Paradox 1.01: Who Shaves The Barber? Who Regulates The Regulator?

One of the great 20th century philosophical conundrums – The Barber’s Paradox - is attributed to Bertrand Russell and it is still used to teach logic and logical thinking today.

Wikipedia describes the paradox thus:

The Barber's Paradox
“Suppose there is a town with just one male barber; and that every man in the town keeps himself clean-shaven: some by shaving themselves, some by attending the barber.
It seems reasonable to imagine that the barber obeys the following rule: He shaves all and only those men who do not shave themselves.

Under this scenario, we can ask the following question: Does the barber shave himself?

Asking this, however, we discover that the situation presented is in fact impossible:

- If the barber does not shave himself, he must abide by the rule and shave himself.
- If he does shave himself, according to the rule he will not shave himself”

One of the great 21st century paradoxes is “Who regulates the regulator?”

The Regulator's Paradox

Suppose there is a market where everyone is held to the highest standards – each participant either keeps their nose clean voluntarily – ie follows the regulator's rules - or has their nose forcibly cleaned by the regulator.

The regulator is, of course and by definition, a participant in the market.

Under this scenario we can ask ourselves the following question:

Does the regulator regulate himself?

Asking this, however, we discover that the situation presented is in fact impossible. No one, it seems, regulates regulators – least of all in SEC-land.

Dramatic proof of this was presented today when one of the SEC’s longest serving Commissioners – a Harvard lawyer and businessman - made the kind of pronouncement for which senior US capital market figures are becoming increasingly well known (See John Thain of the NYSE’s preposterous claims about London’s AIM exchange at Davos).

But it wasn't a mere Exchange head who sparked today's philosophical test. It was Commissioner Roel C. Campos widely quoted remarks . Crains’ Investment News captures the gist under the following headline:

“Campos decries AIM's 'casino' culture”

Quoting an interview with Dow Jones, the article goes on as follows:

“Securities and Exchange Commissioner Roel Campos called out the London Stock Exchange Group PLC's Alternative Investment Market for its "casino" culture, saying that it has become a place that companies flock to due to its low level of oversight.

"I'm concerned that 30% of issuers that list on AIM are gone in a year," Mr. Campos told Dow Jones Newswires at the 11th annual SEC Regulation Outside the United States Conference.

"That feels like a casino to me, and I believe that investors will treat it as such."

Many of the LSE listed companies don’t even meet SEC standards for over-the-counter or pink sheet markets, he said.

"It's a losing proposition to tout lower standards as a way to promote your markets," Campos told Dow Jones.

For those of us who are subject to the SEC’s regime (and I am, as a Director of two large multinationals) this is powerful stuff.

If such a criticism were true, then only a fool or a crook would possibly consider an IPO on London’s AIM.

And it has to be true, doesn’t it, because the SEC is the guardian of truth as we know it.

They bear this onerous responsibility not just throughout the capital markets of America but. rather chillingly as uncovered by the title of the conference at which Campos was quoted - globally!)

The SEC stands for everything clean and pure - ensuring standards, as we are reminded by Mr Campos, of only the highest order.

The impact of this is, as many a US-listed company Director knows, is enormous.

Make even a marginal slip of accuracy – say incorrectly code an accounting item, wrongly state a geographical allocation, or slip up on the fine details of international acquisition accounting and the SEC is down on you like a ton of bricks.

Typically, the onslaught starts with a piercing letter and is followed up by meetings, calls, declarations, depositions and the whole panoply of regulatory investigation and enforcement until you have either convinced them of your innocence or published a correction on Edgar.

Oh, and in most cases you have to disclose the existence of the letter to the market (using an SEC filing) which guarantees screaming headlines announcing SEC investigations and implying felonies not far short of murder.

I estimate that an SEC letter costs a company a minimum of $250,000 of attorney fees, internal costs and time - plus whatever the impact of an "investigation" is on a company's shareprice and reputation.

And I don’t blame the SEC, the Federal Government standards demand their enforcement of and adherence to the highest standards of integrity.

Take the simple matter of information quality. As the SEC's own charter demands:

“Quality. The Commission takes pride in the quality of its information and is committed to disseminating information that meets the Commission's already rigorous standards for objectivity, integrity and utility. Commission divisions and offices should treat information quality as integral to every step of their development of information, including its creation, collection, maintenance and dissemination"

And who could argue with that? Keeping the market’s participants’ noses clean is a fundamental prerequisite of an orderly market.

