Wall Street’s top regulator, sifting through the wreckage of the mortgage crisis, was weighing enforcement actions last year against several large financial companies.
But then the regulator, the Securities and Exchange Commission, decided in some prominent cases to quietly back down.
After many months of investigating the roles of Goldman Sachs, Wells Fargo and Standard & Poor’s in troubled mortgage securities â€" and even warning the companies that enforcement actions were possible â€" the S.E.C. closed or shelved these cases and at least two others.
While these outcomes have been known, the reasoning behind the decisions and the contentious way they divided camps within the agency illuminates how difficult choices are made inside the regulator. The S.E.C. comes to its decision, interviews show, after contentious discussions over the strength of evidence and the likelihood of winning at trial.
The internal discord â€" recounted in interviews with more than a dozen current and former officials â€" raises questions about whether the agency, even while winning some big cases, could have done more after the crisis to hold Wall Street accountable. Interviews with officials who spoke on the condition they not be named because they were not authorized to speak publicly, as well as a review of securities filings, also help explain why the S.E.C. dropped cases that other federal agencies pursued.
The Justice Department, for instance, used its broader authority to file a lawsuit against S.&P. In recent weeks, the Justice Department and the rating agency have stepped up settlement talks, officials briefed on the matter say, raising the prospect of a deal emerging early next year.
Five years after Wall Street set off a worldwide economic panic, the S.E.C.’s legal deadline for filing crisis-era cases is expiring. Although the agency is still building a mortgage-related case against Morgan Stanley, officials say, and has not ruled out a separate action against S.&P., the S.E.C.’s response to the crisis is all but complete after filing about 170 actions against some of Wall Street’s biggest banks.
“The depth and breadth of our actions against companies and individuals for financial crisis conduct is unmatched,†said John Nester, a spokesman for the S.E.C. “We make our charging decisions after a thorough investigation and healthy debate of any legal and factual issues.â€
The tension within the agency erupted at a meeting last fall in the Washington office of Robert Khuzami, the S.E.C.’s head of enforcement at the time.
Gathered around Mr. Khuzami’s conference table and squeezed onto his false leather couch, S.E.C. investigators who had unearthed potential wrongdoing clashed with the agency’s trial lawyers, who often warned that mortgage crisis cases lacked sufficient evidence. When the discussion grew hostile â€" officials raised their voices when debating how far to go in accusing JPMorgan Chase of wrongdoing in selling mortgage securities â€" Mr. Khuzami ordered them to leave.
“Get out,†barked Mr. Khuzami, a former terrorism prosecutor, telling the officials to return when they had reached an agreement or had at least identified why they disagreed. “Go back to the drawing board.â€
On the JPMorgan case and others, Mr. Khuzami ultimately agreed with the S.E.C. investigators who pushed for a broad set of charges. In doing so, Mr. Khuzami often overruled the concerns of senior officials like Matthew T. Martens, who led the litigation unit that would have had to try the cases in court had the banks not settled.
But in the cases of Goldman Sachs, Wells Fargo and other banks similarly suspected of overstating the quality of mortgage securities, Mr. Khuzami sided with those who thought the cases posed too steep a challenge.
Some of those decisions traced to concerns about the evidence, with senior officials questioning whether the investigators’ devotion to the cases had colored their judgments. The S.E.C. had the high hurdle of proving that the companies had committed fraud, needing to show that they had “materially†misled investors.
Other times, the decisions came down to dollars and cents. Once the Justice Department took action, the S.E.C. reasoned, an additional action would unnecessarily cost millions of dollars.
“Our coordinated approach,†Mr. Nester said, “avoids duplication of effort and charges, and leverages each member’s limited resources for maximum public benefit.â€
But to some S.E.C. investigators, the case closings suggested a shift within the agency toward unnecessary caution. The change coincided, they said, with the departure in early 2012 of Lorin L. Reisner, who was known for his aggressive streak as Mr. Khuzami’s deputy.
