Tuesday, March 29, 2005

Will the SEC ever get serious about making corporate insiders pay for fraud?

we are all watching yet another venerable old company (AIG) blow up over corporate accounting fraud and investor misrepresentation. same old story, investors lose billions, often everything, while corporate insiders say 'i'm sorry'. then the SEC tries to go after a small few with expensive criminal proceedings that rarely yield much. in this case the chairman, maurice greenberg, has decided to 'retire' and walk with $2.8 billion, in addition to the millions he's already sold. maybe there'll be a whistle blower. maybe in 5 yrs he'll face trial after an enron style bottom up investigation. this white collar crime has become the norm and the SEC is useless in correcting it.

here's the easy solution - MAKE THEM PAY!. it would be soo simple. just create a rule that says any insider who sold during a time of accounting fraud (or any restatement) has to disgorge all profits. this would immediately make every insider liable for the billions they made without bothering to prove any knowledge of wrong doings. the rationale is that they didnt deserve the profit, that they were selling a 'lemon'. california has this for cars, why cant the SEC have it for stocks? instead we punish all companies (especially small ones) with sarbanes oxley (also known as SUX), one of the dumbest laws our country has ever produced. it makes about as much sense as asking people to swear on the bible before testifying.

last year over 400 public companies restated earnings. think about the billions that would have been recaptured for the injured investors. think about AOL where the insiders walked with billions, virtually unscathed, while the poor saps who owned stock in time warner were left with a billion dollar tab to the SEC over fraudulent accounting. how about gary winnick who sold $600m at global crossing before it blew up? he chose to give back $30m to former employees. with this rule, he would have returned the whole boot. john moores sold $600m in his company, peregrine systems, before it too went bankrupt for fraudulent filings. maybe these guys didnt know about it. WHO CARES. just make them give back the ill-begotten gains. and the SEC can still go after any of these people in the current long drawn criminal process and nab one out of 400 or less at a huge tab to the taxpayers.

we're all disgusted with ken lay and the insanity they brewed at enron (see the enron documentary. you wont want to invest in another texas company!). maybe a few of these guys will see jail time, but even then they'll keep the loot.

so why doesnt the SEC enact this obvious rule? i dont know. maybe the same wall street guys who run the very stock exchange that regulates them have a hand here. maybe this would go too far in causing some real pain to a group that represents massive political donors.

btw, there is a clear precedent for this in the current 16B short swing profit rule that says if an insider buys and sells in a six month period he must disgorge the profit. i'm sure this was enacted after realization that criminal laws were ineffective against insider trading.

if anyone has ideas on how we push the SEC to enact real dollar regulations that will start to protect investors and not white wash the same old game, let me know.