Tag: SEC

Free Speech? What’s Free Speech?

Internet site Gawker says that Ashton Kutcher’s editorship of Details magazine was “a brazenly self interested and highly misleading act of journalism.” He helped produce a special online version of the mag that featured tech companies he’s invested in without disclosing that fact.

Having disclosed it for him—the article is called “Ashton Kutcher Is a Massive Whore“—Gawker now reports on how federal officials are looking over their glasses at the television personality and entrepreneur.

“It’s certainly a possibility that a case like this could be investigated,” assistant Federal Trade Commission director Richard Cleland tells the Times of Kutcher’s Details special online issue, in which eight of 12 recommended products in one article were Kutcher investments. “If you’re out there promoting individual products that you have a specific investment in, it needs to be disclosed… If you have a significant economic investment that is not otherwise apparent, that may potentially affect the credibility of your endorsement, and I see that as a potential problem.” The FTC has made a priority out of online conflicts of interest.

It’s also possible Kutcher violated SEC rules. You’re not supposed to promote a company you partly own—say, in a magazine—if you know it’s soon to go public. And if a company’s shares trade on private secondary markets you must abide by federal rules on deceptive marketing, which a former SEC lawyer told the Times were “very broad… These rules apply any time there is a securities transaction.”

You see, in the land of the free—where the government’s founding charter says it “shall make no law … abridging the freedom of speech”—you can’t just say any old stuff you want to in a magazine! Say things that help your business interests too much and you are obviously outside of what the quaint old Constitution says. The First Amendment is fuzzy on this. “[M]ake no law” might mean “make a law if you have a good reason.” Duh, Ashton! You’re pretty, but maybe not very smart, saying what you want in the United States of America.

This episode itself illustrates why “make no law” works despite the fact that it allows sharp business practices. Gawker and other media outlets are actively curing any information deficit with plainly worded articles like “Ashton Kutcher Is a Massive Whore.” This is in aid of the caveat emptor rule, which works even better when people know they need to think for themselves and look for assistance from outlets like Gawker, of which there are an endless supply thanks to the Internet.

Caveat supplicantem if you think that the government is going to protect your interests as a consumer better than you can. Not even close. So there is no good reason for overturning the First Amendment here.

SEC Employees Hard at Work during Financial Crisis

Thanks to Denver lawyer Kevin Evans, who filed the Freedom of Information Act Request, we now know that several employees of the Securities and Exchange Commission (SEC) might have missed the financial crisis because their eyes were glued to their computer screens watching porn.

The chart below shows the number of incidents, as reported by the SEC’s Inspector General.  What caught my eye was that the number of porn-viewing incidents shows a massive spike in 2008, when the financial crisis was at its worst.

It should, of course, be noted that the overall level of incidents was small in number, so we shouldn’t draw too many conclusions about the SEC overall.  We should, however, be concerned at at least one of these employees was being paid $222,418 a year.  I might be able to accept someone getting paid $20,000 a year spending their work time watching porn, but not $222,418.  But then at least this employee has an excuse for missing the financial crisis; we are still waiting to hear the excuse for the SEC’s non-porn viewing employees (perhaps they were too busy on Facebook to keep an eye on Wall Street).

SEC Incompetence

There has been much speculation that the Securities and Exchange Commission (SEC) released its charges against Goldman Sachs on the eve of a Senate vote on new finance regulation in order to help Democrats win that vote.  Perhaps that theory is wrong: It now looks more likely that the SEC timed its Goldman case in order to divert attention away from two SEC inspector general (IG) reports criticizing the commission.

In one of the reports, the SEC IG found that several of the top staffers at the SEC were spending their days surfing the web for porn, rather than looking for securities fraud.  One senior manager spent almost 8 hours a day looking a porn, getting to the point where he even filled up his government issued hard-drive with porn.  His actions were not some isolated incident.  Over 30 employees were found to have regularly used SEC computers to download and view porn.  Some of the senior employees had salaries as high as $222,000 a year.  Sounds like nice work, if you can get it.

But the porn charges are the least of the SEC’s worries.  Also released was the IG’s report on the SEC’s failure to stop the Stanford Ponzi scheme.  The report shows a clear pattern of incompetence at the SEC.  Given the SEC’s failure to act on the Madoff scheme, and the repeated warnings about Stanford, one has to wonder how good SEC investogators are at discovering fraud if they don’t even pursue the clear-cut cases brought to them.

The IG report does help explain the SEC’s poor track record.  The SEC’s head of enforcement made it very clear that the staff was “to bring more Wall Street types of cases.”  Perhaps ones like the recent Goldman case?  The head of enforcement even goes so far as to ask the staff working on the Stanford case, “What are you bringing these cases for?”  Clearly the SEC only seems to care about fraud if its catches a big headline.  Since the SEC was first warned about Stanford, investors placed about $8 billion more into the Ponzi scheme, far more than the damages alleged in the Goldman case.

If anything should expose the current financial regulatory bill being debated in the Senate as a fraud, it should be the fact that it leaves the SEC still standing.  Even worse, it reduces Congressional oversight of the SEC by removing it from the appropriations process.

