As the SEC comes to grips with the Bernie Madoff scandal, I am reminded of a law school course that I took 25 years ago where I was taught that good regulation requires good regulators. Unfortunately, the SEC has turned into a bad regulator and has lost the respect of the public it is supposed to protect.
The SEC leadership doesn’t understand or acknowledge why the SEC exists or what its role is supposed to be. Missionless and confused, the SEC is currently a lost agency that needs to be refocused and remotivated.
The SEC used to know its mission. On the SEC web-site, it still articulate why it exists when it states that “First and foremost, the SEC is a law enforcement agency.” (bold, italic and underline for emphasis). That means, first and foremost Chris Cox is the “Chief of the SEC Enforcement Police.” Unfortunately, Mr. Cox appears never to have embraced or understood his enforcement responsibilities or the SEC’s role to protect the public.
Instead, the SEC indirectly encouraged scamsters and fraud artists through lax enforcement standards. Crime prevention is the most important role of any law enforcement agency and prevention takes place because potential criminals know that they will be caught and prosecuted by a tough but fair cop.
Instead of being a cop, Chris Cox had a nonsensical theory of law enforcement that primarily relied upon self regulation and enforcement. The invisible hand of capitalism was supposed to ferret out frauds and act as the main barrier to illegal and dishonest behavior. However, real criminals don’t self regulate and enforcement usually means economic intimidation and extortion.
In the Madoff scandal, the SEC’s performance as a law enforcement agency is beyond horrible. I was hoping that Cox’s statement that Madoff “lied” to the staff when he was asked if he stole from investors was a misprint or a bad joke. But it wasn’t. Of course Madoff lied to the staff. But then again, what law enforcement organization takes the word of the person that they are investigating?
I have watched enough Law and Order to know that very few people confess unless they have to and then it is as a result of vigorous investigations and vigilant prosecutions. And, I am pretty sure self regulation and market enforcement never entered into Bernie Madoff’s mind when he stole $50 billion. Madoff confessed because he ran out of money to keep on perpetuating his lies. Until the end, Madoff was trying to keep the Ponzi scheme going and was actively marketing for new investors by promising “special deals” for those that he could rip off.
Cox and his immediate subordinates are responsible for not investigating Madoff. Cox was in charge and clearly didn’t have an internal reporting system to keep track of open investigations, cases and clearance. After all, if he did he would have noticed a $50 billion fraud tip that had credibility and might have asked questions. Instead of taking responsibility for the scandal, Cox threw his staff under the bus and blamed them for the mess. He is an out of touch leader who showed little courage or backbone.
I think that most of the SEC staff are good hard working Americans who don’t like being humiliated in public. If they are like most people they also can’t wait to get rid of Cox and get a real leader.
Fortunately, the SEC won’t have Chris Cox much longer. President Elect Obama is nominating Mary Schapiro to be the new Chairman of the SEC. She is known to be a tough and effective regulator who understands the role of law enforcement. Ms. Schapiro has a big job ahead of her but her reputation suggests she is up to the challenge. Her staff will need strong leadership and rebuilding. Ms. Schapiro is going to be a fixer, leader and good regulator.
After all, good regulation requires good regulators.