SEC – “Shredded Justice” an article in review

In our capital market, within the United States of America, there is one long-standing agency which provides for checks and balances within the finance and investing community. Often many readers may see the initials of SEC, which stands for the Securities and Exchange Commission. It’s with this agency that over the past decade has become a house hold buzz word, particularly within the circle of business, finance, and investing.

The agency itself is by far a young branch of the bureaucratic machine, with roots from that of the Great Depression. As we fast forward in time, the agency has undergone some changes for better or worse. In a positive light, although not the scope of this article, the Sarbanes-Oxley Act of 2002 created new guidelines and authority for the agency to require publicly traded companies to provide full disclosure of its financial documents. It also set a precedent for senior management (i.e. CEO, CFO) to legally commit to the accuracy of their books.

This topic of discussion revolves around the most recent accusation of ethics violations. To that affect, a whistle-blower by the name of Darcy Flynn within the SEC has come forth claiming that for the past two decades the practice of shredding vital investigation documents has taken place and needs to be justified. The specific documents in question are known as MUI’s or “Matters Under Inquiry”, which are documents that are created during the initial investigating process, well before deciding if there is enough supporting facts for the case to become or not to become a full-scale official investigation. As one can imagine the importance of these documents should not be overlooked, for they could provide for trends that can be utilized for future and potential cases. If one really thinks about this type of data, it would be equivalent to the evidence that the police collects at a crime scene.

The official testimony that Flynn made in his statement has yet to be revealed, however, many of the questionable activities are already public information. For example under the current administration, the agency has a cooperation with the National Archives and Records Administration, which outlines all documents are supposed to be maintained and kept on file for at least 25 years. Needless to say this practice has not been upheld as of late. To the contrary, the staff at one point was given directives, by senior management, to shred documents that are considered as preliminary investigations, such as MUI’s. To date it has been estimated some 18,000 MUI’s from the year 2000 and on that have been destroyed. Many of these files were from previous offenders such as the likes of Goldman Sachs, Deutsche Bank, AIG, SAC Capital, and Bernie Madoff.

Although on the surface this practice can be viewed in one of two ways, from either as an oversight or as a cover-up. Regardless, the details continue to unravel causing a dark cloud to form over the agency, one in which the ranks of upper management were known to have been tainted over the years, by managers flowing in and out of private sector jobs. These types of positions were mostly from the very banks they had been investigating on their own, and clearly present a conflict of interest of the highest regard. Flynn continues with example after example of cases where top officials, within SEC's enforcement division, did not act on some of these initial investigations, and in many cases already had their foot in the door of the same investment firm or bank. To further stress the issue of possible corruptions, the last five SEC directors have all worked for Wall Street banks or law firms, with typically most of them migrating to and from the agency, as though it was a revolving door. Certainly in any normal business environment a non-compete clause would prohibit this. On several other occasions when the SEC has come under fire, by outside investigators, their responses were diluted and vague as if they are not required to disclose their practices. In other instances the SEC allowed firms to conduct their own internal investigation on themselves and accepted their responses as a valid, without the SEC ever setting foot on their premise. This would be like asking a crook if he did the crime and taking his word for it.

This episode of SEC failings has certainly come to a climax and it will be interesting to see how this resolves, particularly since in this case there could be valid white collar crimes. If you think about it the SEC is comparable to the police, as it applies policing of investing and financing activities. The question is who in society would allow a police department to shred its own documents of past crimes? Whatever the outcome is, it needs to be one that shores up the integrity of the SEC, to instill that it can and will uphold financial regulations, thereby keeping big business honest and ethical.

Works Cited

Taibbi, Matt. “Shredded Justice”. National Affairs. Rolling Stone. Issue 1138. 1 Sept. 2011. 32-37. Print

“About the SEC”. U.S. Securities and Exchange Commision. http://www.sec.gov/about/whatwedo.shtml#create. Web. 20 Sept. 2011.