SEC: always playing catch-up

November 1984

The Lion Capital Group and RTD Securities, two dealers of government securities, declare bankruptcy. Among the victims of the collapse of Lion Capital: more than 20 school districts in New York State, which together suffer losses exceeding $20 million. Despite concerns of some observers about the adequacy of the self-regulatory regime in place for government-securities dealers, the SEC and other federal agencies do not push Congress for the power to regulate the market; interviewed in American Banker, a staffer at the Office of the Comptroller of the Currency is grim on the prospect of regulation: “What will happen this time? I think you’ll see more of the same — that is to say, nothing will happen unless there is a disaster.”

March 1985

Markets in government securities are again shaken when the Bevill, Bresler & Schulman Asset Management Group and E.S.M. Government Securities Inc., additional players in the government-securities market, collapse after the discovery of massive fraud at the firms. The Los Angeles Times reports on Congressional testimony from Thomas Tew, court-appointed receiver for ESM, who says executives plundered the firm to fund their lavish lifestyles, in which they bought boats, mansions, and even a $78,000 dog. Tew calls the executive’s acts the “most abusive corporate raping that I had ever seen.”

Officials at both firms are later tried and convicted on federal charges. A New York Times report published after the sentencing of Bevill executives describes how, “Investigators and court-appointed officials…found a string of fraudulent transactions indicating that the firm had been technically insolvent for four years. They also said that its executives had been taking huge salaries and bonuses while it was going bankrupt.”

Investor losses at BBS are pegged at $240 million; losses at ESM exceed $300 million. BBS and ESM are charged with fraud and executives from both firms are later convicted on federal charges.

The failure of ESM sets off a banking crisis in Ohio, when Cincinnati-base Home State Savings Bank, a thrift with significant exposure to ESM, collapses. Depositors across the state fear for the safety of their savings and the governor declares a bank holiday for 71 savings and loan associations to prevent a run on the institutions.

Wirth observes in a memo that, under current law, “the SEC lacks the authority to inspect the books of unregulated government securities dealers or take other steps that might prevent fraud.”[9]

Despite the turmoil, industry insiders continue to oppose regulation of government securities.

Francis X. Cavanaugh, director of the Treasury’s office of government finance and market analysis, tells the New York Times, “We don’t want regulation of the government securities market until there is clearly a need for it…Regulation is no guarantee against fraud or bad business judgment.”

August 1985

The General Accounting Office (GAO) reports on the decrease in enforcement actions at the SEC. American Banker reports, “According to data gathered by the GAO, the agency completed 206 enforcement actions during a six-month period on 1978, compared to 191 during the same period in 1985 — despite a huge leap in the volume of activity on Wall Street.” The results of the study echo the concerns of agency critics, who say the SEC is consistently outgunned by the industry it regulates.[10]

1986

Another GAO study finds that the SEC often fails to review  —  or reviews only superficially  —  the corporate filings it receives. Reporting on the study in the Washington Post, David Vise writes, “The inventory of unprocessed annual reports and quarterly filings has nearly tripled, from 5,846 in 1983 to 15,1551 in the first half of this year.” Rep. John Dingell (D-Mich.), chairman of the House Committee on Energy and Commerce, blames the backlog on a “lack of staff resources.”[11]

The agency’s regulatory staff is 9 percent smaller than it was in 1980, despite significant increases in the volume of activity on Wall Street.[12]

Dingell speaks of a “growing concern in Congress and in the securities industry about the agency’s long-term effectiveness in deterring future violations.”[13]

Royce Griffin, president of the North American Securities Administrators Association, testifies before the House Energy and Commerce Committee’s subcommittee on telecommunications, consumer protection, and finance about the state of the SEC. Griffin blasts the agency, arguing that “because of a retreat from enforcement we have sent a message to scam peddlers that deregulation means that anything goes. SEC staff levels must catch up.” Shad denies Griffin’s claims.[14]