You’ve been watching the SEC for years. How do you think the SEC is doing now? Have the changes to staff and structure that SEC Chairman Mary Schapiro has been making done enough to help protect investors?
They’ve reorganized along functional lines but they still don’t get it. They still have lawyers in charge of all of the main functions at the SEC, and lawyers aren’t going to be able to spot any sort of financial fraud. They are not equipped for it. They’ve never sat on a trading desk, they’ve never managed money themselves, never had customers or clients so they have the wrong people in charge.
[The agency] It’s not changed substantially because no one has been held accountable. If you miss $50 billion in debt leaving Lehman’s balance sheet every quarter end and then coming back at the beginning of the new quarter, and you’re right there when they are doing it, well then you are a non functional regulator, as is the Fed. If you’re going to keep missing the large crimes and felonies, then what makes anyone think that they are going to be capable of day to day regulation for the small and middle sized stuff. They need to get more power to regulate over the counter derivatives and to regulate hedge funds, but they didn’t use the powers they already had which brought us to the brink of financial collapse in 2008 and 2009. So with the same people there, the same systems, the same operation manuals, we can’t expect different results.
Is Mary Schapiro making strides in the right direction with the changes she’s made or is she falling short?
They are short strides in the right direction. She has brought in a few industry professionals, which they sorely needed. But they really need to make wholesale staff replacements. With just the type of people that she’s already brought in, in small amounts, she needs to clear the decks so she can bring in a much larger number.
Would that include getting rid of the Commissioners?
Oh, yes. I think the commissioners need to be replaced because they are all securities lawyers. Like I said, you just cannot have lawyers in charge of finance because they it’s not going to work–they are not going to know where the skeletons are buried and they’re not going to know a fraud when it hits them in the face. You need to have people that came from the industry who can say, ‘No, this is wrong.’ The problem with securities lawyers is they only know how to follow black letter law that’s already been passed. Well as soon as a securities regulation has been passed, the industry figures out ways to circumvent it almost immediately. So the regulators are always going to be light years behind. So you need someone who’s going to manage the agency and run it according to a higher standard of good ethics, full transparency, full disclosure, and fair and square deal for investors, and that’s not what a securities lawyer is all about. All they are going to do is enforce the old laws that are outdated immediately. So you need someone who’s going to manage under a set of high ethics, and that’s a standard far above black letter law, and the only people that are going to recognize that would be people with industry backgrounds that are in the trenches and know what it’s like to be an investor and know what it’s like to manage client money… they can recognize good ethics and what’s bad ethics and make sure we steer the industry toward good ethics. …Does that make sense to you?
Sure it does. If the SEC gets the boost in its budget…Schapiro can add staff and update the SEC’s outdated technology.
It’s horrible technology. I can only imagine what computer languages they are programming in there. They’ve got to be dead languages. The other thing is they need to move their headquarters out of Washington to New York. It would be like fighting your war in Afghanistan and your headquarters is certainly in Afghanistan. Well here, it would be like setting up your headquarters in Bahrain or something. New York is the largest financial center. You’re going to get plenty of qualified financial help; if you want to get new employees on board you’ll be able to get them in New York on board easier than if you’re in Washington because those skilled people would have to move to Washington. Unless [the SEC] is a political organization, and they do seem to be one, they seem to be captive to the industry. If you want to be near a lobbyist, the best place to be is in Washingotn. If you want to be a captive regulator, the easiest place to do that is in Washington. If you want to be a financial regulator, the best place to do that is New York because that’s the largest financial center.
I know that you’re angry at the SEC, but what about FINRA’s role in not detecting the Madoff Ponzi scheme?
FINRA is nothing but an industry shield. It’s a self regulator…they don’t do much and they are even more check the box than the SEC is; that’s hard to believe. They are even less competent than the SEC and certainly more subject to political influence than the SEC. They are not a visual watchdog; they are a blind, deaf, and mute lap dog.
But do you regret not going to FINRA?
No! My submission would have ended up in Bernie Madoff’s hands within minutes! He was the former chairman [of NASDAQ] and his brother was the vice chairman. The only thing that you can say about FINRA is that it’s a corrupt organization. If they allowed Bernie Madoff to be chairman, his brother, Peter, to be vice chairman, it tells you all you need to know about the ethics of FINRA. I had reported to FINRA in the past, the predecessor organization the NASD, and they never did a thing about any of my complaints or my brother’s complaints. That’s an organization I find to be nothing but a self-protective organization. They are not going to be enforcing any laws anytime soon. Look at the meager fines that they dole out each year.
Senator Christopher Dodd’s financial services reform bill directs the SEC to consider authorizing an SRO to augment the SEC’s examination of advisors. And FINRA is still lobbying hard to get oversight of advisors. What do you think about that?