Corporate Governance

The SEC, Bear Stearns and the Failure of Regulatory Oversight: The Unredacted Version (Part 5)

By J. Robert Brown

We are discussing the differences in the Report issued by the Office of Inspector General at the SEC on the SEC's Oversight of Bear Stearns, comparing the redacted and unredacted version.   The vast majority of the deletions go to references to staff memoranda, staff notes, and staff conclusions. 

So what is going on with the redactions?  Some of the information might be work product or privileged.  That at best explains a small portion of the deletions.  Most likely the staff was trying not to disclose information about reports that would result in waiver of exemption 8 of the Freedom of Information Act.  The Exemption allows agencies to withhold reports "prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions".   The Exemption applies to financial institutions supervised by the SEC.  See Berliner, Zisser, Walter & Gallegos, P.C. v. SEC, 962 F. Supp. 1348 (D. Colo. 1997).  While an exemption is available, an agency can waive them.  Moreover, once exempt material is made public, the exemptions are waived. 

Possible the staff thought that if it mentioned or quoted from the reports this might result in waiver and make them available under the FOIA to subsequet requesters.  That is a dubious argument.  Identifying a report and citing it as authority is unlikely to result in waiver of the entire content of the report.  Public Citizen v. Department of State, 11 F.3d 198, 201 (DC Cir. 1993) ("The law of this circuit provides that an agency official does not waive FOIA Exemption 1 by publicly discussing the general subject matter of documents which are otherwise properly exempt from disclosure under that exemption.").

Moreover, the redactions went beyond references to specific documents.  Thus, on p. 18, the report left in the phrase "according to TM's [Trading and Markets] own documentation" but deleted the phrases "TM staff even found that the amount of mortage securities was occasonally well beyond Bear Stearns' internal limits" and "these 'red flags' that TM knew about".  On p. 20, the report deleted the highlighted portion of the following phrase:  "Prior to Bear Stearns' approval as a CSE in November 2007, OCIE found that Bear Stearns did not periodically evaluate its VaR models, 110 nor did it timely update inputs to its VaR models.  Further, OCIE found that Bear Stearns used outdated models that were more than ten years old to value mortgage derivaties and had limited documentation on how the models worked.111

In other words, some of the references were not to specific reports and others were general in nature.  They seem less likely to prevent waiver of Exemption 8 and more likely to obscure the role of the staff in the inspection process. 

Whatever the reason for the redactions, what is beyond a doubt is that the decision represented, at a minimum, horrible judgment.  The Agency should have allowed the information about its role in the inspection process to be fully disclosed, irrespective of the impact on any subsequent FOIA request.  This is not unlike AIG, where company officials spent $400,000 entertaining sales people after the government agreed to lend the company $85 billion.  The entertainment expenses weren't illegal but they reflected horrible judgment.  The same is true with the SEC's redactions to the report on Bear Stearns.

Full post as published by The Race to the Bottom on October 09, 2008 (boomark / email).