Ever get frustrated with attorneys who fuss over precise contract wording?  They do it for good reason:  In negotiating and drafting agreements, millions can be won or lost by the placement of commas or parentheses.   Chartbrook v. Persimmon Homes, decided July 1, 2009 by the British House of Lords,* vividly illustrates the principle.

Chartbrook and Persimmon Homes thought they understood each other, on October 16, 2001, the day they inked a deal to develop 100 flats totaling 50-60,000 square feet of “internal area”.   Not so.  It took eight years, untold thousands in legal fees, three courts and 40 pages of Law Lords’ verbiage to unravel what could have been resolved at the front end with a few strategic keystrokes.   Did Persimmon owe Chartbrook £4,484,862 or a mere £897,051?

In their opinion reversing the trial judge and the Court of Appeals — which interestingly found the contract “clear, certain and unambiguous” with “straightforward arithmetic” — the Law Lords held for Persimmon.

While the Lords found the agreement clear on most points, it was  ambiguous with respect to that half of the price formula termed “Additional Residential Payment” or “ARP”.  The contract defined ARP as follows:

23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value [MGRUV] less the Costs and Incentives

At trial, J Briggs thought the interpretation obvious:

ARP means 23.4% of something. To the question ‘23.4% of what?’ the clear answer is the excess of the price achieved for each Residential Unit over the MGRUV, less the Costs and Incentives.

Note well that J Briggs added a comma not found in the original contract.  The Lords, on the other hand, lamented the parties’ failure to reduce the ARP definition to an algebraic expression and dismissed the comma.  Two competing ARP formulas emerged:

1. ARP = 23.4% x (Sales Price – MGRUV – C&I), yielding £4,484,862, or

2. ARP = [23.4% x (Sales Price - C&I)] – MGRUV, yielding £897,051.

Through deep discussion and copious amounts of ink, the Lords adopted the second formula.  Lord Hoffman articulated the rule which guided their construction of the agreement:

There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] . . .  It is agreed that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The House emphasised that “we do not easily accept that people have made linguistic mistakes, particularly in formal documents”. . . but said that in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language”. In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.

Applying this rule, Hoffman continued:

It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another. . . The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed. I agree with the dissenting opinion of [appellate judge] Lawrence Collins because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense.

Ouch.  Acknowledging the hindsight advantage and clear superiority of algebraic expression, the parties might still have avoided the legal battle with this simple rewording of the ARP definition:

ARP = 23.4% time the net price achieved for each Residential Unit after deducting Costs and Incentives, in excess of the Minimum Guaranteed Residential Unit Value [MGRUV]

Looking for practical lessons from the case?  First, meticulous drafting is essential where the issues or amounts involved are material to the parties.  Where the issue is monetary compensation, a clear algebraic formula may be best.

Second, it is wise to include in every contract an “integration” clause that says, in essence, “this piece of paper that we have signed revokes any prior understandings of the parties and includes their entire agreement.”  In other words, you want to discourage courts as much as possible from considering evidence outside the four corners of the agreement itself.

Third, on the chance that a court (in or out of the United States) decides to consider outside evidence to aid in contract interpretation, it would be wise to preserve contemporaneous evidence of a “consensus” on key issues.  Compensation, price and payment terms are usually front and center.  Email trails can help narrow down the ambiguity.

Fourth, if during negotiations your attorney expresses misgivings about linguistic ambiguity in the draft, listening attentively may save you from reprising Chartbrook.  No one really wins when a dispute runs on through two appeals and eight years.  As a value proposition, upfront investment in quality relationship infrastructure (i.e., a well-drafted contract) pays big dividends down the road.

Fifth, attorneys who entered the legal profession to avoid math might want to consider a course in algebra.  In this case, I have a feeling some attorneys in the U.K. are wishing they had.

* * *

* For American readers, the “Law Lords” (or Lords of Appeal) of the British House of Lords are roughly speaking the U.K. equivalent of the United States Supreme Court.

From the War on Terror to the War on Wall Street, due process violations by government agencies are proliferating like nuclear weapons. Facilitated by widespread ignorance among Americans — general public, financial professions, and the federal judiciary — the pattern of abuse threatens not only American markets but the very foundations of American life.

In April 2009, the staff of the Securities and Exchange Commission took another bite out of due process by issuing without public notice or input a “Staff Accounting Bulletin” or “SAB” for the first time since December of 2007.

