CHRISTOPHER BYRON DECLARES :"Boca Raton, Fla., the scam capital of America, where entire office blocks are filled with Wall Street swindle shops of one sort or another."
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SEC'S HARD MEDICINE
By CHRISTOPHER BYRON
March 24, 2003 -- MR. William Donaldson, the new chief of the Securities and Exchange Commission, has an impressive way about him. And the new SEC boss was certainly at his smoothest the other day, when he testified before Congress regarding the Bush administration's 2004 budget request of $841 million for the SEC.
The words were fine, and well delivered to be sure. But there was something about the whole exercise that seemed rather disturbing, even off-putting. And, looking back on it afterward, what had the new SEC chairman really said?
With the markets in a three-year meltdown that may or may not be ending, and with people everywhere convinced that Wall Street exists so the rich and powerful can steal from the poor and weak, Donaldson's prescription for change boiled down to this:
1. Hire more people (but not too many more).
2. Improve staff and management training programs.
3. Get better computers and set up a better backup system.
4. Pick someone better than William Webster to run the Accounting Oversight Board.
5. Do everything else the same way as always.
FRANKLY, he needs to do better than that - a lot better. And he can, because, with the possible exception of Arthur Levitt, no SEC chairman knows more about the workings of Wall Street - from the inside - than Donaldson does.
More than almost any other department of the federal government, the SEC depends on the agenda-setting leadership of its chairman - and Donaldson needs to speak clearly, and soon, lest the relentless and viscous drag of Washington's bureaucracy begin to snuff out whatever hope for reform his appointment may have kindled.
And that does not simply mean standing before the cameras and wagging one's finger at corporate miscreants after the commission brings a case against some new corporate world fat cat. Last week the SEC brought yet another such case, charging the head of an Alabama network of hospitals with $1.4 billion worth of financial fraud.
The problem is that parboiling your average CEO fraudster is the easy way out. The real challenge facing Donaldson is to transform the SEC from what it has become - something approaching a regulatory joke - back into an effective deterrent force on Wall Street itself.
WALL Street's perception of the agency simply has to change if self-regulation of the capital markets is to work.
But the view of the regulators as weak and ineffectual has been growing on Wall Street for nearly 20 years, fed by the perceived riches of a runaway bull market. And it's not going to change until Wall Street gets treated to the regulatory equivalent of some good old-fashioned shock and awe.
The lash needs to crack not just in the corner offices of the big and prestigious investment giants like Merrill Lynch, where the SEC last week charged four top executives with aiding and abetting fraud in the Enron case, but down in the bowels of the over-the-counter and penny stock markets, where Wall Street's worst weasels prey on the public.
In his testimony, Donaldson spoke of the need to hire 188 more people devoted to the "prevention and suppression of fraud" - and though it's a start, the SEC in fact needs many more shock troops than simply that. What's more, many of them need to be tasked to the labor-intensive work of policing the lower depths of the business, just as the FBI has task forces assigned exclusively to the dangerous, gritty work of organized crime and drugs.
In other words, Donaldson needs to borrow a page from the lessons of Rudy Giuliani: If you want to win back the city, getting rid of the squeegee people and panhandlers is probably more important than spiffing up City Hall.
One good place to start would be by setting up an SEC task force of fraud examiners assigned specifically to Boca Raton, Fla., the scam capital of America, where entire office blocks are filled with Wall Street swindle shops of one sort or another.
Out of these offices pour an unending stream of the city's biggest export product - worthless penny stocks - destined for the 401(k) accounts of thousands upon thousands of gullible investors around the country. And though the outpourings of this swindle machine are chronicled regularly in the press, the SEC rarely acts - mainly because the enforcement division is already overworked.
The same situation prevails in towns like Great Neck, L.I., and Newport, Calif. Wherever one is likely to find a population of well-off and elderly residents - preferably widows who've inherited their husbands' retirement money and don't know how to manage it - you'll find the jackals of Wall Street, feeding on the easy prey.
DONALDSON also told the legislators the agency will be adding some 204 more experts to read and review the flood of financial filings that arrive electronically in the SEC inbox every day.
These filings are the absolute heart of the entire self-regulatory system of Wall Street itself. But so many filings now flood into the SEC every day that the 500 employees assigned to read and review them are able to do little but random-check the filings of just the largest companies. In such a situation, it's hard to see how even a 50 percent increase in personnel will make much difference.
So, instead of simply throwing them into the breach, Donaldson should use them as a strike force to hit the filings where their work will actually have an impact. Specifically, a team of examiners needs to crack down on what is plainly the most widely abused area of all when it comes to filing timely reports to the SEC: the so-called 13D filing.
These filings are the foundation of the entire SEC policing apparatus against stock-rigging and insider-trading conspiracies - but enforcement is almost nonexistent.
Anyone holding 5 percent or more of the stock in almost any Exchange or Nasdaq-listed company has to file such a 13D form within 14 days after increasing his stake or selling some of what he already holds. But many traders, particularly those in the penny-stock arena, never bother to file the forms at all - and the SEC has no system for spotting the delinquencies.
Offshore hedge funds are another area where SEC visibility needs to be raised. This $400 billion bazaar of global finance is home to one of the largest, most mysterious and most rapidly growing pools of capital on earth. And though the SEC has clear jurisdiction, by federal law, over the activities of any hedge fund investing in U.S. equities, this too is an area where enforcement is almost nonexistent.
Under a 1975 amendment to the Securities and Exchange Act of 1934, any investor with more than $100 million of U.S. securities under management must file detailed quarterly reports of the holdings on a so-called Form 13F. But most investors just ignore the requirement since, once again, the SEC has no system for monitoring compliance.
If Donaldson does these things - or even some of them - the markets will be a better and safer place for everyone to invest.
If he keeps talking about management training sessions and backup systems for the computers, his tenure as head of the SEC will have been a waste of his time and your money.
* Please send e-mail to: cbyron@nypost.com |