The outcome of the cases also echoed the decision not to file charges over the September 2008 collapse of Lehman Brothers because some S.E.C. officials decided it would be legally unjustified to do so. That move perplexed the S.E.C.’s chairwoman at the time, Mary L. Schapiro, who often prodded George Canellos, who succeeded Mr. Reisner and is now the co-head of enforcement, to explain, “Why is there no case?â€
The S.E.C. can still point to significant victories, including a $550 million settlement with Goldman Sachs over a complex debt instrument. And while the agency ruled out separate mortgage securities actions against Goldman Sachs, Wells Fargo and others, it did file four such cases, including the one against JPMorgan, which settled for $154 million.
Other agencies have gone further in mortgage securities cases. The Federal Housing Finance Agency, which possesses certain legal advantages that the S.E.C. does not, has secured larger settlements.
The S.&P. case also tested the S.E.C.’s resolve.
The investigation emerged from the agency’s Structured and New Products Unit, known internally as the Snoopy group. The unit, then supervised by a 23-year veteran of the agency, Kenneth R. Lench, seized on a trove of emails suggesting that S.&P. may have inflated ratings on investments that banks sold before the crisis. Focusing on the ratings of a deal called Delphinus, the unit in 2011 sent S.&P. a so-called Wells notice warning that an enforcement action was possible.
S.&P. pushed back. And Mr. Canellos raised his own concerns, officials say, arguing that a narrow case on Delphinus would elicit only token fines for a company the size of S.&P., disappointing some investigators on the case.
Mr. Canellos and Mr. Khuzami continued to urge the investigators, officials say, to pursue a broader action against S.&.P. As the December 2012 holidays drew near, S.E.C. investigators and litigators informed Mr. Khuzami that the broader case would probably survive initial hurdles in court but might fail at trial. Mr. Khuzami emphasized the silver lining, saying, “So you agree that we could win the first couple rounds.â€
Ms. Schapiro, hoping for a case, instructed the enforcement division to buy more time from the Justice Department.
“I’ll go over there and tell them myself if need be,†she told enforcement officials, according to people briefed on the conversation.
But in February, the Justice Department filed a lawsuit that accused S.&P. of knowingly playing down “the true extent†of risk tied to securities. S.&P. has called the case “meritless.â€
Mr. Canellos, who took control of the enforcement division in February after Mr. Khuzami left, expressed concern to colleagues that a similar S.E.C. lawsuit would be redundant and less potent. Under an obscure federal law created a quarter-century ago, the Justice Department had authority to collect bigger fines.
The S.E.C., which has all but closed the investigation of Delphinus, did sue the Mizuho Financial Group over its role in marketing the deal and providing S.&P. with “inaccurate and misleading information.†The S.E.C., officials say, is still pursuing individual S.&.P. employees. The agency has also suggested that it could ultimately strip S.&P. of its ability to rate certain investments, providing the Justice Department with leverage in settlement talks with S.&P.
But there is no Plan B for investigations into mortgage securities.
The S.E.C.’s Snoopy unit, scrutinizing whether banks misrepresented the quality of loans inside the deals, pursued two cases against Credit Suisse but ultimately dropped one. The S.E.C. also decided against suing a company that had made the loans contained in a Credit Suisse deal.
A debate also arose about the Goldman Sachs and Wells Fargo mortgage security cases. On the same day in February 2012, the S.E.C. sent Wells notices to both banks.
Soon after, senior officials raised concerns about the cases. Mr. Martens â€" who separately led a trial against Fabrice Tourre, a Goldman Sachs trader found liable for fraud â€" questioned whether some banks had “materially†misrepresented the quality of loans underpinning the security. The agency had to show that the banks had intentionally or negligently committed fraud.
Goldman told investors that the loans in its deal were “generally in accordance†with guidelines, a vague statement warning investors that not all the loans were up to snuff.
But Goldman also made specific disclosures about the loans in the deal, including that less than 1 percent of the underlying mortgages were worth more than the home. When the Federal Housing Finance Agency reviewed the deal for an action against Goldman, it estimated that 23.5 percent of the loans in the deal were “underwater.â€
Such after-the-fact data sampling, however, may have had flaws and not been admissible in court for the S.E.C. to use.
In August 2012, the S.E.C. told Goldman that it had dropped the investigation. And by November, the S.E.C. informed Wells Fargo that its investigation was also closed.
A version of this article appears in print on December 22, 2013, on page 
