Letter to David Kotz, Inspector General of the US Securities and Exchange Commission - Review of SEC Decision to Decline Case Against Bear Stearns
Letter
GRASSLEY SEEKS REVIEW OF SEC DECISION TO DECLINE CASE AGAINST BEAR STEARNS
Senator Chuck Grassley has asked a top government watchdog to find out why the Enforcement Division of the Securities and Exchange Commission declined to bring a case last year against Bear Stearns for improperly valuing mortgage-related investments.
In a letter sent today to the Inspector General of the Securities and Exchange Commission, David Kotz, Grassley requested a thorough investigation into the facts and circumstances surrounding the agency's decision not to pursue enforcement action against Bear Stearns. Grassley also asked Kotz to follow up on previous audit work on the Division of Trading and Markets at the Securities and Exchange Commission. The assessments affect large broker-dealers such as Bear Stearns.
Last year, Grassley along with Senator Arlen Specter issued a report on the Securities and Exchange Commission's failed investigation of Pequot Capital Management. The report found that senior agency officials showed extraordinary deference to a particular witness due to his prominence. The August 2007 report is available at http://finance.senate.gov. Click on legislation. Documents are posted in reverse chronological order.
The text of Grassley's letter to the Inspector General today follows below, along with a December 2007 story from the Wall Street Journal.
April 2, 2008
The Honorable David Kotz
Inspector General
US Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-2736
Dear Inspector General Kotz:
According to regulatory filings and a December 2007 Wall Street Journal article, the SEC Enforcement Division declined to bring a case against Bear-Stearns for improperly valuing mortgage-related investments. Given the later collapse and federally backed bail-out of Bear-Stearns, Congress needs to understand more about this case and why the SEC ultimately sought no enforcement action.
Moreover, I am particularly interested in this case in light of the SEC's failed investigation of Pequot Capital Management. As you know, in the final report of the Senate's inquiry into that matter, we found that senior SEC officials showed extraordinary deference to a particular witness because of his "prominence" as the head of Morgan Stanley.
Request for Investigation
In light my earlier investigation I need to know whether the same problems identified in the Pequot investigation were repeated in the Bear-Stearns case. Accordingly, I request that you conduct a thorough investigation into the facts and circumstances surrounding the decision to not pursue an enforcement action against Bear-Stearns. Please provide a final report on whether there was any improper action or misconduct relating to SEC investigation of Bear Stearns and its decision to close the investigation. The report should also describe and assess:
the nature, extent, and propriety of communications between Bear-Stearns executives or their representatives and senior SEC officials;
the decision-making process which led to the SEC's failure to bring an enforcement action following the drafting of a Wells notice; the reasons for declining to proceed with an enforcement action;
and the degree to which more aggressive action by the Enforcement Division may have led to an earlier and more complete understanding of the issues that contributed to the collapse of Bear Stearns.
Request for Audit
In addition to this investigative request, I would also like your office to follow-up on previous audit work relevant to issues surrounding Bear Stearns. The Division of Trading and Markets (Division) is responsible for regulating the largest broker-dealers and the associated holding companies. Offices within the Division are staffed with accountants and economists who are responsible for reviewing the market and credit-risk exposures of the broker dealers. Their review includes assessing broker-dealers' quarterly financial filings, ensuring broker-dealers are meeting net-capital requirements and that other financial ratios, such as liquidity ratios, are adequate. There is a special emphasis in reviewing the five very large broker-dealers, including Bear Stearns, known as the Consolidated Supervised Entity (CSE) Program. The Division staff exercises additional oversight of these firms and examines their risk models.
I understand that the OIG conducted a prior audit of these responsibilities in 2002. Please provide an update of the previous findings, determine whether earlier recommendations were implemented, and analyze the current function of these offices. The review should include a description and assessment of their missions, how the programs are run, their policies and procedures, the adequacy of any reviews conducted regarding Bear Stearns, and recommendations for improvements in the process.
Sincerely,
Charles E. Grassley
Ranking Member
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