GAO Confirms: The SEC Let Companies Commit Fraud

Under Chris Cox, this was official SEC policy

Readers of this blog won't be the slightest bit surprised by the findings of a GAO report released today.

Bloomberg reports:

Under former SEC Chairman Christopher Cox, the agency instituted policies that slowed cases and led enforcement-unit lawyers to conclude commissioners opposed fining companies, the Government Accountability Office said in a report today. An unidentified attorney said it was “widely felt” commissioners prevented the division from “doing its job,” according to the report.

“Some investigative attorneys came to see the commission as less of an ally in bringing enforcement actions and more of a barrier,” the GAO said. Cox’s policies “contributed to an adversarial relationship between enforcement and the commission.”

The GAO report will solidify Cox's reputation as the worst SEC chairman in, possibly, its entire history:

When Cox became chairman in August 2005, he stepped into a partisan dispute among SEC commissioners over whether it was appropriate to sanction public companies for violating securities laws. Democratic commissioners argued that fines helped deter misconduct. Republicans countered that shareholders ultimately paid SEC penalties.

The SEC issued guidelines in January 2006, stipulating that the agency would consider how much an alleged fraud benefited the company and the impact on shareholders before imposing a fine.

Cox, now 56, set up a procedure in 2007 that required enforcement attorneys to seek approval from commissioners before negotiating corporate penalties. Previously, SEC investigators could enter into settlement talks without obtaining permission.

“The pilot program was designed to test ways to speed up cases and improve oversight, and was tried in only nine of more than 1,000 cases that were all approved by the commission,” Cox wrote yesterday in an e-mailed statement. “The GAO analysis supports the chairman’s decision to end the pilot and pursue other approaches.”

The GAO report doesn't specify the names of companies given a "get out of jail free" card by Cox's new policy, which "led to 'fewer and smaller' corporate fines, reduced incentives for corporations to cooperate with SEC investigations and generated a backlog of cases." But one beneficiary is perfectly obvious: the corporate crime petri dish Overstock.com.

Last year, the SEC announced that it was dropping a lengthy investigation of the company despite evidence of blatant accounting improprieties.

Overstock, encouraged by the SEC's negligence, ratcheted up its use of smoke and mirrors to fictionalize its recent financial statements, as described in an item the other day.

SEC chairperson Mary Schapiro said in response to the GAO report that the SEC sent the “wrong message to enforcement staff and to the public at a time when the SEC needs to be sending a message that corporate wrongdoing will not be tolerated.”

Schapiro can prove she's serious by reexamining the cases dropped by Cox, and seeing to it that the Overstock.coms of this world stop getting away with inflating their financial statements.

© 2009 Gary Weiss. All rights reserved.