STOCKGATE TODAY-SEC's Secret Conflicts of Interest
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SEC's Secret Conflicts of Interest - October 11, 2006
David Patch
Today, you can't pick up a newspaper or magazine without finding some topic of discussion on the conflicts of interest between our members of Congress and the US business community. From who it is that contributes to their campaigns to what programs are proposed through the back door lobbying of some special interest groups, Congressman are clearly scrutinized over their business and financial associations.
While the power of Congress is such that the media must carefully scrutinize these potential conflicts of interest, so lies the expectation for scrutiny of other federal employees including those who regulate our securities markets. As Wall Street goes so goes our economy and thus, potential conflicts of interest can have an overall damaging affect on our nation if not properly controlled.
Last week the NY Times published an op-ed piece drafted by a lawyer named Richard Sauer (October 6; Bring on the Bears). Sauer’s resume includes such distinguishing roles as former SEC Division of Enforcement attorney and administrator. Sauer' s op-ed piece, leveraged off his prior employment, was woefully biased to the short selling side of the market as the writer admitted to initiating investigations into public companies based on the recommendations of short-interest investors. To Sauer, the short sellers act as nearly the non-deputized sheriff’s in the act of market regulation and should be heralded for their public service.
Certainly, coming from a former SEC attorney, this should carry some measurable weight to the credible role short sellers play in our capital markets.
At the conclusion to this op-ed article the NY Times disclosure states that Sauer is now employed by a “short-biased hedge fund.” The op-ed article, while frequently disclosing Sauer’s former position at the SEC, never identifies the name of the short-biased fund Sauer is now employed for.
While the NY Times failed to make such proper disclosure, others within the media thought it garnered enough interest to investigate and, as truth would have it, Richard Sauer is in fact employed by Copper River (formerly Rocker Partners). Copper River is the same hedge fund under SEC investigation for illegal tactics used in their short selling practices including the possibility of paying off analysts to write “hatchet jobs” on companies they short to distort the public’s perception of those public business operations.
Why is all this critical information?
In the NY Times publication Sauer admits that he “received from short sellers early warnings on certain companies that led to the capture and return to investors of hundreds of millions of dollars taken by stock frauds. Such information came from no other source"
According to an April 2006 Hedge Fund Intelligence article published by Michelle Celarier “Rocker Partners exposed frauds at such companies as AremisSoft, ACLN and Lernout & Hauspie Speech Products, all of which were later prosecuted by the U.S. Securities and Exchange Commission.”
And who was the SEC attorney involved in each of these cases?
According to public records for each case identified, Richard Sauer was one of the attorneys in each of these investigations. Public record does not identify the lead attorney. Leading from Sauer's own commentary, and with the SEC cases publicized, Richard Sauer appeared to be David Rocker’s personal SEC cop and now Sauer works for the Fund Rocker co-Managed until just recently.
The problem?
Since nobody can be 100% accurate, even those smart Hedge Fund managers the financial press makes them out to be, this thus begs the question regarding how many cases Rocker directed Sauer or other SEC agents way that yielded no enforcement actions? This is important because of the impact such an investigation has on a company who, when the SEC comes calling, is presumed guilty first by Wall Street and the Investing public standards. >
When the SEC comes calling there must be something there.
If the SEC created an open door policy with David Rocker, as the SEC did with Anthony Elgindy, Rocker could then use the SEC to manipulate the markets in companies he took a short interest in yielding profitability despite a lack of successful SEC enforcement action. Once Rocker has received the confidence of the SEC trust he then could control the situation and Rocker clearly had the SEC's confidence.
Records indicate that Sauer worked for the agency as late as 2003 before heading to the law firm that represented Rocker; Vinson & Elkins. But Rockers fortunes of having his short interests investigated have not changed since Mr. Sauer’s departure with SEC investigations made public regarding Allied Capital (NYSE: ALD), Taser Corporation (NASDAQ: TASR), Novastar Financial (NYSE: NFI) and several others known short by David Rocker. Ironically, these SEC investigations have not yielded the same “capture and return of millions of dollars” in stock fraud but each saw a share value impact off the news of such investigations..
Sauer was so impressed by the selective results provided by Rocker that his op-ed piece even suggested that “Congress should provide the S.E.C. with discretion to pay bounties, similar to those available in insider trading cases, for tips resulting in successful financial fraud cases. This would give some degree of recognition to those contrarian’s who help keep the market honest by flagging problems concealed by companies - and missed by institutional analysts. "
As if the profits obtained by short sellers through the collapse of the security itself was not enough.
The flaw in Mr. Sauer’s recommendation, it will draw every short seller out of the woodwork to knock on an SEC door looking for an investigation into some company “they perceive” of wrong doing. At times when assessments are accurate, justice will be served and the short interests will be profitable. For those times they erred, they too can become profitable as the SEC would have tarnished the markets perception of the company for no other reason than a short seller “thought” deceit was in the works.
It is a win-win situation for the hedge funds and one destined for lobbying about Washington for weeks and months to come.
In the regulatory environment, the SEC has a “neither confirm nor deny” policy on investigations. While holding to this policy, the SEC also has laws that require public companies to disclose material events to their shareholders for which most consider an SEC investigation a material event. Such disclosure, made by the company but forced upon by the SEC, will have a negative impact on the market in that security.
On the flip side, the markets will never hear of a decision where the SEC elects not to investigate a company recommended by a short seller.
There is no public disclosure required of a material event that never transpired because, in many cases, the company is unaware of the preliminary analysis in the first place. The times a short seller proposed wrongdoing but the SEC attorney never pursued it because they were wrong is not data the public has access to. The public will only see the success and failure stories of SEC investigations initiated and that data alone highlights the level of mistakes short sellers have made.
Being exonerated from claims of fraud is a secret but being suspected of wrong doing, whether accurate or misplaced, quickly becomes public knowledge and possibly a distortion of the truth, manufactured for personal profit.
For Richard Sauer and his short-biased hedge fund, this is an acceptable risk they believe is necessary. After all, it can only turn into hefty profits if even 25% of the referrals get investigated and 5% yield an enforcement action.
The Commission would not respond to inquiries about a potential conflict of interest between Sauer the SEC attorney and his new employer Copper River with whom he admits to running investigations for. The Commission would only confirm that Sauer worked for the agency between March 1990 and June 2003.
One can only wonder, based on other comments stated in the op-ed piece, how many times complaints came across attorney Sauer's desk regarding Rocker and how many were dismissed based on this relationship.
Yet another conflict for another day.
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2006
