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Foxes guard the SEC henhouse

By Sheyna Steiner · Bankrate.com
Friday, August 19, 2011
Posted: 3 pm ET

Despite the fervent belief in unfettered capitalism, America insists on installing gatekeepers for every industry. For some reason, people are under the impression that industries do a poor job of policing themselves; conducting business in an ethical manner; refraining from poisoning the air, land and water or maybe not crippling the largest economy on the planet.

As it turns out, when regulators install a revolving door between them and the industries they oversee, actual enforcement goes out the window. Or in some cases, regulators actively cover up industry misdeeds. This is exactly the situation at the Securities and Exchange Commission, contends Rolling Stone writer, Matt Taibbi, in a stunning piece published on the Rolling Stone website August 17, titled "Is the SEC covering up Wall Street crimes?"

According to Taibbi, the SEC systematically destroyed evidence of inquiries that did not become full-blown investigations. Not only that, but there is a distinctly selective approach to the inquiries that become investigations thanks to the revolving door between the SEC and Wall Street.

If the mind-blowing implications of the SEC destroying evidence of investigations are not immediately apparent, consider this quote from the story.

The nation's top financial police destroyed more than a decade's worth of intelligence they had gathered on some of Wall Street's most egregious offenders. "The SEC not keeping the MUIs (matter under inquiry) – you can see why this would be bad," says Markopolos, the fraud examiner famous for breaking the Madoff case. "The reason you would want to keep them is to build a pattern. That way, if you get five MUIs over a period of 20 years on something similar involving the same company, you should be able to connect five dots and say, 'You know, I've had five MUIs – they're probably doing something. Let's go tear the place apart.'" Destroy the MUIs, and Wall Street banks can commit the exact same crime over and over, without anyone ever knowing.

What's not clear is if there is any will at the SEC to investigate Wall Street criminals. After all, the top spots at the SEC are taken by industry honchos -- and the banking system is the next obvious rung in the ladder for former SEC insiders.

Small wonder, then, that SEC staffers often have trouble getting their bosses to approve full-blown investigations against even the most blatant financial criminals. For a fledgling MUI to become a formal investigation, it has to make the treacherous leap from the lower rungs of career-level staffers like Flynn all the way up to the revolving-door level at the top, where senior management is composed largely of high-priced appointees from the private sector who have strong social and professional ties to the very banks they are charged with regulating. And if senior management didn't approve an investigation, the documents often wound up being destroyed ...

But that's not all. In 2001, the SEC began putting businesses and institutions in charge of doing their own investigations and punishments. Naturally, crooks like Bernie Madoff benefited from that sort of tough policing. And, in fact, that's why he was able to continue for so long.

Head over to Rolling Stone and read the entire piece, it's well worth it.

What can be done to fix the mess that we're in?

Hat tip to Claes Bell for the link.

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