Scathing watchdog report blasts Securities and Exchange Commission oversight

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Darren Barbee
May 15, 2009 - Star-Telegram (Dallas-Ft. Worth)

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The Securities and Exchange Commission abandons investigations for lack of resources, allows corporate wrongdoers to skip fines and drops cases because of a bureaucratic culture of risk aversion, according to a recent federal report.

The list goes on: A lack of support staff is so severe it forces SEC attorneys to send confidential documents to nonsecure copy shops. One attorney spent a day putting together document boxes instead of pursuing cases, according to the scathing report by the U.S. Government Accountability Office.

The report raises questions about how well the SEC can do its job protecting investors with such glaring deficiencies.

The number of SEC enforcement attorneys declined 11.5 percent from 2004 to 2008 while cases were closed prematurely or not investigated at all, the report says. Although a wide range of cases is pursued, "one attorney told us of closing several cases that were promising but which could not be pursued for lack of resources," according to the report.

Other times, lack of specialized experts, such as accountants and those knowledgeable about trading, weren't available, causing delays. Over four years, penalties and disgorgements declined by 84 percent — to $256 million in fiscal 2008, compared with $1.59 billion in 2005.

The report also details problems with the commission's lack of consensus in punishing corporate misconduct.

"Officials acknowledged that there could be flagrant misconduct, but no penalty, if corporate benefit [from the misconduct] cannot be identified through economic analysis," the report states.

According to many investigative attorneys, commission penalty policies have contributed to an adversarial relationship between the enforcement division and the commission. In one case, an enforcement attorney told the GAO that a company offered to pay $1 million to settle a case, but the attorney recommended no penalty because "they did not believe the commission would approve the company offer."

In response to the report, SEC Chairman Mary Schapiro wrote that she agreed with the findings and recommendations and that she has asked the new director of the enforcement division to conduct a top-to-bottom review of processes and culture.

Schapiro hired a longtime federal prosecutor to head the division. He and Schapiro will work on management reforms, including harnessing technology, improving risk assessment, and improving training and supervision for law enforcement personnel "so that we can maximize our resources to combat fraud and wrongdoing in our markets."

Andrew Stoltmann, a Chicago securities attorney, said the report reveals nothing new about the troubled agency.

"The SEC has been an impotent, toothless tiger pretty much since its creation in the 1930s," he said. "The SEC tends to be more concerned about banging the drum and getting publicity as opposed to stopping stock crooks like Bernie Madoff."