more insight into the particulars of the Enron scandal, the researcher examined multiple primary and secondary scholarly sources in order to gain an overview of what exactly occurred in this scandal, and which factors of it precipitated (at least partially), the details of the Investor Protection Act of 2009. Even though the Enron scandal took place approximately six years prior to the enactment of this particular investor protection policy, it was nonetheless held up as a shining example of why such legislation urgently needed to be passed, and so it is a case study which merits further analysis and explanation. Additionally, several individuals who are currently employed within the financial industry within the United States were interviewed for their own insights with regards to this data.

Original Analysis

The former United States energy conglomerate, the Enron Corporation, is synonymous with the notions of insider trading and corruption in corporate America. Enron's problems began in the 1990's, when allegations of fraudulent accounting practices at the firm began to circulate throughout the financial world. Enron's woes came to a head in 2001, with the emergence of a scandal that they had engaged in insider trading and manipulation of the then-recently deregulated California energy market, a move which caused the energy bills of the average Californian to skyrocket. In the wake of this scandal, Enron's stock values began to fall precipitously, and the officers of the corporation, among them founder Kenneth Lay and executive officer Jeffrey Skilling, decided to file for Chapter 11 bankruptcy protection. While this action alone was highly unethical, to make matters worse, the core of Enron executive officers wrote themselves large checks out of the company's remaining assets the day before they were due to file bankruptcy proceedings. As a result, 46 Enron executive officers were prosecuted in Federal court under criminal proceedings, the corporation was dissolved, and as a result of the scandals, the United States government passed several laws intended to prevent such a situation from occurring in the future.

While many of the executive officers involved in the crime, including Skilling and Lay, were sentenced to Federal prison time, most received no punishment at all (and Lay passed away before he could be sentenced. In many ways, justice was not served at Enron; while the company was dissolved and several offenders received prison sentences, most did not (Aillon 2011). However, the Enron scandal ultimately resulted in the passage of new legislation that allows for greater government scrutiny of corporations such as Enron, and so in a larger sense, one could claim that justice was served.

Regardless of the malfeasance prior to the Chapter 11 Bankruptcy filing by several of its corporate officers, the bankruptcy claim was allowed to proceed, and the Enron Corporation was essentially brought to an end in 2004, reorganizing itself as the Enron Creditors Recovery Corporation in 2006, a shell company with less than 40 employees whose sole purpose was to liquidate Enron's existing assets in order to distribute them to creditors (Li 2010). According to Sandler, the Enron bankruptcy suit was one of the most complex bankruptcy proceedings in United States history, and several debtors were implicated in the suit. For instance, the banking giants Citigroup, Inc and JP Morgan Chase and Co both paid amounts totaling several billions of dollars in order to settle claims by investors (Patrick & Scherer 2003). Regardless of the multiple parties involved in the bankruptcy lawsuit, the Enron Corporation essentially ceased to exist at the end of 2006, once the Enron Creditors Recovery Corporation had served its purpose.

As the Enron Corporation has been completely defunct for a decade at the time of this writing, it is thus impossible to answer questions regarding lucrative government contracts, recent revenues and profits, and top executives' earnings, because they are non-existent. However, with regards to the larger question of whether justice prevailed in the case of Enron's misdeeds, the "death" of the corporation can be taken as prima facie evidence that corporate crime does not pay in the United States. While, in many ways, one can read Enron's voluntary Chapter 11 bankruptcy filing as "corporate suicide," the fact that the Federal government effectively stymied them from simply reorganizing and re-emerging under new executive management could be labeled as, if one is to continue with the "death" metaphor, as a "corporate execution" at the hands of the Federal government.

In the wake of the Enron scandal, bankruptcy, and collapse, there have been several lawsuits filed against the executive officers who were primarily responsible for the malfeasance, Jeffrey Skilling and Kenneth Lay. In both instances, the civil lawsuits were complicated by several circumstances, including Skilling's Federal criminal conviction and subsequent imprisonment, and Kenneth Lay's sudden death due to heart failure in 2006. While the Federal criminal case against Jeffrey Skilling was still pending, a group of 15,000 former Enron employees sued because their retirement plans essentially disappeared in the collapse of the Enron Corporation. The civil suit was, in essence, incorporated into Skilling's criminal case, and he was ordered to pay almost $45 million out of his personal funds as part of his criminal restitution. The fact that Skilling was criminally convicted of fraud and other crimes helped the plaintiffs in the civil lawsuits tremendously, as he essentially had no defense against the claims.

As far as civil lawsuits against Kenneth Lay, the defendants in these instances had greater challenges in establishing their claims. As has been stated previously, Lay passed away suddenly while on a vacation in 2006, prior to his criminal conviction and sentencing. Following the demise of Lay, the Federal court vacated the proceedings against him, stating that as he was now deceased, he had no opportunity to defend himself the charges, or to file an appeal should he be convicted. At this point, litigants who wished to file a claim against Lay had to sue his estate and his surviving wife, Linda Lay. Additionally, while the plaintiffs in the civil cases against Skilling had his criminal conviction as evidence proving his fraud, they did not have this advantage in the cases against Kenneth Lay. Linda Lay, for her part, denied having any knowledge of or participation in her husband's alleged criminal mischief whatsoever.

