I've discussed my own views on the SEC on many occasions, dating back to the 2006 original edition of America's Financial Apocalypse.
First, I warned that the SEC would not be likely to act in a manner to prevent Fannie and Freddie from continuing massive fraud...
“Lack of congressional oversight and transparency with the GSEs has already resulted in mismanagement, fraud, and abuse of power. Only in 2003 did Fannie Mae finally agree to register under the SEC Act of 1934 due to mounting pressure from outside critics. It will now be required to provide annual and quarterly financial filings. But the damage has already been done. Recent investigations have forced Fannie to restate earnings to the tune of nearly $11 billion from 1998 to mid-2004. The SEC has fined them $400 million and the management is now being investigated by the Department of Justice. The SEC has a long track record of acting too little too late, and this could prove to be another example.
Thus far, Fannie Mae was found to have misrepresented its risk position, acted irresponsibly, and manipulated earnings so company executives would receive huge bonuses. Figure 10.3 (appendix) shows that Fannie was able to meet earnings goals for all bonuses from 1996 to 2003. No doubt, these bogus numbers would have continued if they were not caught. Box 10-1 (appendix) shows a partial summary of the 311-page special report of the OFHEO’s special investigation of Fannie Mae.”
Source: America’s Financial Apocalypse, 2006.
Later, I discussed how the SEC permits legalized insider trading by permitting corporations to purchase their own stock, as well as allowing executives to execute stock options even when they know the near-term fate of their companies.
“Because companies know better than anyone what their short-term fate will be, they are truly the ultimate insiders. Corporate treasury departments can time the purchase and sale of their stock as long as they abide by certain minimal restrictions mandated by the SEC. Hence, unknowingly, shareholders lose when companies purchase treasury stock. Yet, the SEC has allowed this practice ever since inception.
As well, there are very few restrictions for insider purchases of company stock. Don’t you think CEOs and CFOs know their company’s business prospects over the next few years? Of course they do. But the holding period for stock options execution is remarkably short. This legalized insider activity by has accounted for the bilking of billions of dollars from investors. Yet, in most cases, the timely liquidation of stock options is transacted legally, although representing an unfair advantage and what I consider legalized insider trading.
Executive management cares only about one thing—earnings growth, because it leads to a higher stock price. This makes their stock options more valuable. But it also makes treasury stock more valuable in a variety of ways, whether through the effects of increased buying power, improved earnings growth, or as a source of collateral for loans. And of course, management stands to benefit from higher bonuses and more stock option awards.
Today, CEOs are much too powerful and overcompensated, in large part due to unchecked stock option programs. Oddly enough, they do not share a proportionate decline in compensation when performance lingers. But they stand to profit from overly generous stock option awards when the company performs well on a short-term basis. Thus, it’s greed rather than the fear of underperformance that provides incentive to cook the books. It’s really not a big deal for them because they know they won’t go to jail if they get caught.
Enron and WorldCom serve only as rare examples of prosecution due to fraud, but only because these scandals received so much media coverage. Executives in hundreds of other companies weren’t prosecuted after extorting billions of dollars from shareholders by the timely exercise of stock options. Unfortunately, this will continue as long as corporate America controls Washington.”
Source: America’s Financial Apocalypse, 2006.
Next, I discussed the SEC's poor track record of detecting securities fraud...
“And of course we cannot forget the SEC, which focuses most of its efforts on small-time crimes as a way to create the perception that it’s policing the securities markets. Widespread fraud continues at the highest levels on Wall Street and corporate America on a daily basis. In almost every major case of Wall Street and corporate fraud, the SEC has acted only as a reactive investigator after someone else discovered the deceit. This has been true in the accounting scandals with Enron and WorldCom, hundreds of other accounting scandals, stock options backdating, mutual fund and market maker trading fraud, and virtually all other scandals that affect millions of shareholders.
Rather than focusing on the major crimes, such as illegal activities of market makers, fund managers and traders, floor traders, Wall Street firms, and corporate insiders, the SEC operates with the mentality of “You might be doing something wrong but don’t let us know about it or we will investigate.” In contrast, the SEC should be constantly probing head figures that influence the capital markets because they’ve been getting away with criminal activities for decades. The passage of the Sarbanes-Oxley Act has had only a minor impact, with much more bark than bite. The fact is that things haven’t changed and they probably never will. It’s still business as usual on Wall Street. As with everything else in America, big money makes and breaks the rules.”
