No Time for Fraud: Roberta Karmel on the S.E.C.

...One regulatory initiative she thinks should be pursued vigorously is the SEC's steps toward making firms report the effect of inflation on their earnings--something businessmen are not hesitant to complain about among themselves but seldom spell out in reports to shareholders...

...with the rest of the Commission...

...Some of it, of course, must be constrained by the government, but only after public consensus establishes that it is foolishness, or worse...

...Clean...

...Perhaps the main reason, ironically, is that she returned to an agency staffed by bright, ambitious attorneys, much like Robe'rta Karmel in her mid-20s, who accepted uncritically that to be on ~he government's side of a case is to be on the side of the angels...

...I t involves considerable restraint and acceptance of the idea that no institution can be all things to all men...

...Rather, the SEC should simply concentrate on ensuring that consumers are not being defrauded...

...There is, she insists, quite enough fraud around to keep regulators busy...

...Few from Harvard did refugee interviews before Ezra Vogel's Canton under Communism of 1969...

...She herself continued to think of herself as liberal, at least in the traditional sense of that overstretched word...

...What should be done instead is to think through ~ current problems and design a regulatory strategy accordingly...

...I think that corporations ought to stick to making money," Karmel told me...

...She even worries that the SEC may be understaffed and the staff-it has underpaid...

...Fox Butterfie.ld and Richard Bernstein, for example, began by doing history Ph.D...

...tough," and "rigid," along with "smart" and "ambitious," suggest the way Karmel describes the man one briefly expects will be cast as the villain in her book, Stanley Sporkin...

...as, presumably, they did...

...9 I t l t o . . . . ~ . ~ 1 7 6 1 6 2 1 4 9 * l e o r * * e * * o , . * . * o _9 **~l*.J~o~.t=o*~**=~ **al*~176149 " ~ - " Fred D. Baldwin NO TIME FOR FRAUD: ROBERTA KARMEL ON THE S.E.C...

...Instea~d she often found herself a minority of one on the five-person Commission (which, before her appointment, had always been a five-man Commission...

...who joined the SEC staff about the same time that Karmel did, stayed with the agency to become director of its Division of Enforcement...

...If the Whole meeting is consumed by questions from the shareholder activists about whether or not the company should be investing in South Africa or selling baby food in undeveloped countries, or running plants-with nuclear power, then you don't have a chance for what I-think is an api}ropriate discussion of issues that are of most concern to real live shareholders...

...In law school, Karmel wrote a paper attacking McCarthyism, and in her book she attacks what she sees as a liberal version of McCarthyism aimed at businessmen, but one without a central McCarthylike character...

...This passage occurs early, in her book, but Sporkin is mentioned only three more times in its remaining pages...

...work before becoming journalists...

...Among other things, it makes it very difficult to encourage an intelligent dialogue between management and shareholders about matters that are vital economic concerns...

...This applies to both government and business...

...For more than thirty years, the SEC generally stayed within this philosophy, insisting that its main job was to see that the financial markets had enough information to function efficiently...

...But this may apply to'the Londons as well as to me...

...The SEC first resisted this 16 THE AMERICAN SPECTATOR NOVEMBER 1982 tactic, then acquiesced to the point of appearing to encourage it...

...Forcing firms to disclose material facts about their financial condition would not only discharge the government's duty toward investors, who could then make fools of themselves if they chose, but it would tend to improve business ethics...

...Brandeis, a successful investor himself, argued that investors in stocks and bonds did not need a federal bureaucracy to protect them from financial risk, but they did need protection against being lied to...

...Crime is quite common there, sin utterly unknown...

...The serpent has still not been sighted there...

...But they are political issues...

...Today "full disclosure" must mean something more than a periodic retrospective look at a company's books...

...She disassociates herself from any New Right antipathy for regulation per se, making clear that she would fight any attempt to restrain the SEC from .prosecuting business fraud...

...According to reports published at the time, his clashes with Commissioner Karmel were fierce and bitter, and Regulation by Prosecution is to a large extent an argument against the regulatory style Sporkin stood for...

...Two years earlier, Roberta Sega...

...President Franklin Roosevelt and the leaders of the 73rd Congress resisted this pressure...

...Indeed, her book and career suggest how debased the current political language has become: She was dismissed by "public interest" lawyers as the "most conservative" member of the SEC during the Carter Administration, yet what she was trying to conserve was the SEC's liberal mandate as conceived in the early years of the New Deal and based on an insight by Louis Brandeis, the original public interest lawyer...

...She thinks that we have already seen dangerous instances of the latter kind, which cannot be justified because the victims happen to be corporations...

...No unelected government official should wield that kind of power too long...

...Why, then, was she so often out of step ~fSee Fred D. Baldwin, "Naderism: Commerce on the Babylonian Model," The American Spectator, April 1980...

