May 16, 2011

Under Fire: The SEC’s Revolving Door

Last year, I blogged several times about Senator Grassley’s desire for a study to be conducted regarding SEC Staffers who depart for jobs at organizations that they regulate. I also blogged that this issue is as old as the SEC itself. And note that it’s an issue that exists at most federal agencies, not just the SEC (eg. last week’s FCC Commissioner announcement).

Ahead of reports expected from the GAO and the SEC’s Inspector General on the topic, the Project on Government Oversight (POGO) released a study on Friday that shows – between 2006 and 2010 – at least 219 former SEC staffers appeared before their former agency on behalf of private-sector clients in 800 different matters. POGO also has made its database available online, where you can search by Division or even an individual (yes, Big Brother is watching). Here’s an article covering the study.

Perhaps even more troublesome for the SEC, a House Financial Service Committee hearing produced fireworks on Friday when it was revealed that the former Chief of the SEC’s Fort Worth Regional Office – Spencer Barasch (now at Andrews Kurth) – has become the subject of a criminal investigation for continuing to represent fraudster Allen Stanford even after he was repeatedly told by the SEC’s Ethics Office that he couldn’t under rules barring former senior Staffers for appearing before the SEC on matters that they worked on during their time on the Staff. This NY Times article notes that Barasch blocked efforts to pursue Stanford at least 6 times over 7 years when he was at the SEC. Not good.

The SEC’s Whistleblower Office Does Not Want To Talk To You

Hat tip to Werner Kranenburg for pointing out this Forbes’ article entitled “SEC Whistleblower Office Does Not Want To Talk To You.” The author – Edward Siedle – tried calling the SEC’s new Office of the Whistleblower with disturbing results.

The SEC’s home page features a prominent button called “Questions – Tips and Complaints – Whistleblower Provisions,” right up in the top right corner. Prime real estate. But when you navigate to any of the pages associated with that button, your only options are submitting your facts electronically or through snail mail. No phone number.

And then Edward apparently called the Office of Public Affairs who told him the new Office didn’t exist (even though the SEC made the effort to issue this press release announcing the new head – my good friend Sean McKessy – back in February, even though the Office hadn’t been created yet. It still doesn’t exist as it’s still not funded). Edward was then given a phone number that wound up being the Office of Investor Education. And whistleblowing is not really their forte…

The Bigger Picture: Why Doesn’t the SEC’s Enforcement Division Provide a Phone Number?

Besides one more episode making the SEC seem silly, this article raises a serious issue. I often support the SEC – in this blog and otherwise – because I strongly believe in its mission, I’m in awe of the wisdom of many of its Staffers and I recognize how tough it is to get things accomplished there given its limited resources. But I had assumed that a fundamental problem from when I served there a dozen years ago had been fixed.

Now, I realize I was wrong to make that assumption. When I served in Corp Fin’s Office of Chief Counsel, a fair number of the calls I returned – returning calls to those with interpretive questions is the largest component of that job – were to laypeople who had some type of Enforcement complaint. Since the Division of Enforcement didn’t allow anyone with a fraud tip to phone it in, those calling the SEC with a complaint often got routed to Corp Fin – by the SEC’s receptionist I suppose – and trust me, it was not my favorite part of the job.

For starters, I wasn’t in Enforcement and I had enough on my plate as it was. But the real reason that I didn’t like these calls is that I couldn’t help them – they simply had made a bad investment decision and no fraud was involved. The caller just needed someone to talk to (i.e. they were kicking back drinking a beer on their couch, with Maury blaring in the background). Of course, the few calls that I received that appeared “legitimate,” I referred to the Enforcement Division.

Anyways, I always was troubled that Enforcement didn’t bother to make themselves accessible because collecting fraud tips is one of their primary functions regardless if a tip proves meaningful or not. As far as I can tell – nothing has changed. Here is Enforcement’s page regarding how to submit a tip – and that page eventually leads you to an online portal that requires a bunch of data to be submitted regarding your tip (after you click “accept” on a lengthy disclaimer). No phone number is posted. And this is a framework that doesn’t seem to provide a lot of comfort that taking the time to report a fraud will result in any action.

I know that Enforcement is strapped and has nowhere near the manpower it needs to pursue the numerous open investigations that it already has open. But it would seem relatively easy to rotate a group of Enforcement Staffers to pull phone duty so that someone would always be available to either take new complaints by phone or respond to calls left on voicemail. This is something that I imagine every other enforcement agency in the country maintains – and it would be seem particularly important to establish after the grief the SEC has received in the wake of Bernie Madoff, Allen Stanford, etc. Until that happens, I imagine the good folks in Corp Fin’s OCC receive fraud complaints and are taking in Maury

– Broc Romanek