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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Protecting Senior Investors in Today’s Markets


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
September 22, 2008

Thank you, Linda [Thomsen, Director, U.S. Securities and Exchange Commission, Division of Enforcement]. Good morning, and welcome to the SEC’s third annual Seniors Summit. I want to begin by thanking Linda and our entire team in the Division of Enforcement for the tremendous level of support and dedication to our mission that they’ve shown over the past many months of this market turmoil.

First and foremost, the SEC is a law enforcement agency — and as the investor’s advocate, there is no one more important to us than all of the senior investors represented here this morning. Protecting you from fraud and unfair dealing in the markets is job one — and it’s a big part of what we’ll be discussing throughout the Seniors Summit.

When we scheduled this summit many months ago, we didn’t know that we’d be in the midst of tackling some of the greatest challenges to our markets that we’ve ever faced. But so much the better that you are here, because this Summit reminds us who we’re fighting for and why our work is so important.

For seniors, who’ve saved for a lifetime, looking past the current market turmoil to the long run isn’t an option. They need access to their investments now. That’s why the SEC is working so hard to make sure that seniors’ retirement savings are protected.

The professional men and women of the SEC have been working around the clock, seven days a week, during these extraordinary times. If I could, I’d like to acknowledge by name every one of the SEC’s nearly 4,000 staff who are doing their part to fight for investors. What I can do is ask every member of SEC staff in this room to stand. To you, and to all of our colleagues here in Washington and across the country — please accept this hearty ovation for your dedication, your patriotism, and your public service. [Applause]

There are several interesting and vital topics on the agenda for this Seniors Summit, including how investors and their firms can make contingency plans for the effects that aging sometimes has on our ability to make decisions — issues such as diminished capacity; fraud artists that specialize in victimizing seniors; and the special questions of what kind of investments are suitable for investors with immediate cash needs and short time horizons. Let me add to this outstanding list of issues a real-time update on what the Commission is doing more broadly in this market crisis to maintain orderly markets and protect you as an investor.

First, you should know that if you have money in a securities broker-dealer firm, you benefit from the extensive protections provided by the Commission rules and its vigorous enforcement of those rules. The SEC’s Customer Protection Rule requires a broker-dealer to segregate customer cash and securities from the broker-dealer’s own proprietary assets.

That’s why, even in the recent bankruptcy of Lehman Brothers, the SEC-regulated broker-dealer, unlike the consolidated Lehman entity, didn’t declare bankruptcy. We have worked double time and around the clock to see to it that Lehman Brothers customers have continued access to their cash and securities. Retail accounts holding over one hundred billion dollars are expected to be transferred within days.

You should also know that even if a broker dealer were to become insolvent — which was not the case with Lehman Bros — if it’s a member of the Securities Investor Protection Corporation (SIPC), as most are, then you as the customer get protection for up to $100,000 in cash and up to half a million dollars in cash and securities.

You have seen that just last week, we took emergency action to temporarily restrict short selling in financial companies. This was done in close coordination with, and with the full support of, the Treasury and the Federal Reserve to protect the integrity of the securities market and to provide a bridge to the legislation being considered in Congress today.

We’ve also required new disclosures of short positions to the SEC, similar to the existing reporting that’s required for long positions. We’ve used our newly granted legislative authority over credit rating agencies to examine the way they rated mortgage-backed securities. Our recent report exposed weaknesses in the ratings process, and it has led to strong new rules to ensure that ratings are honest and not affected by financial conflicts-of-interest.

Last March, the merger of Bear Stearns and J.P. Morgan highlighted the inherent problems with the lack of any statutory authority for the SEC, or indeed any government agency, to regulate investment bank holding companies. Our voluntary program for investment bank holding company supervision, invented in 2004, was clearly not enough.

The standards for capital and liquidity that were borrowed from the commercial banking world fared equally poorly in both the commercial and investment banking context, when it came to anticipating the complete collapse of the mortgage asset market that led to the failure of Fannie Mae and Freddie Mac, AIG, Indy Mac, and a total of 12 commercial banks or thrifts already this year. As a result, beginning in March, we made immediate and dramatic changes to our program of voluntary investment bank supervision: first, by establishing a formal collaboration with the Federal Reserve for both investment bank holding companies and bank holding companies; and second, by working with the Federal Reserve and international regulators to improve the vital risk management and capital and liquidity standards that govern both commercial and investment banks.

From the SEC perspective, these recent market developments have driven home the need for clear statutory authority to substitute for the memorandum of understanding that the Fed and the SEC currently operate with in order to regulate commercial and investment banks. That is all the more important in light of yesterday’s announcement that Goldman Sachs and Morgan Stanley will become bank holding companies. We have formally made the case to Congress earlier this year, and I am encouraged that Congress has indicated that it will be taking up broad reform of our financial regulatory system.

