SEC Admits Its Powerless To Curb Stock Buyback Fraud

SEC Admits Its Powerless To Curb Stock Buyback Fraud

The Securities and Exchange Commission (SEC) has admitted it has no intention or ability to enforce rules designed to prevent manipulation of the market when companies buy back their own stocks according to its chair Mary Jo White.

White's comments came in response to questions on stock buybacks raised by Sen. Tammy Baldwin, D-Wisc., one of a growing band of politicians which includes presidential candidates Bernie Sanders and Hillary Clinton who are saying buybacks are cases of deliberate financial manipulation that keeps the rich wealthy and stagnates the financial situation of the working class.

Financial experts say stock buybacks are becoming a common practice through which corporations take profits, and instead of putting them back into the business buy shares of their own stock on the open market, building boosting demand and driving up the share price. Last year Companies bought back half a trillion dollars’ worth of their own shares.

The experts say share buy backs create short-term rewards for executives paid in stock options and stocks. The practice also makes corporations look good by limiting outstanding shares and raising reported ratio of earnings-per-share.

In responding to Sen Baldwin's quiry White admitted the SEC did not collect data that would show if companies were breaching allowed buyback limits.

“Performing data analyses for issuer stock repurchases presents significant challenges,” White said “because detailed trading data regarding repurchases is not currently available.”

William Lazonick, an economics professor at the University of Massachusetts at Lowell, said  “The companies have that information, but the SEC doesn’t collect it."

In her written response to Baldwin, White said his query asking for a list of all investigations undertaken by the SEC into possible violations of buy back rules could not be provided because companies had the option of reporting fully or not, effectively giving them a do-not-go-to-jail-card because even if they did not comply with request for buyback data, they did not violate any rules.

“I wouldn’t have thought that she would put it that way, but she said it,” said Lazonick.

White did however provide a list of  a number of enforcement actions by the SEC against stock market manipulation, including “pump and dump” schemes, through which companies make  false statements to boost their stock prices.  

In an issued  media statement Sen. Baldwin said, “While I am concerned that the SEC lacks the tools to properly evaluate this issue, I am also disappointed that the SEC’s official response does so little to even acknowledge the stock buyback phenomenon we are seeing in financial markets.”

In 2014 companies spent $553 billion to buy back shares. and over recent years business giants like General Motors, Apple, McDonald’s, Microsoft and Pfizer,  have taken part in buy back share operations. Also in 2014 returning profits to shareholders accounted for 95 percent of all earning. A Roosevelt Institute study shows under 10 percent of company earnings are reinvested.

Earlier this year, Sen Baldwin attempted to pass legislation required the SEC to investigate share buy backs but this was blocked by the Republican majority  in the Senate Appropriations Committee.

Bernie Sanders in an op-ed in the Boston Globe wrote "We must demand an end to stock buybacks.”and  Hillary Clinton has vowed to increase disclosure by forcing companies to deliver buyback information.

Lazonick said “More disclosure might start a discussion about what manipulation is, but we’re way beyond that. Why not recognize that this is manipulation, and say this is something we shouldn’t allow?”

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