Blog on the Run: Reloaded

Tuesday, September 22, 2009 8:15 pm

When government doesn’t govern


Susan Antilla at Bloomberg has some suggestions about what we might do with the Securities & Exchange Commission, inasmuch as it is utterly failing to do its job, i.e., protect the interests of investors:

  • Shoot it like a horse with a broken leg. Problem is, to extend the metaphor, any new colts/fillies sired to replace it likely would have the same orthopedic problem. “There is a reason it is the way it is,” Antilla quotes Barbara Roper, director of investor protection at Consumer Federation of America and a member of the SEC’s Investor Advisory Committee, as saying, “and it’s because of the deference that Congress and various administrations have to the financial services industry.”
  • Move the enforcement division to where most other government enforcement is housed: the Justice Department. As Karl Rove and Alberto Gonzalez have shown us, it wouldn’t be completely immune from political pressure there, but it would be better protected there than it is now.
  • Appoint commissioners from the investment community, not the broker/dealer community. But again, you run into “the deference that Congress and various administrations have to the financial services industry.” Even if a president were bold enough to appoint them, the Senate would never confirm them.

And the deference goes even further:

In 2006, the SEC’s Office of Compliance Inspections and Examinations actually set up a hotline for firms that were feeling put out about being investigated. Amazingly, the hotline offers regulated firms “senior-level attorneys” to help resolve complaints.

The investing public, in the meantime, is relegated to filling out an online form when it has a complaint. An improved SEC might consider giving investors access to the top people and letting the brokerage firms sit there and fume if they don’t like the way they’re being treated.

Yeah, that’s gonna happen, particularly after our supposedly non-activist Supreme Court overrules 100 years of legislative precedent and lets corporations make unlimited political contributions.

There is one bright side: Current SEC chairwoman Mary Schapiro, in addition to being at best inept, may have a potentially fatal conflict-of-interest problem:

[Schapiro] was in charge of the self-regulators at the Financial Industry Regulatory Authority when the organization was staunchly defending the greatest gift ever to the brokerage industry: mandatory arbitration of investor disputes.

It’s worth noting that Finra is a defendant in three lawsuits dating from Schapiro’s tenure. One of them, by Standard Investment Chartered Inc., names Schapiro as a defendant and seeks to make unredacted versions of certain documents public. Those might wind up embarrassing the woman in charge of the SEC if they show that she misled brokerage firm members about the “special member payments” they got when Finra was formed in 2007.

You probably haven’t heard the last on this one: On Sept. 11, Standard and Finra heard from the court that the case had been assigned to Jed Rakoff.

Who, you ask, is Jed Rakoff?

I’m glad you asked. This is Jed Rakoff:

A federal judge on Monday rejected a $33 million settlement between the Securities and Exchange Commission and the Bank of America and accused the regulators of falling down on the job.

Manhattan Federal Judge Jed Rakoff said the proposed settlement – over bonuses paid to Merrill Lynch executives just before the bank took over Merrill – was little more than a sham to “provide the SEC with the facade of enforcement and the management of the bank with a quick resolution to an embarrassing inquiry.”

“The notion that Bank of America shareholders, having been lied to blatantly in connection with the multibillion-dollar purchase of a huge, nearly bankrupt company, need to lose another $33 million … in order to ‘better assess the quality and performance of management’ is absurd,” the judge wrote in a scathing ruling.

The SEC sued Bank of America on Aug. 3, claiming bank bosses lied to shareholders when they asked for permission to buy the nearly bankrupt Merrill Lynch for $50 billion.

The SEC charged Bank of America signed off on a plan to pay up to $5.8 billion in bonuses to the executives who ran Merrill Lynch to the brink.

In statements to shareholders, Bank of America said it had not agreed to such bonuses.

The same day the SEC sued, regulators agreed to a settlement with Bank of America and the $33 million fine.

The SEC claimed such a fine would actually help shareholders – alerting them that bad decisions had been made and enabling them to better assess the quality of bank management.

Rakoff called the SEC’s logic “absurd” and told both sides to be ready for trial by Feb. 1, 2010.

Quoting Oscar Wilde – who once said a cynic is someone “who knows the price of everything and the value of nothing” – the judge said the settlement suggested a “cynical relationship” between the bank and the SEC.

“The SEC gets to claim that it is exposing wrongdoing on the part of Bank of America in a high-profile merger; the bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators,” the judge wrote.

He added that “all this is done at the expense, not only of the shareholders, but also of the truth.”

If I were Mary S., and I’m glad I’m not, I’d be shipping resumes.

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1 Comment

  1. […] securities-rating firm Moody’s was implicated? Has been assigned to Judge Jed Rakoff. Yeah, this Jed Rakoff. (I hope the judge is taking extremely good care of his health, if you know what I mean, because he […]

    Pingback by More odds and ends « Blog on the Run: Reloaded — Wednesday, October 21, 2009 10:46 pm @ 10:46 pm


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