Courtesy of Larry Doyle.
For those with an interest in learning how our financial regulators fail to perform in upholding both the law and their duty to protect investors, the SEC is “the gift that keeps on giving.”
As if we did not already know that the SEC has all too often failed to protect investors, let’s navigate and learn about the case of current SEC employee Kathleen Furey. From a recent complaint brought by Ms. Furey against the SEC:
The three-year ascent of Kathleen Furey to higher levels of official responsibility and pay came to an abrupt halt in 2008, shortly after she was forced to become a whistleblower.
In August or September of 2007, Furey approached Assistant Regional Director George Stepaniuk, her level-2 supervisor, to discuss the investigation of “name redacted” which seemed to be floundering, just like many investigations of other investment companies or advisers had floundered in the past.
Wouldn’t you like to know what entity this was? I would. Could it have been Bernie Madoff’s operation? Actually a review of the amended complaint reveals that Furey did work on the Madoff case — after it had blown up and the SEC was skewered by Harry Markopolos.
Furey believed that “name redacted” had violated both the Investment Company Act of 1940, and the Investment Advisors Act of 1940. Stepaniuk responded that his group—approximately twenty lawyers in the SEC’s Division of Enforcement — “does not do IM (investment management) cases.” In essence, Stepaniuk had arrogantly admitted that he was flouting two of the four major securities acts that Congress and the Code of Federal Regulations had mandated the SEC and its staff enforce.
Wow. Talk about a bombshell allegation regarding a total abdication of duty within the SEC. If this is not a smoking hot gun of enormous proportions, I do not know what is. I would maintain that Stepaniuk’s statement, if made as Furey asserts, is a clear cut indication of corruption within the commission.
If the SEC “does not do IM cases,” and we know they bring very few cases against the major banks, the question begs what was — and still is — going on within the offices of our nation’s top financial cops?
Furey faced a dilemma: should she join in Stepaniuk’s decision to flout the law and thereby violate the oath she took when she became an SEC employee or risk angering Stepaniuk by disclosing his personal moratorium on enforcing the IAA and ICA to his supervisors, the next logical step to correct the problem.
In October 2007, Furey approached Associate Regional Director David Rosenfeld, her level-3 supervisor, and requested a transfer out of Rosenfeld’s group. Furey told Rosenfeld about Stepaniuk’s self-imposed moratorium on “IM cases.” Rosenfeld reacted with indifference. Consequently, Furey took her concerns about Stepaniuk’s IM moratorium a step higher—to the Regional Director of the New York Regional Office, Mark Schonfeld.
Schonfeld offered Furey two options: she could recant her statement about what Stepaniuk told her or she could inform the staff of the SEC’s Inspector General, David Kotz of her allegations. In this way, Furey was forced to become a whistleblower.
Talk about cavalier. Again, if true and as alleged by Ms. Furey, Rosenfeld and Schonfeld should be thoroughly investigated by an external official. Although, if we were to look for Mr. Schonfeld these days, we would have to track him down by going through the revolving door as Schonfeld is now working at Gibson Dunn.
One year later—before the sting of her whistleblower disclosures to Rosenfeld, Schonfeld, and IG Kotz had worn off—NYRO’s indifference to enforcing the securities acts against one prominent investment manager—Bernard Madoff—would produce the worst failure or perhaps more accurately the worst scandal in the SEC’s history.
Whether Furey’s claims of the SEC’s unwillingness to investigate alluded to the Madoff scandal, we may never know. We may also never know why Ms. Furey suffers the consequences of the derailment of what was once a promising SEC career. Why is that? The SEC is contesting Furey’s request for the necessary info to pursue her case via a Freedom of Information Act request.
Furey remains an employee of the SEC and is fighting to be compensated at the level of which her own reviews indicates that she deserves.
If the new leadership of the SEC might like to convey a meaningful change in the manner in which it handles situations such as these, then they should release the information requested. Or are we to believe that perhaps the SEC still “does not do IM cases” and remains in bed with Wall Street and Washington instead of upholding its mandate to protect investors.
You cannot make this stuff up.
I thank the regular reader who brought this story to my attention. If you find situations such as these as troubling and disturbing as I do, I hope you will care enough to share it with your friends, family, and colleagues. In light of the most recent developments with the DOJ and the AP, whistleblowers need all the support they can get these days.
For those with an interest in reading more about this case, I welcome linking to Furey’s complaint brought against the SEC and related Exhibits:
FUREY v. SEC (click on image to access pdf document):
FUREY RELATED EXHIBITS (click on image to access pdf doc):
Related Commentary
Bloomberg’s William Cohan writes, How Bad Can It Be for SEC Whistleblowers?; May 15, 2013
Larry Doyle
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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.
