Saturday, March 04, 2006

SEC Commissioner Flops on Microcap Fraud

Securities and Exchange Commissioner Paul Atkins yesterday challenged the SEC to do a better job of fighting microcap fraud. When I read about the speech on Reuters, I felt pretty good. The guy seemed to "get it."

But then I read the text of the speech on the SEC website, and I wanted to throw up.

Atkins noted that the dollar volume of the microcap market is enormous -- $57 billion -- and not adequately policed by the SEC. Terrific. I describe in detail in Wall Street Versus America how the SEC does a crummy job of pursuing stock fraud. The reason, Atkins says, is the culture of the SEC enforcement staff:



Beating micro-cap fraudsters is a fight that we can and must win. So why have we not been able to put more micro-cap promoters out of business? I believe one reason is that junior staff members think that spending time pursuing pump-and-dump promoters is a poor career investment.

If the junior staff believe that only big dollar penalties against corporations will bring a promotion, and managers believe that only these cases will distinguish them from their peers, then is it a surprise that individual staff members avoid spending time pursuing pump-and-dumps?

True, Atkins' agenda was transparently ideological, and more concerned with making life easier for big corporations than helping investors. Still, at least he was making sense on microcap fraud. Or at least he was -- until he started spouting baloney.

In describing the problem of microcap fraud, Atkins said as follows:


Fraud in this market manifests itself through old-fashioned boiler-rooms with hard-sell cold-calling; new tactics such as cyber-smear or the infamous voicemail that was supposedly incorrectly left on machines giving a bogus stock "tip"; and bear raids composed of an unholy alliance of abusive short sellers, stock promoters, class-action lawyers, and others.

I put in italics the stuff that made me reach for the barf bag. Atkins ruined a perfectly good speech by showing how the fraudulent "naked shorting" conspiracy cult has polluted the regulatory mindset.

There have been hundreds if not thousands of cases of boiler rooms pushing stocks and using all kinds of manipulative tactics that cause stocks to climb. But bear raids on legitimate stocks -- or even not-so-legitimate stocks -- happen on the "once in a blue moon" order of magnitude.

Just look at the slew of prosecutions and SEC enforcement actions in recent years and you can see what I mean. You can count "bear raids" since the first Bush administration on the fingers of one hand. You need a small auditorium's worth of hands to count all the instances of boiler room and "chop stock" manipulations in which shorting played no role whatsoever.

That doesn't matter to the crackpots and crooks of the anti-shorting Baloney Brigade, who have waged a war of lies and intimidation to divert regulators from real stock fraud.

If you want to see the damage they've done, just go over to the SEC website and read the Atkins speech.

If you want to read several dozens more examples of the SEC doing things that are just as dumb.... well, I guess you'll have to wait until the book comes out.

Atkins is certainly right that microcap fraud needs attention. But what requires attention is genuine fraud -- not conspiracy theories spun by the very same people who perpetrate pump-and-dump scams.

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Wall Street Versus America will be published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

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