Faulty Regulator

By Christopher Byron
New York Post
June 27, 2005

On Thursday the Securities and Exchange Commission's departing chairman, William Donaldson, will step down from his two-and-a-half year stint as Wall Street's top regulator, vacating the most thankless and difficult job in the administration to make way for President Bush's third nominee.

Though Donaldson is widely credited with having been an effective and activist-oriented SEC chairman who — among other things — pursued more high-profile corporate-fraud cases than any chairman before him, he actually initiated only one major SEC fraud probe that has led to litigation against a defendant.

That case, filed two years ago in Miami against ex-Wall Street analyst Michael Lauer and the so-called Lancer hedge fund group he headed, will now become part of the unfinished business to be pursued (or more likely, ignored) by Donaldson's successor, Christopher Cox.

For its part, the press has nonetheless already reached a thumbs-up judgment about the SEC's departing 27th chairman, who resigned as pressure for his ouster mounted among business groups in Washington.

Unfortunately, whether Donaldson was a "good" SEC chairman or a "bad" one is beside the point. Frankly, he has turned out to be no different from every SEC chairman who has preceded him — namely, an irrelevant SEC chairman — underscoring again why I have argued more than once in this space that the 71-year-old commission, as it is currently constituted and empowered, is a colossal waste of taxpayer money and should be junked.

We'll turn in a minute to the Lancer fraud and price-rigging case as a fine example of that irrelevance in action. The Lancer case was Donaldson's first major enforcement initiative after becoming chairman. Yet with Donaldson now about to step down, the Lancer matter has gotten no further than the mold-growing phase of a civil law suit, languishing on the docket sheet of a federal judge in Miami.

But before getting into the details, it is helpful to recount why Congress passed the securities laws of 1933 and 1934 in the first place — and then set up the SEC to enforce them.

The primary purpose of those initiatives, spelled out in plain and clear language on the SEC Web site, was never to enforce federal securities laws and catch white-collar felons per se, but to "restore investor confidence" in the stock market after the 1929 crash. In that sense, the SEC began life as a public-relations effort, and that is what it has remained to this day — a way to encourage rodeo cowboys who get thrown from the horse to climb right back in the saddle.

In reality, the SEC's powers to make Wall Street a safe rodeo for tenderfoots are almost nonexistent. The commission has no power to bring criminal cases, and not even many of its civil cases ever get to trial. Instead, they are typically settled beforehand through so-called "consent decree" rulings.

In these settlements, the defendants agree to accept a fine but are not required to admit they did anything wrong. Until 2003, the SEC didn't even bother to keep track of the fines that went unpaid because its capacity to enforce judgments is also limited.

Lacking criminal prosecution powers of its own, the SEC has thus had to depend, from its inception, on the cooperation of prosecutors from the Department of Justice to bring the felony cases that can actually send a person to prison.

Moreover, when DOJ prosecutors do pick up an SEC criminal referral, the SEC typically drops its own civil case, which is what it now seems to be doing in the Martha Stewart matter.

This entire arrangement, which never worked very well under even the best of circumstances, has now run completely off the rails in the aftermath of 9/11. With the resources of federal law enforcement stretched to the breaking point over terrorist-related issues, the capacity of the SEC to generate criminal referrals that actually result in prosecution has all but disappeared.

That has certainly been the case with the Lancer fund.

As chairman of the SEC, Donaldson led a noisy and divisive fight to bring hedge funds under the regulatory control of the commission through the same set of laws that give it the power to regulate mutual funds. The action against Lancer was the opening salvo. But being able to issue a regulation is one thing, while enforcing it is something else entirely.

Donaldson was chairman for scarcely three months when commission lawyers — responding to a series of expose articles in The Post and elsewhere — obtained a secret (ex parte) court order enabling them to raid the Lancer group's Park Avenue offices and shut the fund down.

IN the Lancer operation, more than $600 million from fat cat investors around the world had been poured into a rag-bag portfolio of worthless penny stocks, many of them linked to a white collar felon and organized crime figure named Abraham Salaman.

The stocks were then marked up to astronomical levels through various end-of-month "tape painting" gimmicks. After this, the Curacao office of the PricewaterhouseCoopers accounting firm "audited" the totals, and the investors were mailed the resulting reports, which appeared to show the funds' assets soaring when, in reality, they were collapsing.

Beyond its ability to shut down the Lancer operation and fine the man who ran it — race-car enthusiast Lauer — the SEC's powers in the case were virtually nil. To develop a criminal case, the SEC turned to federal prosecutors in Miami, who had already netted a top Lancer figure named Bruce Cowen in an FBI undercover sting called Operation Bermuda Short.

Cowen blamed Lauer for his transgressions and has since pleaded guilty to conspiracy with FBI undercover operatives in a plot involving a Lancer stock called Lighthouse Fast Ferry Inc. But the Bermuda Short cases have now largely been wrapped up and no charges have been brought against Lauer himself — and law-enforcement sources in Miami say not to expect any either.

This has pushed the case against Lauer back into the laps of the SEC's lawyers, whose case boils down to seeking fines, restitution and a permanent injunction against Lauer from ever again running something called the Lancer Fund. Of course, if he wants to start a new and different fund, he'll be able to do so.

Meanwhile, Lauer has successfully stonewalled repeated attempts by SEC lawyers to obtains various documents from him, and though a federal magistrate in the case has been recommending for months that he be jailed for contempt, the stonewalling continues.

As a result, no one seems to know when — or if ever — the civil case against Lauer will come to trial. And beyond that looms the larger question: Since it is a civil case, and since it is being pursued by the toothless lawyers of the SEC, what difference should it make whether Lauer wins or loses? By simply dragging the case out as long as he has, Lauer has effectively won, and it seems likely that the very second the case against him is wrapped up — win, lose or draw — he'll be back in business all over again.

It's just another example of why I say that when it comes to law enforcement on Wall Street, the Securities and Exchange Commission is irrelevant — no matter who its chairman might be.

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