After Madoff and Bear Stearns Scandals, Reputation of SEC in Shambles as Obama Names New Chairman
President-Elect Barack Obama recently named Mary Shapiro as the new Chairman of the Securities and Exchange Commission. The appointment of Ms. Shaprio as SEC Chairman comes at a time when the reputation of the SEC it at one of its lowest points in memory.
A recent article from the New York Times, written by Stephen Labaton, outlines some of the negative light that has recently shone on the SEC. For example, Labaton cites the “series of red flags” missed by the SEC with respect to the scandal that broke about Bernard L. Madoff Investment Securities. Additionally, Labaton describes the assertion early this year by former SEC Chairman Christopher Cox that Bear Stearns was in fine shape, only to see it collapse three days later.
Unfortunately for investors and for the SEC itself, these two egregious examples appear to be only the tip of the iceberg of problems at the SEC. According to article by Labaton:
“There are other difficulties plaguing the agency. A recent report to Congress by Mr. Kotz is a catalog of major and minor problems, including an investigation into accusations that several S.E.C. employees have engaged in illegal insider trading and falsified financial disclosure forms.
The report said that a senior employee had used her position in violation of agency policy when dealing with a dispute with a broker about a family member’s account. It said that a commission lawyer had not maintained his status as a member of the bar for 14 years. And it found repeated instances of the failure by officials to pursue investigations.
Some experts said that appointees of the Bush administration had hollowed out the commission, much the way they did various corners of the Justice Department. The result, they say, is hobbled enforcement and inspection programs.”
Labaton also includes a quote from Joe Seligman, the president of the University of Rochester and a leading SEC historian. “You are dealing with a commission,” said Seligman, “whose effectiveness in fraud deterrence is open to serious question after cases such as Bear Stearns and Madoff.”
For compliance executives across the nation, fraud like that perpetrated at Bear Stearns and in the Madoff case as an exigent concern with so much uncertainty and negativity on the horizon in 2009. Another recent report outlined a survey with results that showed a strong belief from a preponderance of the compliance executives surveyed that fraud activity will rise in 2009. A primary reason for this expectation is the anticipation that compliance departments and programs will be hit with budget cuts in response to the recession.
In his article, Labaton cites budget cuts as one of the causes for the recent problems at the SEC. The enforcement arm of the department has reportedly been “hamstrung by budget cuts” that have made it more difficult for corporations to be penalized, even when it is clear that there has been “egregious wrongdoing.” The result, according to Arthur Levitt Jr., the former SEC chairman from 1993 to 2001, has been a “demoralizing of the enforcement staff.”
Discussion Questions for Comment Section:
- In her new role as Chairman of the Securities and Exchange Commision, what can Mary Shapiro do to reverse the recent wave of negativity being dealt with by the SEC?
- What do you think are the primary reasons for the recent failures of the SEC to properly monitor and prevent scandals and downfalls like we have seen at Bear Stearns and with Madoff?
Tags: bear stearns, madoff, mary shapiro, scandal, sec
