NEWSLETTER: Oct. 5th 2018
The SEC Fails Again by not Meaningfully Punishing Tesla or Musk
The SEC’s light-touch to no-touch enforcement just created another way for big shot CEOs to get away with breaking the law by adding “too important to punish” to the already indefensible “too big to jail.”
First and most importantly, the SEC settlement with Tesla and its CEO is a meaningless slap on the wrist. It does not punish, and it does not deter. A $20 million fine is irrelevant to a person like Mr. Musk who is reportedly worth about $20 billion dollars. It is also grossly insufficient given Mr. Musk’s allegedly fraudulent tweet caused Tesla’s stock to rocket up and then crash causing hundreds of millions if not billions of dollars in damages to investors.
The SEC-required management changes are less than the Board of Directors should have done on their own a long time ago. This Board failed in its most basic duties to protect investors and the company from a CEO/Chairman who clearly needed supervision and controls. Remember, this is a CEO/Chairman of a public company who baselessly and maliciously accused one of the divers in Thailand who saved the kids trapped in a cave of being a pedophile. While it’s good that the SEC has now required them to take some modest steps, where is the rigorous SEC investigation into the Board’s apparent dereliction of duty?
Moreover, how could the SEC think Mr. Musk was such a danger to investors that it sued him seeking to bar him from being a director or officer of a public company on Friday, but on Monday settled for a puny fine and a little increased Board supervision? Given that such a bar is one of the most serious and draconian punishments that the SEC can employ, this dramatic and unexplained change in penalties must be clarified, which the Federal Court Judge is now seeking.
The SEC is simply wrong to claim that such a weak penalty was appropriate because the CEO was “indispensable” and the shareholders wanted this “visionary” leader. In trying to justify such a light penalty, Chairman Clayton made an unprecedented statement that Musk was “important to the future success” of the company. We get it that the SEC was trying to balance competing interests, but the SEC still should have meaningfully punished Musk and Tesla and let Musk remain as the CEO.
CEO and Board failures like this and worse are going to continue (if not increase because incentivized by rewarding it with such non-punishments), and investors are going to continue to suffer serious harm, until the SEC starts meaningfully punishing wrongdoers by substantial fines that hurt, permanent injunctions and/or cease and desist orders, lengthy bars and other stiff penalties, including the removal of grossly deficient directors. After all, no one was claiming that the directors were indispensable visionaries.
The double standard at the SEC (and elsewhere like the DOJ) where the rich and powerful get away with breaking the law while hardworking Americans get the book thrown at them must end. This is intolerable in a democracy and a leading reason for the loss of faith Americans have in government and institutions more broadly.
Slapping Voters in the Face, Republicans Mindlessly Push for More Financial Deregulation
In May, President Trump signed a law deregulating 26 of the largest 40 banks in the country. Many were the same banks that received massive bailouts just ten years ago when Wall Street’s biggest banks caused the worst financial collapse since the Great Crash of 1929. Many of these banks are also repeat lawbreakers and need more not less supervision to protect consumers, investors and our financial markets.
No matter, President Trump gleefully signed a gift to finance misleadingly called the Economic Growth, Regulatory Relief and Consumer Protection Act. Now, just four months later, Republicans are trying to pressure regulators into quickly and mindlessly deregulating these big banks even though the law requires the regulators to carefully analyze the risks to determine the appropriateness and level of deregulation. For example, a number of Republican Senators, including some members of the Senate Banking Committee, sent a letter to Fed Vice Chair Quarles inquiring why the Fed was taking so long and demanding immediate deep and broad deregulation, including far beyond the provisions of the bill.
Remarkably, they are also insisting that the regulators deregulate foreign banks operating in the U.S., even though many received some of the biggest bailouts in 2008 and pose unique risks to the U.S. financial system. Indeed, nine of the top twenty largest users of the Fed’s emergency lending facilities during the crisis were foreign banks and several have tried to evade the most sensible and modest regulations since the crash. For the protection of U.S. taxpayers, they need to be very carefully monitored and regulated.
As we point out in an op-ed in The Hill, “Size isn’t the be-all, end-all in banking regulation,” and in a more detailed letter to the Senate Banking Committee,
“No one disputes that the law requires regulators to undertake certain, specific actions. However, it also appropriately and wisely provided regulators with ample discretion to use their best judgment and expertise to ensure the safety, soundness and stability of the financial system. Put differently, the legislation does not mandate unwise, mechanical or blind deregulation that would undermine financial stability, increase the likelihood of future bailouts, and once again harm hardworking Americans who are still paying the bill for the last crash that they did not cause.
