"Corporate Cops Outgunned"...
Posted on Sun, Mar. 03, 2002
SEC has huge task, modest means
By TREBOR BANSTETTER
Star-Telegram Staff Writer
From the 19th floor of a downtown Fort Worth office tower, a small
cadre of accountants and lawyers is responsible for protecting
millions of investors in four states against fraud and corporate crime.
These Securities and Exchange Commission employees filed more
enforcement cases last year than any of the 10 other SEC offices,
including much larger ones in New York and Chicago. The Fort Worth
investigators also began what is now an intensive examination of
Houston's Enron Corp.
But that investigation did not begin until October, after news of
Enron's collapse began making the news. Often, corporations such
as Enron don't appear on the SEC's radar screen until long after the
damage has been done.
Wall Street watchers say budget constraints are the reason. Even
though the SEC is the nation's top financial watchdog, its resources
have been strained by a decade of explosive growth in financial
markets. As a result, it can scrutinize only a small fraction of the tens
of thousands of financial reports that it receives every year. And low
salaries have left it with a young and transitory staff to take on
corporations with vast resources.
Observers say the money crunch reflects a longtime philosophy in
Congress, which controls the SEC's budget, that it is not the
commission's role to keep a close watch on big business. Major
corporations, the reasoning goes, already have a system of checks
and balances through auditors, credit agencies and Wall Street
analysts. The SEC's investigative efforts have usually focused on
cracking down on small-time investment scams and cleaning up after
companies implode.
"It's pretty obvious that for some time, Congress hasn't been very
keen on having an aggressive SEC," said Celia Wexler, senior policy
analyst for political watchdog Common Cause. "There was this
feeling during the go-go economy that regulators were in the way,
that they just didn't get it."
Since its inception, in 1934, the SEC has relied mostly on the private
sector - bankers, lawyers and accountants - to monitor Wall Street.
"The historical mission of the SEC was to ensure disclosure" of
financial information, said Jack Wing, executive director of the Illinois
Institute for Technology's Center for Law and Financial Markets in
Chicago.
"The SEC was never intended to actually be regulating corporations,"
said Wing, who worked for the commission during the 1960s and has
researched its history.
That philosophy shows in the Fort Worth office, which has 68
employees monitoring the financial sector in Texas, Oklahoma,
Kansas and Arkansas. A top priority for the office has been cracking
down on "affinity" fraud, which usually involves con artists who
target a specific demographic group, such as the elderly or
churchgoers. The office has also helped in efforts against Internet
e-mail scams, which usually involve small groups of crooks.
"We're looking for blood-on-the-floor fraud," said Hal Degenhardt,
who oversees the Fort Worth office. "We have limited resources, so
we have to choose our battles."
Beefing up the SEC has not been a priority among key government
leaders who set the agency's budget. For example, in 1995, Sen. Phil
Gramm, R-Texas, who was chairman of the Senate Securities
Subcommittee, proposed slashing the commission's budget by 20
percent. He wanted to kill its Office of Investor Education and
Assistance, which handles inquiries and complaints from consumers.
About 18 percent of SEC investigations originate in that office.
At the time, Gramm said the job of educating consumers belonged to
the private sector, and consumer protection, he argued, was better
handled by state securities agencies.
In April, before the Enron collapse, President Bush recommended
cutting the SEC's staff, which would have resulted in 6 percent fewer
reviews of corporate filings each year. As recently as last month,
White House budget director Mitchell Daniels Jr. said the
administration didn't consider the SEC's request for $76 million for
pay raises justified.
Congress has also wielded its power to squelch unwelcome SEC
policies. In 1999, then-SEC Chairman Arthur Levitt proposed a rule
that would have forbidden accounting firms to consult for companies
they audited - a conflict cited as a problem in the Enron case.
But lawmakers threatened to cut the commission's budget if the rule,
which was heavily opposed by accounting companies, went into
effect, Levitt told a Senate committee in January. The proposal died.
According to Common Cause, the accounting industry gave federal
candidates and political parties $27 million during the 1990s.
"Through campaign contributions and lobbying, the corporations
have made their case against the SEC very strongly and effectively
to Congress and to others in government," Wexler said.
Compounding the problem was the red-hot 1990s stock market, in
which most investors made money, resulting in little pressure from
consumers to strengthen the SEC.
"The feeling was, there is no problem, we're all getting rich, why
mess things up by bringing in the SEC?" said Colleen Kelley,
president of the National Treasury Employees Union, which
represents about 2,000 SEC employees. "The SEC got caught up in
that."
Corporate cops outgunned
When the SEC does take on large corporations, the cash-strapped
agency often faces an opponent with immense financial resources.
Last year, for example, SEC investigators probing the Foundation for
New Era Philanthropy, alleged to be a Ponzi scheme, determined
that a Prudential Securities broker in Kenosha, Wis., helped
perpetrate the scheme by giving false information to investors. The
commission filed a fraud lawsuit against Prudential.
In taking on the financial services and insurance company, the SEC
was clearly outgunned: Prudential had $2.6 billion in revenues in
2000. The SEC's total budget for that year was $438 million. But
Prudential settled the case and paid an $800,000 fine.