But hold on – what did Campos say? What were the objective grounds of high integrity that informed his assertion that AIM was a casino?

The foundation, you will recall was:

“I'm concerned that 30% of issuers that list on AIM are gone in a year”

Now it doesn’t take an expert to see what is wrong here. Where widows and orphans’ futures are at stake, a market that loses a third of its new entrants within a year is clearly not a market as we know it.

Run the math.

Actually, don’t bother, anything so unstable would clearly be a total disaster from the perspective of any rational investor with anything other than an oilman’s appetite for risk.

Unfortunately, there is one tiny flaw in Campos’ data – the pesky matter of a misplaced zero.

But what’s a zero I hear you cry – it’s nothing, by definition.

I don't now what Harvard was teaching when young Roel was there, but it clearly wasn't mathematics.

The actual number of companies that “are gone within a year” isn't 30%

Not so much a zero error – more an order of magnitude one.

If Campos had said 30% and the real number had been 25% few would have quibbled.

If he had claimed that say 15% of AIM companies churned each year, it might have raised a few eyebrows of those observers who fail to appreciate that markets for young companies tend to be more volatile than their bigger siblings.

BUT IN FACT THE NUMBER OF AIM COMPANIES THAT “ARE GONE WITHIN A YEAR” IS ONLY 3%!

So what was Campos on?

Well, we’ll never know because the evidence is destroyed and he’s heavily into damage limitation mode now.

Challenged later in the day by the Financial Times to justify his assertions he fell back on the age old claim made by all fools who engage their mouth before their brain:

The following piece appeared in the later editions of the Financial Times:

Asked by the FT if he felt that Aim was a casino, he said: “Absolutely not, I don’t believe it’s a casino and that was not the intention….What I was referring to was a generalised situation in which if [regulatory] standards are ignored and you have a spiral downward you could get into a situation where an exchange could be nothing more than a casino.”

So there you have it.

You make a little slip, you correct it under mild pressure and life moves on.
True if you're an SEC Commissioner.

Not true if you're a public company Officer.

Consider who would have made the first call to the CFO of a US issuer were they to claim that:
- their profits had risen by 30% when they meant 3%, or
- their market share had gone up by something approaching a third when it meant almost imperceptibly or
- its options had been dated 27 days earlier than was the case.

Yes, you’ve got it – the SEC.

And what would the SEC’s response be likely to be if the issuer then pleaded misquotation as their defence when, many months and many millions of dollars later they had their day in court?

Yes – you’ve got it. The answer is unprintable.

In the US, the question of who regulates the regulator will become ever more pressing as increasing numbers of savvy US companies recognise that capital, paper and profile await them in a well regulated market in a country where public servants are still expected to do their homework before opening their mouths.

Or put more simply, the constant stream of ill-informed propaganda emanating from the US will certainly deter the faint hearted from seeking a listing in London, leaving the road clear for US companies of quality to access AIM's advantages.

Oh and one other thing – if you have a moment, check out Commissioner Campos’ Bio on the SEC website.

There you'll discover that before he was appointed to the Commission, he was one of two principal owner-executives of El Dorado Communications, a radio broadcasting company, at its headquarters in Houston, Texas.

Just out of interest I Googled El Dorado Communications and Houston.

Nothing came up.

Must have been one of the 30%!

Comments

[REG CROWDER]

A Few Words on the Subject of Roel C. Campos

Inasmuch as Securities and Exchange Commission (SEC) member Roel C. Campos is from Texas, it might be timely to refer to an expression used by Texans to describe their friends and neighbors who can’t ever seem to be troubled to get their facts straight before shooting their mouths off:

“He’s such a liar that he has to have a neighbor call his dogs home.”

Given Commissioner Compos’ extreme form of “foot-in-mouth disease,” he isn’t exactly the world’s most dangerous critic of the London financial markets. His statements of fact are so far from reality and so easily disproved that he effectively discredits himself in real-time. His claiming that the annual failure rate on AIM is 30% when it is, in fact, 3%, was a pathetic spectacle indeed.

If you examine the texts of many of Commissioner Campos’ recent speeches, you will discover that they read as if they were written and delivered by a salesman for NASDAQ or the New York Stock Exchange. This is a grave betrayal of Commissioner Campos’ sworn duty under the law of the United States. The fundamental responsibility of the SEC is to protect investors. Period. There is nothing in the law that requires him to pump up sales for stock peddlers.

