A failure of leadership at the SEC

Baltimore Sun

Not everyone opposes giving government sweeping new powers like those being considered over health care and the finance industry. But everyone should care that those in power are competent, apply the law fairly and hold themselves to the highest ethical standards.

Much evidence points to the fact that Securities and Exchange Commission Chairwoman Mary Schapiro does not meet those standards.

Senators did not seem to care that Ms. Schapiro was incompetent when confirming her to her position. Under her stewardship, the Financial Industry Regulatory Authority, a self-policing body, missed serious fraud. Those scandals include Bernard Madoff's bilking of billions from clients, members securitizing "no document" and other fraudulent mortgages while reaping billions, and the meltdown of the $330 billion auction rate securities market in February 2008 - in no small part caused by member firms marketing the securities to investors as vehicles that were as good as cash, even when the market for them was failing.

Somehow, the Financial Industry Regulatory Authority was savvy enough to liquidate more than $860 million of auction rate securities that it held in mid-2007, less than six months before the market tanked, according to Bloomberg. But the authority didn't share its investment strategy with investors. Small investors around the country still hold billions of these securities that they can't sell. The authority sent out investor beware notices in 2008, after the market for them dried up.

But according to two lawsuits, Ms. Schapiro was not just Nero fiddling while the industry under her supervision was burning. The suits claim she deliberately lied to her members for personal financial gain and to facilitate the merger of the National Association of Securities Dealers and the regulatory arm of the New York Stock Exchange. benefiting the 200 NYSE members who stood to greatly reduce their regulatory costs through the merger at the expense of the 5,100 members of the securities dealers group. Ms. Schapiro was head of that group at the time of the merger. (For a thorough overview of the situation, visit senseoncents.com, run by Wall Street veteran Larry Doyle.)

A proxy statement issued for the proposed merger said the National Association of Securities Dealers could not pay each member more than $35,000 as part of the deal because of Internal Revenue Service rules surrounding nonprofits. The I.R.S., however, did not issue a ruling on the merger until 2007, months after members voted to approve the deal. According to court documents, the I.R.S. did not specify $35,000 as the cutoff.

Likewise, the proxy did not mention how Ms. Schapiro and other officers would benefit from the merger. Her total compensation rose 57 percent, to $3.14 million, in 2007 following the merger, a huge salary by any nonprofit standard.

The Financial Industry Regulatory Authority will not release the details, and the I.R.S. ruling is sealed by the court. But not everyone is pleased with the regulatory authority's stonewalling. Bloomberg joined Dow Jones & Co. Inc and The New York Times Co. earlier this month to petition the U.S. District Court of the Southern District of New York to unseal redacted financial information in the lawsuit filed by Standard Investment Chartered against the authority.

According to their filing, "The sealed portions of the judicial records at issue here are of significant public interest because they will reveal whether the current head of the Securities and Exchange Commission [" SEC"], defendant Mary Schapiro, lied in a proxy statement and in other public statements ..."

They would also show whether Ms. Schapiro favored large Wall Street firms under her purview at the S.E.C. over smaller firms. If the charges prove true, it would be akin to hiring Goldman Sachs or JPMorgan Chase & Co. to run the S.E.C.

And what does it say about Ms. Schapiro's commitment to transparency - so important to President Barack Obama that he recently scolded China over the issue - when the organization she previously led not only refuses to open its books to its members, but spends millions to defend its right to lie to them?

In a speech at the Securities Industry and Financial Markets Association in October, Ms. Schapiro said of regulators, "Either way, the right questions were not asked, nor were the necessary steps taken to mitigate the risk before we coasted to the brink." That's obvious.

The bigger issue is how so many smart people in the Obama administration and in Congress could approve of a regulator, post-financial meltdown, whose priorities and actions clash with every goal they purportedly seek to achieve.

Marta Mossburg, a Baltimore resident and senior fellow at The Maryland Public Policy Institute, is a columnist for the Washington Examiner, where this article originally appeared. Her e-mail is mmoss


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