Also last year, the SEC tussled with Chase Manhattan Bank, which is
owned by J.P. Morgan Chase & Co., over allegations of billions of
dollars in inaccuracies in Chase's system of tracking bonds. In that
case, which Chase settled, the SEC was up against a company with
$4.3 billion in revenues.
Both were considered victories for the SEC. But cases against major
corporations are rare, at least in part because of the legal muscle of
big companies.
Clearly, many now say, the SEC lacks the resources and the political
clout to police America's financial sector and prevent fraud and
corporate meltdowns.
"The Enron case raises fundamental questions about the adequacy
of the SEC's oversight," said Barbara Roper, director of investor
protection for the Consumer Federation of America, who has studied
the SEC since the late 1980s. "The agency is grossly underfunded."
Consider:
The commission did not review about 75 percent of corporate
financial reports, including Enron's, filed in 2000, according to its
annual report.
SEC staffers earn $28,000 to $100,000 a year, according to the
treasury union. That's 50 percent less than employees in similar
positions in the private sector, according to the General Accounting
Office, the investigative arm of Congress.
Over 1,000 employees, or one-third of the SEC's staff, left from
1998 to 2000. More than half were lawyers. Nearly 300 positions
were unfilled last year because of a dearth of qualified applicants.
The average SEC lawyer in 1999 had only 2 1/2 years of experience
at the agency. As of February 2001, 76 percent of financial examiners
had worked for the SEC for less than three years.
"I've suffered a lot by having my good people pirated by private
industry, where they can make a lot more money," said Degenhardt
of the Fort Worth office. Turnover "is a serious, disruptive problem."
Despite the budget constraints, the commission doesn't cost
taxpayers any money and even makes money.
Corporations pay a fee every time they file a document with the
commission, and since 1983 the SEC has raised more money than it
has spent. Last year, the SEC had a budget of $423 million and
collected $2.06 billion in corporate fees. The extra money went to the
federal treasury.
A law that went into effect last month, will cut fees for registering,
buying and selling securities. The law, which was heavily backed by
Wall Street, will save companies an estimated $15 billion over the
next 10 years.
Another new law would have boosted SEC salaries to the same level
as those of federal banking agencies, but Bush's new budget did not
provide money for the raises.
Outpaced by market
In the 1990s, while the SEC's budget increased by about 73 percent
and its staff by 39 percent, the financial markets that it oversees
grew far more rapidly.
From 1991 to 2000, the number of initial public offerings, which must
be rigorously reviewed by the SEC, grew by 242 percent, and the
dollar volume in the financial markets grew by 670 percent as
Americans invested unprecedented amounts in the stock market.
The SEC oversees about 12,000 publicly traded companies and gets
about 12,000 annual reports, about 12,000 proxy statements and
36,000 quarterly reports every year.
The commission has 80 to 90 accountants to review that material,
said Lynn Turner, a former SEC chief accountant who heads the
Center for Quality Financial Reporting at Colorado State University.
"Many of the filings are long, some involve complex transactions and
many exhibits," Turner said. "The bottom line is that the SEC does
not even come close to having the resources to review but a small
portion of these."
The SEC hadn't done a complete review of an Enron filing since 1997.
Enron's 2000 annual report was scheduled for another review, but
the SEC postponed it because staff members needed more data on
the company's derivatives trading.
The 2000 review still hadn't been conducted when Enron collapsed.
"If the SEC had been there, maybe they would have spotted some of
these warning signs and things would have turned out differently,"
said Roper of the consumer federation.
Roper and other consumer advocates are now calling for increasing
the commission's funding so that it might be able to detect the next
Enron before it implodes.
Whether post-Enron reforms will include a stronger SEC remains to
be seen. Rep. John LaFalce, D-N.Y., the ranking minority member of
the House Financial Services Committee, said the commission is in a
"funding crisis," and he said he wants to pump an additional $200
million into its budget next year. But Bush's 2003 federal budget
included only a 4 percent funding increase.
Enabling the SEC to root out future Enrons goes further than just
adding money and staff, though. It would entail a fundamental shift
in the SEC's mission, from overseeing a largely self-regulating
financial industry to becoming deeply involved in monitoring all
aspects of corporate finances.
"We would be talking about a real change in the SEC's framework,
something different than was envisioned when it was created," said
Constance Wagner, a professor of securities law at St. Louis
University.
Though the government hasn't rushed in yet to boost the SEC's
powers, the Enron case is fueling a drive to strengthen private
oversight of public corporations.
In Enron's case, failure by management was coupled with a
breakdown in the checks by analysts, Wall Street researchers and
auditors.
The vast majority of financial analysts recommended Enron's stock
even as the company was unraveling. Enron's auditor, Andersen, has
been accused of allowing Enron to hide debt that should have been
reported on its balance sheet.
"We're seeing a drive for tremendous change in the accounting
industry, financial markets and legal industry," said Dallas lawyer
Larry Schoenbrun, managing partner of Gardere & Wynne and a
securities law expert. "And we can thank the Enron case for that."
Ken Moritsugu in Knight-Ridder's Washington bureau contributed to
this report.
ONLINE: Securities and Exchange Commission: www.sec.gov
Trebor Banstetter, (817) 390-7064 tbanstetter@star-telegram.com |