I stumbled on this unhappy fact after reading, somewhat in disbelief, the following text from Footnote 17 to HSBC’s March 31, 2008 Quarterly Financial Statements:

In November 2007, the SEC issued Staff Accounting Bulletin 109. . . which supersedes SAB 105 . . . SAB 109 revises the views expressed by the staff in SAB 105 to specify that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of written loan commitments that are accounted for at fair value through earnings. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 did not have a material impact on the HUSI consolidated financial statements.

Why disbelief? HSBC’s language assumes that SAB 109 is legally binding when, in fact, it is not.  SAB 109 was written by SEC staff (not the Commission who have legal rulemaking power) without any attempt at complying with 5th Amendment due process or Administrative Procedure Act notice and comment requirements. The SEC staff openly admit that their SABs are not law with this coy disclaimer:

The statements in staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission’s official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws.

Yet, the staff nevertheless proceed to unilaterally “amend” the Code of Federal Regulations to reflect the addition of SABs with language posted at the top of the SABs like this:

Accordingly, Part 211 of Title 17 of the Code of Federal Regulations is amended by adding Staff Accounting Bulletin No. 109 to the table found in Subpart B.

Registrants are thus confronted with stealth legislation written by SEC staff on their own initiative.  The SABs have the aura of legitimacy without real authority.  The SEC and its staff should know better, but registrants and audit firms should do their part by pushing back against this abuse of due process.

HSBC is an American company, incorporated in Maryland and headquartered in New York.  Its officers — especially its attorneys — should know not to treat a mere SAB as if it were law.  SABs are not “adopted” and have no “effective dates”. They are staff opinions, nothing more.

The SEC obviously knows this but they also know that Americans have forgotten the meaning of due process and are willing, in the interests of “protecting investors,” to wink at the SEC’s illegal rule-making behavior. It knows that corporate officers — cowed by congressional anti-fraud theatrics — are reluctant to take a stand against such abuse on the part of the sacred-cow SEC.

Enter SEC Commissioner Paul S. Atkins’ Feb 8, 2008 remarks to the Practising Law Institute.  Atkins effectively dismantled SAB No. 99 with which the SEC staff attempted to define what is perhaps the most important term in the securities law lexicon: materiality.

Here are excerpts from Atkins’ speech, last paragraph copied first:

The process of issuing Staff Accounting Bulletins is organized to avoid “complications” with the Administrative Procedure Act. Is that how a full-disclosure agency should operate? The Commission never voted on the views espoused within any SAB, so it does not and cannot represent the views of the SEC. Worse yet, SEC staff developed SAB 99 without public input. Substantive policy ought not to be made by the staff in private meetings, and ought not to be made based solely on the wisdom and experiences of SEC staff. . .

. . . One of the most glaring examples of lack of predictability is determining what constitutes materiality. The crux of our federal disclosure system is that all material information must be disclosed — with an emphasis on material. Yet the age-old question is: What does it mean to be “material”?

Issuers, investors, and regulators have struggled with applying the materiality test since the enactment of the securities laws. Materiality is an objective test: the Supreme Court has said that something is material if “there is a substantial likelihood that a reasonable shareholder would consider it … as having significantly altered the ‘total mix’ of information made available.”

It is not enough that some investors may view a fact as important; rather, it must be important to the reasonable investor. In coming to this standard, the Supreme Court in 1976 in TSC Industries v. Northway, specifically overturned a test applied by the Second Circuit — that material facts include all facts that a reasonable shareholder might consider important. Can you imagine what prospectuses and proxy statements would look like if that standard had prevailed? TSC Industries is an example of the Supreme Court showing judicial restraint by not expanding the securities laws. Does this sound familiar? We have seen similar restraint in recent Supreme Court decisions this year and last in the area of securities law.

In TSC Industries, the Supreme Court clearly understood the problem of materiality. In the unanimous opinion written by Justice Thurgood Marshall, the Court observed that “[s]ome information is of such dubious significance that insistence on its disclosure may accomplish more harm than good.” The potential liability for a fraud violation can be great and, so Justice Marshall explained, “If the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking.”

