NEW YORK (TheStreet) -- It's official: Barack Obama is now an unmitigated disaster when it comes to fighting stock fraud.
If you had any hope that he would represent a change from the dismal record of the Bush administration when it comes to Wall Street and corporate crime, you might as well give up right now.
Nothing Obama has done (or, more frequently, not done) in this administration -- not even his Justice Department's failure to pursue criminal cases against banks for their role in the run-up to the financial crisis -- prepared me for the bombshell he dropped on Thursday, during his much-ballyhooed jobs speech.
As is typical for this administration, he coated his latest surrender to the Republican party in honey-lathered rhetoric. His aides are calling it "crowdfunding." I call it a "green light to stock fraud."
During his speech, if you were listening carefully, you might have noticed that Obama said as follows: "We're also planning to cut away the red tape that prevents too many rapidly growing start-up companies from raising capital and going public."
Aneesh Chopra and Tom Kalil -- respectively, the U.S. Chief Technology Officer and Deputy Director for Policy at the Office of Science and Technology Policy -- translated that soaring but meaningless rhetoric into nitty-gritty in a blog post on the White House Web site that evening.
"As part of the President's Startup America initiative," they wrote, "the Administration will work to unlock ... capital through smart regulatory changes that are consistent with investor protection." Chopra and Kalil went on to say that "this means reducing the disproportionately high costs that smaller companies face when going public, as well as raising the cap on 'mini' public offerings (Regulation A) from $5 million to $50 million. It also means responsibly allowing startups to raise money through 'crowdfunding' -- gathering many small-dollar investments that add up to as much as $1 million."
David Schweiker, a Republican congressman from Arizona, immediately saw this for what it was: an undisguised victory for the GOP. Obama was adopting Republican legislation that passed the House Financial Services committee in June. "Obama Backs GOP Plan to Exempt Some Companies from SEC Registration," a headline in his press release crowed.
This didn't get much attention in the rush to claw through the details of the Obama job plan. But Sam Antar, convicted felon and mastermind of the Crazy Eddie stock fraud, blogged about it the following day.
Antar, who navigated the Crazy Eddie stock fraud past gullible investors and clueless analysts in the 1980s, immediately recognized what this means: It's not a Democrat-Republican issue, but one of criminals versus investors. "Why White-Collar Criminals Should Thank President Obama and Congressional Republicans," goes the title of his blog post.
You don't have to be a reformed felon like Sam Antar to understand how dreadful this idea truly is. To anyone who followed the dreary history of microcap stock fraud as it gathered steam in the 1990s, this plan is breathtaking in its naivete. Investor ripoffs were rife among the smallest echelon of the equities market, with microcap offerings being ripe for exploitation by unscrupulous stock promoters.
While SEC registration was anything but a panacea, removing registration entirely for offerings in the $5 million to $50 million range greatly expands opportunities for private-placement fraud, a peril that I saw frequently during the bad old days of microcap fraud in the late 1990s.
Those days, by the way, were the era of Bill Clinton and his self-aggrandizing SEC Chairman Arthur Levitt, proving that incompetence in dealing with stock fraud is by no means a Republican monopoly. At one microcap brokerage that spun out of control in the early 1990s, Hanover Sterling, 12,000 investors were ripped off in sales of worthless stocks. While their aggregate losses were not as high as the ones that afflicted Bernie Madoff's victims, the amount of investor savings destroyed was, proportionally, often the same.
And mind you, Hanover dealt in stocks that were registered with the SEC. Had there been no registration requirement, the ripoffs of that era would have been even worse. What worries me about "crowdfunding" -- when it involves weakening regulation of the capital markets -- is that it is more than just shoddy rulemaking. What Obama did in his speech, and what his aides did in that White House blog post, was to adopt the Republican-Libertarian "regulation is bad" ideology, that the only way forward is to deregulate the securities market. The underlying assumption is that raising capital in the markets should be cheap and easy, that "red tape," as Obama put it, is bad.
I disagree. I think that red tape is good, if it means preventing thieves from preying on investors. And let's face it: Unscrupulous stock promoters don't hand out business cards saying "I'm an unscrupulous stock promoter." Weeding them out requires coherent regulation and competent regulators. Raising capital in the markets should be, if anything, harder. Time and again, it's been proven that the markets are simply not capable in dealing with stock fraud. Regulators haven't been all that hot either, but they're all we have.
Chopra and Kalil include hyperlinks to bright-faced entrepreneurs in their "crowdsourcing" blog post. There were, for instance, some fresh-faced bakers of gluten-free organic baked goods linked on the White House Web site. Hey, I wish them the best of luck.
But I see other faces in my mind's eye when I think of cutting red tape in the capital markets: not entrepreneurs but cynical thieves and corporate hucksters whose aim is to line their pockets, not to bake a brand new kind of cookie.Two and a half years ago, before I grew accustomed to this kind of thing, I would have said that I expected better from the man who had been elected in 2008 with such fervent hopes from the populace.
Today, after disappointment piled upon disappointment, I have to admit that I've given up. Obama is a disaster when it comes to policing the markets, and he is only going to get worse now that campaign season is upon us, and his campaign coffers will be requiring constant replenishment.
Wall Street and the venture-capital community can be expected to pour money into the Obama campaign coffers, and I don't blame them. You know there's one constituency that Obama's fundraisers won't be nagging for bucks: the victims of his half-baked deregulatory schemes.
Gary Weiss has covered Wall Street wrongdoing for almost a quarter century. His coverage of stock fraud at BusinessWeek won many awards, and included a cover story, �The Mob on Wall Street,� which exposed mob infiltration of brokerages. He uncovered the Salomon Brothers bond-trading scandal, and wrote extensively on the dangers posed by hedge funds, Internet fraud and out-of-control leverage. He was a contributing editor at Conde Nast Porfolio, writing about the people most intimately involved in the financial crisis, from Timothy Geithner to Bernard Madoff. His book "Born to Steal" (Warner Books: 2003), described the Mafia's takeover of brokerage houses in the 1990s. "Wall Street Versus America" (Portfolio: 2006) was an account of investor rip-offs. He blogs at garyweiss.blogspot.com.