The SEC was created in 1934 to regulate the securities exchanges and to protect securities investors from fraud and market manipulations. President Roosevelt was of the view that “it takes a crook to catch a crook.” (The same perspective as Joseph Peter Simini, my auditing professor in college). Therefore he named as the first Chair of the SEC one of the biggest manipulators of the 1920’s – one who had the brains to pull out of the market before the Great Crash, Joe Kennedy, the patriarch of the Kennedy clan.
The SEC did a great job in the 1930’s in cleaning up the markets. It acquired a reputation as one of the best of the best of the federal regulatory agencies. The agency promulgated Rule 10b-5 and initiated the crusade against insider trading, well known to generations of law students. The SEC was also given increasing powers and responsibilities while its resources lagged. In other words it had to do more and more with less, while in reality it did less and less as it was perusing prospectuses, proxy statements, and utility holding companies for material omissions and misstatements.
The SEC’s ability to detect and thus protect investors was severely compromised. It missed the Great Salad Oil Scandal of 1963, which almost sank American Express, and cost AmEx, Bank of America, and Bank Leumi $150 million. It was clueless about Black Monday, October 19, 1987 when the Dow Jones plunged 22.6% because “sophisticated” investors practiced “Portfolio insurance.”
It was utterly surprised by the near bankruptcy of Long Term Capital Management in 1998. This hedge fund was a warning to come of 2009, but the SEC did nothing.
The SEC was blindsided by the corporate defalcations of Adelphia, Enron, Global Crossings, Peregrine Systems, Tyco, and WorldCom a decade ago. Sarbanes-Oxley was Congress’ response.
Indeed, even if you waved a securities fraud in the SEC’s face, it might miss it, as shown by the Madoff $50 billion Ponzi scheme. The SEC had the chance as early as 1992 to shut Madoff down, but ignored warnings and conducted incompetent audits and investigations of Madoff for almost two decades.
One of its early goals was to shut down boiler rooms, bucket shops, “pump and dump” and penny stock frauds, but it took 16 years to shut down Robert Brennan and his First Jersey Securities. You may remember the effrontery of Brennan, who in television ads, used to alight from a helicopter exclaiming “Come grow with us.”
And now the SEC, the same SEC that has trouble stamping out securities fraud, is joining the crusade against global warming. President Obama’s SEC on a party line 3:2 vote proposing issued standards requiring publicly traded corporations to disclose business risks and opportunities related to climate change.
The President’s Council on Environmental Quality (CEQ) tried a similar idea three decades ago. President Carter’s CEQ issued regulations in 1977 mandating “worst case” analysis in NEPA statements, in other words, the classic “What if ….”
Let’s think for a moment about worse case scenarios:
A magnitude 9.5 earthquake, The really “Big One,” is centered in downtown LA or San Francisco at noon on a Monday (The San Francisco Earthquake of 1906 is estimated to be between a 7.7 and 8,3).
An earthquake in the Tennessee valley similar to that of the series of three quakes on the New Madrid fault between December 1811 and February 1812. The quakes two centuries ago, of magnitudes over 8.1 to 8.3, caused church bells to ring on the East Coast.
A Category 5 hurricane directly strikes Boston (The last major hurricane to strike New England was the Great New England Hurricane of 1938). New England is overdue.
Planes crash into the Empire State Building and Twin towers (both happened.
Mount Rainier, an active volcano, erupts with the fury of a Krakatoa.
40 days and nights of rain fall on Iowa.
SARS spreads rapidly around the globe.
Needless to say, we don’t run our lives from worst case scenarios eventhough disasters and catastrophes occur.
President Reagan’s CEQ rescinded these regulations in 1989, and the Supreme Court held in 1989 that no duty existed for a worst case scenario.
The SEC, which is having trouble discovering material misstatements in securities documents, is now acting on a “science” which has been manipulated by some academicians and politicians.
The “Gold” standard internationally on global warming, now referred to as global climate change, as we are experiencing an unusually deep, cold, and wet winter, is the periodic IPCC Assessment Report. The fourth edition was issued in 2007.
It asserts for example that the Himalayan glaciers will melt in 30 years and that “up to 40% of the Amazon rain forests could react drastically to even a slight reduction in precipitation” The rain forests would most likely be replaced by ecosystems such as tropical savannas. These were alarming, headline grabbing "scientific" statements.
The IPCC claim is that the report was based on sound science and peer review.
We now know through the leaked East Anglia emails that some of the science is questionable.
We also learn that the estimate for the decline of the Himalayan glaciers is off by at least 300 years, and is not based at all on scientific studies.
The report cited a 2005 study by the World Wildlife Fund, which cited a 1999 article in the New Scientist magazine, which in turn quoted an Indian glacier expert in saying the glaciers could disappear in 40 years. He denies ever making that statement. So much for peer review of the science.
The rain forest claim is just as tenuous. It was also based on a WWF report. The 40% figure came from a letter published in Nature Magazine. The letter discussed harmful logging activities. Once again the gold standard was based upon some dramatically short of any peer review.
And now we learn that Dr. Rajendra Pachauri, Chair of the IPCC, knew of the Himalayan inaccuracies before Copenhagen, but said nothing. He had previously rejected as “voodoo science” a report by the Indian Government which questioned the validity of the IPCC statements about the glaciers.
The SEC is ironically basing its regulation on false and misleading material omission and misstatements.