Issue of the week: The SEC shows its fangs

last updated 8 January 2015

This is not your father’s Securities and Exchange Commission, said Edward Wyatt in The New York Times. In recent years, the SEC has resembled “the cop in the doughnut shop, sitting idly by while the likes of Lehman Brothers and Bernard Madoff ran amok.” But with its blockbuster fraud suit against Goldman Sachs last week, the agency has served notice that “it’s back on the beat” and ready to take on “very big targets.” Goldman, “the most powerful, most feared, and most envied firm on Wall Street,” isn’t the only imposing prey in the SEC’s sights. The agency has proposed tighter regulation of bond-rating firms such as Moody’s and Standard & Poor’s, which made the financial crisis worse by giving their highest safety ratings to some of the most toxic mortgage debt. And it’s investigating General Electric CEO Jeffrey Immelt for possibly misleading investors about GE’s financial condition during the crisis. Any regulator willing to take on the likes of the ratings agencies, GE, and Goldman must be feeling its oats.

The Goldman case isn’t just a lawsuit, said David Scheer and Joshua Gallu in Bloomberg.com. It’s also an image-building exercise. Well aware that the SEC is widely scorned as a toothless, clueless regulator, SEC chief Mary Schapiro has chosen to “pick a fight with the biggest kid on the block.” She’s betting that a victory against Goldman will go a long way toward repairing the SEC’s image, which was “battered by the financial crisis and its failure to detect frauds” such as Madoff’s Ponzi scheme and a similar, $8 billion scam allegedly perpetrated by Texas financier Allen Stanford. And the agency isn’t just wooing the public. It’s also out to change minds in Congress, where even conservative legislators, such as Iowa Sen. Charles Grassley, have criticized it for showing “too much deference to Wall Street.”

It’s too bad the SEC is more concerned with looking tough than with protecting the investing public, said The Wall Street Journal in an editorial. To learn how miserably the SEC has failed to look out for investors, consider the Stanford case. In a report published the same day that the Goldman suit was announced, the SEC’s inspector general details how the agency failed to halt Stanford’s alleged Ponzi scheme despite investigating him four times between 1997 and 2004. Worse, Spencer Barasch, the SEC official who “sat on various referrals” to investigate Stanford, subsequently went to work for him. This is the real SEC—an agency that is “very good at nailing politically correct targets like Goldman,” but is “a dreadful failure in fulfilling its core mission of protecting individual investors.”