As the Fed implements the provisions of the new law, it must conduct individualized, multifactor risk analysis on these huge banks, which must include sizes, activities, complexity, interconnectedness, leverage and other key risk factors.
The American people don’t want deregulation. In fact, as our recent polling shows, the bipartisan majorities want the nation’s biggest banks to be more closely regulated, not less. And, they want to hear candidates talk about how they are going to do this when they talk about jobs and the economy. This should be no surprise to anyone paying attention. The American people have suffered and continue to suffer from the devastating ongoing effects of the 2008 crash and don’t want to risk yet more harm.
The SEC Should Fight Fraud, Not Whistleblowers Exposing Wrongdoing Like Bernie Madoff’s Ponzi Scheme
Whistleblowers perform a vital public service to consumes, investors, financial markets and all Americans by revealing and stopping fraudulent and illegal conduct. They should be encouraged, protected and rewarded, but they are too often disregarded, suffer retaliation and lose their careers and often much more. The Dodd-Frank financial reform law had specific provisions to make sure that didn’t happen. The SEC should embrace those provisions, but they are seeking to weaken them. We are fighting back.
The largest Ponzi scheme in history is Exhibit A in support of a whistleblower protection program. The first information about the Ponzi scheme masterminded by Bernie Madoff came to the Securities and Exchange Commission from a whistleblower, Harry Markopolos. He first approached the SEC in May 2000 with detailed information about Madoff’s scheme, at a time when Madoff managed between $3 and 7 billion. In a dereliction of duty that remains hard to understand, the SEC took no action repeatedly over the years even though the whistleblower provided more information. By the time Madoff confessed in December 2008, his fund had grown to over $50 billion and investor losses were catastrophic.
That’s the primary reason Congress established a whistleblower program at the SEC in the Dodd Frank law. It has been an overwhelming success, handing out $266 million to 55 whistleblowers who have provided the agency with critical information about fraudulent and illegal conduct. Keep in mind that whistleblowers only get any reward if their information leads to recoveries for investors.
Yet, the SEC has proposed to change the law by a rule that will snatch defeat from the jaws of victory. The proposed changes threaten to make the program less accessible, disincentivize future whistleblowers from coming forward, and are contrary to Congress’s intent, vision, and established direction of the program. These proposed changes put investors needlessly at risk, increases the likelihood of fraud going unreported and therefore undetected, and makes missing future Madoff Ponzi schemes distinctly possible if not likely.
Better Markets vigorously opposes these changes and detailed these objections in a comment letter it filed with the SEC.
Failure to Adequately Fund CFTC Now Resulting in Staff Cuts, Leaving Cop on the Derivatives Beat Woefully Unable to Do the Job
The years’ long campaign to cripple the Commodity Futures Trading Commission (CFTC) and leave it unable to adequately oversee the derivatives, swaps, and futures markets has reached a tipping point as the agency announced employee buyouts and early retirement opportunities due to underfunding by Congress.
Failing to fund the CFTC to do its job is one of the biggest failures in the last ten years since the 2008 crash, which was in large part caused and spread by derivatives. That’s why regulating them was so important and why an entire Title in Dodd Frank focused on just that. After all, Warren Buffet didn’t call derivatives “financial weapons of mass destruction” for nothing. They were a primary accelerant of the 2008 financial crisis and acting as a conveyor belt distributing unseen risks throughout the global financial system (as proved by AIG, Lehman Brothers and so many others).
In any rational world or a world where decisions are based on merit or risk-assessment, the CFTC’s annual budget would be many multiples of its current size. Better Markets has commented often on the chronic underfunding of the CFTC (as you can read here) and even praised the Trump Administration when it asked for increased funding for the agency in its 2019 budget request. We have repeatedly advocated for increased funding so that the cops on the derivatives beat can do their job to protect the markets and the American people.
And yet Congress inexplicably has only provided the CFTC with a $249 million budget to oversee a derivatives market that has ballooned to $400 trillion or so, the equivalent of trying to compete in the Indianapolis 500 with a Pinto. While Congress’ actions may be inexplicable, it’s pretty clear who benefits: the 5 biggest Wall Street too-big-to-fail banks are also the five largest derivatives dealers in the U.S. They are the biggest beneficiaries of an underfunded CFTC all to the determent of fair, competitive markets and consumers everywhere.