Gut the SEC, catch the next Madoff
Two of the victims of Bernie Madoff’s Ponzi scheme are suing the Securities and Exchange Commission for ‘negligence.’
While it’s not clear whether their case will go anywhere, it’s undeniable that the SEC failed miserably in the Madoff case. Many private citizens tried to help the agency do its job; a 29-point, 17-page report on Madoff, entitled “The World’s Largest Hedge Fund is a Fraud” was submitted to the SEC by accountant Harry Markopolos several times. According to the lawsuit, the SEC received eight complaints about a Madoff Ponzi scheme.
So what should be done to minimize the chances of this kind of failure in the future? The typical response is that the SEC needs more money and wider powers to catch the next big securities fraud. But the SEC’s own statistics show that its budget more than doubled between 2001 and 2008—and Markopolos’s testimony on his attempts to get the SEC to see the light on Madoff illustrates that the failure had nothing to do with lack of money.
The SEC did not fail because it vigorously attempted to prosecute securities fraud but just couldn’t muster the resources from a Scrooge-like public. It failed because it was spending its time doing seemingly everything but prosecuting securities fraud.
Over the last decade, while Madoff and other real criminals were scheming, well-funded SEC bureaucrats were busy dictating the composition of mutual fund boards, mandating the public release of executive compensation numbers shareholders wanted private, investigating private citizens for “insider trading” even when they had no fiduciary duty whatsoever, and intervening on many other issues that are properly determined by contract between investors, companies, and financiers.
This is not the fault of any particular set of SEC bureaucrats; it is the fault of the SEC’s sprawling and corrupt mandate. According to the organization’s website, “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
This mission goes infinitely beyond the government’s proper role in financial markets, which is to investigate and prosecute evidence of theft, fraud, and breach of contract, so that individuals can invest and trade freely. The SEC’s mission is effectively unlimited; it basically means that the SEC’s job is to use the coercive power of the government to do whatever the heck it feels will improve financial markets. Such a mission both shows a profound ignorance of and disregard for the unique ability of individuals on a truly free market to allocate capital efficiently. It also completely diverts the government from prosecuting criminals. Who has the time and energy to follow real evidence of securities fraud when you view your mission as, essentially, to manage the world’s largest financial market?
Obviously not the SEC.
Want to stop the next Madoff? Gut the SEC, and limit the government’s role to prosecuting real criminals.