Corporate Governance

Bear Stearns and the SEC: The Enforcement Proceeding that Never Was (Part 1)

By J. Robert Brown

Ten days or so ago the Inspector General of the SEC issued yet another critical report involving the SEC's interaction with Bear Stearns.  Titled "Failure to Vigorously Enforce Action Against W. Holding and Bear Stearns at the Miami Regional Office," the Report has yet to be posted on the SEC's web site.  A copy can, however, be found at the Miami Herald web site.  The case is relevant to the current turmoil in the markets primarily because it provided an opportunity to uncover systematic problems with the pricing of various debt obligations, raising the question of whether earlier attention would have prevented some of the abuses that surfaced later. 

The Report examined an investigation by the Miami Office of the SEC into the purchase of Collateralized Bond Obligations by W. Holding Company from Bear Stearns.  According to the report, the registered representative "violated Bear Stearn's internal policies and procedures by calculating his own prices" for the instruments.  The investigation focused on the failure of W. Holding to disclose relevant information about the impairment of these obligations, the behavior of the registered representative who distributed the incorrect pricing information, and the role of Bear Stearns in the matter.    

Despite lengthy delay (apparently resulting from personnel changes at the Miami office), the staff succeeded in negotiating  tentative settlements with most of the parties, including Bear Stearns and W. Holding.  Moreover, the staff was alerted to an ongoing criminal investigation into debt pricing issues by Bear Stearns.  Nonetheless, as the Report concluded, the regional director "abruptly decided to close the case entirely."  The Report described the decision to close the case as a failure to administer "statutory obligations and responsibilities to vigorously enforce compliance with the securities law." 

The report received only modest coverage in the press, although that may be changing, with the articles focusing on the decision to drop a case against Bear Stearns and the Agency's failure to "vigorously enforce compliance with applicable securities laws."  The Division of Enforcement strenously objected to the Report.  As the Division contended:

• The staff?s brief review of the report and its attachments has revealed that the report is misleading and, all too often, relies on speculation and innuendo to support its harsh conclusions. Further time for review will undoubtedly reveal more instances in which the Inspector General failed to comply with his fundamental obligation to conduct a fair and impartial fact-finding report. Nevertheless, since the Inspector General has not allowed the staff the time or opportunity to complete such a review, we request that ? at the least ? the Commission forward this initial response to Congress. We also request that we be afforded an opportunity to submit a more detailed response to the report, once we have had an opportunity to review the materials which relate to the report.
  

With this background in mind, we will provide some observations and comments in the next few posts. 

Full post as published by The Race to the Bottom on October 20, 2008 (boomark / email).