Source: America’s Financial Apocalypse, 2006.
Finally, I discussed the stock options backdating scandal…
“This is the latest scandal that’s been exposed as an aftermath of the Internet bubble. While investigations are just beginning and are expected to take several years, already several experts have estimated that as much as 20 percent of all stock options to top executives from 1996 to 2005 were backdated illegally. In addition, as much as 29.2 percent of stock options were manipulated in some manner during this period. Options backdating has been linked mainly to high-technology firms since most used stock options as a significant source of compensation during a period when such awards were not expensed on financial statements.
While options backdating is legal, it must be done with proper and timely disclosure according to SEC rules. However, many financial professionals (including myself) had suspected for some time that stock options to executives were being mishandled. Currently, the SEC has identified nearly 80 companies under investigation for options backdating (figure 12-5). Keep in mind that the SEC didn’t discover these fraudulent activities.
These brief examples of corporate fraud are just scratching the surface of a corrupt system whereby executives have become invincible. Some are more powerful than Washington politicians. And you can bet that there will be many more scandals exposed over the next several years. It’s a pattern consistent with America’s capital markets and big industry. Unfortunately, shareholders will never be properly compensated, but the executives, Wall Street brokers, and litigant attorneys will continue to get rich. Perhaps the most troubling aspect of all of this is that investors seem to have very short memories. Most act as if these scandals occurred decades ago, as evidenced by the large amount of speculation in the stock market over the past two years.”
Source: America’s Financial Apocalypse, 2006.
My thoughts were perhaps best communicated when I reiterated my assessment of the SEC directly to SEC investigators at the end of my formal complaint regarding the illegal and inappropriate seizure of Washington Mutual by the FDIC and Federal Reserve (although the official story line was that the Office of Thrift Supervision seized the savings and loan).
“In the future I will be submitting a proposal to the next presidential administration and other agencies regarding my recommendations for needed changes to the SEC. Among these changes, briefly:
- The SEC should provide measures which encourage whistle-blowing for those who see fraudulent activities. And a monetary award should be provided for successfully changed cases. This is will serve as a very helpful force towards the SEC’s mission of enforcement of all securities laws.
- Future SEC Chairmen need to be enforcement officials rather than politicians. They must be detached from the White House and given the leverage to act on parties thought to represent the most damaging levels of fraud. This means they should be proactively monitoring all market makers and floor traders on a daily basis, rather than waiting for 10 years before an outside party discovers foul play. This is something expected by the American people and it is mandated by interpretation of the Securities and Exchange Laws of 1933, 1934 and others since then.
- As a partial solution to overcome the bureaucratic barriers that hinder the efforts of the staff, the SEC should create a fund dedicated to compensating industry experts who submit credible issues of fraud. As well, these experts should be contracted for hire on certain cases as needed by the SEC. Each submission should be held accountable to an agency outside of the SEC such as the Department of Justice to ensure that it receives the proper consideration. I continue to be shocked at the lack of understanding SEC attorneys have of the illegal activities I observe in the capital markets. Most likely, they are being micromanaged so they are unable to see anything other than the task that is laid out before them. But the overwhelming problem is the lack if qualified and experienced investigators.
- Ultimately the SEC has failed to protect investors from massive fraud that has been a daily occurrence for over a decade now. Thus, a radical restructuring is necessary. The SEC should be overseen by an organization that is disconnected from Washington politics to ensure those in charge are held to the highest standards, remain committed to serve the original intended missions of the SEC, and are held accountable for their actions or lack thereof. Obviously, such a proposal would be viewed by SEC officials as a threat to their authoritative responsibilities. As a result, I would not expect this recommendation to receive any level of serious consideration. Asking an agency to create an independent party to oversee its actions and hold its officials accountable is not something one can expect in America. Therefore, I will be forwarding the details of this and all other recommendations to other government agencies, watch dog groups, etc.