The SEC allowed the waters to be muddied on the issue of materiality in 1999 with Staff Accounting Bulletin 99. Anyone who has tried to apply SAB 99 is left with little certainty. Regardless of how quantitatively tiny a disclosure might be, the answer to any materiality question seems to be “it depends.” (Of course, too often it is said to be clear later in 20/20 hindsight.) And yet that bulletin has been cited by courts, SEC staff, and lawyers as authority for materiality. As a result of SAB 99, issuers feel compelled to inundate shareholders with “an avalanche of trivial information,” which was precisely the fear of the Supreme Court almost 32 years ago. Often, when you read a 10-K, it is as if you are reading Greek. Maybe we do need Hermes, after all, to interpret the content!

Would it surprise you to learn that SAB 99 does not necessarily represent the views of the Commission? As the title implies, it is a Staff Accounting Bulletin. . . .

Little wonder that two days ago the Russian State newspaper, Pravda, published a commentary — “We the Sheeple” — ridiculing the people of the United States for so easily abandoning our Constitution and free markets in favor of a Russian-style Marxism.

It must be said, that like the breaking of a great dam, the American decent [sic] into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people.

The Russians should know.  Meanwhile, Americans should demand that the federal agency charged with protecting investors and rooting out financial fraud cease and desist from the regulatory fraud of legislation without representation.  Of all of the SEC’s regulatory failures (and there are many) this one may be the worst.

For an eloquent illustration of how accounting innovations like FAS 157’s “fair value” regime are way beyond even above-average American financial readers, try Michael Rapoport’s May 1, 2009 article entitled
New FASB Rule Aims to Clarify ‘Net Income’.

Rapoport, trying to capture the meaning of the new SFAS No. 160, stumbles over one of the most basic concepts in the accounting literature — that “minority interests” in consolidated financial statements reflect the fact that “parent” companies don’t really “own” 100 percent of the assets or income of “subsidiaries” except those they wholly own.

If Coca Cola owns only 51 percent of Coca Cola Enterprises (it doesn’t, but let’s pretend that it does), Coca Cola’s consolidated net income should not include the 49 percent of CCE it doesn not own.   Sounds simple, doesn’t it?

Rapoport is no financial dummy.  No one who authors articles like this one on derivatives accounting could be.  So if a  guy like Rapoport is confused by SFAS No. 160, just imagine what SFAS No. 157 and 133 do to the average investor!  Against such a backdrop, why bother writing more standards?

Lenders have been hammered by the pathologically procyclical impact of FAS 157’s mark-to-market regime.  Hardly surprising, therefore, that banks and credit unions came out in force to support the latest FASB “clarification” of FAS 157.  Some other commenters, mostly from the “analyst” community, emphatically disagree.

Yesterday, the Financial Accounting Standards Board’s comment period closed on yet another proposed FASB Staff Position — denominated FSP FAS 157e — clarifying FASB Statement 157, the highly contentious standard on fair value measurement and disclosure.

Between its March 17 issuance and April 2 at 7:30 eastern time, FAS 157e garnered 367 comment letters (counting mine transmitted near midnight on April 1), more than triple the 102 comments posted last October on FAS it’s immediate predecessor, FSP FAS 157d.  The single largest bloc of commenters were banks and credit unions nearly unanimous in their support of the proposal, with some modifications.

The proposal has, however, come in for withering criticism from some quarters, mostly financial analysts and valuation “professionals,” whose lifestyles are heavily subsidized by FAS 157’s arcane, risk-metric-rich framework.  Others, like the New York Times’ Floyd Norris, view any liberalization of fair value standards as undermining the “integrity” of financial accounting.

As my comment letter explains, I disagree with Norris & Co. on several points including the notion that financial accounting and the FASB had any integrity to lose in the first place.  Individually, yes.  Institutionally, not.

The FASB has always been dominated — as the current FASB members’ bios demonstrate — by big-firm and big-academy politics.  In a professional sense, they are congenitally disconnected from the market they dominate with only spasmodic oversight by Congress.

I’ve been in the financial reporting business for nearly 30 years as a CPA, attorney, consultant, author and college professor.  I can say with authority that financial standards and statements are like sausage and pickles: once you’ve seen them made, you’ll find it hard to trust them ever again.

