SEC Enforcement: What Happened to Getting Tough?

In my last post I was downright jubilant that Wall Street endorsed the fiduciary standard for brokers. And don’t get me wrong, this is a major development. But, as they say, one step forward…two steps back. To wit, I read with great dismay two recent cases where the SEC enforcement division levied fines equivalent to a love tap for what appears to be serious wrongdoing.

In what I’m sure was a delight to Morgan Stanley’s PR office, the first case was buried in the Wall Street Journal in a five paragraph blurb on page C4. So allow me to give you some background.

Morgan Stanley (MS) was recently censured a paltry $500,000 by the SEC for allegations that one of its former financial advisors misled his clients and failed to disclose conflicts of interests. According to the SEC, William Keith Phillips, who was based in a Nashville, Tennessee branch of Morgan Stanley, breached his fiduciary duty when he allegedly recommended “unapproved” money managers to clients. Under the terms of a proprietary program, Morgan Stanley would provide custody, execution, performance reporting, and, importantly, due diligence on money managers for their clients.

The SEC alleged that Mr. Phillips had a financial incentive to recommend these three money managers, after developing a relationship with them and negotiating $3.3 million in commissions. Moreover, two of the unapproved money managers convinced some clients to open advisory accounts with the Morgan Stanley Nashville branch, generating an additional $200,000 in fees and commissions, a portion of which was paid to Morgan Stanley.

Investors harmed by this will no doubt file arbitration cases. And while I’m sure Morgan Stanley wasn’t happy to sign a check to the United States Treasury for $500,000, I’m pretty sure they did the math a realized they were still ahead.

The second case involved Perry Corp., a $6.6 billion hedge fund managed by Richard Perry. According to the SEC, Perry Corp. withheld a critical regulatory filing which serves to give the market notice when an investor has amassed more than a 5 percent stake in a public company. The goal of the rule is to ensure investors understand if there is another investor that could influence company decision making. In this instance, it is alleged Mr. Perry bought a 10 percent stake in Mylan Inc. in order to throw his weight behind a potential merger in which he stood to profit.

Representing Mr. Perry was William McLucas, who ran the SEC’s enforcement division for eight years before leaving the agency in 1998. When I say the there is a “revolving door” phenomenon between the SEC and Wall Street, this is precisely what I mean. Mr. McLucas negotiated a measly $150,000 fine with his old employer.

Not surprisingly, Mr. Perry called the settlement a “satisfactory conclusion.” What is “satisfactory” to Mr. Perry most assuredly isn’t for other shareholders in Mylan Inc. Nor will it likely deter anyone else from playing the same game.

On the other side, David Rosenfeld, associate director of the SEC’s New York regional office, who oversaw the case, said he “[hopes this] will deter others from engaging in this type of conduct.” I wish I could be so hopeful but I’m afraid the fines are a far cry from a deterrent.

What happened to “getting tough” on Wall Street?

Comments

[Graham and ...:]

The SEC doesn't like to "get tough" on any one. To them, a $1 penalty is about the same as a $1 million penalty. It goes into the "win" column. But traders aren't fooled.

Jul 27 01:31 PM