In the years following Lay's 2006 death, several groups of shareholders unsuccessfully brought civil lawsuits against his estate, which were all dismissed on the grounds that there was not sufficient evidence that Lay participated in the wrongdoing. In addition, the United States Department of Justice filed civil suit against the Estate of Kenneth Lay in 2008 in an effort to recover the costs of the criminal investigation against him; this case was summarily dismissed out of court. The Internal Revenue Service also filed civil suit against the Estate of Kenneth Lay, alleging that he committed tax fraud when he liquidated the assets of Enron Corporation prior to the Chapter 11 bankruptcy filing and did not report this income on his 2001 tax return. Once again, the judge in this instance declined to proceed with these charges, citing insufficient evidence. Thus, Linda Lay, the widow of Kenneth Lay, essentially got to walk away with all of the ill-gotten assets of her deceased husband, and was held culpable in no way for his wrongdoing. In this instance, it is difficult to see how justice was served; it seems that Mrs. Lay had sufficient assets to hire a team of highly competent attorneys who were able to beat the charges against her husband's estate.

In the case of the Enron Corporation, the question of whether crime paid off in this instance is a complex one. Certainly, the shareholders and the employees of Enron were the groups who paid the most; they lost their jobs, incomes, and retirement plans with little recourse. Jeffrey Skilling and other officers were forced to serve time in Federal prison. However, there is a clear winner in the Enron scandal: Linda Lay. Because of the timing of her husband's death, she became a very wealthy woman, and was held culpable for nothing.

Clearly, multiple issues that gave rise to many of the stipulations of the Investor Protection Act of 2009 were well illustrated in the particular details of the Enron energy company scandal. Not only can one observe the existence of a highly predatory executive leadership who were willing to cut all possible corners in the interest of gaining more profit, but it is also particularly heinous, in hindsight, that these Enron executives were completely willing to take advantage of something as basic as an energy market in order to obtain these large returns. Clearly, in the instance of the Enron scandal, most of the victims were not willing "investors" who understood the risks that they were incurring, but rather the general utility company customer in California.

However, in many regards, the Enron scandal demonstrates the major disregard that many within the United States financial services sector held for other, and for the general public and economic good. It goes without saying that any electricity customer is an "unwilling investor," since it is ridiculous to assert in this day and age that any one can simply go without basic power and electricity services at will, but the Enron scandal well illustrated the general rapacious attitude of the larger financial and investment community within the United States at the time. Ultimately, the details of the Enron scandal simply go to show how, if financial executives were perfectly willing to exploit the basic survival needs of the average utility consumer at the time, how willing they would be to take advantage of anyone who seemingly had money to spare and wanted to become a willing investor, in an effort to secure their own financial future.


Ultimately, the Investor Protection Act of 2009 was a highly detailed, and very well intentioned effort of the part of the United States Congress, and on the part of the United States Securities and Exchange Commission (SEC) to attempt to rein in much of the corruption, and many of the abuses of investor trust, which led up to the 2008 financial crisis. Overall, in reviewing the history behind the Investor Protection Act of 2009, it is clear that a general culture of corruption among the financial and investment sector had coalesced within the United States up until the time of the 2008 financial crisis. At the higher echelons of the investment and finance industry, many managers felt that it was perfectly alright to take advantage of wealthy or middle class investors who were simply looking to leverage their personal wealth in order to enrich themselves even more greatly, or to simply secure their financial futures. At the lower end of the spectrum, one can easily witness the manner in which various financiers took advantage of the relative lack of sophistication of many first time home buyers, or even just ordinary electricity consumers, in order to enrich themselves.

At any rate, it is clear that American investors and consumers, at all ends of the socio-economic spectrum, were being taken strongly advantage of by unscrupulous (or, as some might argue, simply self interested and unregulated) financial managers who led many to financial ruin and despair. As such, in the wake of the 2008 financial crisis, the United States Congress drafted, legislated, and passed the Investor Protection Act of 2009, which included multiple components. In essence, the United States Investor Protection Act of 2009 included legislation that greatly expanded the investigation and enforcement powers of the Securities and Exchange Commission (SEC), allowed for the widened ability for individuals currently employed at investment and financial firms to "blow the whistle" without personal penalty (at least, in theory), and also required all financial firms, be they hedge funds or simple credit card issuers, to fully disclose the terms and conditions behind all of their offerings, and to ensure that the investor or consumer fully understood these terms and conditions prior to accepting their offers.

However, as of this writing, in 2020, it is truly unclear as to whether or not the Investor Protection Act of 2009 had any real impact. For one thing, the current United States President, Donald J. Trump, rolled back many of the consumer protections of the Dodd-Frank Act almost as soon as he was inaugurated into office. Moreover, judging from the gross social and economic inequities that have only seemed to exponentially grown in the last few years, it is clearly not ye to be seen if the Investor Protection Act of 2009 truly had any impact. To be sure, there have not yet been any major investment scandals on the scale of the Enron matter, or the Bernie Madoff brouhaha, but these may well arise in the years to come.


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