SEC's regional offices present managerial problems, become an obstacle to reform
Thursday, June 10, 2010
For nearly a decade, Julie Preuitt told her colleagues at the Securities and Exchange Commission's Fort Worth office that she had found problems at a fabulously successful investment firm in Houston, saying its unmatched returns were probably the result of fraud.
But officials in the agency's enforcement division weren't interested in complex cases, just quick-hit lawsuits that would make the regional office look active, according to a review by the SEC inspector general. They brushed off her warnings about the Houston enterprise run by R. Allen Stanford -- only much later exposing it as one of the largest scams ever: an $8 billion Ponzi scheme.
So Preuitt was dismayed in 2007 when the Fort Worth office decided to extend what she feared was the same quick-hit approach to other work. Her complaints centered on a new method of inspecting financial firms that she protested was motivated only by a desire to boost the office's exam statistics. Preuitt was also essentially demoted after vocalizing her complaints, according to a second report by the inspector general.
The introduction of the new inspections, dubbed raves, followed by Preuitt's reassignment, opened a rift between Fort Worth managers and staff that continues today, undercutting the effort by SEC leaders in Washington to rebuild the agency and promote coordination after years of setbacks, according to current and former SEC officials and internal agency documents, including three separate reports by the SEC's inspector general.
Managing the SEC's 11 regional offices has long posed a difficult challenge. Breakdowns in coordination among the New York, Boston and Washington offices, for example, helped Bernard Madoff get away with his Ponzi scheme for years.
These failures are among various agency shortcomings documented over recent years in internal reviews and media reports. The accounts have in part blamed an agency culture that favored easy cases over difficult ones, as well as a deadening bureaucracy and a workload that has overwhelmed the staff.
The Fort Worth office investigates alleged wrongdoing by public companies and financial firms in Texas, Oklahoma and Arkansas and conducts periodic reviews, or "exams," of financial companies. The region is home to some of the country's largest public companies, and most financial firms have major offices there.
Fort Worth's fumbling of the Stanford fraud investigation was discussed in an inspector general's report published two months ago. But its findings that the office failed to act on credible concerns about Stanford -- potentially costing investors more than a billion dollars -- only hinted at broader problems within the office.
Tensions in Fort Worth escalated in 2006 after Preuitt, an assistant regional director for exams, was beaten out by her colleague, Kimberly Garber, for the job of overseeing the office's exams of financial companies. Soon after, Garber told the staff she was interested in boosting the number of exams the office conducted, and later decided to introduce a new half-day exam for brokerage companies that sold investments to customers or traded on their behalf. In these exams, SEC officials would interview management and review company policies for complying with securities rules, but did not examine company records. The end result was a page-long summary.
Several lower-ranking officials, including Preuitt and her deputy, Joel Sauer, protested the new type of review, according to agency documents and current and former officials. Preuitt and Sauer said that the rapid-fire exams were an artificial way of boosting the number of exams the Fort Worth office conducted, were cursory at best and duplicated work being done by other regulators.
Garber decided to proceed with the exams. Preuitt protested vocally and repeatedly, contacting agency officials in Washington to complain about the raves. But agency officials in Washington let them proceed in the hope of spotting more cases of financial fraud, according to SEC spokesman John Nester.
Her superiors -- Rose Romero, head of the Fort Worth office, and Garber -- considered Preuitt antagonistic in the way she voiced her objections. They took action against her, removing Preuitt, a 16-year veteran, from the exam program and placing her in a job with far fewer responsibilities, according to the inspector general's report.