Its Time For The SEC To Stop Taking The Fifth

Government lawyers typically decline to talk about a matter under investigation, citing the possible negative impact on the pending inquiry. The theory is straight forward: the inquiry is incomplete and it might be harmful to the investigation and those involved to discuss the matter until it is finished. The SEC, as a matter of policy, declines to comment on pending investigations. DOJ officials take the same position.

Last week the “on-going investigation” rationale was cited by senior SEC officials when they refused to answer questions from a congressional committee probing what happened at the SEC regarding the Bernard Madoff scandal. It was an ugly moment in the Commission’s history. On the one hand, whistleblower Harry Markopolos was detailing how he discovered the massive fraud in a few hours and spent years trying to get SEC officials to listen and investigate. On the other, Congressman were hurling vitriolic statements at Commission officials which were designed to be sound bites for the next TV news cycle, not questions seeking answers and information, the supposed purpose of the hearings. The Congressmen got their TV news clips. The Commission was disgraced. The public, which is supposed to be served by government officials, got nothing.

The question remains: Why did the SEC decline to answer any questions about its prior investigative efforts and contacts with Mr. Markopolos? What investigation would be jeopardized if the SEC talked about what happened in 1992 or 2000 or 2001? Cleary not the SEC’s current case against Mr. Madoff. That case is pending in federal court in New York. Presumably, the Commission is using civil discovery to develop the evidence, not its investigative authority.

Likewise, the testimony would not impact the case being developed by the U.S. Attorney’s Office regarding Mr. Madoff. That office does have an on-going criminal investigation into Mr. Madoff’s activities. The USAO has filed a criminal complaint against Mr. Madoff and presumably will be seeking an indictment soon. That indictment will have little if anything to do with whether the SEC properly investigated tips and leads it had which might have uncovered the Madoff Ponzi scheme earlier. In any event, if SEC testimony might have impacted that inquiry, the USAO should have told the congressional committee. DOJ routinely intervenes in SEC enforcement cases seeking a stay pending the resolution of its criminal matter. The USAO did not make any request at the hearings last week.

The only inquiry which apparently might be impacted by the SEC testimony is the one being conducted by the Commission’s inspector general, discussed here. That inquiry is examining the question the congressional panel was suppose to be probing. If this is the inquiry the SEC officials referred to when declining to testify last week, then their basis for refusing to testify is questionable at best. The inspector general’s investigation is an internal inquiry, not a law enforcement investigation like those conducted by a grand jury or even the SEC’s enforcement division. If this is the investigation Commission officials referenced in their refusals to testify, the claim was inappropriate and a misuse of the law enforcement privilege.

Since the SEC officials were not protecting a law enforcement investigation it appears that in reality they were invoking the Fifth Amendment last week. What was really being protected is the reasons the Commission did not follow up on lead after lead about Madoff from as early as 1992. This has nothing to do with a law enforcement investigation, but everything to do with whether the agency carried out its statutory duties. It is more than ironic that an agency which routinely penalizes individual who appear before it for citing their constitutional privileges (discussed here) is now, in effect, doing the same thing. At a minimum, it was a wholly inappropriate invocation of privilege and, perhaps worse, a violation of the Commission’s obligations to report on its activities to congress and the American public.

On Friday, the new SEC Chairman made a good start toward reforming and revitalizing the enforcement program by announcing the end of the “pilot program” of special procedures regarding corporate penalties (here) and streamlined procedures for obtaining a formal order. The next step should be for the Commission to stop citing privileges and talk about what happened with Madoff.

As a law enforcement agency the SEC has an obligation to protect investors by effectively policing the capital markets. Whether the Commission failed or not in its past investigative efforts regarding Madoff, it is clear that the future of effective enforcement begins with a full and complete examination of what happened. That examination should be conducted with a view not to the evening news or recriminations but toward determining what happened so that the Commission’s enforcement program can be strengthened and improved. To do this, the Commission must stop taking the Fifth Amendment and start doing what it asks of every company and individual that fails to properly perform obligations under the securities laws: self-report, determine what happened, and take the remedial steps necessary to reform its processes to ensure future compliance.