Financial statements are only as trustworthy as the management who prepares them while their luck holds and market conditions remain static.  The idea that accounting, valuation or risk management practitioners can provide reliable “forward-looking information” that magically invests financial statements with predictive capacity is nonsense.  By their very nature, financial statements are historical and always will be.  Anyone who still believes otherwise — including, apparently, all current FASB members — needs to read Nassim Taleb’s The Black Swan.

The federal False Claims Act (FCA) encourages private whistleblowers to sue, usually in partnership with the U.S. Department of Justice, to recover federal funds allegedly misspent by individuals, companies or local government agencies.

Rewards of blowing the whistle can be very substantial — up to 30% of the government’s recovery plus attorneys fees — but would-be whistleblowers must satisfy a number of stringent rules.  One of these is the so-called “public disclosure bar” of 31 U.S.C. § 3730(e)(4)(A) that bars most claims based on publicly available information the disputed definition of which is now before the U.S. Supreme Court in Graham County Soil & Water District, et al., v. U.S. ex rel Wilson (08-304).

In December 2008, after receiving briefs from the parties and various amici, the Supreme Court invited the U.S. Solicitor General to file a brief outlining the federal government’s interpretation of “public disclosure.”

The specific question in the Graham County case is whether, contrary to the 4th Circuit’s ruling, a whistleblower suit is barred if the information on which the suit is based is found in state or local government reports or audits as opposed to federal ones.

Today, in congressional action sure to give every internal auditor and financial analyst recurring nightmares, members of the U.S. House Capital Markets Subcommittee demanded that the Financial Accounting Standards Board (FASB) demonstrate greater flexibility and speed in changing market-to-market (or “fair value”) accounting rules in the face of today’s financial industry crisis, or else. Much of the commentary came across as a congressional call for an IASB-like principles approach in place of the FASB’s detailed rules-based approach.

House Financial Services Committee Chair Barney Frank (D-Mass) and Capital Markets Subcommittee Chair Paul Kanjorski (D-Pa), each in his own way, stated that mark-to-market accounting must be applied differently to different companies and industries based on their respective circumstances that changed must happen now, not later after more “academic” study. In his opening statement, Kanjorski declared:

We meet today to examine the much publicized and hotly debated mark-to-market accounting rules. . . Previously, I have taken the position that the Congress should not interfere through legislation in the area of establishing specific accounting rules. It seemed best that such technical work be left to the regulators, standard setters, and financial experts.

We can, however, no longer deny the reality of the pro-cyclical nature of mark-to-market accounting. It . . . has exacerbated the ongoing economic crisis. If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself.

To say that the Congress will have to act is not to advocate an outright suspension of mark-to-market accounting. If we do away with this standard entirely, accounting will revert to the very kind of subjectivity and sleight-of-hand that made mark-to-market necessary in the first place. The standard does provide transparency for investors, but its strict application in the current environment is, in too many instances, distorting, rather than clarifying, the picture. . .

As our witnesses explain the implications of this standard and offer solutions to improve its application, we must bear in mind that fair value accounting is not one uniform rule affecting all parties to whom it applies in the same manner. . .

Moreover, one industry’s predicament may require a unique accounting treatment or regulatory forbearance that will not solve another sector’s problems. In pursuing improvements, we need to recognize this fact. . .

Frank, as well, made some remarkable statements — some of which will create consternation in the accounting community — in his opening. Among other things, Frank suggested that write-downs of banks’ asset portfolios should be tied to the particular bank’s level of culpability for the decline in asset value:

We do have to have you move now. It is important that we get some speed. . . You are the FASB . . . cannot be the “slowsb”.  First, more realism and flexibility in the mark-to-market . . . Yes, we had irrational exuberance . . . but this is not the time to make up for past mistakes by excessive rigidity . . . by pretending that there is more reality and certainty in mark-to-market than there is. It should be applied with flexibility . . .

It does seem to me that if you are talking about an asset class that [has traditionally been held to maturity] and is performing and it is providing an income stream, that the case for devaluing that is a lot weaker . . . I do not think we have had enough flexibility in how we apply them.

Second, we need to give you some discretion in how you apply, how you react to these things. I am now asking everybody . . . if anything in existing legislation deprives you of discretion, in how you react in a mark-down-to-market situation, I insist that you tell us. That’s our job. Our job is to think about the extent to which we give you some discretion.

