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Sodano and SEC: Remembrance of Things Past

Written: January 9, 2009

< =- =en-us>By Bill Singer

http://RRBDLaw.com

http://BrokeAndBroker.com

 

You read it on BrokeAndBroker.com first:

http://www.brokeandbroker.com/index.php?a=blog&id=106 http://www.brokeandbroker.com/index.php?a=blog&id=25

and  Mark DeCambre of the New York Post took the story to the next level this morning:

http://www.nypost.com/seven/01092009/business/post_ponzi_mess_up__sec_renews_sodano_su_149303.htm

The Securities and Exchange Commission reversed the Administrative Law Judge's Initial Decision dismissing the Commission's case against former American Stock Exchange Chair/CEO Sal Sodano.  I won't repeat the history of the case, as I have previously covered it at http://www.brokeandbroker.com/index.php?a=blog&id=106  and at http://www.brokeandbroker.com/index.php?a=blog&id=25 (November 2007).  However, now that the story has gone viral, let me note why this case matters.

First off, it's about the chronology.  Focus on the dates.  Focus on the age.  The Commission uncovered misconduct at the AMEX during 1999 and settled that case in 2000.  The alleged violation was that the AMEX, one of those much-heralded Self-Regulatory Organizations (SROs),  failed to support critical customer-protection rules relating to firm quotes and trading ahead. What's the important takeaway aspect of that case? Well, it's pretty simple: The Commission is a regulator. The AMEX is a regulator subject to the Commission's oversight. This is a rare situation in which a Chief of Police is sanctioning a precinct Captain -- this is an in-house regulatory matter; we're not talking about a regulator going after a stockbroker or a brokerage firm.  Frankly, it's more on the order of an historic event than a mundane traffic stop.  

Okay, fine, the AMEX was embarrassed and chagrined (remember, this is all happening during the midst of the Tech Wreck and the upcoming 9/11 tragedy).  To some degree, the Commission should also have been embarrassed and chagrined because one of its partners in regulation dropped the ball under the Commission's apparently less-than-watchful eye. Again, okay, fine, these things happen. Everyone makes mistakes. The point is to fix them, and I'm sure the Commission admonished the AMEX to clean up its act; in fact, that's spelled out in the 2000 settlement.  The AMEX promised not to do it again.  The AMEX gave mommy Commission a kiss.  The Commission gave its child the AMEX and hug. They then went into the kitchen for milk and cookies.

Unfortunately, in 2003 when the inveterate Commission staff returned to the AMEX, the federal regulator determined that the SRO had failed to enhance and improve its regulatory enforcement programs as required by the September 2000 Order. Subsequently, the Commission investigated Sodano’s alleged failure to fulfill his responsibilities as an SRO officer. Seems that the Commission wasn't all that pleased with what Sodano failed to accomplish --- and how he and the AMEX sort of failed to keep their promises.  Keep in mind that from September 1999 until January 2005, Salvatore F. Sodano was the Chairman and CEO of the American Stock Exchange (AMEX), a quasi-governmental self-regulatory organization (SRO), which was a subsidiary of the NASD, Inc. from 1998 through December 2004.  Yeah, that all sort of gets lost a bit in the shuffle and passing of time. 

Let me highlight that for you. We're not just talking about a lapse at the little old AMEX SRO. No, this also occurred during the nearly six year period when the AMEX was a subsidiary of the much larger NASD (now FINRA). 

Then time stands still.  The planets cease their rotation. The heavens stop in their steps. Apparently, the Commission did something after 2003, when it determined that Sodano failed  to enforce compliance with the Exchange Act during his term as the AMEX’s Chairman and CEO. What the hell took four years to "do" is beyond me. The case was a simple one: Sodano broke his word when he failed to clean things up as of the 2000 settlement.  It's a pretty basic case. The Commission says that Sodano promised to do X, Y, and Z. The Commission charges that those failures breached the promises in the 2000 settlement. Sodano argues he either kept his word or never made such a promise. The two sides close their case and an Administrative Law Judge crafts an Initial Decision and the Commission either accepts or rejects that proposed result.

We know from the 2007 Order Instituting Procedures (OIP) that the Commission belatedly realized (I'm not sure how else to characterize the passage of time from 2003 inspection to the 2007 OIP) that Sodano failed to

pay adequate attention to regulation, put in place an oversight structure, ensure the regulatory staff was properly trained, and dedicate sufficient resources to ensure that the AMEX was meeting its regulatory obligations.

The Commission's stinging conclusion was that Sodano’s inattention to and apparent lack of interest in regulation filtered down the AMEX management chain creating an environment in which regulation was not a priority and, therefore, compliance with the securities laws and the AMEX’s rules was not enforced. 

To avoid glossing over the points, let me try to clarify a key issue that gets lost in the dates and allegations. One, the Commission uncovered problems at the AMEX in 1999--that's a decade ago and in another century.  We clear on that age thing?  In 2000 the AMEX and Commission settled the charges and the AMEX promised to clean up its act.  The SRO crossed its heart and promised. Some tears were shed. Feelings were slightly hurt.

Four years after the Commission uncovered problems at AMEX and three years after that SRO promised to clean up its room, the Commission returns and sees that the pants are still hung over the chair, the toys are on the floor, and the bed is unmade.  At that point the case was less about any new violations and mainly about broken promises to reform.  As such, we are now asked by the Commission to give them some space -- they are complaining to us that they needed four years to put down on paper how disappointed they were that the AMEX and its honcho Sodano essentially failed to honor the promise in 2000  to reform the AMEX's regulatory practices.  If you look at the Initial Decision you will see that there were four Commission lawyers assigned to prosecute this case Stephen L. Cohen, Donald N. Dowie, Amy L. Friedman, and Daniel Weinstein for the Division of Enforcement).  During the time when Bernie Madoff was running amok and the subprime calamity was building a full head of steam, the Commission allocated four lawyers to prosecute Sodano. Under most circumstances, that's fine.  However, keep in mind that the only sanction sought here was a Censure --- no dollars, no suspension, no restitution.  Four lawyers. A Censure of a former SRO officer. You balance those scales and tell me if that now seems a sensible allocation of taxpayer dollars and manpower.

Now, in the year 2009, the Commission sits and reviews the Initial Decision in the Matter of Salvatore F. Sodano and decides on the basis of verb tense (is "is" is and can it also be "was") that this matter should now be remanded for a full hearing. Put in its most absurd perspective, we will now be allocating more limited Commission resources to prosecute a case brought in 2007 that alleged a breach of faith in 2003 based upon a promise in a 2000 settlement derived from violations uncovered in 1999.  And you folks wonder why I have become so cynical and disgusted with the entire regulatory system?