The Securities and Exchange Commission (SEC) should be ashamed of its abominable investigation and enforcement of Allied Capital. As detailed in a damning report by the SEC Office of Inspector General (OIG), made available today by The Washington Post, the SEC completely dropped the ball in its investigation despite having overwhelming evidence of Allied’s wrongdoing. To make matters worse, an SEC enforcement attorney even took outrageous steps to investigate the person who alerted the agency to the problems at Allied.
The OIG launched its investigation based on allegations made by Greenlight Capital President David Einhorn in his book, Fooling Some of the People All of the Time: A Long Short Story. (Disclaimer: Einhorn and employees of Greenlight are major contributors to POGO.)
The dispute between Einhorn and Allied dates back to 2002, when Einhorn gave a speech at a charity investment conference announcing that Greenlight had sold short its shares of Allied, a private equity firm based in Washington, DC. Over the next few years, Einhorn sent about a dozen letters to the SEC detailing how Allied overvalued many of its investments. But rather than following up on his tips, the SEC decided to launch an investigation into Einhorn looking into possible stock manipulation. In his book, Einhorn claimed that Allied pressured the SEC into investigating him, and that the enforcement attorney who had led the investigation soon left the agency and became a registered lobbyist for Allied, a claim verified by the OIG report.
In fact, the report confirms nearly all of Einhorn’s allegations, painting a picture of an enforcement agency that’s beyond dysfunctional. Here’s just a sampling of what the OIG found:
June 2002, Allied successfully lobbied the SEC’s Enforcement
launch an investigation of Einhorn and Greenlight, despite having
evidence of wrongdoing other than Einhorn’s speech. Over the next
months, an SEC enforcement attorney aggressively questioned Einhorn
testimony, subpoenaed several boxes of documents, and sought his
records and list of clients. After failing to find any credible
of wrongdoing, the Enforcement Division effectively closed
its investigation into Einhorn in mid-2003,
but didn’t formally close it
until December 2006. Einhorn was never notified that he was no
subject of an investigation, as is required by the SEC
2003, the enforcement attorney who headed the investigation into
was asked to leave the SEC due to “performance problems,” and soon
a registered lobbyist for Allied. Although the attorney’s name and
position as a lobbyist are redacted in the report, Einhorn’s book
reports revealed that it was Mark K. Braswell, who joined
Venable LLP in 2003 and became
a registered lobbyist for Allied in October 2004. Braswell got
clearance from the SEC’s Ethics Office to register as a lobbyist
Allied after hiding the fact that he had led the investigation into
Einhorn at Allied’s request.
around the same time the Enforcement Division began investigating
the SEC’s Office of Compliance Inspections and Examinations (OCIE)
own examination of Allied based on Einhorn’s tips. The OIG
examination as “unusual in many ways.” It was conducted by only one
headquarters examiner supervised by the OCIE Associate Director.
the examination lasted a full 18 months, the SEC never paid a
to Allied’s office just a few blocks away. The examiner told the
received “pushback” from the Associate Director despite finding
that Allied’s method for utilizing cash to pay dividends was akin
Ponzi scheme. And all of the work papers from the investigation
subsequently and inexplicably deleted from the OCIE’s computer
in April 2004, the OCIE referred three findings from its
the Enforcement Division, which launched its investigation into
following month, nearly two years after Einhorn first alerted the
to Allied’s wrongdoing.
March 2005, Einhorn wrote a letter to Allied’s board claiming that
company had gained access to his telephone records by engaging in
illegal act of identity theft known as “pretexting.” Although
initially denied any wrongdoing, after a grand jury was convened in
acknowledged in a 10-Q filing that “an agent of Allied Capital
obtained what were represented to be telephone records of David
and which purport to be records of calls from Greenlight Capital.”
lawyers informed the SEC that the “agent” responsible for this
was in fact Braswell, the former enforcement attorney who led the
into Einhorn. However, the SEC took no action against Allied in
this shocking admission.
mid-2006, the Enforcement Division had determined that more than a
of Allied’s investments were incorrectly valued, and that the
materially overstated its income for several years. But in October
Allied requested and obtained a “pre-Wells” meeting with the
Division, in which a team of attorneys representing Allied,
former SEC Enforcement Director, convinced the agency to bring
more than a “books and records” charge against the company.
- In June
2007, despite the overwhelming evidence of Allied’s wrongdoing and
admission by Allied that its lobbyist had engaged in pretexting,
entered into a settlement agreement with Allied in which the
merely agreed to continue to employ a Chief Valuation Officer and
third-party valuation consultants. The SEC neglected to impose any
penalties and subsequently took no actions to monitor Allied’s
the settlement agreement.
This is just the latest example of unthinkable incompetence and possible corruption at the SEC, an agency that also failed to detect the Madoff Ponzi scheme despite receiving numerous credible tips, failed to adequately supervise Bear Stearns and other firms at the heart of the financial crisis, failed to investigate overwhelming evidence of insider trading at Pequot Capital Management while maintaining improper contacts with former Enforcement officials, failed to protect whistleblowers who came forth with allegations of wrongdoing, and so much more.
The OIG is recommending that the Directors of OCIE and Enforcement clarify the agency’s investigation and examination procedures, especially in regards to contacts with outside parties and former officials, but given the agency’s recent history of ignoring the OIG’s recommendations, we aren’t exactly holding our breath.
As Congress turns its attention to overhauling the nation’s financial regulatory system, they should keep in mind that strengthening the regulatory rules won’t mean much if the SEC is unwilling or unable to actually enforce them. We hope the OIG’s latest report is all the evidence Congress needs to ramp up its oversight of an agency in utter disrepair.
-- Michael Smallberg