SEC too fo­cused on vol­ume of cases, in­spec­tor says

Los Angeles Times - - Business - Ron­ald D. Orol re­port­ing from washington Orol writes for Mar­ McClatchy

The Se­cu­ri­ties and Ex­change Com­mis­sion is still fo­cused too much on the num­ber of cases it has brought and not enough on the num­ber of in­vestors pro­tected, the agency’s in­spec­tor gen­eral said Wed­nes­day at a hear­ing look­ing into the com­mis­sion’s fail­ure to iden­tify quickly an al­leged $8-bil­lion fraud scheme in­volv­ing Robert Allen Stan­ford and Stan­ford Fi­nan­cial Group.

“You have to value the clear harm to in­vestors over po­ten­tial lit­i­ga­tion risk,” said H. David Kotz, in­spec­tor gen­eral of the SEC, at a Se­nate Bank­ing Com­mit­tee hear­ing on the al­leged Stan­ford scheme. “The SEC has made some changes, but we’d like it to be even more clear in their pro­ce­dures that the num­ber of in­vestors harmed is the most im­por­tant con­sid­er­a­tion.”

The SEC has been un­der in­tense pres­sure in re­cent years for fail­ing to iden­tify the al­leged Stan­ford scheme and an es­ti­mated $65-bil­lion Ponzi scheme per­pe­trated by Bernard L. Mad­off in a timely man­ner.

A 2009 SEC suit al­leges Stan­ford and three of his firms de­frauded in­vestors in a scheme in­volv­ing cer­tifi­cates of de­posit. Kotz pointed out that the SEC’s Washington ex­am­i­na­tion staff iden­ti­fied strong ev­i­dence of fraud in 2007 and that the re­gional SEC of­fice in Fort Worth had been aware since 1997 that Stan­ford might be con­duct­ing a Ponzi scheme. But no SEC ac­tion took place un­til 12 years later.

Kotz ar­gued that dur­ing the pre­vi­ous decades the Fort Worth of­fice op­er­ated within a broader SEC cul­ture where novel and com­plex cases such as the sus­pected Stan­ford scheme were not en­cour­aged be­cause of­fi­cials were eval­u­ated by the num­ber of cases they brought. In­stead, Kotz said, staff were fo­cused on bring­ing a num­ber of “quick hit” smaller cases to make their of­fices ap­pear to be more suc­cess­ful than other of­fices. He added that even if the in­ten­tion is there to change that at­ti­tude at the SEC, he is not sure staff mem­bers know that statis­tics are not im­por­tant.

“We need to make sure that the idea that stats are not im­por­tant trick­les all the way down the line,” he said.

But Robert Khuzami, di­rec­tor of the SEC’s en­force­ment di­vi­sion, ar­gued that he is send­ing a clear mes­sage to the agency’s staff that “quick hit” small cases should not be given more at­ten­tion than big­ger cases. He pointed out that the agency has brought ma­jor, com­plex cases against large com­pa­nies in­clud­ing Dell Inc., Cit­i­group Inc. and Gold­man Sachs Group Inc. as well as World Com and En­ron. In July, Dell, Cit­i­group and Gold­man set­tled sep­a­rately with the SEC on var­i­ous charges, pay­ing $75 mil­lion to $550 mil­lion each.

“We are not get­ting quick stats on those cases,” Khuzami said. “[Quick hits] are not the stan­dard to­day, I as­sure you.”

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