- Media firms that engage in a certain amount of financial news and commentary should be regulated by SEC regulations in a manner similar to broker-dealers since they are receiving indirect payments (via ad revenues and favors) from those who deal in securities (analysts, fund managers, etc.) as well as those who are also directly involved in the securities markets (corporations via ad revenues – i.e. interviews with CEOs, etc.).
- The mutual fund industry is still largely unregulated. I can cite numerous examples of situations whereby investors are exposed to illegal sales and marketing practices, excessive fees are charged but customers are not aware of them, etc. The SEC must begin to regulate mutual fund companies on a level that is meaningful. Such regulation should be focused on marketing and advertisements. I can list numerous examples of what I would consider unfair business practices at best and illegal activities at worst by the mutual industry. I shall save this for a separate report to be composed at a later date.
- A new division should be created that focuses only on investigations of politicians, who use their power to influence the success of publicly traded corporations for which they are shareholders.
‘The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.’
It is clear that the SEC has continued to fail at its mission for decades. It is time for the SEC to be revamped. Americans have been exploited and defrauded for too long. Let’s be honest. The SEC has become a complete joke. And I for one will not tolerate it anymore. And I know I speak for all taxpayers. Together, we fund the SEC. We fund your paychecks. You are public servants to taxpayers, not the crooks you protect. This is not a message to the staff so much as it is to the executives of the SEC. I have always had very favorable encounters with every staff member from the SEC, from the receptionists to the attorneys. But their efforts have been intentionally limited by the decision-makers.”
Source: Formal Complaint to the Securities and Exchange Commission, Trading and Markets Division. Regarding Allegations of Insider Trading and Suspicious Events Underlying the Seizure of Washington Mutual.October 7, 2008.
Recently, the SEC announced that it did not seek charges against Moody's because it lacked the proper authority. But the SEC’s enforcement director, Khuzami did issue a warning to ratings agencies that they could “face charges if they mislead investors with deceptive ratings.” As I have discussed in the past, Khuzami is full of hot air.
Okay, so let me see here. Credit rating agencies conspired with Wall Street banks and to dump worthless trash labeled as investment grade bonds onto naïve investors, causing the collapse of the global economy; millions of foreclosures, millions of lost jobs, millions who have lost any ability to ever retire….and the SEC issues a warning for next time? I have only one question.
WHAT KIND OF BULL IS THAT?
Wake up people. You’re getting ***ked in the a** AGAIN!
Are you people going to stand there and continue to be raped by these Washington and Wall Street criminal ***tards?
Get up off of your asses, organize and do something for God’s sake!
Okay, now that I vented, let me continue on a more sensible tone.
First, let me say that the case mentioned is being used as a smoke-screen. Rather than discuss some computer error made by a European subsidiary of Moody's, you need to ask yourself why the SEC isn't going after Moody's, S&P and other rating agencies for issuing fraudulent ratings for toxic real estate securities.
Sure, the SEC will counter than they have no authority to make criminal indictments. But hell, they haven't even filed any civil charges against the agencies. Furthermore, the SEC can easily go to the Department of Justice and get them to file criminal charges; that is if they wanted.
I don't even want to talk about Goldman or Citigroup's settlement with the SEC because it angers me too much. You know you're running the show when you are permitted to defraud taxpayers of tens of billions of dollars, only to receive a penalty which amounts to a tiny fraction of that.
The SEC has been a complete disgrace for years, focusing on scapegoats and the little guys, while letting the largest of the criminals go free. The agency never spots major fraud. It only reacts to it after the fact.
A good part of the problem is that the Chairman position is appointed by the White House. And when you have a White house that's in bed with Wall Street, what more can you expect but a continuation of the same old game?
The only way in hell I'd ever give the SEC another shot to prove itself is if Eliot Spitzer, Andrew Cuomo, or I was in charge. I doubt either of them would answer to the demands of the White House because that would most likely mean they wouldn't be doing their job. I know I'd resign from the position if I found myself in a situation whereby I was acting as a puppet.
I don't want to speak for either of them, but I know if I was running the SEC, there would be a whole hell of a lot of Wall Street guys in prison for a very long time. Many of the others would resort to sending me hate mail, if I'm lucky.
