The SEC and Negligence Lawsuits

On Thursday this week The Wall Street Journal reported that a couple of Madoff investors are suing the SEC for negligence (Two Investors Sue SEC Over Madoff Probe). This will be an extraordinary case.

The defense the SEC will seek to invoke is "Sovereign Immunity" - a concept based in English law that essentially prevents people from suing the state or king because "the king can do no wrong". It's roll today is to prevent the state from being sued for damages that may result from policy decisions.

The Madoff case will present an interesting challenge here because the SEC was alerted to possible fraud multiple times and they repeatedly failed in their mission to discover what has been made quite obvious - Madoff's fraudulent investment business, not his legitimate market-making business - failed to do any trading at all in his alleged "split-strike conversion" strategy; something anybody who worked in a Wall Street back-office could have discovered. Their repeated incompetence and ineptitude was so egregious that it prompted a Congressman to admonish them in a hearing with the words, "You couldn't find your asses with both hands if you were standing!"

If the SEC made some policy decision that created some sort of market disruption that was unforeseen, "sovereign immunity" could be a good shield from frivolous lawsuits for damages. However, when your dereliction in your duty leads to circumstances that helps to perpetuate and enable a fraud you need to be held accountable and liable for your failures.

SEC Ruling on Proxy Access and BofA’s Lack of Planning

Last Friday, the Wall Street Journal reported that the SEC will wait till early next year, 2010, for any decision regarding making it easier for shareholders to access the proxy.

Naturally the folks at the US Chamber of Commerce are up in arms that shareholder investors would like to exercise their ownership rights and nominate people to corporate boards who may actually make a difference at a company. If they’re concerned about the “activist types” gaining access to the boardroom, why worry? Do they think that these board members will march companies like Merrill Lynch, Bank of America, GM, Chrysler, Lehman Brothers, Bear Stearns, AIG, Fannie Mae and Freddie Mac off of a cliff? THAT’S ALREADY HAPPENED! Did it take “activist” do-gooders and tree-huggers or Greenpeace to destroy some of this country’s best companies? Nope; all it took was no-nothing, do-nothing board-members, megalomaniac executive managers, and spineless professional investment managers. If you’re wondering why I’ve thrown in the investment managers it’s because they’re the largest shareholders of stock in America and all this big, ugly stuff happened while these companies were in “our” retirement portfolios under their supervision and guidance; sorry if this offends some folks, but all of you need to share in the blame.

As for BofA and their lack of succession planning, I’m shocked, but not very surprised. I know they have a lot of new members on that board now, but this just points, again, to the dysfunctional nature of corporate boards. Why, when a country is awash in educated and seemingly intelligent people, does this level of failure in planning occur?

Ken Lewis has been under extraordinary pressure for a year. He’s been scorned and disabused at nearly every turn since this financial calamity was sprung upon the nation and BofA was forced to acquire Merrill Lynch. One would think that succession planning would have been raised as a talking point for no other reason than that the enormous stress put upon Mr. Lewis could have killed him! And the US Chamber of Commerce wants to defend this dysfunction?

Memo to SEC: Put down the fiddle, Rome is burning.