Many of you who have followed me and read my most recent books (The Wall Street Investment Bible/2009 and America’s Financial Apocalypse/2006 & 2007) know that I feel the SEC is beyond useless. In my opinion, the agency works for Wall Street.
As a financial professional and former direct employee working for Wall Street, I saw how they operate. They pick on the little guys; the brokers who often commit minor violations that affect very few, while turning their heads away from the biggest criminal activities affecting most if not all investors. In this manner, the SEC creates the impression that they are doing their job and that they are competent.
This could not be further from the truth. In the best of situations, SEC officials only act once outsiders deliver evidence of fraud, as was the case of thousands of corporate scandals, including the back-dated options mess, after hours trading by mutual funds, and many others. In the worst of cases, they allow massive fraud to continue despite several years of warnings from outside experts, as was the case with Bernie Madoff’s Ponzi scheme.
But the shame at the SEC continues to mount. Last year, the SEC Inspector General issued a report that found SEC employees watching porn, trading stocks and other alarming activities while at work. This is just one of the reasons why the SEC rarely catches the really big cases of securities fraud. See here.
Right around the same time last year, the SEC charged Mark Cuban with insider trading. See here.
Cuban claimed that these allegations served as a means of retaliation due to his criticisms of the SEC. While I am certainly no fan of Cuban, I would tend to agree with his claims. Cuban reacted in his predictable manner, lashing out at the SEC, and claiming they were the ones guilty of insider trading.
But was this just another example of Cuban's typical theatrics, or was he on to something? Despite any differences in opinion I may have with Cuban on other matters, and despite what I may think of the man, based on what I have seen, we share similar opinions regarding the SEC. And based upon my knowledge of how the SEC operates, I would have to give Cuban the benefit of the doubt regarding SEC allegations of insider trading.
Ironically, just a few days ago, the Inspector General issued another report detailing allegations of insider trading by two SEC attorneys. See here.
Regardless of the outcome of Cuban's case with the SEC, it looks as if he has been vindicated in voicing his valid claims of hypocrisy of this agency. Either way, Cuban wins.
For several years now, I myself have made many calls the SEC officials to voice my concerns and raise criticisms about the incompetence and negligence of the agency. I have also made numerous complaints regarding violation of securities laws. Yet, nothing has been done. Despite these discouraging results, I continue my efforts to this day. I would say that many attorneys know me by name.
I even addressed the problems at the SEC briefly in my 2006 book America’s Financial Apocalypse.
“And of course we cannot forget the SEC, which focuses most of its efforts on small-time crimes as a way to create the perception that it’s policing the securities markets. Widespread fraud continues at the highest levels on Wall Street and corporate America on a daily basis. In almost every major case of Wall Street and corporate fraud, the SEC has acted only as a reactive investigator after someone else discovered the deceit. This has been true in the accounting scandals with Enron and WorldCom, hundreds of other accounting scandals, stock options backdating, mutual fund and market maker trading fraud, and virtually all other scandals that affect millions of shareholders.
Rather than focusing on the major crimes, such as illegal activities of market makers, fund managers and traders, floor traders, Wall Street firms, and corporate insiders, the SEC operates with the mentality of ‘You might be doing something wrong but don’t let us know about it or we will investigate.’
The SEC should be constantly probing head figures that influence the capital markets because they’ve been getting away with criminal activities for decades. The passage of the Sarbanes-Oxley Act has had only a minor impact, with much more bark than bite. The fact is that things haven’t changed and they probably never will. It’s still business as usual on Wall Street. As with everything else in America, big money makes and breaks the rules.”
I continue:
“Because companies know better than anyone what their short-term fate will be, they are truly the ultimate insiders. Corporate treasury departments can time the purchase and sale of their stock as long as they abide by certain minimal restrictions mandated by the SEC. Hence, unknowingly, shareholders lose when companies purchase treasury stock. Yet, the SEC has allowed this practice ever since inception.
