What’s the Matter with the SEC? Funny Farm Redux

 

We need not go back to the SEC’s missed Madoff opportunities or its unwillingness to shut down the Stanford Ponzi operation because it was a little too complex to fit within the performance evaluation slam-dunks its lawyers needed. The SEC is a troubled agency with the hits that just keep on coming.

We learned a week ago from a government audit of its books that the SEC, if it were a publicly traded company, would not be able to get its financials or internal controls certified.  We learn this week that the agency charged with policing directors and officers of publicly traded companies for their conflicts of interest missed a big in its own general counsel. 

Former SEC General Counsel David Becker had inherited $2 million from his mother’s Madoff account.  Mr. Becker disclosed this tidbit after he joined the agency.  The agency’s ethics counsel cleared Mr. Becker to work on Madoff issues.  While the agency’s ethics counsel may have been correct in its interpretation of the slap-happy ABA Code of Professional Responsibility, the decision ranks right up there with the conflict determinations in the 1988 George Roy Hill film, Funny Farm. Chevy Chase (as Andy Farmer) realizes that his lawyer for his divorce represents his wife’s lawyer in his personal injury suit.  Mr. Chase queries, “Isn’t that a conflict?”  To which his wife’s lawyer responds, “Not in my book.”  The SEC follows the “not in my book” methodology for determining conflicts.

Not only did Mr. Becker have a conflict, he behaved as a person would a conflict would.  In 2009, Mr. Becker recommended that the SEC demand increased payouts to Madoff victims in order to account for inflation.  As the beneficiary of his mother’s Madoff account, Mr. Becker made a recommendation that resulted in direct personal benefit.  Further, his office’s recommendation to the SEC was at odds with the Madoff bankruptcy trustee and the Securities Investor Protection Corporation.  Neither saw the need for an inflation adjustor. What will happen in terms of the at-odds SEC recommendation is pending before the courts. 

Mary Schapiro testified before Congress on March 10, 2011 that, in hindsight, she wished Mr. Becker had recused himself.  No, in hindsight, Ms. Schapiro should have taken the reins from ethics counsel and issued a definitive, “No way!”, the same ruling the agency would have had if an executive for a company had proposed similar self-serving payouts.  A conflict is a conflict is a conflict.  There are only two ways to resolve a conflict:  (1)  Don’t do it; and (2) Disclose it.  The tricky part is when disclosure is not enough – you need to stop.  Neither Mr. Becker nor the agency took that second step.

To her credit, or perhaps because the agency’s budget is before a Congress that is justifiably concerned about doling out more money to the Keystone Kops of regulatory bodies, Ms. Schapiro also testified, “I have to be looking around the next corner, looking beyond the horizon and thinking above and beyond what may be appropriate advice from ethics counsel to make sure nothing occurs that raises questions about the commission’s mission or process.”  Funny, most of us would have seen this conflict without having to anticipate corners and horizons.  In anybody’s book except the technical and legalistic interpretation, this one was a big conflict for Mr. Becker. Ms. Schapiro’s statement here is a complex way of admitting that the strict letter of ethics rules is insufficient when it comes to public trust – that spirit of the rules, a standard the agency uses with companies, is determinative. If it looks like a conflict, it is a conflict, and prohibit it accordingly, even with a codified imprimatur.  Here’s another way to see around corners and beyond horizons:  if you have to ask, it probably is a conflict.  If you don’t want to disclose it before you are hired, it probably is a conflict.

The  Barometer cannot predict Congressional budget actions, but knows that regardless of budget numbers approved, the SEC’s credibility hangs in the balance.  Given the market collapse that finds us still scrambling, it is disconcerting to learn that little has changed in crony capitalism.