Mark DeCambre and Kaja Whitehouse published a story today in the New York Post titled: “Ex-SEC Boss: Not My Fault,” which opened a window onto the thoughts of those charged with regulating Wall Street. (Full disclosure: I am cited in that story.) On the heels of the recent lurid discoveries about Bernard Madoff's multi-billion-dollar fraud, former SEC Chair Arthur Levitt is quoted in the article as saying: "At this point, I don't see any evidence that the SEC dropped the ball.”
That comment infuriates me—and likely many others who have spent countless hours this past week listening to the devastation brought upon the life savings of many victims of Madoff's apparent fraud. It is possible that Madoff made off (sorry for the pun) with billions of dollars of other folks' money. I think the enormity of the theft needs repeating: Billions of dollars. Billions. And this occurred right under the nose of the SEC, which regulates RIAs and b/ds, and FINRA, which regulates the latter only. We will need to see how this story unfolds to know the extent of the regulatory failure and determine where to point the finger.
Still, what kind of evidence does former Chairman Levitt need in order to recognize that the SEC failed the investing public and the industry? What evidence is required to convince this former industry cop that the streets of Wall Street were not being patrolled … that the squad cars were arriving too late while their occupants were munching on donuts and slurping down coffee?
Just over a decade ago, Levitt went before the press and issued an historic condemnation of the price-fixing practices of the NASDAQ market. In a speech he gave on August 8, 1996, he chastised the former NASD (now transformed into the Financial Industry Regulatory Authority or FINRA), and also noted that the SEC itself had failed. Among his comments were the following:
“The evidence—gathered from hundreds of witnesses, thousands of hours of tapes, and more than a million pages of documents—shows that the NASD did not fulfill its most basic responsibilities, and I quote from its charter: to promote just and equitable principles of trade for the protection of investors. On the contrary, American investors were hurt—large and small, sophisticated and inexperienced, institutional and individual—all were hurt by these practices. Nor has the SEC emerged unscathed. To the extent these practices took place on our watch, we should have acted sooner. We, as well as the NASD, need to be faster and more vigilant, to assure that the public interest is protected.”
Yet, here we are, in another century, and the SEC remains scathed. Sure, it’s not mixed-up in another market price-fixing scandal or engaged in the high dudgeon of criticizing a self-regulator over which it had responsibility, but, still, the scenery is not so different.
The Madoff fraud took place on the SEC's watch. The SEC should have acted sooner. The SEC needs to be faster. The SEC needs to be more vigilant. The public interest is not being protected.
And in response to the known facts about Bernard Madoff and his firm, the best the former SEC Chairman can offer is to say that he doesn't see any evidence that the SEC dropped the ball? Do we really need to connect the dots here? Is this the time for the SEC's alumni to once again close ranks in defense of that failed institution?
In raising his tepid defense of his former organization, I wonder if Levitt recalled all too uncomfortably the barbed accusation he lobbed at the NASD—and deservedly so—some 12 years ago in the same speech cited above: “Where was the NASD, the cop on the Nasdaq beat? The NASD was not blind to these practices in the marketplace. It simply looked the other way.”
You were right then, Mr. Levitt—you are wrong now. The same stringent test applies to the SEC now as it did to the NASD then. Where was the SEC, the cop on the registered investment advisor/broker-dealer beat? If the SEC was not blind to Madoff's practices, then it must have simply looked the other way.
Double standards have no place in regulation, whether that be in holding NASD or FINRA to a higher standard than the SEC, or in failing to regulate the Bernie Madoffs of Wall Street with the same diligence as his smaller competitors.
For more of Bill Singer's writing, please visit http://brokeandbroker.com.