On March 10, 2011, the House Financial Services Subcommittee on Oversight and Investigations held a hearing regarding conflicts of interest by David Becker, the Securities and Exchange Commission general counsel. Mr. Becker had recently resigned over this issue. Since February 2009, Mr. Becker oversaw the SEC’s legal work on the massive Madoff fraud, including how the SEC should deal with Madoff victims who got their money out before the massive fraud was exposed.
Last month, the Madoff bankruptcy trustee, Irving Picard of Baker & Hostetler, announced a $1.5 million clawback lawsuit against Becker and his two brothers. The Becker brothers were heirs to the estate of their mother, Dorothy Becker. Dorothy Becker, who died in 2004, invested roughly $500,000 with Madoff. In 2006, the three Becker brothers withdrew $2 million when they closed the Madoff account. Picard wants the Beckers to return everything above the original $500,000 investment.
Understandably, many are curious why Becker was involved in the very issue that is now at play in this lawsuit. In her prepared comments, SEC Chairwoman Shapiro stated:
It did not strike me that his mother’s account closed years ago would present a financial conflict of interest.”
Upon questioning, Ms. Shapiro made a similar claim, as follows:
I didn’t think the account of a long-deceased relative would cloud his work,”
To practically every American, $1.5 million is a lot of money, yet Charwoman Shapiro’s comments ignore the amounts involved. $1.5 million (or even a third of that since he needs to share it with his two brothers) will get most people’s attention. Such money is not forgotten since the issue of the return of that money is prominently in focus from over a hundred active claw-back suits that are in process.
Since Ms. Shapiro’s prepared comments made a big deal about how Mr. Becker’s potential conflict was cleared by the [again, former] SEC ethics officer, I did some additional digging into how that was considered. There is little available. In a May 4, 2009 email, general counsel David Becker writes to ethics officer William Lennox about a “Recusal question” Because of his position as general counsel, Mr. Lennox reports to Becker, so the entire communication lacks the desired independence. Becker describes the conflict, as follows:
… As I mentioned to you when I first started, I inherited some money from my mother’s estate that included the proceeds of an account held with Madoff Securities. My mother died in June 2004, and her estate was liquidated in 2006 or 2007. … The amount withdrawn was somewhere in the neighborhood of $2 million…
The Madoff Trustee has institute a small number of lawsuits to “claw back” sums that were distributed to by Madoff customers. … In theory, the Trustee could file such a suit against everyone who received distributions from his or her Madoff account. I have no idea whether any such lawsuit could be brought against me based on distributions from my mother’s estate. Among other things –
- The amounts involved are relatively small when compared to the $50-65 billion size of the Madoff scheme), so that litigation might not be cost effective;
- The amounts involved came to me as a beneficiary of my mother’s estate, and not from my own account;
- I had no involvement with the administration of any investments in my mother’s estate;
- The extent that my mother had a Madoff account, she almost certainly wasn’t aware if any wrongdoing (she was a social worker and an academic); and
- The proceeds from the account were used to pay estate taxes. …
My instinct is that any claim against me would be much too small and of dubious merit to bring in any event, but I can’t say that I’m certain.
Let me know, please, what I should do.”
We certainly now know that the $1.5 million lawsuit was filed. While all of Becker’s comments might be true, there can be little doubt that $1.5 million is a decent amount of money and that such a sum creates a conflict. Unless Becker is one of the wealthiest persons in America, characterization of $1.5 million being so small as to not cause a conflict of interest seems preposterous.
The SEC’s ethics officer upon which Ms. Shapiro relies responds to the above email with a one paragraph email. The response occurs a half hour after Becker makes his request. Here is how the ethics officer disposes of the issue:
The small size of the distribution, or the way in which you obtained a portion, are not relevant to whether you may participate (similar to the other matter we discussed last week). The question is whether the matter in which you are asked to participate will have a direct and predictable effect on your financial interest, however small. In this case, you are being asked to participate in a question about a specific interpretation of SIPA. As you note, this is a legal question distinct from any decision of the trustee to decide from whom to seek to “claw back”. There is no direct and predictable effect between the resolution of the meaning “securities positions” and the trustee’s claw back position. For this reason, you do not have a financial conflict of interest and you may participate.”
The above response is absolutely incorrect. The SEC was being asked to weigh in whether or not the trustee would have a valid lawsuit against Becker (and others similarly situated). Not surprisingly, the SEC is not now repeating the incorrect conclusion expressed by the ethics officer. Instead, the SEC is suggesting that the matter is just too small to cause a conflict. Interesting, the above email from the ethics officer says that the allegedly small size is not the proper analysis.
For example, Steven Cummins, in written testimony during the March 10, 2011 hearing, supported the SEC. Mr. Cummings had the gall to minimize $1.5 million of money that Mr. Becker and his brothers received and that is now at risk in his lawsuit, as follows:
We need some perspective. … What we are talking about is whether the Dorothy Becker estate…. will be able to keep some small amount [of money].
The SEC’s mishandling of the massive Madoff fraud must be the worst black mark in the history of the Commission. The SEC Inspector General Report on the SEC’s conduct showed incompetence at best, and fraudulent cooperation at worst. For this reason, the SEC needed to be particularly careful in the matters that Becker was addressing. Consequently, the casual manner of addressing the potential conflict is perplexing.
Ultimately, the SEC position taken in the Madoff bankruptcy case actually was detrimental of Mr. Becker’s position. Whether this was because of Mr. Becker or others will probably never be known. But what troubles me the most about all of this is the after-the-fact spin doctoring that the SEC and its advocates are now employing to minimize a conflict involving a lot of money. Yes, the failure to catch this conflict of interest shakes the public’s confidence in the SEC. However, the SEC’s failure to describe this properly after the fact tells me that the SEC administration just doesn’t get it.