Meanwhile, the SEC has also worked to enhance the disclosure to investors by financial institutions of off-balance sheet arrangements and the valuation of mortgage-backed securities. And of course we’ve trained our enforcement sights on fraudulent and manipulative actors. We filed fraud charges against two Bear Stearns hedge fund managers. We’ve brought a landmark case against a trader who spread false rumors designed to drive down the price of stock — a particularly dangerous offense in these fragile markets. We’ve initiated examinations of the controls that brokers have to prevent the spread of false information intended to manipulate stock prices. And last week we announced a major investigation to identify potential market manipulation by hedge fund managers, brokers, or institutional investors with significant trading activities in financial stocks.

When we launched the Seniors Summit three years ago, we had no idea the third annual summit would be this timely. Today’s headlines prove again that knowing how to protect yourself, and knowing how to protect the older investors you might advise, is always timely.

Work on today’s programs has been under way for months. I’d particularly like to thank the SEC staff, the leadership and staff of AARP, the Financial Industry Regulatory Authority, and the North American Securities Administrators Association for working to make this an informative day. And I’m pleased that so many senior investors have been able to join us this morning, both in person and via webcast. There is a lot to report about the SEC’s recent activities that relate directly to seniors.

We’ve brought more than 50 major cases over the past two years that involved securities fraud whose targeted victims were senior citizens. Our recent cases have ranged from Ponzi schemes and offering frauds, to schemes specifically targeting senior investors through free lunch programs and sales pitches disguised as seminars.

Just this morning, the Commission charged Gary Gross, a Florida broker, for defrauding senior investors of almost $3 million and personally pocketing more than $700,000 in commissions and fees. Our complaint charges that Gross lured customers into opening brokerage accounts by falsely promising high returns with little risk. Many of these customers were elderly and unsophisticated investors with conservative investment objectives. When investors complained, they were told to ignore their account statements. And Gross is alleged to have created false documents about their portfolios.

On Friday, we sued Global Marketing Consultants, and its former manager, David William Thomas, alleging that over a three-year period, they raised approximately $6.3 million from investors nationwide, about a third of whom were seniors. We allege that they falsely promised investors their money would be placed in a bank account and used only as collateral for certain investments, but that their returns were guaranteed to be high. In fact, Ponzi-type payments created an illusion of profitability. A judge in a parallel criminal action has ordered Thomas to pay back more than $4 million to investors and to serve 42 months in prison.

Several of the largest cases in SEC history, which we have brought this year, have also had a disproportionate impact on seniors.

You’ve probably either read about the failure of the auction rate securities market in February, or were affected by it. Thanks in no small part to subprime mortgages, the auction rate securities market seized up, leaving retail investors with long-term bonds that they couldn’t sell.

Hundreds of investors told the SEC that auction rate securities were sold to them as cash equivalents with higher interest rates than money market accounts, and that could be sold any time. The Commission’s Enforcement Division, state attorneys general — most notably in New York and Massachusetts — the North American Securities Administrators Association, and the Financial Industry Regulatory Authority joined us in investigating these complaints and many like them. As a result, the Commission’s Division of Enforcement has entered agreements in principle with four of the largest underwriters of auction rate securities, which have publicly pledged to unfreeze up to $50 billion of assets. When and if approved, these will be the largest settlements in SEC history.

In addition to these landmark cases, we are working with the North American Securities Administrators Association, the Financial Industry Regulatory Authority, and our state counterparts to expose abusive sales practices used to promote unsuitable investments to older investors.

The SEC has also partnered with the Department of Labor to protect workers’ and investors’ retirement savings. An agreement this summer formalized our information sharing to protect $5.8 trillion in retirement assets of American workers, retirees and their families held in employee benefit plans. One reason we’re here at this Summit today is that people are living longer. We can be grateful that longevity is now the norm, but that also means we must be more financially prepared. We also need to recognize that the shift from defined-benefit pension plans to 401(k) and similar plans has placed responsibility for managing retirement savings with the individual investor. That’s why our new collaboration with the Department of Labor is so important.

One final note. The work the SEC is doing to address the mortgage crisis, and the work all of the SEC staff is doing here to protect seniors, is very personal to me. These two priorities are also very connected.

Before my mother died a few years ago, she was pestered by a seemingly endless barrage of unsuitable investment schemes and foolish mortgage offers. Even while she was suffering from throat cancer and could barely speak, the scoundrels pursued my mother with unsolicited sales pitches over the phone and even in person. The products they were pushing weren’t just unsuitable, but they were affirmatively harmful to any senior in her circumstances. The investment products they were selling would have locked up her modest savings, with huge penalties for getting more than a little of her money back. One persistent mortgage salesman repeatedly pestered my mother to refinance her safe, low-rate 30-year mortgage with a short-term loan that had a balloon and a teaser rate.

I know that all of you, too, have very personal reasons for working together with us at this Seniors Summit today. On behalf of the SEC and America’s investors who are looking to you for help, thank you for participating. To those of you in this room who are investors, thank you for attending. And for those of you watching the webcast across the nation, stay tuned for an outstanding program.



Modified: 09/22/2008