POST OF THE DAY
Berkshire Hathaway
Are Both The Markets and SEC Broken?

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By Parsad
August 31, 2004

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Last year, Sir John Templeton announced that he considers the markets broken, and that it would take some time for it to be fixed. As we know, the pain of the Japanese economy over the last decade has been partly exacerbated by them not admitting that they had billions of bad loans on the books. I'm just wondering if our market system is broken partly due to the fact that the SEC is not functioning properly when applying checks and balances.

Many of you may know that I have been an advocate of Fairfax Financial and Prem Watsa for some time now. The last four years have been very difficult, and some of you may be aware that I have been waging a battle against organized professional shorts and TheStreet.com's Peter Eavis.

Mr. Eavis, who has made Fairfax Financial his personal cause celebre, has been utilizing information from a couple of notorious sources. He recently wrote another article on Fairfax, to which I sent a letter to TheStreet.com. If you are interested, you can read them here:

Eavis article.
Parsad's Letter.

Recently the SEC fined broker Morgan Keegan $875,000, for not disclosing compensation from investment bankers on certain companies Morgan Keegan did reports for, and the bankers were selling. This in itself is not disturbing. What I was clearly perturbed by was this quote from Philly.com:

Janney and Morgan received higher fines than some of the other brokerages because they failed to preserve business-related e-mail records as required under federal securities law.

Janney had already 'reviewed and where appropriate strengthened its internal safeguards' before the SEC began its case, Janney spokesman Walter Westhead said Wednesday.

Westhead declined to comment on how the firm had changed its policies on accepting money in exchange for its research reports, or on whether the people who took the money and didn't disclose it still worked there.

Morgan Keegan spokeswoman Kathy Ridley said her firm had addressed the disclosure requirements and improved its e-mail storage policy.


And from USA Today:

The SEC said it also fined four of these firms � Adams Harkness, Janney, Morgan Keegan and Needham � for failing to preserve certain business-related e-mail between July 1999 and June 2001. The fines are included in the $3.65 million figure.

The four consented to cease-and-desist orders without admitting or denying wrongdoing.


In other words, the SEC fined these brokerages for securities violations, they agreed to pay the fine, but would not accept any blame or liability for their actions. How can this be? If they aren't guilty, then why pay the fine? Did they have enough incentive to correct their behavior?

In today's copy of the Vancouver Sun, David Baines, perhaps one of the best investigative business journalists I have read over the years, wrote an article about a company trading on the OTC Bulletin Board called Can/Am Auto Sales (CAUO.OB). Can/Am began trading in July at less than a penny, but the price climbed to $1.70 on August 17, 2004, when Can/Am issued a "Letter of Intent." I kid you not, this is what it said:

VANCOUVER, B.C., Aug. 17 /PRNewswire-FirstCall/ - (OTCBB:CANU - News) Can/Am announces it has signed a Letter of Intent to purchase all of the stock of a London company that owns a number of businesses, including a major European financial institution and a financial software platform. The combined net income of these businesses in 2003 was in excess of $30,000,000 US. Both sides are working on a definitive agreement, which proposes to involve a stock exchange of Can Am stock for the London company stock. If the agreement is signed, the London company will become the majority shareholder of Can Am. The Letter of Intent calls for an agreement to be signed no later than September 20, 2004.

On Monday, the stock soared to $7, and gave the company a market capitalization of $2.1B. Can/Am's current book value was $38,771 at June 30, 2004, and they have no revenues or earnings per share. The stock closed today at $5.10 per share.

I do not understand how a newspaper business journalist could develop such a damning case. Yet the SEC, whose job it is to monitor the activities of public corporations, seems to have far more difficulty detecting unethical conduct.

And this isn't just a case of a journalist finding one good story. Mr. Baines writes at least two to four stories like this a week! Naturally, as a Vancouver resident, he focuses on our penny-stock exchanges in Canada, but he comes up with regular doozies regarding U.S. companies. Maybe the SEC or the OSC (Ontario Securities Commission) should hire him.

Most of us realize that North American's have it quite good as far as corporate accounting, corruption and ethics are concerned. We have a very good system of checks and balances, with a very low percentage of deception occurring relative to the number of publicly traded companies listed, when compared with the rest of the world. Perhaps, public opinion of the stock market and corporate ethics is too good!

As we have seen since 2000, the amount of fines levied for securities violations relative to the amount of capital that was lost in a number of nefarious corporate debacles, seems like a very small slap on the wrist. It seems to be that a fitting analogy for the SEC's punitive measures would be like growing a pimple on someone's [rear]! It'll never smell like roses, but the pain is minor and eventually goes away! Cheers!


Become a Complete Fool
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.