Then:

An online newspaper reporting the issues of Securities Fraud



GAO Tells SEC to Finish the Job - September 19, 2007

David Patch



The Securities and Exchange Commission needs to do a better job of managing their open caseload on regulatory enforcement according to a newly released report out of the Government Accounting Agency. (A complete copy of the report can be located at www.gao.gov)



As a recommendation from the GAO, in response to their near year long investigation, the agency concluded that the enforcement division of the SEC needed to establish written procedures and criteria for reviewing and approving new investigations.



The report states that "according to CATS data, about two-thirds of Enforcement's nearly 3,700 open investigations as of the end of 2006 were started 2 or more years before, one-third of investigations at least 5 years before, and 13 percent at least 10 years before." Approximately 481 cases have remained open for greater than 10 years and, most likely; the agents involved are no longer employed at the agency.



Many within the media have covered this story but few have looked closely at what impact such egregious neglect can have on the public markets to those involved; both directly and indirectly. The GAO's conclusion, correlated to market events, could imply that the SEC's negligence has led to fraud, manipulation, or worse.



Consider what impact open cases can have on the investing public.



First and foremost, open cases can and are used by members of the financial press as an indication of wrongdoing. The financial press are paid to write stories and a negative story is the juiciest of all. Having these writers draw immediately to conclusions of quilt, stories of wrongdoing are plastered repeatedly across print and live media outlets. The stories released have an immediate, direct, and irreparable impact on the market the SEC is commissioned to protect.



Sometimes the efforts of the media are not entirely innocent either.



Unlike the general principles of innocent until proven guilty, open cases by the SEC imply wrongdoing in the minds of certain media members. This opportunity to denigrate a company publicly, using an open case as a validation of wrongdoing, can be used as a vehicle to manipulate the market in such a security. Such a problem is exacerbated when the case itself was opened based on a tip from an interested third party who may also be a frequented source for the business writer.



The SEC has forever contended that they will 'not confirm or deny' that an investigation is on-going against a firm. This policy frees the agency from responsibility for such stories released. The problem the Commission faces is that the Commission also has rules that require firms to file with the Commission all material events relative to the business. An SEC investigation into possible wrongdoing within the company would be considered a material event and to fail to file could lead to even more unpleasant public exosure. Hence, the SEC forces corporate executives to shoot themselves in the foot by requiring such filings despite the closure into a conviction that may never come. A corporate catch-22 every tipster is fully aware exists.



To protect the integrity of the market the SEC must act swiftly regarding investigations in which the public has been made aware.



Second, a delay in closing out a case can deny the public and the issuer access to SEC case records obtained in the investigation itself.



Under SEC policy all case files are excluded from a FOIA response as long as the case remains open. Cases that go well beyond the statue of limitations (5 years) remains open and thus deny interested parties access to the information obtained during such an inquiry. Many issuers and investors have cases pending in civil court and have been denied access to SEC materials due to the case being in a status of "open dormancy". It has been long believed that the SEC has used the "open case" status to deny the public such access.



In the wake of the John Mack/Pequot scandal it is no wonder so many SEC cases remain in an "open dormancy". Had Gary Aguirre not become a federal whistleblower the public may never have gained access to the damaging e-mails and mishandled investigative steps taken by the agency.



I would suggest that the GAO take a stronger position than that already set forth and require that a more detailed analysis of what these 3700 cases involve take place. The effort will seek to establish some common threads in the pattern to hold cases in "open dormancy". The GAO should also force the SEC to establish a level of investigation metric accounting in which tipsters, SEC Attorney's, and issues can be linked more easily.



The SEC's investigation process needs to be easily audited for patterns of possible abuse. Today such auditing techniques appear deficient as identified in the report.



As an example, in a 2006 FOIA request into the caseload of former SEC Attorney Richard Sauer and his relationship with hedge fund tipsters the SEC denied the request based on a lack of captured information of this nature. The SEC response indicated that no such database existed which would make such information available for review.



I was particularly interested in Richard Sauer after he openly admitted in an October 2006 NY Times Op-Ed piece (October 6; Bring on the Bears) that he frequently initiated investigations based on the insight provided by short interest hedge funds.