...On the one hand, it is clear, direct, and sensible, and makes points that may not be dramatic, but nevertheless need to be made...

...Its third chairFred D. Baldwin is a private consultant on energy conservation and social policy, and is working on a book on corporate governance...

...Deans are authority figures, manipulators of money and people, usually appointed by management...

...I don't know what ever gave the political activists of the 1960s and 1970s the idea that if corporations became politicized, they would solve the problems of pollution, unemployment, relations with South Africa, nuclear power, et cetera...

...But paradise beckons as I write...

...Even crooks like Soapy Molloy, selling his bogus silver mine shares, and wicked baronets like Sir Gregory Parsloe-Parsloe, intent on nobbling the Empress of Blanding so that his own Pride of Matchingham shou.ld be victorious, have no malevolence in them...

...She left the SEC in 1968 for private practice, where she developed an appreciation of the importance of business investment to the economy and concluded that most businessmen are neither dishonest nor anti-social...

...Supported from the Hill by Senator William Proxmire, Sporkin (who in 1981 became general counsel for the CIA) embodied the prosecutorial side of the SEC during the 1970s...

...This combination of directness and reticence suggests what is both valuable and frustrating in Regulation by Prosecution...

...Their feelings of grievance surface when they speak of Harvard's getting Ford Foundation money and then ask, "Did accurate knowledge of the flesh-and-blood realities of China under Mao emerge from this establishment or rather from the works of a few scattered outsiders and foreigners, often operating on a shoestring...

...There is some reason to doubt that the political activists she referred to ever .really had very high expectations of large firms...

...But I think shareholder proposals that are strictly political in the broader sense don't belong in the proxy machinery...

...Congress does not have the political nerve to abolish or change outdated or outmoded regulatory schemes and instead it gives out a message to the regulatory agencies to change--by erecting procedural barriers or refusing to allocate sufficient f u n d s . " That, she thinks, is as much an abdication of legislative responsibility as the tendency of previous Congresses to send out signals that regulators could g e t away with anything...

...I do not respect the Commissions under which he served for abdicating to Sporkin a policy making role that made him de facto head of the SEC in certain areas . . . . What frightened me most about Sporkin's power at the time I became a commissioner was the fear he aroused of both him and the SEC...

...Of businessmen who make grandiose statements about serving the public interest, Karmel remarked tartly: THE AMERICAN SPECTATOR NOVEMBER 1982 17 "Foolishness is the prerogative of anyone in our society, and there are certainly as many foolish people in the private sector as the public sector...

...The nearest we get to a designing woman is Stiffy Byng and her attempts_to blackmail Bertie into pinching a policeman's helmet...

...She did not succeed at that task...

...My own approach was largely historical...

...18 THE AMERICAN SPECTATOR NOVEMBER 1982...

...They have been staunch anti-totalitarians from way back, appalled at uncritical American acceptance of the Maoist revolution's ideal image in the 1950s, and committed ever since to exposing its evils through refugee interviews...

...The different sense of problem in the Harvard graduate school is indicated by the fact that out of 124 volumes on China published by the center there from 1955 to 1975, only 18 dealt with the People's Republic after 1949...

...Yet, as she writes, some analysts have remarked that many major American firms "have been engaged in a process of liquidation, because, after their financial statements are adjusted for inflation, they appear to have been paying dividends out of capital instead of real earnings...

...I believed," she writes, "that I was part of a new group of regulators, who would dispose of the useless and rotten parts of the btireaucracy that had accumulated since the New Deal began and build a better regulatory structure...

...It requires collecting data, sharpening definitions, and, above all, constantly questioning whether what one is doing is truly in the nation's best.interest...

...When this dubious deanship is combined with seeming soft on Mao, surely it should be shown UP, preferably before the incumbent loses, like all deans, his faculties...

...Although she uses the word "promotional" to describe this kind of regulation, she insists that she does not mean boosterism...

...Many wanted one modeled after state commissions administering "blue sky" laws, so called from a Populist complaint that fast-talking stock salesmen could persuade innocent investors into buying shares of the "blue sky" itself...

...Disillusionment would, after all, be out of place in Eden, which is where Wadehouse's novels take place...

...In the sixties and seventies this distinction was blurred both by image-conscious business executives and by social activists who bought stock to avail themselves of the legal rights of shareholders to challenge management...

...It is more likely that they were, in her words, "people who were unable to make their points in the political process...

...On the other, its tone is f0rmal, worded like a lawyer's brief...

...That may sound like a contradiction in terms, but it is easy to recognize the dynamics Karmel describes without reference to any towering villains...

...It is no doubt true, for example, that scholars maturing in a field pick up a set of assumptions that they have difficulty modifying or discarding as rapidly as circumstances and the dominant truth of the day keep on changing...

