Wednesday, July 28, 2010

So much for transparency

Dunstan Prial reports:
Under a little-noticed provision of the recently passed financial-reform legislation, the Securities and Exchange Commission no longer has to comply with virtually all requests for information releases from the public, including those filed under the Freedom of Information Act.

The law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from "surveillance, risk assessments, or other regulatory and oversight activities." Given that the SEC is a regulatory body, the provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot.

That argument comes despite the President saying that one of the cornerstones of the sweeping new legislation was more transparent financial markets. Indeed, in touting the new law, Obama specifically said it would “increase transparency in financial dealings."

UPDATE: John Carney finds more troubling issues:
One of the strongest justifications for outlawing kickbacks to lead plaintiffs in class actions is that the payments seemed to be part of the class-action extortion racket, in which plaintiff’s lawyers would file class-action suits any time a company’s stock dropped. Having a ready-made set of paid-off lead plaintiffs made this task all too easy.

Don’t be so sure that the SEC’s role in the whistle-blower process is a guarantee against similar abuse. In the first place, the structure of the law allows plaintiff’s lawyers to represent the whistle-blowers—even keeping the identity of the whistle-blower secret from the government. The lawyers will then collect the whistle-blower bounty, skimming a piece for themselves in the process. No doubt lawyers are already figuring out how to alert employees or other “whistle-blowers” at companies with falling stock prices about their potential windfalls.

The SEC itself is far from immune to jumping on the same bandwagons that attract the plaintiffs’ lawyers. Think about the misbegotten cases filed against allegedly fraudulent corporations that were accused of backdating stock options. More controversially, consider the case against Goldman Sachs [GS 148.05 0.82 (+0.56%) ], which the SEC brought with much fanfare and then dropped after Goldman agreed to pay a record-breaking fine.

That’s exactly the kind of deal that could enrich a whistle-blower and his lawyers—for very little public benefit.

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