June 20, 2018
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A Defanged Watchdog

With Congress debating an economic stimulus bill with a nearly $1 trillion price tag, a House hearing this week provided a stark reminder of the need for oversight. At a time when investor confidence has sunk, as evidenced by the stock market plunge of recent months, revelations that the country’s financial investment watchdog is “financially illiterate” and captive to the industry it is supposed to oversee should prompt lawmakers to take a close look at the Securities and Exchange Commission. They must ensure the SEC has the knowledge and power it needs to stop illegal schemes, like those allegedly perpetrated by Bernard Madoff. Restoring investor confidence is critical to reversing the current recession as is government spending to jump-start the economy.

Testifying before a House Financial Services subcommittee, Harry Markopolos, an independent fraud investigator, said he tried for nearly a decade to warn the SEC about Mr. Madoff, who is accused of bilking investors of billions of dollars in a massive Ponzi scheme.

Mr. Markopolos told lawmakers that the SEC was “financially illiterate” and unable to understand the complex financial instruments that Mr. Madoff and others used to perpetuate their scams.

“You are both a captive regulator and a failed regulator,” he said of the SEC. He said the agency was too cozy with the financial firms it was supposed to oversee and afraid of investigating them.

While Mr. Markopolos’ tales of Russian mobs and drug cartels showed a flair for the dramatic, his criticism of the SEC fits a long pattern that Congress and the Obama administration should be eager to end.

Five years ago, Congress, and Sen. Susan Collins specifically, had harsh words for the SEC when it was late to investigate mutual fund fraud. It did not begin investigating problems, such as late trading, until after state regulators threatened to do so.

Then, as now, the SEC’s reassurances rang hollow.

“I think I speak for everyone when I say we hate fraud,” Linda Thomsen, director of the SEC’s division of enforcement, told the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

Rep. Paul Kanjorski, a Democrat from New Jersey, had the right response: “Your job is to prevent fraud, not to hate it.”

If the SEC is unable to do this, lawmakers need to remake the agency so it is.

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