The Politicization of the SEC

Thursday, 07 Mar 2013 07:46 AM

By Jacob Wolinsky

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Among the big financial stories this week has been the Securities and Exchange Commission (SEC) announcing that it would likely be bringing charges against Mark Cuban, owner of the Dallas Mavericks. Cuban is accused of selling a stock in 2004 and avoiding a $750,000 loss.

The SEC has taken many other high-profile cases lately. While the actions are commendable, a somewhat disconcerting concern has arisen.

The SEC has been under fire for its total incompetence during the financial crisis, missing the Bernie Madoff trial and other fiascos. The SEC states that it filed 734 cases this year, one short of last year’s record. Additionally, many high-profile cases have been pursued.

Among the most famous this year is the attempt by the SEC to bring charges against SAC Capital, a large hedge fund. However, there are some other cases that have been absurd. The SEC wants to charge Netflix CEO Reed Hastings over a Facebook post, and Cuban is now likely to face trial for a small gain on a stock from nine years ago.

While President Barack Obama wants to show he is tough on Wall Street, many of these absurd cases (such as the Cuban case) started during President George W. Bush’s term. Obama’s SEC is clearly taking action against “the evil billionaires and hedge funds.”

However, the financial industry mostly consists of people who never are in the news yet make millions of dollars and could be involved in insider trading. There are over 8,000 hedge funds and approximately 3,000 private equity firms in the United States. Many of these funds are small, and only a tiny percentage are in the media such as SAC capital. However, thousands of funds lie in the middle.

Not only are these people not charged for insider trading, but the definition is so murky it is hard to even attempt to prosecute. When I was in private equity, we would meet with management and discuss important details not available to others. I wouldn’t touch stock of companies we spoke with, but with thousands of firms you can bet many do.

There are likely thousands of insider trading cases in the private equity industry alone that go undetected. In fact, in 2010 the SEC said that it has never even examined 3,000 registered investment advisers (many times that refers to hedge funds).

According to a Chicago Booth study, only 6 percent of the frauds are revealed by the SEC. The SEC misses 94 percent of fraud causes they are in charge of!

This brings me back to my original point. The SEC likes to go after the big guys because it makes them look good. It does not matter if they fight nine years with Cuban and lose far more money in the process. The resources should be allocated to the mid-sized firms that never make it into a newspaper. Additionally, going after mid-sized firms would actually scare other firms that may be tempted to commit fraud.

However, any chance of reforming the SEC appears to be a pipe dream especially under the Obama administration. Expect to see more “fat cats brought to justice,” while insider trading continues on a daily basis.

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