But Who Watches the Watchdogs?

A disturbing report by the Securities and Exchange Commission’s Inspector General tells of gross misconduct at the financial services’ industry watchdog at the height of the most recent crisis. The report tells of these government workers searching and viewing copious amounts of pornography on the job and on government computers. The lengths that some employees, even senior staff, went to feed their addiction are nothing short of scandalous.

Among the startling findings:

– A senior attorney at the SEC’s Washington headquarters spent up to eight hours a day looking at and downloading pornography. When his government computer ran out of hard drive space, he burned the files to CDs or DVDs. He later agreed to resign.

– An accountant was blocked more than 16,000 times in a single month from visiting “sex” or “pornography” sites, but still managed to amass a collection of “very graphic” material by using Google to bypass the SEC’s internal filter. He wound up with a 2-week suspension.

– Seventeen of the randy employees were “at a senior level” earning salaries of up to $222,418.

– The number of cases jumped from two in 2007 to 16 in 2008. The cracks in the financial system emerged in mid-2007 and spread into full-blown panic by the fall of 2008

Read more: New York Daily News 4/23/2010

The timing of this report will further bruise the reputation of the agency that recently brought civil-fraud charges against Goldman Sachs (GS) and one of its traders. However, the SEC has seemed to make news because of its missteps lately rather than any regulatory successes, perhaps there is no story in a bad situation averted. That said, the SEC reportedly had many opportunities for further investigation of bad dealings by both Bernie Madoff and Mark Stanford. A recent Wall Street Journal article suggests the SEC suspected Stanford was running a ponzi scheme back in 1997. In the decade that followed, four different times they concluded Stanford’s practices were fraudulent but did not pursue the matter further!

Clearly, the SEC failed in their duties to protect the victims of these schemes. Now, we come to find out that senior staff members were surfing porn during the height of the credit crisis and ensuing market meltdown, when they should have been extremely busy doing their jobs. We can hope that this was all caused by some obscure virus, and all involved are vindicated of impropriety. However, an internal report by the SEC’s own Inspector General and the disciplinary actions already taken make that an extremely slim possibility.

Financial regulation is a clearly a hot issue right now with reform legislation working its way through Washington, in addition to the civil-fraud charges against Goldman. However, this instance shows that just because there are rules in place does not mean that they actually work or are even followed. While these porn allegations are abhorrent for a myriad of reasons, our concern is exactly who we trust to enforce the regulations intended to curb abuses. No one knows if anything more would have been accomplished by the SEC to protect “the little guy” were it not for the porn offenses, but it does shed further unflattering light on the organizations culture.

SEC Chairman Mary Schapiro claims that improvements have been made relating to investigations, but hey, it could hardly get much worse. I do not think we are alone is our apprehension over handing over even further authority to government agencies that continue to fall short with ineptitude and now depravity.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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