SEC: Gone Fishin'


By Chris Byron
New York Post
March 6, 2006

It’s good to see that the U.S. Securities and Exchange Commission has come to its senses and that - at least for the time being - it won't be enforcing the media subpoenas that have gotten the press so riled up.

But before anyone breaks out the pom-poms for SEC Chairman Christopher Cox, let's remember that these wrong-headed subpoenas were 100 percent the responsibility of Cox's own agency in the first place - and until the SEC develops better, more focused leadership, problems like those caused by these subpoenas are going to keep occurring.

What's more, while the SEC has been chasing after wrongdoing by hedge funds that may not even have occurred, real examples of hedge-fund misconduct have gone ignored.

Consider the Lancer hedge fund case, which has been rotting like a dead fish in the agency's own files for years.

Two weeks ago, a federal judge in Miami unsealed more than 40 pages of internal e-mail, memos and similar materials produced in the Lancer hedge fund fraud case, which developed out of a series of articles that ran in The Post almost four years ago.

This latest round of Lancer documents had been produced, under a court-ordered subpoena, by the fraud-drenched fund group's administrative and record-keeping firm, Citco Fund Services. The Citco brass had fought tooth and nail to keep the documents sealed, and it's not hard to see why.

Even a casual reading of the unsealed case file shows that Citco's profit-crazed officials were fully aware, year after year, of the flagrantly false and fraudulent accounting that turned Lancer into a $1.2 billion house of cards.

Worse, the documents show that almost to the moment of Lancer's collapse in the summer of 2003, Citco bigwigs spent much of their time fretting over how they could extricate Citco - and themselves - from the Lancer fiasco before being dragged down in the collapse that was certain to come.

There is e-mail between Citco officials warning that the fund was deeply engaged in price-rigging schemes involving an array of worthless penny stocks. Other documents, one dating from as far back as autumn 1996, warn that rampant accounting skullduggery was affecting the funds' net asset values.

One remarkable e-mail message from May 2002 shows Citco officials scheming to get Lancer's outside auditors at PricewaterhouseCoopers to "sign off" on the fraud so that Citco wouldn't wind up being accused of orchestrating a coverup on its own.

THE memo warns, "This would be very bad news for us."

Elsewhere in the memo, the author - Citco official John Verhoorfen - suggested alerting U.S. law enforcement, offering an astonishing rationale for doing so: "At least that way it looks like we uncovered the problems."

All this and more has sat unpursued in the SEC case file for years while the agency has waged a faltering struggle to develop a case not against Citco and Lancer's equally vulnerable and complicit accounting firms, outside auditors and bank custodians, but merely against the fund group's founder and managing director, Michael Lauer.

In any event, the most the SEC can hope for is a fine and an injunction from further fraud. By contrast, a case against Citco would not only have been far easier to prove, but would have yielded a much larger fine than anything likely to be slapped on Lauer. +

And most important of all, pursuing a case against Citco would likely have led to a high-visibility criminal referral to the U.S. Department of Justice years ago, sending an unmistakable message to the entire hedge-fund industry that those who break the law will go to prison.

But the SEC has done nothing of the sort, choosing instead to spend its time frittering away its resources on conspiracy snipe hunts like the one inolving the subpoenaed e-mail of three journalists.

This is all happening because, as I have argued many times in this space, the SEC is a poorly led, bureaucratic anachronism from the New Deal that lacks a mission relevant to the times and the enforcement tools to get the job done.

As such, it has been functioning for the last half decade in a climate marked by revolving-door leadership at the top, staff defections in the middle ranks and bewilderment at every level regarding the types of activities the agency's enforcement division ought to be looking for when it comes to improper and illegal behavior by hedge funds.

Against that backdrop, the SEC has developed into one of the most troubled and demoralized - yet intensely politicized - agencies in the entire federal government, with the once-coveted job of SEC chairman becoming one of the most shunned hot seats in Washington.

For the first six months of his first term, President Bush couldn't even find a replacement for the departing Arthur Levitt, helping bolster the impression that this was a job no sensible person wanted.

The man Bush finally signed up, white-collar criminal defense lawyer Harvey Pitt, lasted 18 months before pushing the self-destruct button. After Pitt came William Donaldson, a Wall Street old-timer who was hounded out of office after two years.

Donaldson's tour ended when he impaled himself on a pledge to bring the unregulated world of hedge funds to heel by forcing them to file regular financial statements with the SEC, the same way mutual funds do.

After Donaldson came the current occupant of the office, Cox, who arrived on the scene last August.

Anxious to deflect speculation that he planned to let Donaldson's newly enacted hedge-fund reporting rules become dead-letter law through lax enforcement, Cox said he intended no such thing and expected the rules to be enforced exactly as written.

Now, of course, he's got exactly the opposite problem, courtesy of subordinates who apparently took his comments as a thumbs up for a hedge-fund jihad, and thereupon launched themselves on a subpoena-backed fishing expedition through the e-mails of three journalists.

This isn't how any agency of government should be run, but it's been standard operating procedure at the SEC for years. And don't count on it changing anytime soon - especially now that Cox has managed to dial down the volume on the whole affair.

Besides, out here in the short attention span theater of American life, a person can only stand so much of anything before reaching for the zapper. A night at the Oscars? Some quality time with the gang at "Law & Order SVU"? Maybe some of the overnight action from Baghdad. The mind reels, it's all a blur . . . Zzzzzzzz.


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