SEC: Porn, Ponzi Schemes and Accountability

Last Updated Apr 23, 2010 3:21 PM EDT

The latest in the continuing revelations about what was and wasn't happening at the SEC when the biggest Ponzi schemes in history were percolating: Examiners were watching and downloading porn.

A summary of pornography-related investigations involving some 33 SEC staffers was released this week, following a request by Sen. Charles Grassley (R-Iowa), who read about the SEC's porn problem in a February report in the Washington Times. The Washington Times piece, which had been derived through Freedom of Information Act requests, reported that at least two dozen SEC accountants and attorneys, some earning as much as $222,418, were spending their days subverting agency firewalls so they could download and watch porn at work. The report was right in every way except that it understated the problem.

Instead of two dozen wrongdoers, there were nearly three dozen, according to the summary report (thoughtfully posted by CNN). The report doesn't name names, but provides details about 33individuals, including a staff accountant, who had 600 pornographic images saved on her laptop and a senior counsel with 775 pornographic images on his computer. Another staff accountant admitted to investigators that he was looking at sexually explicit videos and web sites five hours a day.

Porn-addicted auditors are only part of the disturbing picture that's been revealed about the internal workings of the SEC in recent weeks. Another exhaustive report by the Inspector General found that SEC examiners had uncovered that Robert Allen Stanford was operating a Ponzi scheme back in 1997, but failed to do anything about it for nearly a dozen years, while the scheme grew to a stunning $8 billion.

Why didn't examiner's act? The report says that auditors were chasing smaller fish -- easy cases that would boost their examination statistics and make them look better -- and the Ft. Worth office's enforcement chief thwarted further scrutiny into Stanford, before attempting to go to work for him.

Likewise, the Bernie Madoff debacle resulted in a 400-page report, with 800 pages of exhibits. It still falls short of fully explaining why examiners had failed to spot and stop the nation's biggest Ponzi schemer in history, despite repeated warnings from Harry Markopolos, who has now written the true financial thriller "No One Would Listen."
The question now becomes what happens to all of those SEC auditors, attorneys and other (often highly paid) officials who managed to violate the public trust by using their work time to watch porn; subvert investigations; and otherwise ignore the warning signs of financial fraud that they were paid to investigate?

SEC spokesman John Nester said that the porn-addicts are in the process of being "disciplined."

"Each of the offending employees has been disciplined or is in the process of being disciplined," he said. "Some have already been suspended or dismissed."

Why weren't they all dismissed? The SEC must adhere to a list of guidelines that determine the appropriate punishment for employees, Nester said. These guidelines attempt to take their entire careers and contributions into account when determining whether to reprimand, suspend (without pay), or dismiss employees, he said.

As for the employees who ignored or subverted investigations into Madoff and Sanford, Nester said the agency's course has not yet been determined.

Stay tuned.