The Sunshine Report

MAN IN THE STREET: WHY NOT PROSECUTE CEO’S?" rel="bookmark">MAN IN THE STREET: WHY NOT PROSECUTE CEO’S?

This morn­ing I was a guest on FOX Busi­ness Net­work. FOX pro­vided a car and dri­ver to take me to the stu­dio. The dri­ver imme­di­ately started quizzing me on what I was going to talk about on tele­vi­sion. When I told him I would dis­cuss bank­ing and pub­lic mar­kets and that I am a for­mer lawyer he demanded to know “Why isn’t the gov­ern­ment pros­e­cut­ing cor­po­rate exec­u­tives whose com­pa­nies have made bad dis­clo­sure to share­hold­ers?” The dri­ver was very clear that he believed cor­po­rate CEOs and CFOs vio­lated the law by mis­lead­ing share­hold­ers and he didn’t under­stand the government’s reluc­tance to pros­e­cute any­one involved in bad and mis­lead­ing dis­clo­sure. He par­tic­u­larly thought that bank exec­u­tives had abused the pub­lic trust and deserved to be pros­e­cuted. The dri­ver said that after Enron he fig­ured things would be bet­ter and the mid­dle class would be treated fairly by Wall Street. He repeated sev­eral times that “bro­kers for a com­mis­sion will do any­thing” and that CEOs were “screw­ing the lit­tle guy”.

For a while I didn’t know what to say and couldn’t answer him. My driver’s com­mon sense ques­tions and analy­sis seemed correct.

After a while I told the dri­ver that the SEC needs to enforce the secu­ri­ties laws in a dili­gent, delib­er­ate and dis­ci­plined man­ner. I stated that the integrity of the finan­cial sys­tem depends on small investors trust­ing the mar­ket, gov­ern­ment, banks and cor­po­rate exec­u­tives. I told the dri­ver that the United States has a “social con­tract” between and among its cit­i­zens and the gov­ern­ment. And, some of the contract’s basic tenets are that all peo­ple are cre­ated equal, the law applies equally and fairly to all cit­i­zens and that gov­ern­ment will make sure that there is a “level play­ing field” between the lit­tle guy and big cor­po­rate inter­ests. The dri­ver said that small investors think the sys­tem is dis­hon­est and that they can’t invest with­out wor­ry­ing about being ripped off. And, he asked why the screw­ing of the lit­tle guy isn’t a vio­la­tion of the social con­tract. By the time I got dropped off at the FOX stu­dios we agreed that the cur­rent bank­ing and credit cri­sis has as its root cause a vio­la­tion of the social con­tract and that the cri­sis has the poten­tial to not only under­mine the United States econ­omy but dam­age soci­ety for gen­er­a­tions. And, we agreed that the gov­ern­ment should enforce the law and make sure that bad cor­po­rate exec­u­tives are pun­ished for their behavior.

As any­one who knows me real­izes, I have been a con­stant critic of both the Bush admin­is­tra­tion and the bank­ing and secu­ri­ties reg­u­la­tory agen­cies. I have spo­ken out on TV and I have writ­ten about this issue in my blog. As I wrote on August 3^rd

“In my first year of law school I learned why enforce­ment of crim­i­nal and civil law is essen­tial for the United State’s social and eco­nomic func­tion­ing. Appar­ently, the elite lawyers of the Bush Admin­is­tra­tion didn’t learn the same les­son since they have a non-existent enforce­ment pol­icy which has made the US finan­cial mar­kets a Petri dish of ille­gal and immoral behav­ior. The SEC, Jus­tice Depart­ment and bank­ing reg­u­la­tors’ tol­er­ance for uneth­i­cal busi­ness behav­ior and bla­tant dis­re­gard for the law is the root cause of the cur­rent credit cri­sis. With­out a rad­i­cal change in enforce­ment pol­icy by the next Pres­i­dent, the last 7 years of mis­takes will be repeated.“

This week SEC Chair­man Cox will announce a replace­ment web site for EDGAR. While a new sys­tem is needed, I think that the SEC is focus­ing on “form over sub­stance”. A new web site isn’t what is needed to fix incom­plete and mis­lead­ing investor dis­clo­sure. After the new web site is up and run­ning dis­clo­sure will still be defec­tive because the infor­ma­tion that is being dis­closed will still be unre­li­able and incom­plete. Cox’s solu­tion to the dis­clo­sure prob­lem con­firms the adage “garbage in – garbage out”. It is a shame that the crown­ing achieve­ment of Cox’s tenure at the SEC will be a new web site rather than bet­ter sub­stan­tive investor reporting.

My dri­ver told me that he hoped that the next Pres­i­dent takes his respon­si­bil­i­ties more seri­ously than Bush. When I got out of the car we both agreed that our children’s futures depend on it.