...The kind of work Karmel recommends is less glamorous than moral posturing and unquestionably more difficult...

...The shareholder proposals that are legitimate uses of corporate proxy machinery often get a fair number of votes...

...The Moselle is nicely chilled, the afternoon balmy, and the deck chair guaranteed not to collapse on impact...

...While I think it is not necessarily wrong or inappropriate for the governmellt to be concerned with corporate morality," Karmel said, "I think it is an inappropriate mission for an agency concerned with investor protection...

...One thing Karmel now feels the SEC coutd do is return t o its original mission of restoring public confidence in business so as to encourage capital formation through investment...

...They're economic entities...

...The financial press accused him of trying his cases through press leaks, and he unquestionably cultivated an image of toughness toward big business...

...Moreover, in the wake of Watergate and revelations of widespread corporate campaign contributions and overseas payments: virtue.lay in being "clean...

...Karmel, a young g r a d u a t e g f New York University Law School, had joine d the agency as a staff attorney in its New York Regional Office...

...Unlike Karmel, however, they had no experience in the private sector, nor perhaps her'capacity for introspection...

...She s~aw herS:elf as responding to Kennedy's call for aNew Frontier and more or less took for granted that both her own ambitions and the public interest would be served by prosecuting novel cases "where I might push the law io a new froniier...

...Some, such as Lockheed's payments to Japanese "offi'cials, caused political crises abroad and embarrassed the United States government...

...In 1964, a senior member of the SEC staff, who had been elevated to the Commission by President John F. Kennedy, became its chairman...

...Miriam and Ivan London's eloquent review of Fairbank's Chinabound (TAS, July 1982) is appropriately entitled Peking Duck," suggesting how the targeted creature is hung up, drained dry, then thoroughly roasted, and finally carved into slices, eaten, and in due time no doubt eliminated...

...Similarly, with regard to the overseas payments scandals that emerged during Watergate, Karmel thinks the SEC "spent too much of its energy in improving corporate morality even in situations where corporations were acting in a way as to maximize profit...

...In creating the Securities and Exchange Commission, they instead took a leaf from a book by Louis D. Brandeis, who had won a reputation as what would today be called a "public interest lawyer" fighting corporate interests in the courts...

...Her fellow Commissioners saw their roles largely as supporting staff-developed.positions, rather than setting policy...

...Reflecting on hbr own early experience, she writes: A bright, ambitious young government attorney wants to make a name for himself, or herself, and such a reputation is built on prevailing in difficult and controversial cases...

...For example, comparing the countryside and people of 1972 with the countryside and people we had seen in 1932-35 showed an amazing improvement...

...Such a comment could be dismissed as a clever bit of pro-business apologetics were it not for Karmel's professional record and longstanding support for strong government agencies...

...I think the Londons and I differ first in our focus of interest and sense of problem...

...Unlike many who go out through the much-maligned "revolving door" between *Roberta S. Karmel, Regulation by Prosecution: The Securities & Exchange Commission versus Corporate America...

...THE AMERICAN SPECTATOR NOVEMBER 1982 15 the regulators and the regulated, Karmel went back in again...

...A constant theme of my book," she emphasized in our interview, " i s that there should be less reliance on ad hoc prosecution and more reliance on rule-making...

...Instead, she has in mind two things...

...others were more nearly blackmail extorted under threat of confiscatory taxation or even seizure of assets...

...Very old-fashioned fraud," she adds...

...I f the government can capriciously deal with the powerful and respected," she writes, "consider how easily it can tyrannize the weak and the scorned...

...Her other great theme is the evil inherent in the neglect of due process-whether by a McCarthy "exposing" bureaucrats or by bureaucrats "exposing" business...

...I n s t e a d of viewing investors as producers who finance the business of America," she says, "the SEC has tended to look at them over the years as consumers who ought to be protected as to the value of their investment...

...In 1977 President Jimmy Carter, who had campaigned on a platform of regulatory reform, :asked her to rejoin the SEC as a Commissioner...

...If the novel is neither new nor unread, that reminds u s we have something to look forward to when we reach the real paradise...

...A f t e r the stock market crash of 1929, congressional investigations unearthed financial scandals as sleazy and headlinegrabbing as Watergate...

...Mark'Green, an independent legal activist associated with Ralph Nader and the former director of Big Business Day,t called her " P r e s i d e n t C a r t e r ' s worst regulatory appointment...

...D e s p i t e her reservations about the recent regulatory behavior of the SEC, Karmel disapproves of several current plans to make issuing regulations more difficult...

...The social sciences took longer to get started...

...Few, if any, of the mostzpublicized cases, however, involved fraud against investors...

