The Sunshine Report

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.