I criticized the press last month for burying a blistering General Accountability Office report on the incompetence of Christopher Cox’s SEC—a report covered best by my friend Moe Tkacik over at Talking Points Memo.
So I’d like to tip my hat to the Washington Post for coming back around to this one. It’s better late than never, especially since its story fills in some background on the agency’s head-in-the-sand years. The press too often lets stories go if they’re not “new” enough. But there’s important spadework to be done on our recent history that helps us understand what’s going on now.
The Post story puts the page-one spotlight back on Christopher Cox, who headed the SEC during Bush’s second term, when enforcement penalties plunged 84 percent.
That happened because Cox was, to put it euphemistically, corporate-friendly, as was Commissioner Paul Atkins, according to the Post. Reporter Zachary Goldfarb interviewed nineteen current and former officials to get an idea how this played out on the inside. For example, from the lede:
The five enforcement officials caught a morning Acela train bound for Washington. Based at the New York office of the Securities and Exchange Commission, the team was seeking agency approval to impose tens of millions of dollars in fines on a drug company, Biovail, which had allegedly used the crash of a truck hauling depression medicine to cover up financial losses.
But when the group arrived at SEC headquarters on that winter day early last year, it was barred from the room where the commission was meeting, according to a person familiar with the case. Chairman Christopher Cox and his colleagues reviewed the case inside. When the doors opened, the enforcement officials learned the commission had knocked down the penalty to a small fraction of what they had sought.
The outcome, though discouraging to the team, was not a complete surprise, sources said. After Cox became SEC chairman in mid-2005, he adopted practices that undermined the enforcement division’s efforts to investigate cases of corporate wrongdoing and punish those involved, according to interviews with 19 current and former SEC officials.
Cox concentrated the power of the bureaucracy at the top, in the commission itself. That had the effect of delaying cases significantly and effectively discouraging investigators from bringing them.
During Cox’s tenure, investigators who wanted to subpoena documents or compel interviews faced an increasingly cumbersome process to win the commission’s approval for each case, according to current and former agency officials.
Cox also required enforcement officials to see the commissioners before approaching a company about a civil settlement. In several high-profile cases, when SEC lawyers were ready to ask the commission to authorize lawsuits or approve settlements, Cox postponed the decisions at the last minute, leaving cases unresolved for months, the sources said. At times, as in the Biovail case, the commission eventually weakened the sanctions sought by the enforcement division.
The Washington Post calls it like it is here:
This is the legacy Mary Schapiro inherited when she replaced Cox as chairman this year. Among her first acts, Schapiro freed enforcement officials from getting commission approval before negotiating settlements with companies and established an accelerated process for authorizing subpoenas and depositions. She speaks frequently of taking the “handcuffs” off of the enforcement division.
It goes onto detail how the delays and delegitimization of the SEC’s investigators played out:
On many occasions, former enforcement lawyers said, Cox removed cases from the agenda because of Atkins’s concerns. Often, the enforcement team had already reached a settlement with a company. The practice made it more difficult for enforcement lawyers to negotiate credibly, the attorneys said.
“Cases would sit and linger for months while you waited to get a response… . There was often a question as to what authority the staff had,” said Thomas O. Gorman, a defense lawyer at Porter Wright Morris & Arthur in Washington who specializes in SEC cases.
The Post focuses on Cox’s tenure here, which is perfectly fine. But I’ll point out that the GAO report had damning details about the infrastructure and organization of the agency itself—problems that presumably predate Cox or even the Bush Administration. Like this, which Tkacik found diving into the report a few weeks ago:
Investigative attorneys with whom we spoke concurred that having little or no administrative or paralegal support causes them to spend considerable time on non-legal duties such as copying, filing, document-scanning, preparing exhibits, making travel arrangements, soliciting bids for court reporters, and logging and processing documents submitted by respondents. For example, one attorney told us such duties can take 2 to 3 hours daily. Another, who joined the agency from private practice, said that investigative attorneys can spend up to half their time on tasks handled by support staff in their previous position. One attorney told us of plans to spend a day assembling document storage boxes. Because there is insufficient in-house copying capability, confidential documents sometimes are sent to non-secure outside copy shops. Frequent equipment breakdowns mean attorneys must search for working copiers and scanners, a number of attorneys told us…
Once all those internal memos are completed, they have almost no value internally because the system is run on a proprietary case tracking system called CATS that is incompatible with all their other computer systems (which are all incompatible with one another) and which no one bothers to update or fix when it’s broken, both because their old information technology contractors no longer work there and because it is, in the staffers’ own words, “severely limited and virtually unusable.”
While downloading of information from computer hard drives has become a basic evidentiary technique, some investigative attorneys told us there can be lengthy delays for information technology support staff to retrieve the contents from hard drives obtained during an investigation. For example, one attorney told us about a case in active litigation in which Enforcement had to seek an extension of time for discovery because after 6 months, only two of a number of hard drives had been downloaded…
Some investigative attorneys suggested that Enforcement would benefit from a divisionwide system for sharing information, such as litigation documents or legal analyses…
Several attorneys said that another significant shortcoming is that the investigative staff does not have access to real-time trading information… Currently, when attorneys need such information, they manually query hundreds of broker-dealers, a process that initially produces only incomplete records.
These show an institutional culture of failure. There’s much more for the press to dig up yet on the SEC.
Maybe the financial press will notice that in Cox's last year he hand picked the current SEC's IG (Kotz) who is wasting limited SEC resources. Kotz is taking months (and using expensive consultants) to write a report on Madoff that any journalism student could write in a week (i.e., the examinations were not thorough). The money and time wasted on reporting the obvious should instead be spent on the computers and the other needs of the enforcement program mentioned in the GAO report. Maybe Shapiro will realize the waste with Kotz and hire an IG who might do something productive instead of destructive to the program.
#1 Posted by Peter, CJR on Tue 2 Jun 2009 at 09:35 PM
McClatchy just covered the SEC. Their take? Wall Street and the SEC need a visit from the super nanny:
http://www.mcclatchydc.com/227/story/80277.html
During the past three years, some of the nation's largest financial firms have been accused by the government of cheating or misleading clients and ripping off tens of thousands of consumers of their investments.
Despite these findings, these financial giants got, sometimes repeatedly, special exemptions from the Securities and Exchange Commission that have saved them from a regulatory death penalty that could have decimated their lucrative mutual fund businesses.
Among the more than a dozen firms that have gotten these SEC get-out-of-jail cards since January 2007 are some of Wall Street's biggest, including Bank of America, Citigroup and American International Group.
SEC rules permit corporate lawbreakers to apply for what are known as Section 9(c) waivers from one of the agency's harshest penalties — effectively shuttering the violator's mutual fund operations — but regulators never rejected any of these firms' applications. While the firms were punished in other ways, they were spared from what some claimed would be "severe and irreparable hardships."
In fact, the last time the SEC's staff could recall a waiver being turned down was 1978. The SEC declined to comment in detail on its decisions, however.
There's no discipline, AT ALL.
#2 Posted by Thimbles, CJR on Wed 9 Dec 2009 at 07:15 PM