But it gets worse.

Permit me to offer you –

CROWDER’S FIRST PRINCIPLE OF AMERICAN SOCIETY, ECONOMICS AND POLITICS:

1. Regardless of what you have heard about the Securities and Exchange Commission, the reality is worse.

(And;)

CROWDER’S SECOND PRINCIPLE OF AMERICAN SOCIETY, ECONOMICS AND POLITICS:

2. Given the opportunity to use political influence to put money in their own pockets, self-described “conservatives” in America engage in personal behavior inconsistent with all known principles of conservatism. (Without getting terribly personal about it, this is not exactly unique to America, if you know what I mean.)

Roel C. Campos has spent remarkably little of his life in what I would call a legitimate business. (He was mostly a lawyer.) But he was, in fact, at one time one of two owners (that I know of) of Hispanic radio broadcasting company El Dorado Communications Inc. 1980 Post Oak Boulevard, Suite 1500, Houston, Texas 77056.

When it comes to debating the integrity of regulatory schemes, it seems to me, uh, you know, let’s just say that people who live in tin houses shouldn’t throw can openers.

While Campos was an owner of El Dorado, the company tried to persuade a regulatory agency of the U.S. government to pressure advertisers into paying it more money for its radio advertising. In this case, the agency was not the SEC. It was the U.S. Federal Communications Commission (FCC). (As in the UK, the regulation of broadcasting in the US is highly politicized. When politicians decide how things are bought and sold, the first things bought and sold are politicians.)

Evidence that El Dorado tried to use the FCC as a lever to intimidate advertisers into paying more for it radio advertising can be found in a January 13, 1999, press release posted on the website of the FCC at this address:

http://www.fcc.gov/Bureaus/Mass_Media/Informal/ad-study/eldorado.html

I am unable to find any documents on the FCC website indicating that Commissioner Campos ever disassociated himself from this statement. Tom Castro, Chairman and President of El Dorado Communications, was quoted at length in the FCC study mentioned in the press release. It appears that El Dorado Communications played an important role in bringing a U.S. government regulatory agency into the business of advertisers deciding where and how to spend their money.

I can’t and won’t say any of this was illegal. But this smells to me like a tactic to threaten companies with bad publicity and harassment from regulatory agencies if they don’t open their cheque books when advertising salesmen from El Dorado Communications come calling. It seems to me that the fact that Commissioner Campos would allow himself to be associated with such conduct utterly discredits anything he has to say on securities markets or regulatory integrity – anywhere in the world.

[REG CROWDER]

My Dear Fellow AIM4TECH Fans:
Just wondering what a little investigation might turn up, I asked the Texas Secretary of State's office to run a check on SEC Commissioner Roel C. Campos' old company, El Dorado Communicatins Inc. This is what they came up with:

Dear Mr. Crowder,

In response to your request we find the following information:

EL DORADO COMMUNICATIONS, INC.
Filing #: 12131306
Entity type: Foreign For-Profit Corporation (CA)
Date of Filing: June 1, 1998
Status: forfeited for failure to pay state franchise taxes on July 7, 2006
Last registered agent: Roel C. Campos, 1980 POST OAK BLVD., STE 1500,
Houston, TX 77056
From the 2003 franchise tax public information report:
Entity address: 9426 OLD KATY RD., # 10, Houston, TX 77055-6320
Management: TOM CASTRO-PRESIDENT, 9426 OLD KATY RD., # 10, Houston, TX
77055-6320
Our database does not contain telephone numbers.

Database searches are now available via our web based system called
SOSDirect. There is a $1.00 search fee associated with use of the system;
there is no fee to establish an account. This service will allow you to
retrieve information regarding business entities at your convenience since
the system is available 24/7. Please visit this site at
www.sos.state.tx.us/corp/sosda Should you have any specific questions about
SOSDirect, please call 512-475-2755.

Sincerely,

David Moerbe
Corporations Section

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(E-mail message from the Office of Secretary of State, State of Texas, ends here.)
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[anon]

Wow! I feel so much safer now that that was only 3%! Gosh, what a moron to question the integrity of the markets!

p.s. I hope you lost your shirt! I guess as a taxpayer, Congress is going to give you mine though.