Losing public trust and confidence

One of the problems in covering Wall Street for a living is that my friends assume that I…

One of the problems in covering Wall Street for a living is that my friends assume that I have hot stock tips or “inside knowledge” of the market.
I am not so quick to laugh off this simplistic view anymore. Those who distrust the basic fairness in our markets can’t always be dismissed as ignorant pikers.
Start with scandalous CEO pay packages. The amount of money execs extract from corporate coffers proves that they don’t care about investors and shows that boards don’t protect shareholders.
We now have more than 120 suspected cases of options backdating, according to a tally by The Wall Street Journal. It certainly looks as if more than just a few bad-apple chief executives are ripping off shareholders.
The Securities and Exchange Commission has brought several insider-trading cases. This month, the SEC brought charges against 14 defendants in an alleged $15 million scandal involving hedge funds, and it froze another $5.4 million in a case against unknown targets who traded in calls on Dallas-based TXU Corp. calls prior to reports that the utility company would be sold.
The SEC also has an-
nounced a sweep of hedge funds, looking for odd trading patterns.
That is enough to make casual observers balk. Optimistic types might think that Sarbanes-Oxley and the insider-trading cases show that reforms are in place, that the cops are on the beat and that small investors have nothing to worry about.
They would be wrong. Corporate interests have been relentless in chipping away at SOX and other investor protections — and the SEC is going along.
Meanwhile, as frauds continue SEC Chairman Christopher Cox is concerned about auditor liability, according to The New York Times. It turns out that he is worried about losing another accounting firm to scandal.
But an accounting firm’s demise such as that of Arthur Andersen LLP is unlikely. The Chicago-based firm was charged with obstructing justice, not screwing up the books.
Actually, getting rid of public accounting firms might not be a bad idea.
As former SEC chief accountant Lynn Turner and former SEC member Bevis Longstreth recently told the Washington-based Corporate Crime Reporter newsletter, if large accounting firms don’t recognize that they are public franchises, the SEC could assume the responsibility for auditing public companies. Such a role was envisioned when legislation creating the SEC was drafted but was objected to by the accounting industry and never materialized.
Under SOX, the Public Company Accounting Oversight Board in Washington now looks out for investors. However, after four years in existence and with a number of post-SOX scandals erupting, “the PCAOB has yet to bring a single case against any of the top six accounting firms,” Mr. Turner told the Corporate Crime Reporter.
Clearly, the board isn’t the tough, independent enforcement body investors might have hoped for.
And call the SEC’s insider-trading cases what they are: political cover. SEC officials were embarrassed about allegations (the subject of Senate hearings) that they shut down an insider-trading case against Pequot Capital Management Inc. of Westport, Conn., and suspected tipper John Mack, when it became clear in 2005 that he was being considered to run New York-based Morgan Stanley.
The whistle-blower in that case, former SEC investigator Gary Aguirre, claimed that hedge funds engaged in “institutionalized insider trading” while the SEC looked the other way.
Look, the market still is a great place to invest. With a diversified portfolio, an investor won’t be greatly affected by any one fraud.
But shady practices still fester, which is why during a bull market run-up, we have seen erosion of the public’s trust and confidence.
Troubling? Yes. Surprising? Hardly.