Corporate Governance

Communicating with the Division of Enforcement (Part 4)

By J. Robert Brown

So what did the Inspector General conclude about these communications between Morgan Stanley and the top echelons at the SEC? 

The Report concluded that "relevant information was imparted to representatives of Morgan Stanley by both Berger and Thomsen regarding the nature of the evidence that the Enforcement Division had aagainst Mack in connection with the Pequot investigation."  With respect to Thomsen's representation that the disclosure was appropriate "given the potentially disruptive effects on the markets of information concerning the potential CEO of a large institution like Morgan Stanley," the Report observed:

• the information she and Berger imparted (i.e. the lack of evidence against Mack) only served the interests of John Mack personally and Morgan Stanley.  This was not a situation where Morgan Stanley and the larger financial markets would have been adversely affected by Enforcement not advising Morgan Stanley that they were poised to bring an Enforcement action against the person chosen to be their new CEO.  In fact, the only danger in Enforcement not sharing with Morgan Stanley that Enforcement did not have substantial evidence against Mack while Morgan Stanley was considering Mack for the CEO position was that Mack may not have not obtained the position, and Morgan Stanley would have to find another candidate.

Finally, the Report recommended that appropriate "disciplinary and/or performance-based action" be taken against Linda Thomsen, the clarification of the Commission's policies on the disclosure of nonpublic information, and a reassessment and clarification of the practice of allowing outside counsel the opportunity to communicate with counsel above the staff attorney level when they have disagreements or issues.  

On this point we take strong objection to the Inspector General's conclusions.  First, it is true that the information involved the hiring of John Mack as CEO of Morgan Stanley.  But to imply that it was about an ordinary personnel matter at Morgan Stanley understates the importance of the decision.  Mack had been with Morgan Stanley before losing out in a battle for CEO.  In replacing Phillip Purcell, Mack stepped into a business that to some degree was in turmoil.  His return had a quick effect. 

• "Morale has already improved in anticipation of his return," Byron Wien, a senior investment strategist at the firm, said before the announcement. "He has proven that he can bring harmony to disparate factions."

In other words, the entire firm and, to some degree, the market, had an interest in the decision. 

Second, as we have noted, there is some discretion to release non-public information to the public.  Linda Thomsen essentially informed Mary Jo White that, at that particular stage of the investigation, Mack was not a target.  At the same time, however, she made it abundantly clear that the circumstances could change and that his testimony would likely be necessary.  To reveal facts about an investigation that implicate others is one thing.  To reveal facts about an investigation that suggest that the SEC is not targeting someone is to prevent the existence of an investigation from unnecessarily impugn reputation.

The decision was Thomsen's to make.  She made the right one.

A redacted version of the Report is posted.

Full post as published by The Race to the Bottom on November 04, 2008 (boomark / email).