More on SEC bias favoring the big players

Posted on June 29, 2009 by Dave Broadwin

This is an observation that I have made before in this blog, but I was a little surprised to see similar thoughts appear in an analysis piece by Joe Nocera in the New York Times on Saturday under the title "S.E.C. Chased Small Fry While Big Fish, Madoff, Swam Free." The article makes a pretty compelling case that there is an institutional bias in favor of chasing the small fry over the big fish. Among the points that Nocera makes is that the SEC enforcement people are judged on cases they bring and win.. As Nocera points out, the small fish tend to be easier marks. They settle and pay the fines, even if they may not be guilty. In part this has to with the fact that the small fry may not have the resources to fight. In Richard Kwak’s case (the case Nocera outlines in his article), Richard Kwak was essentially bankrupted by his fight against the SEC (which he won in the end).

Now, I don’t think that Nocera’s point is particularly original or insightful. I have expressed this thought before as have others. But, I think (and these are my thoughts not those of my partners or my firm) that the same bias against the small exists in the corporate finance side of the SEC as well as in the enforcement side. I am not trying to make that case. My view, which I have expressed before, is that fraudulent activity is randomly spread throughout the market. Instead, I want to point out that confidence in the regulators is really key to confidence in the market.

Consider that a huge portion of the investing community (baby boomers) is trying to retire or prepare for retirement right now. These folks may want to have a portion of their investments in equities, and it is one thing to take normal market risk for an appropriate portion of your portfolio. But, is the risk that the regulators are not watching the big players (or giving them a pass because they are part of the club) a normal market risk? I think not.

It is unfair to assert that the bias at the SEC is solely or even primarily responsible for the woes in the capital markets, but it doesn’t help. To bring back a robust capital market you have to do a lot of things, but one of them is restore confidence in the regulators. To turn to the entrepreneurial world, without a robust market for new issues, exists will continue to be disappointing (both IPOs and M&As). A lot of other things have to be done, but the tone at the SEC affects the venture world.

The SEC needs to take a very tough and probably very public look at itself to achieve a change in perception.
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Madoff and the SEC

Posted on January 6, 2009 by Dave Broadwin

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.

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