In the wake of the financial crisis, the Securities and Exchange Commission took a beating for appearing to sit idly by while the likes of Lehman Brothers and Bernard L. Madoff ran amok.
Government regulators on the Wall Street beat have long been outnumbered and outspent by the companies they are supposed to police. Even after receiving budget increases from Congress in April 2011, the Securities and Exchange Commission is struggling to fill crucial jobs, enforce new rules, upgrade market surveillance technology and pay for travel.
The money squeeze comes as the regulators take on added responsibilities including monitoring hedge funds, overseeing the $600 trillion derivatives market and other tasks mandated by the Dodd-Frank law.
The regulators say they are largely in a holding pattern as lawmakers debate the 2012 budget in May. Republicans may move to cut spending further beginning Oct. 1, the start of the government’s fiscal year.
The S.E.C. was created during the Great Depression, in the wake of hearings that exposed a multitude of ways in which big investors had taken advantage of small customers or had taken on too much debt.
After the Financial Meltdown
In a lawsuit filed in April 2010 against Goldman Sachs, the most powerful, most feared and most envied firm on Wall Street, the S.E.C. sent a signal that it was going after very big targets. In July 2010, Goldman Sachs agreed to pay $550 million to settle the lawsuit, which contended that it misled investors in a subprime mortgage product as the housing market began to collapse.
The commission's failure to uncover major financial problems at the big investment banks, or to detect the Ponzi scheme that Mr. Madoff operated for years, led to withering criticism from Congress and former S.E.C. chairmen from both parties.
Demoralized staff members had been watering down proposed settlements in enforcement cases lest the commission reject them. Commission examiners, under harsh criticism for missing major scandals, have been fearful of taking risks or proposing changes in oversight.
Groups representing investors had been frozen out by an agency that had been dominated by commissioners describing themselves as proponents of free-market principles, who made it more difficult for the professional staff to bring cases. Senior jobs lay vacant for many months.
Ms. Schapiro, who took over as S.E.C. chairwoman in January 2009, and Robert Khuzami, its director of enforcement since March 2009, said after the filing of the Goldman case that the agency was stepping up both its rule-making and its investigations in the wake of the financial crisis. Ms. Schapiro said the commission had proposed new rules for credit rating agencies and for the reporting of the specific investments behind asset-backed securities, two issues that were integral to the recent financial crisis.
The Goldman case was not the only example of the agency raising its sights. In April 2010, General Electric said the S.E.C. had asked for information about reassurances that its chief executive, Jeffrey R. Immelt, made in 2008 about the company's ability to refinance its debt. The S.E.C. also has joined an international investigation into whether Hewlett-Packard paid bribes to win business in Russia. The company said it was cooperating with investigators while conducting its own inquiry.
Not all of the S.E.C.'s recent actions have been winners. In August 2009, a federal judge in New York slapped down a proposed $33 million settlement with Bank of America over accusations that it had failed to adequately disclose to shareholders details of the financial condition of Merrill Lynch as the two were merging. More than six months later, the judge reluctantly approved a $150 million settlement, but he complained that it was an insufficient penalty.
And the commission has been the subject of three scathing investigative reports over its failure to catch irregularities in some of the biggest investment debacles in history, including those involving Lehman Brothers and Bernard L. Madoff Investment Securities. It had received tips years ago that Mr. Madoff was running a Ponzi scheme but failed to develop a case against him.
Questions About a Madoff Connection
In March 2011, Ms. Schapiro came under Congressional fire for hiring as the S.E.C.’s general counsel someone with a Madoff financial interest — David M. Becker, who participated in matters involving how the scheme’s victims would be compensated.
The revelations about Mr. Becker’s role have raised fresh questions about ethical standards and practices at the agency, where Ms. Schapiro was brought in as chairwoman two years ago with a mandate to strengthen its enforcement unit. Questions about Mr. Becker arose in February 2011 after Irving H. Picard, the trustee overseeing the Madoff case, sued him and two of his brothers to recover $1.5 million of the $2 million they had inherited in 2004 from a Madoff investment by their late mother. Mr. Becker’s financial ties to Madoff had not been publicly disclosed until that suit.
Mr. Becker said that he advised Ms. Schapiro and the chief ethics officer of his financial interest in a Madoff investment account, “either shortly before or after” joining the agency in February 2009.
Perhaps the most significant Madoff matter involving Mr. Becker is a proposed reversal of the agency’s recommendation on how to compensate victims of the scheme, according to two people briefed on the S.E.C.’s discussions. While the agency had agreed on a deal that would return to investors only the money they had put into their Madoff accounts, Mr. Becker argued that the commission should change its stance to allow victims to keep some of the gains their investments had generated, since the investment would have grown somewhat over time even in a low-interest account. The Becker family would have benefited from the approach.
In September 2011, Mr. Becker’s actions were referred by H. David Kotz, the inspector general of the S.E.C., to the Justice Department, on the advice of the Office of Government Ethics, which oversees the ethics of the executive branch of government.
The report by Mr. Kotz provides fresh details about the weakness of the agency’s ethics office and reveals that none of its commissioners, except for Mary L. Schapiro, its chairwoman, had been advised of Mr. Becker’s conflict.
It says Ms. Schapiro agreed with a decision to keep Mr. Becker from testifying before Congress, where he would have disclosed his financial interest in the Madoff account.
2012 Fiscal Challenge
In May 2011, current and former regulators warned that threatened budgets cuts for 2012 would prevent the agencies from enforcing hundreds of new rules enacted under Dodd-Frank, or worse, catching the next Bernard Madoff.
But critics contend that the agencies don’t deserve extra money, given that they missed warning signs and failed to catch serious wrongdoing in the years leading up to the crisis. The S.E.C., too, has been accused of mismanaging its finances. The Government Accountability Office has faulted the agency’s accounting almost every year since it began producing financial statements in 2004.
Some Republicans argue that the regulators’ cries of poverty are overblown. The S.E.C.’s budget in 2011 is $1.18 billion, up 6 percent over 2010 — and nearly triple what it was a decade ago.
While hiring bans and travel restrictions have been eased since the new budget, regulators say they are largely in a holding pattern as lawmakers debate the 2012 budget. Any further cuts, they say, could undermine their efforts to police Wall Street.
Mr. Khuzami, the S.E.C.’s enforcement chief, noted that some Wall Street investigations have faced mounting delays. Recent departures of lawyers only magnified the problem, he added.
Mr. Khuzami said he faced a “significant backlog” of tips and referrals, including in the area of market manipulations and accounting irregularities. The tips, which come from whistle-blowers, law enforcement agencies and investors, often prompt S.E.C. investigations.
While the S.E.C. offsets its budget with fees from Wall Street banks and other financial firms — and in recent years has even turned a profit for taxpayers — Congress sets the agency’s spending levels each year. Lawmakers in April raised the S.E.C.’s budget for the next few months by $74 million, to $1.18 billion. President Obama had requested $1.25 billion for the agency, and Dodd-Frank called for $1.3 billion.
