Corporate Governance

The SEC and Responsibility for the Financial Crisis (Part 3)

By J. Robert Brown

We are discussing the editorial in the NYT ("The End of the Financial World As We Know It") that contends that the SEC is partly to blame for the current turmoil because it has excessively close relations with Wall Street.

In addition to contending that those in Enforcement were excessively close to Wall Street in order to parlay their position into a high paying job, the editorial also noted that the staff at the SEC was afraid to bring cases that might "roil the markets" by driving down share prices.   To do so would somehow roil "the careers of the people who run the S.E.C." 

This is a different allegation than the desire by enforcement attorneys to "position" themselves for a good job on Wall Street after they leave the SEC.  This one contends that careers within the SEC could be harmed by taking positions that affect not Wall Street but issuers.  Somehow, aggressive enforcement against public companies will wreck a career within the SEC.

We took a few minutes to look at some of the cases that were brought by the Commission in 2008.  These included a raft of backdating cases involving officials at UnitedHealth, Monster Worldwide, Mercury Interactive, Broadcom, Sycamore Networks, and Apple Computer.  There was the bribery scandal at Siemans AG and the auction rate securities cases against Citigroup and UBS,  Wachovia and Merrill Lynch.  Lazard Capital was sued for improperly entertaining traders at Fidelity Investments, Executives at Duane Reade, the drugstore company, for a multi-million dollar accounting scheme, a final judgment obtained against the former CEO of Waste Management, and actions were brought against a former executive at Kellogg, Brown & Root, for violating the anti-bribery provisions of the Foreign Corrupt Practices Act.  

This is by no means a complete list.  Moreover, the earlier post on the former Directors of the Division of Enforcement listed a number of other high profile cases from the past.  While this is all anecdotal, it at least suggest that the allegation about concern over roiling the market is in fact incorrect.  To the extent there is a problem with a lite touch with public companies, it comes from commissioners like Atkins who strongly objected to some of the staff's enforcement policies, particularly with respect to the imposition of penalties on public companies.  It is a problem that will be easily fixed as the new president appoints officials to the Commission who do not share these views.

Full post as published by The Race to the Bottom on January 05, 2009 (boomark / email).