Friday, September 23, 2011

Can’t This Gang Shoot Straight?

The Securities and Exchange Commission used to be one of the most respected federal agencies in Washington. Some would argue that this is a low barrier to overcome, but nevertheless, the SEC was for many years considered a well run agency that, by and large, did what it was supposed to, and helped to give the United States the best and most transparent capital markets in the world. Alas, things have changed and now it seems that the SEC is the agency that can’t seem to get it right.

The most recent stumbles have come over the fact that the SEC Chairwoman, Mary Shapiro, who was given a mandate by President Obama to strengthen enforcement, failed to disclose to her fellow commissioners a conflict of interest involving the agency’s former top lawyer, David Becker. According to the SEC Inspector General’s report, it seems that Mr. Becker stood to have a financial interest in the settlement of the Bernie Madoff fraud case, and although he disclosed the potential conflict, Ms. Shapiro stayed silent on it, even allowing her fellow commissioners to vote on how to divide up the Madoff assets without telling them how their top lawyer might potentially benefit from the decision.

Not only that, but the Inspector General’s report also brings to light the fact that the SEC decided not to have Mr. Becker testify before Congress for fear that his conflict of interest would come to light. And this is from the agency that is charged with “full and fair disclosure” for investors.

This is bad enough, but it come after a series of other blunders over recent years that make you wonder if the agency has lost its way. Most notably, this is the agency, charged with protecting investors, that actively ignored the pleas of Harry Markopolos to investigate the returns being generated by Bernie Madoff, which turned out to be the biggest ponzi scheme in history.

More recently, and somewhat more mundanely, proxy access, a pet SEC project that would allow shareholders the ability to nominate directors using a company’s own proxy materials, was struck down by the Federal Appeals Court for the District of Columbia. According to the appeals court, the SEC had “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.” Further, the court said there is “good reason to believe that institutional investors with special interests” – such as unions and pension funds -- would use the proxy access rules to advance their own issues and chided the SEC for “ducking serious evaluation of the costs that could be imposed” by shareholders representing special interests. It certainly doesn’t sound as if the Court of Appeals thought the SEC was taking a fair and balanced approach towards rule making in this instance.

And finally, how about the $557 million lease the SEC entered into without competitive bidding, which the agency can’t afford and doesn’t need because the underlying assumptions for the space were incorrect. Never mind that Commissioner Shapiro approved the lease in a 10 minute unscheduled meeting and later said that “The agency made a terrible mistake here,” and “I view myself as being ultimately responsible.” In most corporations if you were responsible for a $557 million mistake, you’d be fired, or maybe the SEC would investigate you…