Wednesday, February 25, 2009

Financiers Used "Hotline" to SEC Examiners

Financiers Used "Hotline" to SEC Examiners

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Washington, DC - In a hearing which exposed failures by the government's financial police, Congressman Stephen Lynch (D-Massachusetts) highlighted the existence of a "hotline," which he said could be used by Wall Street firms to call off government inspectors. The existence of a "hotline" has been confirmed by the Securities and Exchange Commission (SEC), though its purpose has been disputed.

The SEC - the federal agency tasked with policing the financial industry - has come under heavy criticism for incompetence and negligence in its role as the regulator of the giant Wall Street firms, the collapse of which has already cost taxpayers billions of dollars and continues to threaten the world economy. The most prominent example of SEC failure is the decades-long $50 billion Ponzi scheme - likely the largest financial fraud in history - orchestrated by Bernard Madoff. The fraud was identified by money manager and private investigator Harry Markopolos, the star witness at the February 4 hearing before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Markopolos spent nine years trying to get the SEC to investigate Bernard Madoff for a scheme that Markopolos claims he identified in "minutes" and proved in "hours" using basic financial modeling. Despite dogged communication by Markopolos, the SEC failed to thoroughly investigate Madoff. After Madoff admitted his fraud in December 2008, the SEC publicly stated that they had received evidence of Madoff's scheme and had failed to stop it.

During the hearing, Congressman Lynch said that current and former SEC employees complained to him about the existence of a "hotline" used by Wall Street firms to call directly to top SEC officials to "stop an investigation or slow it down."

"The other thing that I keep hearing from some current SEC and former SEC is that there is a hotline. I was told that senior SEC management had actually gone to a financial services industry conference and basically said to the firms out there 'If you feel that you are being too aggressively investigated, then I want you to call this office,'" Lynch said.

A February 2005 speech by then director of the SEC Office of Compliance Inspections and Examinations (OCIE) Lori A. Richards before an industry conference appears to back up Lynch's statement.

"One unrelated final note I want to mention, we've implemented what we call the 'Exam Hotline.' The Exam Hotline will be dedicated to receiving calls from members of the regulated community who have a complaint or a concern about an SEC examination," Richards said to the Investment Adviser Compliance Best Practices Summit, adding "if a member of the regulated community has a complaint or a concern about an examination, they should know where to call for immediate attention."

Lynch said that the existence of this "hotline" sent a signal to career employees at the SEC. "And I know that these employees took that message as meaning 'we've gotta back off a little bit' and that senior management at the SEC was actually captured by the industry and that it wasn't doing the intense investigating that we would expect from them."

SEC whistleblower Mark J. Novitsky, who tracks the actions of the financial regulatory system, tipped Truthout off to Lynch's comments.

A spokesman for the SEC declined to comment for this report.

However, a publicly available brochure provided to the financial companies that are overseen by the SEC contains details about the hotline:

You may also communicate comments, complaints, or concerns through the Examination Hotline, (202) 551-EXAM. The Examination Hotline offers you a choice to speak with either a senior-level attorney in the Office of Compliance Inspections and Examinations in Washington, DC, or a staff member in the SEC's Office of Inspector General. The Office of Inspector General is an independent office within the SEC that conducts audits of Commission programs and investigates allegations of employee misconduct.

Purpose of "Examinations Hotline" Sharply Contested

According to Lynch's statement, unnamed former and current SEC officials see a nefarious purpose, implying that the hotline is a direct line for powerful Wall Street business people to apply pressure to SEC officials and back them off of investigations.

"It just struck me that there was a hotline to stop an investigation or to slow it down at the SEC but there wasn't one to speed it up or initiate it. It just seemed counter-intuitive to me given the mission of the agency itself," Lynch said.

Lynch did not provide any example of investigations that had been halted using the hotline. Through his staff, Lynch declined to comment for this report.

SEC documents present the hotline as a means for expanded communication between top SEC officials and the businesses that are undergoing inspection by SEC examiners.

The SEC brochure also raises a central issue - anonymity.

"When you [a business subject to examination] speak with staff on the Examination Hotline, you may identify yourself or request anonymity," the brochure says.

When it was first set up in 2006, the hotline routed directly into the OCIE Office of the Chief Counsel - the internal lawyer for OCIE. The OCIE chief counsel reports directly to the OCIE director.

An August 2007 report by the nonpartisan investigative arm of the legislative branch, the Government Accountability Office (GAO), criticized the design of the hotline.

According to the GAO report, some of those who might otherwise use the hotline would be concerned about receiving unfair treatment from OCIE if they complained.

The GAO report does not address the issue of possible misuse of this direct line of communication from industry to top SEC officials.

However, the GAO recommended putting up a barrier so the hotline would rout to an independent ombudsman, as is the practice at other regulator entities.

"By locating the hotline in an office or division that is independent of OCIE, OCIE could lessen registrants' concern about the independence of that staff who operate the hotline and thus encourage greater use of it," the report says on page 29.

1 comment:

American Investor said...

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