Is the SEC Toast?

"Three months ago, in a courtroom in Bridgeport, Conn., a 72-year old former Morgan Stanley [MS] broker named Richard A. Kwak was cleared of any involvement in a small-time stock manipulation scheme. ... Kwak's life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker--he certainly can't afford to retire--he long ago lost his job with [MS], where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was. ... Indeed, it was the [SEC's] Boston office--the same one that so relentlessly pursued Mr. Kwak--that Mr. Markopolos first approached about Mr. Madoff, whom he strongly suspected of financial chicanery. In 2000, 2001 and 2005, he peppered investigators with evidence that, while circumstantial, was far more compelling than anything the SEC ever had on Mr. Kwak. ... The first is that the [SEC] spends too much time going after small fry like Mr. Kwak. 'It happens more times than you can possibly imagine,' said Steven N. Fuller, one of the lawyers in the case. ... But even the new SEC enforcement chief, Robert Khuzami, acknowleged that the agency has for too long judged itself primarily on 'quantiative metrics'--that is, the number of actions it brings and cases it settles--something he hopes to change. ... Clearly, it is far easier for the SEC to add scalps by going after little guys, who will often agree to a settlement and a fine even when they are innocent. They either run out of money, or lose the will to keep fighting, or both", my emphasis, Joe Nocera (JN) at the NYT, 27 June 2009, link: http://www.nytimes.com/2009/06/27/business/27nocera.html.

"When it comes to corporate America, critics and skeptics are about as welcome as skunks at a pool party. And when companies try to silence dissenters, shareholders are often imperiled. ... Matrixx shares have fallen 71 percent since the FDA announcement. ... Last Tuesday, Matrixx's problems grew when it said the [SEC] had begun an informal inquiry into the company related to the FDA action. ... Matrixx filed a defamation suit against the posters. Then, as part of their case, it subpoeaned Tim Mulligan, an independent research analyst who had published a critical report on the company in his accounting-oriented newsletter, the Eyeshade Report. ... Over the years, he had questioned the practices of several companies that were subsequently investigated by the SEC. ... Matrixx never named Mr. Mulligan as a defendant in its defamation case, but the years of legal work and costs that he incurred defending himself against the company's subpoena finally drove him to shutter his research operation in late 2005. ... Citing regulatory filings and other public documents, Mr. Mulligan's 24-page report that August also warned that Matrixx might not be able to supply the FDA with adequate support for its claims that Zicam reduces the severity of cold symptoms. ... In an interview, [Bill] Helmet said Matrixx's subpoena was not intended to silence Mr. Mulligan. ...In addition to his dismay over the legal battle, Mr. Mulligan said he was perplexed by encounters with SEC officials regarding Matrixx. Amid his legal wrangle, he contacted two SEC enforcement officials offering his research about the company. They dismissed him as 'suspicious,' Mr. Mulligan said, and refused to provide e-mail addresses to which he could send his work", my emphasis, Gretchen Morgenson (GM) at the NYT, 28 June 2009, link: http://www.nytimes.com/2009/06/28/business/28gret.html.

Welcome aboard JN. I've questioned SEC case selection for decades. It's worse than JN thinks. The SEC chases nobodys like Kwak to avoid politically powerful defendants. In Yves Smith's parlance, it's a "feature, not a bug". Besides, could Kwak, a nobody, offer an SEC attorney a NY BigLaw job when he decides to "go private"? Hey Khuzami, how about this? Offer Kwak a position as your deputy. Well? Look at SEC disasters in cases like: Joe Jett's, the PWC Two and Gile. See my 9 December 2008 post: http://skepticaltexascpa.blogspot.com/2008/12/linda-thomsen-please-go-home.html.

The SEC should require SEC registrants filing such suits to file them on Form 8-K with a copy to the SEC's enforcement division which should intervene. If the suit was meritless, the SEC should bar the attorneys who filed it from further SEC practice. But "that will chill zealous advocacy". Tough. If you're an SEC registrant you ain't got no "zealous advocacy" in such matters. The attorneys who acted against Mulligan should be forced to reimburse his legal fees. If they don't the SEC should bar them from further practice. Welcome aboard GM. That's my SEC experience too. If you tell it about something "questionable" and you are not an "approved source", you will be ignored at best, if not investigated yourself. The SEC has approved sources? Didn't the Fed claim it had no TBTF list? Whether or not Matrixx's subpoena was "intended to silence Mr. Mulligan" is a jury question. The SEC should refer this to the DOJ and let the sparks fly. Mulligan may have a good abuse of process claim too.