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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