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Lehman Bosses Walk, While Small Fry Walk Plank: Jonathan Weil
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(May 7, 2009 - Thursday) - http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aVRIgJ_Bry5w
Commentary by Jonathan Weil
May 7 (Bloomberg) -- The nation’s top securities cop once again has shown it knows how to go after little fish. There is still no sign it’s capable of bagging any powerful sharks.
Give the Securities and Exchange Commission and its new chairman, Mary Schapiro, credit where it is due. This week, the SEC filed a securities-fraud lawsuit against the management company for the Reserve Primary Fund and the father-and-son team who operated it: Bruce R. Bent and Bruce Bent II. The SEC contends they misled investors about the money-market fund’s health before losses on Lehman Brothers Holdings Inc. debt securities forced the fund into liquidation last year and created a near panic in the money-market industry.
It might be years before the suit is resolved; the defendants are disputing the SEC’s claims. Let’s stop and dwell on the irony for a moment here: The first people to get pinched by the SEC in connection with the collapse of Lehman Brothers didn’t work for the bank. They were two guys who invested other people’s money in Lehman Brothers and lost a bundle.
Almost eight months after the New York-based investment bank ended up in bankruptcy court, none of the firm’s executives has been accused by the government of doing anything wrong, although plenty of investors claim to have been misled about its health. It’s quite possible that nobody from Lehman Brothers will ever be called to account.
No Promising Sign
If the government can’t find anyone who broke any rules at Lehman Brothers, that’s not a promising sign for investigations into other corporate train wrecks, from American International Group Inc. to Freddie Mac. For there is one thing that now sets Lehman Brothers apart: The state has no stake in the firm. Were the SEC ever to target any of the large banks or insurance companies that are partly owned by the Treasury Department, by contrast, it may threaten the government’s financial interests.
So the presumption for the time being remains: Guppies such as the Bents are fair game. So are mega-guppies such as Ponzi- schemer Bernard Madoff. As for a government-backed Godzilla such as Bank of America Corp., which kept investors in the dark about most of the losses at Merrill Lynch & Co. last year until after its purchase was completed, it’s an open question if the SEC would dare lift a finger.
Just a few months into her new post, Schapiro is trying to convince investors she can restore the SEC to respectability. Under her predecessor, Christopher Cox, the five-member commission gummed up its enforcement division’s lawyers with procedural roadblocks to keep securities-fraud suits to a minimum. Schapiro, previously the chief executive of the private-sector Financial Industry Regulatory Authority, says the shackles are now off and that the proof will be in the results.
‘Little Success’
“If we cannot show investors that we are looking out for their interests as much as the interests of the financial institutions, then we will have little success in restoring confidence,” Schapiro said in an April 27 speech at a Society of American Business Editors and Writers conference in Denver.
“Investors need to see that we are going after those who engage in wrongdoing. They need to see that we are forcing companies to be truthful and transparent in their reporting.” She added: “They need to see that we’re rooting out fraud.”
Even so, the ghost of Cox looms large. While he wasn’t much of an enforcer himself, he spent his last weeks at the SEC repeatedly cautioning the public that the government was too compromised to investigate companies where its own money and reputation are at stake. His admonitions made perfect sense.
Cox’s View
“From the standpoint of the SEC, the most obvious problem with breaking down the arm’s-length relationship between government, as the regulator, and business, as the regulated, is that it threatens to undermine our enforcement and regulatory regime,” Cox said in a Dec. 4 speech.
“When the government becomes both referee and player, the game changes rather dramatically for every other participant. Rules that might be rigorously applied to private-sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules.”
It’s imperative that Schapiro lead the SEC to find its footing again and prove Cox’s warnings overblown. Until then, though, there’s every reason to believe the U.S. government has two standards of enforcement when it comes to securities laws: one for the people and companies that are touchable, and one for those that aren’t.
The Bents could be forgiven for wondering if their worst offense, in the eyes of the SEC, was being on the wrong side of that line.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
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