Alan Reynolds

It was unseemly enough when the chairman of the Securities and Exchange Commission, William Donaldson, was obviously competing for the headlines with Elliot Spitzer, attorney general of New York. Now they have resorted to dueling rhetorically in the op-ed pages of The Wall Street Journal and The New York Times, respectively. As one headline put it, "Spitzer and SEC Fight for Turf." Turf involves dirt, if not mud.

Spitzer landed the first punch, criticizing an SEC settlement with Putnam and announcing that "the public will have to rely on state regulators." For one thing, wrote Spitzer, "the agreement does not address the manner in which the fees charged to investors are calculated." It also does not address the price of tea in China. As Donaldson explained, "We should not use the threat of civil or criminal prosecution to extract concessions that have nothing to do with the alleged violations of the law." Spitzer nonetheless threatens hugely expensive "concessions from the industry" even though the Putnam case is unique to that firm and unrelated to those concessions.

Spitzer has made unproven accusations of unknown significance against only a few other firms in the industry, yet journalists nonetheless keep alluding to an industry-wide "scandal." Donaldson opined that "the industry lost sight of ... its responsibility." That was unfair and untrue. The mutual fund industry consists of many firms, the largest of which have not even been accused of doing anything wrong.

Cartoonist Peter Steiner draws two fellows in a prison cell. One says, "If only it had been the SEC after us instead of the cops." Funny, but wrong. The SEC has no authority to put anyone in jail. Elliot Spitzer does have authority to prosecute actual fraud, but accusations of fraud are easier made in the press than in court.

Trying cases in the press is a cheap way to finance a political campaign and a lucrative way to finance the state government, and it avoids all those annoying legal protections accorded to defendants in a courtroom. "Industry-wide concessions" may also be extracted, which amounts to state prosecutors writing law without asking any elected legislators.

Alan Reynolds

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