Who is protecting investors?

The Securities and Exchange Commission is charged with protecting investors, investigating allegations of wrongdoing on Wall Street, and generally policing public companies. Yet recent failures lead investors to question how effective the SEC is.

It is being reported that the SEC had several chances to uncover the massive Ponzi scheme allegedly perpetrated by Bernard Madoff. And we're not talking about some insignificant shreds of information that were presented to them. We're talking about credible information presented to the SEC on numerous occasions over the last ten years or more.

In 2000, Harry Markopolos approached the SEC with solid evidence that Madoff's purported trading strategy couldn't possibly be as he said it was. Madoff said he was generating consistent double digit returns (even when the markets were down) by buying and selling options on the S&P 100 stock index. Yet Markopolos proved that there weren't even enough options available on the S&P 100 to support this strategy. The SEC appears to have done nothing related to this, and Markopolos continued to report his concerns to the SEC over the next several years.
The SEC even opened an investigation into Madoff and his fund in 2006 following credible allegations. Madoff submitted information and documentation to the SEC in response to that investigation, but the SEC now says that he lied to them and didn't submit all the documentation he should have. That investigation was closed after Madoff agreed to register as an investment adviser.

Are the failures of the SEC related to incompetence, understaffing, improprieties, or a combination of all three? I suspect all three come into play. Probably the greatest limitation on the SEC is because of finite time and money. The Financial Times reports: "They had 433 people in the office of compliance and examinations looking at 8,000 advisers two years ago. Today they have 400 people looking at 11,000 advisers and thousands of mutual funds."

There's only so much the organization can do to investigate potential illegal behavior, and we just have to hope that the powers that be are selecting the right targets for investigations. Still, chances are high that illegal activity will go undetected by this government agency, and fraudsters are well aware of that.

Regardless of the reasons, however, investors are left feeling extremely vulnerable. How can we invest our money on Wall Street with any level of confidence in the numbers presented by public companies and the investing strategies of those who advise us? How can the average consumer save for the future if the investment options can't be trusted?

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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