As well, there are very few restrictions for insider purchases of company stock. Don’t you think CEOs and CFOs know their company’s business prospects over the next few years? Of course they do. But the holding period for stock options execution is remarkably short. This legalized insider activity by has accounted for the bilking of billions of dollars from investors. Yet, in most cases, the timely liquidation of stock options is transacted legally, although representing an unfair advantage and what I consider legalized insider trading.”
Finally, in October 2008, I submitted a (not yet publicly released) formal complaint to the SEC regarding insider trading (the most blatant case I have seen in my career) and illegal shorting of Washington Mutual by certain large banks and hedge funds via the prime brokerage units of these banks. At the end of this report, I made my criticisms of the SEC clear.
Just a couple of months later, Madoff’s Ponzi scheme was exposed, but of course not by the SEC. I present my closing statement to the SEC from this report.
Recommended Directives for the SEC
“I will be submitting a proposal to the next presidential administration and other agencies regarding my recommendations for needed changes to the SEC. Among these changes, briefly:
- Whistle blower laws that apply to employees of corporations should be included and fully encouraged by everyone in the financial industry. All suspected illegal activities or investigative studies submitted by financial professionals should qualify for blanket protection from retaliation. The SEC should provide measures which encourage whistle-blowing for those who see fraudulent activities. And a monetary award should be provided for successfully changed cases. This is will serve as a very helpful force towards the SEC’s mission of enforcement of all securities laws.
- Future SEC Chairmen need to be enforcement officials rather than politicians. They must be detached from the White House and given the leverage to act on parties thought to represent the most damaging levels of fraud. This means they should be proactively monitoring all market makers and floor traders on a daily basis, rather than waiting for ten years before an outside party discovers foul play. This is something expected by the American people and it is mandated by interpretation of the Securities and Exchange Laws of 1933, 1934 and others since then.
- It is obvious that the SEC has been intentionally structured to keep its key staff buried in paperwork and bureaucracy, preventing them from serving as an investigative and enforcement arm of the securities industry. Throughout the years speaking with numerous staff members, they have informed me that they feel powerless to take a more proactive role. In many cases, they have also expressed frustration after having many needed reforms being pushed into a closet, never to be seen again. It is obvious to me that Chairman Cox knows well what is going on and while he may not be responsible for the designed incompetence of the agency, if he were an honorable man he would have resigned shortly after realizing the hypocrisy that know characterizes the SEC.
- As a partial solution to overcome the bureaucratic barriers that hinder the efforts of the staff, the SEC should create a fund dedicated to compensating industry experts who submit credible issues of fraud. As well, these experts should be contracted for hire on certain cases as needed by the SEC. Each submission should be held accountable to an agency outside of the SEC such as the Department of Justice to ensure that it receives the proper consideration. I continue to be shocked at the lack of understanding SEC attorneys have of the illegal activities I observe in the capital markets. Most likely, they are being micromanaged so they are unable to see anything other than the task that is laid out before them.
- Ultimately the SEC has failed to protect investors from massive fraud that has been a daily occurrence for over a decade now. Thus, a radical restructuring is necessary. Ultimately, the SEC should be overseen by an organization that is disconnected from Washington politics to ensure those in charge are held to the highest standards, remain committed to serve the original intended missions of the SEC, and are held accountable for their actions or lack thereof. Obviously, such a proposal would be viewed by SEC officials as a threat to their authoritative responsibilities. As a result, I would not expect this recommendation to receive any level of serious consideration. Asking an agency to create an independent party to oversee its actions and hold its officials accountable is not something one can expect in America. Therefore, I will be forwarding the details of this and all other recommendations to other government agencies, watch dog groups, etc.
- The SEC must hold corporate executives and others fully accountable for fraud, neglect of duties, and other practices. Already, thousands of individuals escaped criminal and even civil prosecution from the events surrounding the dotcom collapse just a few years ago. It appears as if the same thing is going to happen with the current real-estate/banking collapse. This is a complete farce. Today, the SEC resembles the FDA, both serving the interests of the industries they are supposed to police.
