March 2, 2009

The SEC Sucks

When retiree Phyllis Molchatsky filed suit in NY against the SEC in December 2008 for failing to protect investors I just looked at it as going after the deepest pockets. But after watching the 60 Minute segment on Sunday night I think she may be justified in pointing the blame their direction.

In the CBS interview, Harry Markopolos was asked how many times he sent materials to the SEC. Markopolos calmly responded, "May 2000. October 2001. October, November, and December of 2005. Then again June 2007. And finally April 2008. So five separate SEC submissions."

Markopolos is not superman, he is a 52 year-old accountant who said he was able to see that something was wrong in minutes and it only took him 2 hours of study to prove it. He went on to say that the SEC was full of lawyers who were great at scrutinizing documents, but were not trained or capable of identifying fraud.

A few weeks ago I was watching the news where a congressman asked if they could bring the regulators associated with the issue into the hearing room. When asked why, he responded because “I want to tell them they suck at their job!”

It seems that the SEC does suck at its job. There is no shortage of litigation around the Madoff matter. My question is can and should the SEC and its regulators be held directly liable for failing to protect shareholders?

Comments

7 Responses to "The SEC Sucks"

Doug Cornelius said... March 3, 2009 at 4:43 AM

David -

Securities fraud, like any other criminal act, is only a crime after it happens. It is just a question of how long the fraud can go on before it is rooted out and an enforcement action begins.

The SEC clearly missed Madoff. No doubt about it. The red flags look obvious in hindsight.

But just take a look at all of the SEC enforcement actions filed this year: http://sec.gov/litigation/litreleases.shtml.

If they sucked at their job, there would not be so many enforcement actions.

As for protecting from Madoff? Those were not mom and pop investors. Those were wealthy investors and hedge funds that should have done their due diligence.

David Childers said... March 3, 2009 at 9:05 PM

Thanks Doug. Appreciate the feedback. I would agree that the SEC is active but the efficacy still is in question. It is just a shame that the Tone from Top at the SEC a few years ago was not more enforcement minded.

Agree with you that the hedge funds were also negligent.

Mike West said... March 4, 2009 at 9:37 AM

Gee, David, I'm not sure I understand Doug Cornelius' sanguine attitude toward the SEC and their shielding of Madoff. SEC is supposed to be a protection against fraud, and not just against the relatively small frauds that Doug refers to. Oh, and the responsibility should be with investors and hedge funds? Not sure I get that logic. I find it appalling that the SEC would ignore well-documented whistleblowing from Markopolous, but almost equally appalling to read Doug's apologia for the SEC.
Keep up the good work. Your blog is consistently interesting and thought-provoking.

Doug Cornelius said... March 9, 2009 at 6:25 AM

To be clear, I am not apologizing for the SEC. There seems to have been a leadership vacuum over the last few years. But I think saying they suck at their jobs is going too far.

I have seen so evidence that the SEC shielded Madoff as Mike West claims. They just did a bad investigation.

Before claiming Markopolos a genius you should look beyond the soundbites presented on the news. I did. His letters to the SEC were rambling and looked more like the rants of a conspiracy theorist than his current polished presentations.

Even his polished presentations are only good when he stays on script. Listen to the whole testimony before congress. Once he finished reading his script, he started sounding much less credible.

Also keep in mind that Markopolos is now working as a fraud investigator. With that in mind, his statements start sounding more like self-promotion than selfless investigator.

Mike West said... March 9, 2009 at 12:18 PM

Ok, I would agree that the SEC did a bad investigation, but a bad investigation of a small player is one thing and someone with the scale of Bernie Madoff is another. Disgraceful, in my opinion. And btw, nobody said Markopolos is or was a genius or entirely free from self-interest. But he was right.

Andrew K. Soto said... March 11, 2009 at 8:05 AM

David:
On your question of whether the SEC should be held directly liable for failing to protect shareholders, I must respond absolutely no. While it might feel good or even seem just that the SEC should be required to make whole victimized investors to the tune of billions of dollars, where will the money come from? There are only two choices - the American taxpayer or American businesses regulated by the SEC.
If the SEC is not doing its job, they should be held politically accountable. Making them financially accountable as well just hurts everyone.
Thanks for the opportunity to comment.

avery said... May 2, 2009 at 8:32 PM

David,
I completely understand the SEC's implementation of the infamous hotline from a management perspective. Being an employee of an organization whose job it is to investigate and incriminate organizations and individuals delivers a position of power. A hotline would be a good judgment call in order to keep that otherwise limitless investigation power in check. The big question should be whether or not the hotline and the complaints received on it were being abused by the upper management.

Example: I am Joe Snuffy, in charge of Segmented Networks, an IT consultation group. One day, on a bad tip, John Doe of the SEC begins investigating my company, going through financial records over the last three years. Unfortunately, and to no discredit of the SEC itself, Mr. Doe proceeds to hound my middle management people every day for records, even if the records he seeks do not belong to that department. The hotline is a good place for me to turn to in order to tell his boss that Mr. Doe is overstepping his boundaries and overly aggressively investigating my corporation.

On the other hand, with the same basic initial scenario, if Mr. Doe shows up and asks the right people for the necessary records, there really should be an uninterested third party at the receiving end of the hotline to decide whether or not Mr. Doe's investigative means have overstepped the boundaries of right and wrong (legally, morally, or ethically), and definitely not someone who will say "Hey, Joe, don't sweat it, I'll have him back off since you've been so generous to me and my family."

The problem I see is that the receiving end of the hotline needs to be an appointment of the same caliber as a federal judge, someone whose sole job it is to be impartial and fair, operating within the limits of the law. If this is not the case, as it sounds like it is not, then the entire system is subject to public scrutiny and, after a disaster such as the one we are currently experiencing, outcry.

Final note: I do not disagree with the concept of a hotline, only with the implementation as it has been presented to me at this time.

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