In the Op-Ed Sauer paints the role of the short seller as the first line of defense to fraud claiming that "received from short sellers early warnings on certain companies that led to the capture and return to investors of hundreds of millions of dollars taken by stock frauds. Such information came from no other source." Sauer never identified how many others her received that never reached a capture, which piqued my interests.



Upon leaving the agency Sauer became employed by the very same short interest hedge fund he was closely linked to in several known cases under his supervision where a capture was made. My concern was that announcements of an SEC investigation will most benefit a short interest investor and to have such a cozy relationship with the SEC can be a valuable tool in creating profits.



Despite this conflict of interest Sauer opines that "but if short sellers are friends to the S.E.C., the commission has been no friend to short sellers. The agency has saddled short sellers with trading restrictions and has looked the other way when companies have taken potentially illegal actions to silence short sellers' criticism."



I disagree with Mr. Sauer in his opinion. I would contest that the SEC should not consider any outside source a "friend of the agency." The SEC has no friends, only sources looking to use such relationships for personal gains. Anthony Elgindy took advantage of the relationships created and used such to manipulate markets. He is now serving 11-years in a federal prison. Hedge fund managers have done the same but have escaped any accountability so far. Any SEC investigation is to the benefit of a short interest investor because it can only have negative consequences. Nothing positive can come from an SEC investigation. It is for that reason that short interest investors seek out the services of SEC more frequently.



Clearly the SEC owes the public full accountability on their open caseload, how such were initiated, and why such were not closed once the statue of limitations had expired.

Now:

http://pipes.dealflowmedia.com/wires...

SEC Inspector General to Audit Naked Short Selling Investigations
Posted May 08, 2008 3:15PM PST
The Office of the Inspector General of the Securities and Exchange Commission is going forward with an audit of how the commission has investigated allegations of naked short selling, according to a person familiar with the situation.

The audit, which is starting this week, will look into the process the SEC's Division of Enforcement uses in responding to naked short selling complaints and referrals.

Investor advocates have argued that naked short selling, where short sellers don't borrow or deliver the stock that they've sold, has been damaging to small cap companies.

The inspector general's office, which conducts internal investigations of the SEC, will be coordinating with the Government Accountability Office. GAO officials said in April that they would conduct their own probe of the SEC's response to the issue of stock-delivery failures. The GAO investigates government agencies on behalf of Congress.

Although...

No wonder the SEC is unable to do its job !!!

Cadre of Senators Urge $50M More for SEC Staffing
Posted May 13, 2008 3:15PM PST
Ten senators pleaded for an additional $50 million to add Securities and Exchange Commission staff, in a May 7 letter to the Senate Subcommittee on Financial Services and General Government.

The letter stated that the current budget proposal of $913 million for the SEC for the fiscal year that starts Oct. 1, is less than 1% more than the SEC was budgeted in the current fiscal year.

The SEC has lost 386 full-time employees, or about 10% of its staff, from its 2005 through 2007 fiscal years, Bloomberg News recently reported. Meanwhile, large investment banks increased their number of employees by at least 10%.

The President's budget proposal for the SEC has not changed since 2005, on an inflated adjusted dollars basis, according to the senators' letter. The SEC's enforcement division, in particular, has seen its staff reduced by more than 11% since 2005. The enforcement division's funding would remain frozen under the President's current budget request.

The SEC's office of compliance, inspections, and examinations is budgeted for fewer than 800 personnel for 2009, compared with 880 at the end of fiscal 2006. The office keeps tabs on registered investment advisers such as hedge funds.

The letter was signed by Sens. Christopher Dodd of Connecticut, Charles Schumer of New York, Robert Menendez of New Jersey, Jack Reed of Rhode Island, Tim Johnson of South Dakota, Thomas Carper of Delaware, Daniel Akaka of Hawaii, Sherrod Brown of Ohio, Robert Casey of Pennsylvania and Jon Tester of Montana, all of whom are Democrats.

They have cases that have been open for over 10 years.

In addition to that it appears that the credit fraud will actually be more like 78% higher than originally anticipated.

This may bering about a huge market downturn and its all because the SEC is understaffed and unable to do its job.

Had they caught on to the computer glitch because it is their primary function perhaps CMKX would not be in this bind. Billions of shares going across their screen and oh well it looks like the SEC had no adequate funding to monitor the markets ....

This is crazy...

Next time the banks may use the same excuse that they don't have the funding hence our money is beeing moved over the internet to offshore accounts !!!