Does The Market Work As Well Without The SEC?

John Carney in his blog post, "Is The SEC Completely Useless?" wonders if the equities market does a better job than the SEC.

Carney mentions a recent research study, "Option Grant Backdating Investigations and Capital Market Discipline" by Kenneth A. Carow, Indiana University Kelley School of Business, Randall A. Heron, Indiana University Kelley School of Business, Erik Lie, University of Iowa Henry B. Tippie College of Business and Robert Neal, Kelley School of Business Indiana University, published in the Journal of Corporate Finance, August 12, 2009.

An excerpt from the Carow et al article's abstract follows:

Our results suggest that capital markets disciplined companies with suspicious option grant histories, often prior to, and irrespective of, any public revelation of an investigation into the matter.

As I wrote in my blog post, "The SEC Chases Fraud After The Fact" on August 15, 2009:

While the contra-factual of life without 75 years of an SEC is difficult to envision, the existence of the SEC did not prevent major securities and investor fraud. Additionally, the SEC is always requesting more funding and staffing to investigate and litigate fraud. It is unclear that the 33 and 34 Acts have decreased fraudulent activities.

It does not help any proponents for the continued existence of the SEC that, today, the SEC charged Philip Barry with running a $40 million Ponzi scheme that existed for thirty years and defrauded 800 investors.

From the SEC complaint:

From January 1978 through at least February 2009, Defendants conned hundreds of investors into investing over $40 million in the Leverage investment funds by promising lofty, but false, investment returns with guaranteed safety of principal and making numerous other misrepresentations.

Carney's complete blog post follows: