classical economics
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Amazing SEC Fraud Shield
By Wayne Jett
© June 30, 2009

    In March, 2008, the giant investment bank Bear Stearns was brought down and merged into J. P. Morgan Chase at a fire-sale price. A month later, the Securities & Exchange Commission told Senator Charles Grassley (R-IA) the agency would not disclose (even to him) why its investigation of Bear was closed shortly before the firm’s collapse. Grassley was not the only member of Congress interested in learning more facts about what happened to Bear.
    Senator Jon Tester (D-MT) earlier asked the SEC to investigate and report on whether securities fraud killed Bear Stearns. House members likewise demanded SEC action. In the week following Bear’s demise, “sources” sounding suspiciously like SEC leakers reported the agency was actually investigating highly suspicious options trading during the intense assault on Bear. But, 15 months later, neither Congress nor the public has learned anything from the SEC about the Bear Stearns debacle.
SEC: “No” Machine
    Essentially the same scenario occurred regarding Fannie Mae, Freddie Mac, Lehman Bros. and AIG. Congress expressed intense concern, demanded SEC actions and reports, SEC initially made cooperative sounds, but nothing whatever was forthcoming. How does an administrative agency whose budget depends upon Congress get away with thumbing its nose at its legislative bosses, not once but repeatedly?
    The short answer is that both the SEC and Congress are captives of the same dominating influence: big, organized money of Wall Street and the hedge funds. Evidence of this political reality is everywhere – in daily events and in statutory law which underpins the SEC’s existence and operation.
    When Bernard Madoff turned himself in, confessing to stealing billions from investors,  Congress learned that a whistle-blower from Boston tried for 8 ½  years to persuade SEC staff Madoff was a fraud – without success.  The House called SEC’s “director of enforcement” to the Hill and publicly upbraided her harshly. In penance, she resigned (amid accolades from the new SEC chair) and took a highly-compensated position with a major Wall Street law firm.
Magical "Discretion" Makes Fraud Disappear
    Perusing provisions of the 1934 Securities and Exchange Act contained in Title 15 of U. S. Code, chapter 2B, euphemistically called “Securities Investor Protection,” a reader is struck by the extent to which Congress has limited the SEC’s authority to act against financial fraud. The statute which grants SEC its greatest power is section 78u(a)(1), which reads:
“The Commission may, in its discretion, make such investigations as it deems necessary to determine whether any person has violated, is violating, or is about to violate any provision of this chapter….” (Emphasis added.)
Congress has not required the SEC to investigate anything! The SEC may investigate a violation of federal securities laws if it chooses to do so. This is the statutory basis upon which the U. S. regulator of financial markets simply looks the other way and never brings a case to prosecute crime by Wall Street’s big players.
    Section 77t in the 1933 Securities Act reiterates the same, permissive attitude towards allowing the SEC, in its discretion, to investigate violations of securities registration and anti-fraud laws. The SEC "may" then transmit evidence of violation to the Attorney General, who “may, in his discretion, institute … criminal proceedings…” to bring justice to a perpetrator of financial fraud. (Emphasis added.)
    This is the amazing, nearly impenetrable, protective shield designed to benefit  exclusively the most dominating, elite class in America. The financiers, according to Franklin Roosevelt writing in 1933, have owned every U. S. government since 1836.
     In choosing to do absolutely nothing to stop Bernard Madoff Securities from defrauding investors of tens of billions, the SEC merely followed the congressional template. If Congress intended the SEC to investigate and prosecute every violator of securities laws, the SEC would not have been given express authority to look the other way.

What to do? … What to do? …
    The bright side of this scandalous reality is that Congress can fix the problem immediately. If members of the House and Senate really want to stop financial crime, they need not stand aside, wring their hands and plead with SEC commissioners and staff to “do something.” Congress can revise federal securities laws to mandate investigation and prosecution of fraudulent practices. Assistance in legislative drafting is available pro bono upon request. ~