The Securities and Exchange Commission (SEC) was created by Congress in 1934 to protect investors
The Securities and Exchange Commission (SEC) was created by Congress in 1934 to protect investors by monitoring the securities industry. According to the SEC’s Web site, “The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public.” Recently, however, a whopping $65 billion securities fraud came to light when the investment company run by Bernard Madoff turned out to be the biggest Ponzi scheme of all time. Madoff used new investors’ funds to pay off the older ones. All the investment profits Madoff claimed were an illusion. Independent investigator Harry Markopolos told Congress he had been warning the SEC about Madoff’s activities for years. “I gift-wrapped and delivered the largest Ponzi scheme in history to them and somehow they couldn’t be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority,” Markopolos testified. Thousands of individual and institutional investors faced financial ruin as Madoff’s scheme evaporated.
Does the SEC bear part of the blame for investor losses if it is not doing its job?
PRO
1. A $65 billion fraud could flourish only under a flawed regulatory system. “Our current fragmented regulatory system can allow bad actors to engage in misconduct outside the view and reach of some regulators,” said an officer of the securities industry’s watchdog organization. “It is undeniable that . . . the system failed to protect investors.”
2. “The SEC is . . . captive to the industry it regulates, and it is afraid of bringing big cases against the largest, most powerful firms,” said Markopolos. “Clearly the SEC was afraid of Mr. Madoff.”
CON
1. The SEC’s director of enforcement told a Senate committee, “We don’t turn a blind eye to fraud. If we see it and we suspect it, we pursue it. We don’t want fraudsters out there.”
2. The director also said the SEC doesn’t have enough resources to pursue all the tip-offs of potential fraud that come before it: “If we had more resources we could clearly do more.” Other regulators blamed lack of coordination among government agencies for the lapses in oversight that allowed Madoff to operate.
Summary
Madoff pled guilty to charges of felony securities fraud and was sentenced to 150 years in prison. The SEC is conducting an internal investigation to discover why it failed to act on information about him that Markopolos and others provided over the years.
Sources: Jenny Anderson and Zachery Kouwe, “SEC Enforcers Focus on Avoiding Madoff Repeat,” The New York Times, www.nytimes.com, February 8, 2010; SEC Web site, http://www.sec.gov/about/whatwedo.shtml, accessed February 13, 2009; Linda Sandler, “Madoff Said Only Brother Could Do Audit, Witness Tells Congress,” Bloomberg News, February 5, 2009, http://www.bloomberg.com; Allan Chernoff, “Madoff Whistleblower Blasts SEC,” CNNMoney, February 4, 2009, http:// www.cnnmoney.com; Dana B. Henriques, “Witness on Madoff Tells of Fear for Safety,” The New York Times, February 4, 2009; http://www.nytimes.com; Julian Cummings, “Madoff: SEC Defends Its Role,” CNNMoney, January 28, 2009; http://www.cnnmoney.com; Liz Moyer, “How Regulators Missed Madoff,” Forbes, January 27, 2009, http://www.forbes.com.