There is no point in having these things be so automatic. It does seem to me . . . if the institution, if a bank, has to mark down its assets, why it had to do that is something you take into account. If they did it because they made a lot of stupid decisions, that’s one thing. If they had to do it because of things that happened in the economy over which they had no control, over assets that are still performing, that’s another. Consequences of a write-down should not be identical in very different situations. . . .

In the context of Frank’s remarks, I can imagine consumers asking, “What about me?” Why, if banks should be treated with so much flexibility, should consumers not be given similar consideration by credit card companies and mortgage lenders who now base their credit limits and interest rates entirely on sterile mathematical formulas that fail utterly to account for the reasons why a particular borrower is financially underwater?

You can watch today’s hearing on video on CSPAN. Witness and committee members’ statements are accessible at the Financial Services Committee website.

When I first watched commodities traders at Chicago’s CME denounce President Obama’s Homeowner Affordability & Stability Plan, I was on board with the traders. “How dare anyone ask that I help pay off my neighbor’s mortgage? If they bit off more than they could chew, that’s their fault!” But I began to have second thoughts . . .

. . . whose misdeeds in this crisis are worse? How are the mistakes of individual home buyers morally or financially worse than similar miscalculations by these very commodities traders or by Lehman Brothers, GM, Chrysler or Citigroup? These companies and professionals are also losers, aren’t they? They arguably took risks that they should never have taken, in many cases totally abdicating their professional duties of care and due diligence, going deep into debt to buy stuff they did not understand and could not afford.

How can we rationalize a grudging “yes” to bailouts for large companies who have all the PhDs and technicians they need to protect themselves — and whose errors have wrought far worse damage on the market than those of individual mortgage holders, and whose employees and execs have since run off with bonuses in the $$ millions — while we tell smaller, less affluent families, “Get lost, you losers! Handle your own problems!” Is there a principled rationale to treat financially troubled companies and individuals so differently?

While we can argue endlessly over its metaphysical merits, readers with pragmatic objectives should read the Plan’s details on the White House website. You don’t have to be in bankruptcy or foreclosure to be eligible. The whole idea is to prevent more Americans from ending up there.  The Plan isn’t perfect, but it may be a good place for some folks to start.

Raising start-up capital is a tough job even in good economic times.  These days, with credit so scarce, it can seem nearly impossible.  Unfortunately, when entrepreneurs want to get things done “in the worst way,” they sometimes run out of patience and do just that.  Raising capital in 21st century America is a bit like taking a road trip across Iraq. The road is strewn with booby traps.

Entrepreneurs hunting for capital should take extra care not to inadvertently violate federal and state securities laws.  The rules are complex and nuanced making it easy to cross the line.  A common scenario these days features a bank that fails or changes hands, leaving technically “non-binding” commitments to fund new companies unfulfilled.  Faced with this dilemma, company founders unfamiliar with the rules may decide to contact just about everyone using all kinds of communications media — e-mail, blogs, website and even phone trees.  This approach can lead to hostile encounters with federal or state securities enforcers.

When funding a new company, a “stitch in time” saves not just 9, but 90 or 900.  Recently, for example, I saw an e-mail similar to the one below:

I am forwarding some information from some close friends.  We originally met them in Any State and became great friends.  Any Name wrote asking us to reach out to anyone that might possibly be interested in an investment opportunity.

Husband was in corporate America for most of his career doing IT as far as I can recall and they used much of the money they saved and invested and partnered with his parents to form this company a few years back and have been very successful.  They recently relocated to a small community in Any State to rehab a building and turn it into their warehouse/distribution center.  I can’t recall which one, but I believe it was one of the top five financial institutions that agreed to back them before they went under this past fall.

Please see her email below.  If anyone can make this venture a success, they can.  They are looking for private investors.  If you or anyone you know might be interested, please forward the very brief overview that she has provided. . . .

What could possibly be wrong with such a friendly, upbeat invitation to invest? In the eyes of the SEC and state “blue sky” regulators, a whole lot. You might think, given the current state of the economy, that governments would encourage just about any sort of entrepreneurial effort. Raising capital is essential to getting businesses going, right? Well, yes, but . . .

In the eyes of the government (and some academics), one of the reasons for our current economic downer is that too many people were too free to raise capital without regulation. They blame regulatory lapses for big banking and investment losses that, in turn, have pushed the stock market south and have cycled back to reduce market liquidity.

