I am going to deviate from my usual practice of limiting my blog posts to subjects related to start ups, venture capital and the like to comment on the Madoff scandal. This particular post reflects my views and my views alone. Specifically, it does not represent the point of view of any of my partners or of Foley Hoag LLP. I am solely responsible for this content. 

For all of my years as a practicing attorney I have represented small public companies before the SEC in connection with their ’34 Act compliance as well as in financing activities (including all sorts of PIPE transactions) and in M&A activity. It has long been my perception that the SEC has an institutional bias against small so-called mini-cap or micro-cap companies. The SEC will spend enormous resources to review and comment on filings from these companies. Small transactions will be hung up at the SEC for months and months because the SEC has a policy (or may be developing a policy) that somehow touches on what these companies are trying to do. Huge costs will be run up trying to comply with SEC comments. It becomes hard to escape the feeling that the SEC uses its regulatory muscle to try to regulate these companies out of the public market. In my experience, my clients have always been willing to make all disclosures – even to the point of disclosing matters that are patently not material to make certain that the public gets what it needs. Nevertheless, I have often had the feeling that the SEC starts from the proposition that all small companies are really nothing more than fraudulent schemes aimed a bilking investors.

From my limited vantage point, fraud seems to occur randomly in the business world. It is just as likely to happen at Enron as at some microcap company. But, one Enron, one Madoff, one Adelphia dwarfs one micro-cap scandal. The notion that the SEC gave a big time industry insider like Madoff a pass is beyond outrageous. It reflects a fundamental prejudice at the SEC in favor of the big boys and insiders and against small players. The SEC needs to re-examine its priorities. Fraud needs to be pursued at all levels and limited resources need to be allocated to achieve the best result for the investment community as a whole, and “small is bad” just should not be acceptable.