The SEC Still Needs a Seeing Eye Dog

Gretchen Morgensen's New York Times column yesterday sticks a pin on the issue that the SEC will have to wrestle with, if it is to stem its slide into oblivion. Will it continue to ignore credible evidence of wrongdoing, or will it continue to be a tool of corporate interests and Wall Street?

Morgensen focused on Allied Capital, whose shares collapsed last week. That was no surprise to anyone who had followed the warnings of short-seller David Einhorn, whose struggle with Allied and the typically stone-headed SEC are chronicled in his new book Fooling Some of the People.

Chris Byron once referred to the media as the SEC's "seeing eye dog," but others have served in the role--thousands upon thousands of tipsters, mainly self-interested, and the SEC has worked very hard to ignore what they say.

Some are shorts, like Einhorn, and others are just disinterested but enraged citizens, such as the Bernie Madoff whistelblower Harry Markopolos. "Just as the S.E.C. failed Mr. Madoff’s investors as tipsters told the agency he might be up to no good, it also seems to have let down Allied’s shareholders by ignoring analyses of aggressive accounting at the company," says Morgensen.

But you'd never know that by reading through the lengthy, self-serving barrage of obfuscations and baloney provided to the Senate Banking Committee on Tuesday by SEC enforcement director Linda Thomsen.

Here's what Thomsen says about its thousands of seeing-eye dogs:

The Enforcement Division receives hundreds of thousands of tips each year from various sources. Some are from credible sources who provide detailed information in support of the tip, and some consist of nothing more than newspaper clippings or printed promotional material sent with no further explanation. Some come from industry competitors, some from disgruntled present or former employees, some from present or former investors, and others are totally anonymous. On the one hand, complaints, tips and referrals from the public often provide valuable information about potential securities violations; on the other hand, sources at times may be attempting to enlist the SEC's authority and resources in efforts to advance their own private interests, which may or may not be consistent with our enforcement mission.

Complaints, tips and referrals come to the Enforcement Division in every imaginable form. We get telephone calls, handwritten letters, thick bound dossiers with numbered exhibits and extensive accounting analyses, complaint forms from the Enforcement Division's Office of Internet Enforcement, newspaper articles with company names circled in red ink, formal referrals from other regulators, informal referrals from other Offices and Divisions of the SEC, notes from reformed fraudsters, anonymous scribbling, seemingly random pieces of a company's financial statements, and occasional lengthy and disjointed diatribes that make no discernible securities-related claims.

While we appreciate and examine every lead we receive, we simply do not have the resources to fully investigate them all. We use our experience, skill and judgment in attempting to triage these thousands of complaints so we can devote our attention to the most promising leads and the most serious potential violations. Because the process necessarily involves incomplete information and judgment calls made in a tight timeframe, we are also continually working on ways to improve our handling of complaints, tips and referrals to make optimal use of our limited resources.

There are a number of major channels through which complaints, tips and referrals flow in to the Enforcement Division. . . .

Notice how Thomsen dances around the elephant in the room, which is Markopolos, whose name she does not utter in all this extended blather. Markopolos was not some crackpot living in an abandoned car. He was a forensic accountant.

He did not, however, have the financial resources to employ a battery of lobbyists, and thus could not get his concerns taken seriously by the commission -- as does, for example, the naked shorting conspiracy nuts, which have a high paid Washington lobbying firm pleading their discredited cause, paid for by the trust fund of Overstock.com's wacky CEO Patrick Byrne. That has enabled this fringe issue to become a priority of the SEC under its chairman Chris Cox. The result was that the Madoff fraud and the Aillied ills (and numerous other significant issues) ignored by every SEC chairman since Arthur Levitt, while this fringe issue was the subject of thousands of wasted SEC man hours.

It is no coincidence that Einhorn and other opponents of fraud have become targets of Byrne and his paid cyberstalker, the nauseating former Jeb Bush flack Judd Bagley. Einhorn also was the subject of a smear campaign by Allied. Indeed, Byrne has embarked on a similar campaign against reformed felon Sam Antar, for dissections of Overstock accounting (such as this) that have also been ignored by the SEC.

The new SEC chairperson, Mary Schapiro, has an opportunity to prove that she is serious about reversing the SEC's decline by acting on credible tips, ignoring high powered lobbying campaigns, and punishing public companies that attack critics. "Issuer retaliation" was ignored by the SEC under Cox, despite early promises.

It's not just a question of resources. It's a question of political will, and a wholesale change in an SEC culture that genuflects to the rich, powerful and connected.

I have very little faith in Schapiro, as I've said before. Given her background, I don't expect her to actually reverse course. But who knows? Maybe she'll surprise everybody. We'll know she has when we start seeing some action.

© 2009 Gary Weiss. All rights reserved.