As a rule of thumb, company founders should assume that any solicitation to invest is subject to SEC regulation and registration unless they have identified a specific regulatory exemption. This, in fact, is how the law works. All securities offerings — private or otherwise — must either qualify for an exemption or be registered with the SEC and, potentially, state regulators under so-called “Blue Sky” rules.  Even when a registration exemption applies, the anti-fraud provisions continue in force even for “private” offerings.

Unintentional failure to properly qualify for an exemption can trigger severe, business-destroying financial penalties. It may come as a surprise to some readers that an e-mail like that described above can easily turn a “private” offering into a public one.  The line between “public” and “private” offerings is not very clear, so thorough understanding of the rules is essential.

Intentional violations involving stock fraud can result in more serious sanctions including prison time. Small business owners looking for capital should first learn about basic registration exemptions by reading the SEC’s Small Business Q&A.  However, because of the complexity of these rules and similar state-level laws, it is a good idea to talk with a knowledgeable attorney before approaching an investor with that first phone call or e-mail.  It goes without saying (almost) that investment solicitations should never be placed on blogs in classified ads.

The House of Representatives this afternoon passed the 1,071-page Obama-Pelosi “economic stimulus” bill on a 246-183 vote with no Republican support and seven Democrats voting against.  One clear group of winners are tax advisors who can look forward to additional work parsing the bill’s 344 pages of tax changes. 

Fully 14 pages of Division B of the bill are focused on the creation of a new income tax credit equal to 10% of the cost of “plug-in electric drive motor vehicles,” up to a maximum credit of $2,500.   It’s hard to imagine two less efficient mechanisms for quickly jump-starting the economy: more tax accounting and more research into technologically questionable “plug-in” electric cars but does anyone really believe the purpose of this bill is to stimulate the economy?

The bill now goes to the Senate where, with seven Democrat House members voting “no” and Senator Kennedy side-lined, anything is still possible.  Full text of Division A and Division B of the American Recovery and Reinvestment Act are available at Thomas.

Yesterday, the SEC announced that KBR and Halliburton have settled their Foreign Corrupt Practices Act case with the SEC and Department of Justice for total fines and disgorgement of $579 million.   The underlying bribes apparently totalled far less: a mere $5 million paid to a Nigerian political party for a train contract.

At this point, a voice inside my head keeps screaming, “What about Madoff?!”  The FCPA violation alleged here is essentially a victimless crime, functionally a penny-ante “bailout” of a few Nigerians that actually helped the companies’ shareholders.  Yet, this SEC complaint is undersigned by no fewer than six SEC attorneys who, judging from the factual timeline, were busily engaged on this case — together with uncounted DOJ counterparts — over at least the past five years while Bernie Madoff made off with $30-50 billion belonging to investors. 

Who at the SEC was responsible for this astounding misallocation of resources?  Six supposedly bright attorneys — although after last Wednesday’s Capital Markets Subcommittee hearing, one wonders — spent years fiddling with a few relatively innocuous millions in Nigeria while billions ran away just a few clicks away, in Manhattan.  Why?

Forgive me if I feel compelled to diminish the fact that this KBR-Halliburton settlement is, as the SEC crows, “the largest combined settlement ever paid by U.S. companies since the FCPA’s inception.”  Something is dreadfully wrong with a regulator that focuses on minutiae like bribery while billion-dollar Ponzi schemes proliferate in New York. This settlement is no reason to celebrate.  It should prompt some serious introspection.

After watching outgoing SEC enforcement chief Linda Thomsen testify last week on the Madoff affair, I think I know one reason why the SEC didn’t discover Madoff until he called them to confess.  Thomsen’s testimony was meandering, non-responsive and, at times, downright inarticulate.  It left me with the disquieting impression that the head of the SEC’s Enforcement Division had no idea of how markets work or how to inspire people to get things done.  It was a dreadful performance.

Perhaps Thomsen wasn’t at the top of her game, but that hearing was no time to get sloppy. Her hearing performance raises other questions.  How could a person like Thomsen rise to a position of such importance in the securities enforcement apparatus?  It defies explanation.

We can only hope that the SEC — if it is to continue in existence, which it may not according to Capital Markets Subcommittee Chair Rep. Paul E. Kanjorski — learns how to hire and promote people who know markets, understand the importance of wise resource allocation, and are capable of organizational execution.

Read the entire SEC complaint here.