- Media firms that engage in a certain amount of financial news and commentary should be regulated by SEC regulations in a manner similar to broker-dealers since they are receiving indirect payments (via ad revenues and favors) from those who deal in securities (analysts, fund managers, etc.) as well as those who are also directly involved in the securities markets (corporations via ad revenues – i.e. interviews with CEOs, etc.).
- The mutual fund industry is still largely unregulated. I can cite numerous situations whereby investors are exposed to illegal sales and marketing practices, excessive fees are charged but customers are not aware of them, etc. The SEC must begin to regulate mutual fund companies on a level that is meaningful. These regulatory activities should be focused on marketing and advertisements. I can list numerous examples of what I would consider unfair business practices at best and illegal activities at worst by the mutual industry. I shall save this for a separate report to be composed at a later date.
- The SEC should regulate all radio, television and print advertisements by mutual funds, Wall Street firms, online brokers, insurance companies offering investment products. The SEC must understand and acknowledge the media is serving as a quasi-broker/dealer is receiving advertisement revenues in exchange for providing a venue for investment analysis and advice. The associations are clear. And I have spoken to several SEC attorneys who agree fully with my position. The most blatant examples are to be found on CNBC and Fox Business Network.
- These changes will obvious require a considerable source of new funding. The staff will need to increase by at least 3-fold. The money will come from fees assessed to investment firms.
- A new division should be created that focuses only on investigations of politicians, who use their power to influence the success of publicly traded corporations for which they are shareholders. A recent example of such an arrangement is that between House Majority Leader, Nancy Pelosi, D-CA and T. Boone Pickens. Upon pushing his wind power plan throughout Washington, Mr. Pelosi was somehow able to purchase $100,000 of Mr. Picken’s natural gas IPO company CLNE. This is just one of many episodes of clear conflict of interest. In my opinion, this goes well beyond insider trading.
- The arbitration process needs to be revised. The SEC needs to work with the NASD (FINRA) and each exchange to ensure that the process is fair. I am prepared to go into detail regarding the problems and solutions for arbitration at a later date.
The class-action securities litigation process is nothing short of a ludicrous. It has been designed only to favor the attorneys. Although I have been able to participate in numerous class-action awards, I have not bothered to do so because the amount of time needed to fill out the paperwork and confirm the dates of purchase etc. is nowhere near worth the amount of money I would receive.
‘The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.’
It is clear that the SEC has continued to fail at its mission for decades. It is time for the SEC to be revamped. Americans have been exploited and defrauded for too long. Let’s be honest. The SEC has become a complete joke. And I for one will not tolerate it anymore. And I know I speak for all taxpayers. Together, we fund the SEC. We fund your paychecks. You are public servants to taxpayers, not the crooks you protect. This is not a message to the staff so much as it is to the executives of the SEC. I have always had very favorable encounters with every staff member from the SEC, from the receptionists to the attorneys. But their efforts are limited by the decision-makers.”
Since that time, I have heard nothing of the allegations I made. I did receive a follow-up phone call from two SEC attorneys to discuss the complaint, but nothing else beyond that. I do not expect the allegations I made to ever be exposed. In fact, SEC officials refused to provide me with critical data that would prove the allegations I made in my report.
The SEC has a perfect system in place whereby they ultimately determine what cases to pursue. And there is no accountability from outside parties. So they can sweep anything under the rug and investors will not know the difference.
Despite my initial commitment to forward a more detailed report regarding changes needed at the SEC to the Obama Administration, I have since decided against this as I feel it would a further waste of my time. What was the deciding factor? Obama’s appointment of Mary Shapiro as the new SEC Chairman. Shapiro has along history of working as a top official in the securities regulatory arena, so she knows how the game is played. In other words, you should expect the same status quo from the SEC.