Big Out-of-Control Government Has Had Better Days at the Supreme Court

This morning at the Supreme Court, the federal government argued for the continued existence of the Public Company Accounting Oversight Board (PCAOB, pronounced peek-a-boo) – and by extension the nefarious financial regulatory scheme known as Sarbanes-Oxley.  Cato filed a brief supporting a free market advocacy group and an accounting firm, who sued PCAOB for violating both the Appointments Clause and general constitutional separation-of-powers principles.

Passed with scant deliberation in the wake of the Enron and WorldCom scandals, the Sarbanes-Oxley Act of 2002 established PCAOB to oversee the accounting practices of the nation’s public companies.  As my piece with Cato legal associate Travis Cushman details today, PCAOB enjoys the rare authority to make its own laws, collect taxes, inspect records, prosecute infractions, make judgments, and impose sanctions.

Traditionally, independent agencies that serve such executive functions must be accountable to the president.  PCAOB members, however, may only be removed “for cause” by members of the Securities and Exchange Commission, who in turn may only be removed “for cause” by the president.  I previously blogged about the case, Free Enterprise Fund v. PCAOBhere, here, and here.

As far as how the argument went, I think the forces of limited constitutional government have eked out a 5-4 victory.  Justices Ginsburg, Breyer, and Sotomayor were extremely hostile to the challengers’ argument, while the Chief Justice and Justices Scalia and Alito were supportive.  (Scalia at one point joked that he had no less power than the president – meaning not very much – to influence PCAOB.)  Justice Stevens only spoke up once but seemed to show a leaning towards the government position.  Justice Thomas, while remaining silent, can be expected to support the view of D.C. Circuit Judge Brett Kavanaugh – whose blistering yet scholarly dissent likely prompted the Court to take up the case.

And so the ruling rests, as often happens with the most interesting cases, on the shoulders of Justice Kennedy.  I remain cautiously optimistic that Kennedy will decide to uphold constitutional checks and balances and strike down what has become an unholy new branch of government.

Two curious notes from the argument: 1. Petitioners’ counsel Michael Carvin referenced Cato’s brief in discussing PCAOB’s overreach internationally – seeking to regulate even foreign accounting standards – without oversight from the State Department or the SEC, let alone the president; 2. PCAOB brought its own lawyer to argue alongside the solicitor general, begging the question: if PCAOB is subservient to the SEC and/or the president, why does it need its own counsel to represent its own views?

Geithner Ignores Bailout History

Perhaps the biggest problem with the Obama plan to “reform” our financial system is the impact it would have on the market perception surrounding “too big to fail” institutions.  In identifying some companies as “too big to fail” holders of debt in those companies would assume that they would be made whole if those companies failed.  After all, that is what we did for the debt-holders in Fannie, Freddie, AIG, and Bear.  Both former Secretary Paulson and Geithner appear under the impression that moral hazard only applies to equity, despite debt constituting more than 90% of the capital structure of the typical financial firm.

Geithner believes he’s found a way to solve this problem - he’ll just tell everyone that there isn’t an implicit subsidy, and there won’t be a list of “too big to fail” companies.  Great, why didn’t I think of that.  After all, the constant refrain in Washington over the years that Fannie and Freddie weren’t getting an implicit subsidy really prepared the markets for their demise.

Even more bizarre is Geithner’s assertion that the government can force these institutions to hold higher capital, maintain more liquidity and be subjected to greater supervision, all without anyone knowing who exactly these companies are.  Does the Secretary truly believe that these companies’ securities disclosures won’t include the amount of capital they are holding?  Whether there is an official list or not is besides the question, market participants will be able to infer that list from publicly available information and the actions of regulators. 

One has to wonder whether Geithner spent any of his time at the NY Fed actually watching how markets work.  Before we continue down the path of financial reform, maybe it would be useful for our Treasury Secretary to take a few weeks off to study what got us into this mess.  We’ve already been down this road of denying implicit subsidies and then providing them after the fact. Maybe it’s time to try something different.

Sarbanes-Oxley’s Harms Are Magnified by the PCAOB’s Unconstitutional Structure

Passed with scant deliberation amid a stock market panic, the Sarbanes-Oxley Act of 2002 vastly expanded the federal government’s role in regulating corporate governance and the accounting industry. As part of that effort, Congress created a new agency to “audit the auditors.” Known as the Public Company Accounting Oversight Board, the agency has broad rulemaking and enforcement powers to set accounting standards, investigate accounting firms, punish criminal violations, and make whatever rules “may be necessary or appropriate in the public interest or for the protection of investors.”

Remarkably, the PCAOB (pronounced “peek-a-boo”) also has the power to fund its own budget by levying taxes on publicly traded companies. Despite giving the PCAOB all this power, however, Congress insulated it entirely from presidential oversight. Unlike with an ordinary “independent agency,” the president has no power whatsoever to appoint or remove PCAOB officials. Those officials may be removed only “for cause” by the SEC, not the president; and SEC officials may themselves be removed only for cause.

The Free Enterprise Fund challenged the constitutionality of the PCAOB and appealed to the Supreme Court. Cato’s supporting brief focuses on the PCAOB’s practical policy consequences, illustrating how the PCAOB’s unconstitutional structure has created incentives for out-of-control spending, agency aggrandizement, and lack of coordination between regulators. Our brief also highlights the PCAOB’s efforts to impose American accounting standards abroad, which has caused confusion and invited retaliation from foreign regulators.

I previously blogged about this case here and here.