...After Douglas left the Commission for the Supreme Court, however, the SEC entered a long rpe~iod of steady, and often dull, prosecuti0n~ fraud...

...Far from a kick-and-tell account of infighting at the Commission, the book is a respectful dissent from the notion "that white knights can do no wrong and a warning that, when panoplied with government power, they can do real damage...

...The collapse of Mao's roseate image that currently forms the dominant truth about China's revolution has been a personal vindication for the Londons, and the "self-satisfied" tone of Chinabound as a minor success story has no doubt provoked their review of it...

...Some of what they say about Fairbank seems to me valid, but not all of it...

...Karmel's account provides a good example of how people in government can advance their own careers by empire-building, yet never feel a conflict between personal and public interest because they are convinced that what is good for the SEC (or the EPA, or the ICC, and so on) is good for the country...

...This leads to a constant increase in the regulatory burdens on business without enforcemetit of preexisting regulations and interpretations...

...Jimmy Carter's "worst regulatory appointment" decries a loss of mission...

...They have to do with management remuneration, options, whether or not a board should be a staggered board, and questions that I think do concern the governance of the corporation or its economic future...

...Nonetheless, Karmel's summation of her feelings ~ ward her former colleague and antagonist is direct but restrained: I admire and respect Sporkin's industry, integrity, creativity and even his ambition...

...Some of these payments w.ere bribes to secure business...

...In her book, she describes Richard Nixon as "an evil man who tried to undermine the institutions of our government and almost succeeded," in part because he managed to taint her beloved SEC with its first political scandal...

...The first is a return to the New Deal capitalist faith t h a t investors, if given accurate information, not only can but should be allowed to lo0k out after their own interests...

...Politicians howled for a federal regulatory agency with power to ban the sale of dubious stocks and bonds...

...This type of work gives us a perspective on the Chinese revolution, though it seldom can compete with journalism in reporting on the current situation...

...What worries Karmel is the tendency of those in tffe public sector to seek short-cuts in the search for a public consensus by relying on regulators ahd the courts...

...In other words, senior bureaucrats need not be .Napoleonic for their juniors to believe, as Napoleon" wanted his troops to believe, that "every man carries a field marshal's baton in his knapsack...

...theses by teachers training in language and history...

...I do not want to see corporations in this country become more politically active...

...But because one had to prove that to be "clean" was to be "tough," "tough;' soon hardened into "rigid...

...After we have sat through all the bloody Brecht...

...I n n recent book, Regulation by Prosecution,* and in an interview for this article, Roberta Karmel explains why she no longer believes that the public interest is being served by pushing the law <into new areas...

...As a result, routine cases tend to be ignored, and c a s e s where new precedents can be established are pushed...

...In other words, more than five:sixths of these books were on pre-1949 topics, mainly begun as Ph.D...

...But who, except his publishers and nervous chairmen of meetings, ever appointed John King Fairbank to be "dean of Chinese studies...

...man, William O. Douglas, got into some lively battles with the officers of the New York Stock Exchange, and he put teeth into the agency's campaign against utility holding companies (under legislationthat was more directive than the Securities Acts...

...electric light the most efficient policeman...

...I don't think they are unimportant issues...

...Hoping to pick up where Douglas left off, he and his:colleagues began to expand:the agency's authority...

...Sunlight," he wrote, "'is said to be the best of disinfectants...

...In any event, Karmel thinks the SEC's acceptance Of their demands was a mistake...

...She became the most frequent dissenter against the majority's rulings, and soon was typecast as the "most conservative" member o f the SEC...

...Some private sector foolishness does not matter much, and some of it is penalized by the market...

...I think corporations today are more politicized than they ever ought to be...

...Simon and Schuster, $20.75...

...One thing that sets Karmel's perspective apart from much of contemporary liberM thinking is her insistence on maintaining a clear distinction between the roles of government and business...

...Some liberals grumbled that it was too cautious, conservatives would now and then complain that it was swinging its flashlight like a club, but, overall, its staff developed a reputation both for honesty anti.for adherence to the moderate mandate of its original legislation...

...The second thing Karmel means by "promotional" is a recognition that, while the old faith in capitalism is sound, the world has changed since the 1930s...

...She also watched the Nixon Administration from the outside, reaffirming her early c6nvictions--first formed in reaction to Senator Joseph McCarthy's red-hunts--that abuse of government power poses a greater threat to the Constitution than i-ndividual or corporate misdeeds...

...John K. F a i r b a n k , with a reply from Miriam and Ivan D. London DUCK SOUP A d i s t i n g u i s h e d Harvard Sinologist d e f e n d s his methods o f China w a t c h i n g . Anyone who lets himself be advertised as " t h e dean" of something asks for trouble...

...The end result is to politicize the corporation in a way that, ironically, is in the opposite direction to what the political activists ever wanted...