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Levitt Defends SEC: A Reply

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Dec 16, 2008 1:42 pm

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An irreverent Wall Street Blog
by Bill Singer Subscribe to RSS Feed: Blog Home | Past Entries Have Arthur Levitt's Words Come Back to Haunt Him? Written: December 16, 2008

By Bill Singer


New York Post writers Mark DeCambre and Kaja Whitehouse published a fascinating story today in the New York Post: Ex-SEC Boss: Not My Fault.  Frankly, they have opened a window into the inner sanctum and thoughts of those charged (and once charged) with regulating Wall Street.  On the heels of the recent lurid disclosures about Bernard Madoff's multi-billion dollar fraud, former SEC Chair Arthur Levitt is quoted in the article as saying: "

At this point, I don't see any evidence that the SEC dropped the ball.

That comment infuriates me and likely many others who have spent countless hours this past week listening to the devastation brought upon the life savings of many victims of Madoff's apparent fraud.  Madoff likely made off (sorry for the pun) with billions of dollars of other folks' money. Billions of dollars. Billions--I think the enormity of the theft needs repeating. And this occurred under the registered investment advisory (RIA) oversight of the SEC and likely under the broker-dealer oversight of both SEC and FINRA. We will need to see how this story unfolds to know the extent of the regulatory failure and where to point the finger.

Still...what evidence is former Chair Levitt looking for before he recognizes that the SEC failed the investing public and the industry? What evidence is required to convince this former industry cop that the streets of Wall Street were not being patrolled...that the squad cars were arriving too late while their occupants were munching on donuts and slurping down coffee?  

Slightly over a decade ago, Levitt went before the press and issued an historic condemnation of the price fixing of the NASDAQ market. In a speech he gave on August 8, 1996, he chastized the former NASD (now transformed into the Financial Industry Regulatory Authority or FINRA) and also noted that the SEC itself had failed.  Among his comments was this:

The evidence -- gathered from hundreds of witnesses, thousands of hours of tapes, and more than a million pages of documents -- shows that the NASD did not fulfill its most basic responsibilities -- and I quote from its charter: to promote just and equitable principles of trade for the protection of investors. On the contrary, American investors were hurt -- large and small, sophisticated and inexperienced, institutional and individual -- all were hurt by these practices. Nor has the SEC emerged unscathed. To the extent these practices took place on our watch, we should have acted sooner. We, as well as the NASD, need to be faster and more vigilant, to assure that the public interest is protected.

Yet, here we are, in another century, and the SEC remains scathed. Perhaps not in another market price-fixing scandal or engaged in the high-dudgeon of criticizing a self-regulator over which it had responsibility, but, still, the scenery is not so different.

The Madoff fraud took place on the SEC's watch.  The SEC should have acted sooner. The SEC needs to be faster. The SEC needs to be more vigilant. The public interest is not being protected.

And in response to the known facts about Bernard Madoff and his firm, the best the former SEC Chair can offer is that he doesn't see any evidence that the SEC dropped the ball?  Do we really need to connect the dots?  Is this the time for the SEC's alumni to once again close ranks in defense of that failed institution?

In raising his tepid defense of his former organization, I wonder if Levitt recalled all too uncomfortably the barbed accusation he lobbed at the NASD--and deservedly so--some twelve years ago in the same speech cited above:

Where was the NASD, the cop on the Nasdaq beat?

The NASD was not blind to these practices in the marketplace. It simply looked the other way.

You were right then, Mr. Levitt.  You are wrong now.  The same stringent test applies to the SEC now as to the NASD then.

Where was the SEC, the cop on the registered investment advisor/broker-dealer beat? If the SEC was not blind to Madoff's practices, then it must have simply looked the other way.

Double standards have no place in regulation: whether that be in holding NASD or FINRA to a lower standard than the SEC, or in failing to regulate the Bernie Madoffs of Wall Street with the same diligence as his smaller competitors.