What’s the Matter with the SEC? Funny Farm Redux


We need not go back to the SEC’s missed Madoff opportunities or its unwillingness to shut down the Stanford Ponzi operation because it was a little too complex to fit within the performance evaluation slam-dunks its lawyers needed. The SEC is a troubled agency with the hits that just keep on coming.

We learned a week ago from a government audit of its books that the SEC, if it were a publicly traded company, would not be able to get its financials or internal controls certified.  We learn this week that the agency charged with policing directors and officers of publicly traded companies for their conflicts of interest missed a big in its own general counsel. 

Former SEC General Counsel David Becker had inherited $2 million from his mother’s Madoff account.  Mr. Becker disclosed this tidbit after he joined the agency.  The agency’s ethics counsel cleared Mr. Becker to work on Madoff issues.  While the agency’s ethics counsel may have been correct in its interpretation of the slap-happy ABA Code of Professional Responsibility, the decision ranks right up there with the conflict determinations in the 1988 George Roy Hill film, Funny Farm. Chevy Chase (as Andy Farmer) realizes that his lawyer for his divorce represents his wife’s lawyer in his personal injury suit.  Mr. Chase queries, “Isn’t that a conflict?”  To which his wife’s lawyer responds, “Not in my book.”  The SEC follows the “not in my book” methodology for determining conflicts.

Not only did Mr. Becker have a conflict, he behaved as a person would a conflict would.  In 2009, Mr. Becker recommended that the SEC demand increased payouts to Madoff victims in order to account for inflation.  As the beneficiary of his mother’s Madoff account, Mr. Becker made a recommendation that resulted in direct personal benefit.  Further, his office’s recommendation to the SEC was at odds with the Madoff bankruptcy trustee and the Securities Investor Protection Corporation.  Neither saw the need for an inflation adjustor. What will happen in terms of the at-odds SEC recommendation is pending before the courts. 

Mary Schapiro testified before Congress on March 10, 2011 that, in hindsight, she wished Mr. Becker had recused himself.  No, in hindsight, Ms. Schapiro should have taken the reins from ethics counsel and issued a definitive, “No way!”, the same ruling the agency would have had if an executive for a company had proposed similar self-serving payouts.  A conflict is a conflict is a conflict.  There are only two ways to resolve a conflict:  (1)  Don’t do it; and (2) Disclose it.  The tricky part is when disclosure is not enough – you need to stop.  Neither Mr. Becker nor the agency took that second step.

To her credit, or perhaps because the agency’s budget is before a Congress that is justifiably concerned about doling out more money to the Keystone Kops of regulatory bodies, Ms. Schapiro also testified, “I have to be looking around the next corner, looking beyond the horizon and thinking above and beyond what may be appropriate advice from ethics counsel to make sure nothing occurs that raises questions about the commission’s mission or process.”  Funny, most of us would have seen this conflict without having to anticipate corners and horizons.  In anybody’s book except the technical and legalistic interpretation, this one was a big conflict for Mr. Becker. Ms. Schapiro’s statement here is a complex way of admitting that the strict letter of ethics rules is insufficient when it comes to public trust – that spirit of the rules, a standard the agency uses with companies, is determinative. If it looks like a conflict, it is a conflict, and prohibit it accordingly, even with a codified imprimatur.  Here’s another way to see around corners and beyond horizons:  if you have to ask, it probably is a conflict.  If you don’t want to disclose it before you are hired, it probably is a conflict.

The  Barometer cannot predict Congressional budget actions, but knows that regardless of budget numbers approved, the SEC’s credibility hangs in the balance.  Given the market collapse that finds us still scrambling, it is disconcerting to learn that little has changed in crony capitalism.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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