The Stamp of the SEC - A False Sense of Security

Rep. Ron Paul uttered those words during his introductory comments at the Madoff hearing this afternoon in Washington (nay - pray tell, it's only an informal meeting....but this was only determined after they pontificated and discussed briefly what was appropriate dress). Rep. Paul was pointing out that further regulation will not fix the problem. It IS the problem. Where was the SEC in this? The reality is they were neck'n'neck with each other, bedfellows with Madoff if you will. After Enron, after Worldcom, after Tyco, and after the mortgage bond fiasco - more regulators and more regulation did not find this scam. Madoff turned himself in after the markets ravaged his scheme, probably through a variety of circumstances including a market in free fall and customer redemption requests.

Rep. Brad Sherman emphasized the fact that the annual financial statements filed with the SEC by BLM every year included any and all the necessary fraudulent information the SEC needed to at least ask the questions (i.e., 2008 $17B AUM and a single office small auditor?). Neither Ms. Erin Arvelund's Barron's story in 2001 nor the considerable and proactive effort of Harry Markopolos were enough. But wait, there's more. Neither was the fact the system had its own watchdog (Inspector General's Office) of the watchdog (SEC) which did not pay attention to any of the red flags. And what about the other agencies? SIPC or FINRA or PCAOB.

Is it not realistic that those people and agencies be held directly accountable? Rep Al Green so eloquently stated that we make it difficult for welfare mothers to steal. We need to make it difficult for criminals to steal from investors. I am not convinced that it matters whether they admit to see the red flags or not or acknowledge that red flags were raised and took no action? That's what I get paid for, to spot the red flags and avoid them. Reference is made that "legally" they are not bound to take action. What about professional morals? What about just doing the right thing?

I spend everyday in the trenches of the regulatory side of doing business. Not the financial business. But the oil and gas and mining business. Not on the regulatory side but the industry side. I work to gain access and approval for industrial development. In our business, it is my opinion that it is NOT the regulation that keeps people and companies in line. Generally, people and companies do what they know is right. If they don't then regulation may be in place for remedies. The legislative and regulatory system still relies on people making every effort to do the right thing. And penalizes those who do not and get caught. Just try and contravene the Fisheries Act in Canada. You'll find out pretty quick that you may be the subject of a fine of $1M per day of the non-compliance. But just as our current police chief struggles with the increasing gang violence in our city, no amount of policing and enforcement will stop that activity. Our top cop has again pleaded for the action of friends and family members to turn the tide. There is not enough personnel or regulation to make the BLM's of the future go away. It is only in the individual people themselves to not do wrong to other people. My hope for a life lesson to my children is not to lie, to anyone, but particularly not to yourself. It will catch up with you. Hmmm, I remember commenting to my dad that I couldn't understand how or why people could and would kill other people willfully. His response was that understanding would require an irrational mind as criminals do not have rational minds.

But, this brings me to what I believe is the most intriguing (and gut-wrenching) aspect of this place in which we find ourselves. Trust. Confidence. Credibility. Reputation. When we lose everything else, we are left with only that. Each are built and carefully nutured over a lifetime. They are often lost in the blink of an eye - possibly a simple moment of poor judgement. These are attributes that are earned through action (and inaction when appropriate). And to all past accounts, the surface writing would suggest BLM deserved the reputation and credibility. He returned funds upon request. He provided prompt and exceptional customer service, worthy of the high flying client list he kept. But this was no moment of poor judgement. Something went terribly wrong in that decision tree Bernie. The how and why of this story will certainly be intriguing. I expect there will be some rather exceptional revelations.

Is it not just supposed to be as easy as knowing and doing the right thing? What has happened to honesty and integrity. Well that requires a particular set of values. Values to which actions are measured. Adherence to those values is what is most important. Important from an individuals perspective.

What happened? Complicity. Complacency. Not doing the job. Not doing the right thing. Being a team player. Climbing the ladder. Making and keeping friends in high places. The path of least resistance. Rep Meeks called the whole lot of them crooks. In his view, every last individual that had a role in this deserves to be in jail. Absolutely. Thievery in its modern and electronically enabled form. Bernie said the real future was in electronic trading.

I have played the role of whistleblower in my career. Markopolos was genuinely worried. The path of most resistance. I paid a very heavy price for that action. But I know that what I did was right, and I defend my values ever stronger knowing that it was the right thing to do.