By Robert Fusfeld 

The SEC recently approved rules for corporate whistle blowers. Chairman Shapiro was quoted in the press as saying, "Today's rules are intended to break the silence of those who see a wrong." Unfortunately the SEC seems to have done little to reform its own management culture which has on a number of recent occasions been exposed as rewarding "yes men" and punishing those who dissent. This is in the long run a recipe for institutional arteriosclerosis and failure. And because bureaucracies are especially prone to this disease cures must be vigorously and aggressively applied. 

Let us briefly examine the SEC's recent record. 

The agency faces millions of dollars of damages claimed by a landlord from whom it leased space. Its Inspector General concluded:  

We found that questioning of upper management decisions by the staff is "not allowed" and that [the SEC official] surrounds herself with "yes-men" and "does not want to hear what [experienced staff] will tell her." These individuals testified that upon learning of the SEC's decision to lease 900,000 square feet of space . . . they "just couldn't understand how they could justify that amount of space ..." and were "flabbergasted" by the decisions. Report of Investigation, Improper Actions Relating to the Leasing of Office Space, SEC Inspector General, May 16, 2011, p. 10. 

Here is what the SEC Inspector General said about the failure of enforcement supervisors at the SEC Fort Worth office to investigate promptly the machinations of Alan Stanford who it eventually sued for fraud by the SEC and indicted. 

We found evidence, however, that SEC-wide institutional influence within the Enforcement group did factor into its repeated decisions not to undertake a full and thorough investigation of Stanford, notwithstanding staff awareness that the potential fraud was growing. We found that senior Fort Worth officials perceived that they were being judged on the numbers of cases they brought, so-called “stats,” and communicated to the Enforcement staff that novel or complex cases were disfavored. . . . As a result of this emphasis on “stats,” cases that were not considered “quick-hit” or slam-dunk” cases were discouraged. [Our] investigation concluded that because Stanford “was not going to be a quick hit,” it was not considered to be as high a priority as other, easier cases. Written Testimony of SEC Inspector General, House Oversight and Investigations Subcommittee of Committee on Financial Services, p. 11, May 13, 2011. 

And here is the Congressional testimony of a SEC examiner in the Fort Worth office who apparently was punished as a result of her refusal to let the enforcement inaction on the Stanford matter go unchallenged. 

I paid a heavy price for complaining [to headquarters]. First I received a Letter of Reprimand for not being supportive of the Associate Director’s “program initiatives” and for contacting [headquarters] regarding the Associate Director’s failure to follow guidelines. Two months later, in June 2008, I was transferred to a new position. 

[My immediate supervisor] complained to the then Chairman, Executive Director and the Director for OCIE for the mistreatment I received. In response he received a Letter of Counseling, daily monitoring, and a Letter of Reprimand for complaining about the regional director and the associate director. The associate director and regional director made the situation so antagonistic that [my immediate supervisor] eventually left the Commission. Only the year before [he] had received an award for examination excellence, submitted by these same individuals. 

I believe my new position was truly an attempt to drive me out of the Commission. . . . My responsibilities and duties have generally been undefined and those that have been assigned are generally not commensurate with my pay grade and salary. Julie Preuitt testimony, May 13, 2011, House Oversight and Investigations Subcommittee of Committee on Financial Services, pp. 5-6. 

Clearly the SEC needs to encourage in-house whistle blowing. It needs to foster a culture of honest exchange of ideas. We should pay attention here to the words of the philosopher Karl Popper. 

[I]ntellectual excellence is the spirit of criticism … The authoritarian will in general select those who obey, who believe, who respond to his influence. But in doing so he is bound to select mediocrities. For he excludes those who revolt, who doubt, who dare to resist his influence."  The Open Society and Its Enemies, p. 135. 

(Robert Fusfeld is on the faculty of the Institute for Public Policy Studies at the University of Denver where he teaches graduate and undergraduate courses. From 1975 until his retirement in 2006 he was an SEC enforcement attorney and managed the SEC's Denver office trial unit for 15 years. He publishes a blog commenting on SEC administrative proceeding decisions at www.secteaparty.blogspot.com).