[Text only of letters sent from the Commerce Committee Democrats]
The Honorable Janet Reno
Attorney General
Department of Justice
Constitution Ave. and 10th Street, N.W.
Washington, D.C. 20530
The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ms. Mary Schapiro
President
NASD Regulation, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Ms. Denise Voigt Crawford
President
North American Securities
Administrators Association, Inc.
One Massachusetts Ave., N.W., Suite 310
Washington, D.C. 20001
Dear Attorney General Reno, Chairman Levitt, Ms. Schapiro, and Ms. Crawford:
I am writing to thank you and commend you for your responses to my inquiry regarding the fraud and abuse plaguing the micro-cap stock market. I also appreciate the detailed briefing that your staffs provided four weeks ago. In response, I would like to make a few observations.
First, your enforcement efforts appear to be marked by an exceptional level of cooperation and coordination. Also, the number of criminal prosecutions has increased, reflecting both an increased willingness of prosecutors to take on these complex cases and a higher level of support being provided to U.S. attorney's offices by experienced SEC and NASDR enforcement staff. However, the ability to meet the growing demand for such support in the future is in question due to limited SEC and NASDR resources. Moreover, the sentencing guidelines for white collar crime are not tough enough to effectively punish and deter the miscreants, given the huge sums involved in today's stock market.
The coordinated approaches that you are taking to the conduct of surprise sweeps -- catching people in the act before they can hide or shred misleading sales scripts -- is laudable, as is your coordinated approach to bettering investor education. Financial illiteracy is a big part of the problem.
The SEC's recent rules and regulations changes are a good first step at stemming many of the types of fraudulent schemes uncovered by your enforcement actions, but more remains to be done. Prompt action is needed to address abuse and fraud associated with introducing brokers and clearing firms. However, in revising the rules and regulations in the micro-cap area, SEC and NASDR must keep in mind that there are a great many honest companies and honest market makers in this market and their ability to function efficiently must not be impaired. It is important that you seek and consider their input as you undertake regulatory reforms.
State securities regulators are an integral part of the solution to this problem. There seems to be a concentration of fraudulent firms in the New York City metropolitan area but the New York State Attorney General does not have statutory authority to conduct routine examinations and inspections of broker-dealer firms and their branch offices. This is an outrage. California is strong on corporate finance but weak on licensing and examinations. These and other deficiencies should be addressed as soon as possible in order to strengthen the lines of defense against unscrupulous brokers and disreputable firms.
Again, I commend you for your responses and your continuing efforts to address this serious problem and restore the integrity of this important marketplace. I respectfully request that you update your responses in six months and, in the meantime, that you cooperate with GAO in the investigation and reporting that I have asked them to do.
Sincerely,
JOHN D. DINGELL
RANKING MEMBER
cc: The Honorable Tom Bliley
The Honorable Michael Oxley
The Honorable Thomas Manton
Mr. Mike Burnett (GAO)
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