SEC-Two Views

"We can't deal with all of them in one week, so we take special note of the regulators on our turf. Although the [SEC] was founded in the 1930s, its efforts to protect consumers have not yet succeeded. But it knows why: All it needs is a little more money. ... After examining a recent report from the SEC's inspector general, we must add a codicil: A government pretending it can do a lot of good automatically will do a lot of harm. ... According to the report, the SEC conducted nine investigations and audits of Madoff's now-infamous operations and was unable to detect his Ponzi scheme or the fictitious nature of the trades he reported to his investors. ... Many people claim that the SEC is understaffed, overworked or underfunded. How about incompetent? As with most regulatory agencies, neophyte lawyers usually work at the SEC for sub-market wages, just long enough to acquire the expertise in regulatory arcana that makes them really valuable in private practice as advisers to those being regulated. ... 'Most of the investigation was directed at determining whether Madoff should register as an investment adviser or whether Madoff's hedge-fund investors disclosures were adequate.' Regulation and regulators frequently drift from substance to form. Paper-pushing and registration are a defense against inquisitive supervisors, but they are no substitute for forcible disclosure, aggressive investigation and well-supported prosecution. ... Though it looked down its nose at the SEC's staff, even the office of the inspector general hired two expert consulting firms to do its investigation. And the IG had the advantage of knowing what had happened. Even when the SEC does find a fraud or a failure to disclose, it almost never prosecutes. It reaches a settlement. ... The IG wants to add more forms, not more effort. It urges new systems to list complaints and keep track of them, to handle tips and assign them to knowledgeable investigators, to acquire and hold data, to train employees, to plan and to analyze enforcement", my emphasis, Thomas Donlan (TD) at Barron's, 5 October 2009, link: http://online.barrons.com/article/SB125452436061160553.html.

"The Inspector General of the [SEC] has provided suggestions on how the agency might improve its chances of catching the next Bernie Madoff. The report has an all-too-familiar-ring. Whenever a new financial scandal erupts the finger-pointing begins: Who knew what when, and why didn't they do something? ... In each case, the SEC's hybrid role as regulator, inspector and enforcer made it particularly difficult for the agency to explain why it came so late to the game. Often adding to its embarrassment in the discovery that someone had been pestering the SEC about the abuse it didn't uncover on its own. Whistleblowers told the agency that no money manager can really get a 10% return every year in perpetuity, that securities built from leveraged real-estate plays may prove problematic, and that no company can book billions of dollars in sales from products no one seems to buy. ... To reflate trust in the post-Enron stock market, Congress stuffed the Sarbanes-Oxley Act with protections for those who know how to out their lips together and blow. ... The IG said the problems include a lack of technical knowledge by line attorneys and many supervisors, little institutional memory for the enforcement staff to draw upon, and weak support from the SEC's other divisions. These are indeed persistent problems--so persistent that some skepticism is warranted that the IG's procedure-heavy recommendations will, in themselves, improve the SEC's investigative performance. ... The safeguards however, can quickly turn into new kudzu, doomed attempts to substitute institutional process for individual judgment. ... From my experience, however, the slush pile of unsolicited investor complaints yields few hits. ... Unfortunately, few of these professionals have any incentive to talk to the SEC. Corporate whistleblowers are often rewarded with a pat on the back followed by a shove out the door, Sarbanes-Oxley notwithstanding. ... And, unlike the criminal authorities, the SEC has no mechanism for giving a free pass to informants, although it's currently considering a move in that direction. ... That leaves short-sellers. ... Almost any public squaring-off against a company by short-sellers (or, for that matter, by journalists or analyst firms) invites a lawsuit. ... The Enforcement Division [ED] hires young lawyers who are smart and hardworking, but devoid of industry experience. ... They need all the help they can get, and the SEC should encourage industry professionals to volunteer information routinely. Additional examination of the tips that bounce into the agency is not enough", my emphasis, Richard Sauer (RS) at Barron's, 23 November 2009, link: http://online.barrons.com/article/SB125875977157458161.html.

My experience dealing with the SEC is that it's worse than TD thinks. The SEC's "neophyte lawyers" (NL) are mostly interested in who is the "relator". If the relator is a nobody and the complaint is about a potential employer, they jump through hoops to ignore the obvious. The NLs are primarily interested in filling up their rolodexes while on the public payroll. I would prefer an SEC that was merely incompetent to today's SEC. Substance vs. form at the SEC? Hahahahahahaha. The SEC's IG needed consultants too! Most SEC investigations are a waste of time. See my 9 December 2008 post about SEC success stories: http://skepticaltexascpa.blogspot.com/2008/12/linda-thomsen-please-go-home.html.

RS is a "former" SEC attorney. After reading this, I wonder if there are "former" SEC attorneys, any more than "former" Vampire Squid (VS) executives. How bad is the SEC? Remember the Ray Dirks fiasco? It led to a Supreme Court decision, my 6 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/31-years-of-failure.html. I see SEC personnel as economic ignoramuses. They can't get past: "condition present, condition absent". Unlike IRS personnel, I have no confidence in SEC ED personnel's good faith efforts. I never encountered an IRS agent I thought corrupt. Stupid and ignorant, yes. How does RS know what is in his "slush pile"? Who is RS kidding? If VS's general counsel complained of something involving say $100,000, the SEC ED would be all over it! The SEC can tell registrants they will not file lawsuits against short-sellers without potentially subjecting themselves to securities fraud claims! When? Right now!