SEC: always playing catch-up

Readable Research | By Raphael Pope-Sussman |

May 1992

After a 10-month Justice Department and Securities and Exchange Commission investigation into fraudulent bidding at Treasury auctions by Salomon Brothers, the firm settles with the federal government for $290 million. The government declines to bring criminal charges against the firm, citing its cooperation in the investigation and the conclusion that wrongdoing “was not a common, everyday occurrence” at the firm.[25] Salomon had previously disclosed, as reported by the Washington Post, that “its chairman…and other top executives learned of ‘clear wrongdoing’ … involving the purchase of Treasury securities…but failed to inform government regulators until months later.”[26]

A New York Times article notes that the settlement “poses no financial jeopardy to Salomon, which last quarter had a $190 million profit and whose broker-dealer affiliate alone has more than $2 billion in capital.”

Robert J. McCartney and David S. Hilzenrath, “Salomon, U.S. Settle Bond case; Wall Street Brokerage to Pay $290 million,” Washington Post, 21 May 1992.

Kathleen Day, “Violations Detailed by Salomon,” Washington Post, 15 August 1991.

 

March 1994

The Los Angeles Times publishes a major article on the “revolving door” between the SEC and Wall Street: “Life is lucrative these days for Wall Street’s former top cops who, following a time-honored path, often come to represent the firms they once probed.” Both David Ruder and John Shad, chairmen of the SEC under President Reagan, followed this path. After leaving the SEC, Ruder joined a corporate law firm, where he represented Chatfield Dien, a penny-stock firm. During his tenure as chairman, Ruder had pushed for more regulation of penny-stock dealers. After Shad left the agency, he joined Drexel Burnham Lambert, the New York investment bank, as chairman of the board. As chairman of the SEC, Shad oversaw the agency’s investigation into Drexel’s junk-bond operation, which resulted in a (then) record $650 million fine and a criminal indictment for the firm.

“Unless we speak out against the SEC’s intrustion into a municipal finance industry that is serving well the public interest, there will be no end.” — Harlan Boyles, then-state treasuer of North Carolina, 1994

The steady stream of high-ranking officials moving from the SEC to the financial industry raises concerns among agency critics about its independence. Monroe H. Freedman, a law professor at Hofstra University, tells the Los Angeles Times he believes firms who hire former SEC officials receive preferential treatment. He also expresses concern about former regulators bringing valuable insider knowledge to firms: “It puts a premium on putting up for private sale to a particular law firm or client what should either be confidential information or should be available to the public.”

A number of state regulators describe the murky world created by the revolving door in state regulation. The Times notes that regulators “make key prosecutorial decisions without thorough investigation” as a result of being “overburdened.” Instead of rendering independent judgments, they defer to the counsel of former colleagues working as defense lawyers — on the very cases about which the regulators seek advice.[27]

Defenders of the current system say government work offers poor compensation and that it is only natural for former SEC officials to eventually leave the agency for high-paying private sector jobs. According to the Times, a staff lawyer with 10 years at the SEC will earn about $70,000 [$107,000 in 2010 dollars] annually. “What do you want somebody to do after serving their country for 15 years?” Philip A. Feigin, Colorado’s securities commissioner, asks the Times. “Become a divorce lawyer?”

Scot J. Paltrow, “Many of Wall Street’s Former Top Cops Now Represent Firms They Once Investigated,” Los Angeles Times, March 13, 1994.

Writing in Bond Buyer that same month, Harlan Boyles, state treasurer of North Carolina, accuses the SEC of “McCarthy-type” tactics and blasts the agency’s move to curb influence-peddling in the municipal-bond industry. “Where does it all end?” asks Boyles. “Unless we speak out against the SEC’s intrusion into a municipal finance industry that is serving well the public interest, there will be no end.”[28] In April, despite industry protests, SEC approves Rule G-37, which bars municipal-bond brokers from engaging “in municipal securities business with an issuer within two years of any contribution to an official of such issuer” doing business with a municipal bond issuer for two years after contributing to any official or candidate who can influence the bond’s sales.” [29]

Bloomberg Business News, “Rule Will Ban ‘Paying to Play,’” New York Times, April 16, 1994.

Harlan Boyles, “Movement Afoot to Expand Disclosure Threatens Municipal Finance Nationwide,” Bond Buyer, 7 March 1994.

 

September 1994

The General Accounting Office releases a report criticizing the SEC for its lax treatment of stockbrokers who run afoul of the law. As reported in the Los Angeles Times, the GAO study finds that “formal disciplinary action against brokers was rare” and that many brokers “who have committed serious violations…are eventually allowed to return” to the industry.[30] The GAO, reports the New York Times, also urges the SEC to improve “its existing monitoring system, known as the Central Registration Depository.”

The 1994 GAO study finds that “formal disciplinary action against brokers was rare” and that many brokers “who have committed serious violations…are eventually allowed to return” to the industry.

The GAO report identifies 9,800 brokers with disciplinary records — out of 470,000 registered brokers. But the report suggests the figure (which does not include brokers disciplined informally) could be low, citing the difficulty of identifying fraud and the weakness of the SEC’s detection mechanisms. James Bothwell, a GAO official, says, “The numbers we have could be the just the tip of the iceberg.”

Later in September, the agency announces a nationwide sweep of small and medium-sized stockbrokers to weed out so-called “rogue brokers.”[31]

[Scot J. Paltrow, “GAO Assails Stockbrockers Punishment,” Los Angeles Times, September 10, 1994.

Brett D. Fromson, “SEC Head Vows to Curb ‘Rogue Brokers,’” Washington Post, 15 September 1994.

 

1996

An SEC investigation of the National Association of Securities Dealers, the industry group responsible for overseeing the Nasdaq Stock Market, finds the association did nothing to curtail long-standing price fixing by brokers trading on the exchange. The illegal and anti-competitive trading practices are estimated to have cost investors tens of millions of dollars. The SEC censures NASD and orders the association to spend $100 million, over five years, to create a new, independent regulatory body to police Nasdaq.[32] As the Washington Post reports, some industry insiders complain that the SEC crackdown will cut into dealer profits.[33]

Mary Mosquera, “SEC Censures NASD for Nasdaq wrongdoing,” United Press International, 8 August 1996.

Brett D. Fromson, “SEC Censures the Overseer of Nasdaq,” Washington Post, 9 August 1996.

In a February opinion piece in Roll Call, Rep. Thomas Bliley (R-Va.), chairman of the House Commerce Committee, attacks the financial regulatory regime, criticizing margin regulation — the rules that govern how much collateral investors must hold to make investments — as “outmoded” and promising to “resist any efforts to shackle our derivatives market with federal regulation.”[34]

Thomas Bliley, “Even After the Securities Litigation Reform Victory, There’s Still More Work To Be Done to Help Investors,” Roll Call, February 1996.

 

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