Suing the SEC for lack of regulation

The SEC did nothing to stop Lehman Bros. from using questionable accounting tactics. Should they be held responsible?

Haraz N. Ghanbari/AP
Securities and Exchange Commission (SEC) Chair Mary Schapiro testifies on Capitol Hill in Washington, March 17, before a House Appropriation subcommittee hearing on the fiscal 2011 budget request for the SEC. Was the SEC asleep at the wheel regulating banks like Lehman Bros.?

Anyone who is counting on the SEC to protect his investments should read the paper. This week we discovered that in addition to ignoring warnings about Madoff’s criminal empire, the SEC ignored warnings about Lehman Bros. too.

Merrill Lynch ratted out Lehman. The SEC did nothing.

Merrill’s motives were pure. It just wanted what was best for Merrill. Its customers wondered how come Lehman seemed to show better numbers. Merrill looked into the matter and discovered that Lehman was cheating. Lehman was flattering its balance sheet by using the “Repo 105” accounting gimmick, which permitted it to disguise weaknesses.

What the big banks don’t know about accounting tricks probably isn’t worth knowing. And when the SEC imposes a new rule, you can count on the fellows with the sharp pencils to figure out some angle to use it to their advantage.

The system is fundamentally corrupt. The SEC can’t really protect investors because to do so it would have to be smarter and better informed than Wall Street’s own hot shots. That’s not likely. Wall Street can pay more – especially to former SEC employees.

SEC regulation is like all regulation. It raises the costs of entry into an industry, thereby protecting the big players from competition. Then, it imposes unnecessary costs – lawyers and paperwork, chiefly – all up and down the line.

Fraud and theft are illegal – even without the SEC. But the agency shifts the focus away from actual fraud and theft and towards compliance with SEC rules. Since Madoff and Lehman Bros. were, as far as anyone could tell, in compliance with SEC regulations, investors felt entitled to believe that their investments were safe. Big mistake.

Investors who lost money should name the SEC in their suits. The agency was complicit in massive frauds.

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