WASHINGTON - Forget too big to fail. In the eyes of federal

regulators, many Wall Street firms are too big to punish.

During the past three years, some of the nation's largest financial

firms have been accused by the government of cheating or misleading

clients and ripping off tens of thousands of consumers of their

investments.

Despite

these findings, these financial giants got, sometimes repeatedly,

special exemptions from the Securities and Exchange Commission that

have saved them from a regulatory death penalty that could have

decimated their lucrative mutual fund businesses.

Among

the more than a dozen firms that have gotten these SEC get-out-of-jail

cards since January 2007 are some of Wall Street's biggest, including

Bank of America, Citigroup and American International Group.

SEC

rules permit corporate lawbreakers to apply for what are known as

Section 9(c) waivers from one of the agency's harshest penalties -

effectively shuttering the violator's mutual fund operations - but

regulators never rejected any of these firms' applications. While the

firms were punished in other ways, they were spared from what some

claimed would be "severe and irreparable hardships."

In fact, the

last time the SEC's staff could recall a waiver being turned down was

1978. The SEC declined to comment in detail on its decisions, however.

Despite

the massive securities frauds of the past decade, the SEC is coming off

a period of stagnant enforcement. The Government Accountability Office,

Congress' investigative arm, reported this year that SEC enforcement

workers have felt overwhelmed by their caseloads and undermined by SEC

leaders hesitant to levy heavy punishment.

The waivers typically

are part of the settlements the commission negotiates with companies

caught violating federal law. Securities experts think companies

wouldn't apply for waivers if they didn't think their applications

would be granted. At the same time, the fact that the SEC could someday

deny one is a major weapon in its arsenal, experts said.

The

infractions that led to the waiver applications raided Americans'

pocketbooks and savings accounts. Some cases involved money that

thousands of citizens had invested based on the advice of their trusted

financial advisers to pay tuition bills, make down payments on houses

or cope with routine monthly expenses.

Small business owners had

money they were counting on to pay their employees frozen by their

bankers, and even bigger companies such as KV Pharmaceutical weren't

immune. The St. Louis drug maker was forced to eliminate 700 jobs this

year, in part because some of its investments went sour.

McClatchy's

review of recent waiver applications also found that the SEC has

granted exemptions to the same firms more than once, once after a firm

committed the same violation of law, and the agency even approved one

for a company that misled the SEC in its application.

Indeed,

granting these waivers has become so routine that different firms use

identical language, culled from a 1940 congressional hearing, to argue

for unrelated exemptions.

Underpinning its decision not to levy

the penalties provided by the Investment Company Act of 1940, the SEC

essentially has accepted the Wall Street firms' argument that they're

too big and too complex to be subject to a law that was written almost

70 years ago.

Earlier this year, for example, the SEC said a

division of E-Trade Financial had been slicing tiny amounts of money

off "tens of thousands" of stock trades, using tactics such as "trading

ahead" of customers. That means that even when a customer had placed an

order to buy or sell stocks, E-Trade executed its own trade for the

same stock first, denying the customer the best price.

The SEC

calculated that E-Trade had cost its customers $28.3 million. While not

admitting guilt, E-Trade settled the case in U.S. District Court in New

York and agreed to pay $34 million in penalties.

In March,

E-Trade applied for a Section 9 waiver. Without it, the company said,

its in-house mutual fund operation could have been decimated,

potentially causing customers "severe and irreparable hardships." It

also said that it needed exemption from punishment that "could disrupt

investment strategies," "frustrate efforts to manage effectively the

funds' assets," and increase the costs to people who owned them,

E-Trade said. More than 1,500 employees could be affected.

Eight days later, the SEC indicated that it would grant the request.

Two

weeks after that, E-Trade closed the very mutual funds at issue -

harming the very customers it told the SEC it was trying to help.

In

fact, at the same time E-Trade was asking the SEC to help it save those

funds, the company had already filed notice elsewhere at the SEC that

it was planning to close them, SEC records show. At the time E-Trade

asked for its waiver, most of the funds couldn't even be purchased any

more.

The waiver still helps E-Trade because it could allow the

company to restart its mutual funds. E-Trade had no comment on its

actions.

Sometimes, "permanent" in SEC enforcement parlance has proved to be a temporary thing.

In

2003, Citigroup settled a case after the SEC accused it of manipulating

stock market research. The settlement "permanently restrained and

enjoined" Citigroup from violating a specific section of federal

securities law.

Then in 2006, the SEC cited Citigroup and other

firms for improperly marketing "auction rate securities," bonds issued

by municipalities, student loan entities and corporations. The agency

censured Citigroup and fined it $1.5 million, and Citigroup promised to

clean up its sales practices. The SEC indicated that was good enough:

In its attempt to deter more lawbreaking, the SEC declared, "this

settlement is appropriate."

Two years later, however, Citigroup

was back under SEC scrutiny. This time, the SEC said the firm had

improperly marketed auction rate securities, violating the same section

of law at issue in 2003.

Citigroup again settled with the SEC,

and while not admitting the allegations, it again agreed to not violate

that key federal securities law.

It was one of those auction rate investments that went sour on KV Pharmaceutical.

Citigroup

first approached the firm in 2005 to invest in the securities, pitching

them as safe and dependable - perfect for KV's needs. When the market

started souring in 2007, however, Citigroup never passed those concerns

on to KV, according to a lawsuit the drugmaker eventually filed in

federal court.

KV bought $10.7 million in the securities, then

another $16.9 million. And it kept right on buying them, long after

Citigroup traders were receiving e-mails like this one intended to

boost sales: "Hit all bids . . . Times like these, we need to do

whatever is necessary. Just make sure all hands are on deck and paper

is sold," according to court records.

KV, in its lawsuit, said

Citigroup "put its economic interests before KV's" in an effort to save

Citigroup's own faltering finances. All along, KV said, it was assured

there was nothing to worry about.

The auction rate securities market failed in February 2008, and KV was left holding more than $70 million it couldn't spend.

While

the settlements the SEC negotiated with Citigroup and other banks could

make some customers whole, it didn't help KV in time. In February,

facing a cash crunch, it said it was cutting 700 jobs, due in part to

its auction rate problems.

Its lawsuit is pending; neither KV nor Citigroup would comment.

Meanwhile, Citigroup filed its application for a waiver, and the SEC granted it.

In

theory, securities law allows the SEC to levy heavier fines or extract

greater punishment from companies that violate their previous

"permanent" injunctions.

"The SEC has a miserable record of

policing and keeping track of recidivism even of prior violations,"

said James Cox, a Duke University law professor and an expert on

financial regulation. "I think it's not uncommon and I think it's a

problem."

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