There are a few ways to interpret how the Securities and Exchange Commission handled a blatant conflict of interest on the part of one of its own lawyers, and none of them is particularly flattering.
If you don’t already know the story, see this Wall St. Journal editorial: The SEC’s Ethics: Washington’s double standard on conflicts of interest
…this week’s remarkable report from SEC Inspector General David Kotz disclosing how the SEC’s former top lawyer, David Becker, directly handled matters relating to the Madoff fraud case despite his mother’s $2 million investment with the firm, to which he and his brothers were heirs….
Despite a clear conflict, Mr. Becker didn’t recuse himself. He did (properly) report the conflict to his superior, Mary Schapiro, but she didn’t take the appropriate action in response.
How do we explain this failure? One possibility is that leadership of the Commission is clueless about what conflict of interest is. That seems unlikely; watching for conflict of interest at regulated companies is an important part of the Commission’s mandate.
Alternatively, it could be that this is a case of actual corruption (something not intrinsic to the notion of conflict of interest). That is, it’s possible that Becker was intentionally acting in a genuinely self-serving way, and that Schapiro was facilitating his attempt to do so. But there’s no evidence of that as far as I can see, and making that assumption is neither charitable nor consistent with our best understanding of what motivates wrongdoing. Self-serving rationalizations are much more commonly the mechanism behind wrongdoing than is actual pursuit of personal gain. So I’m willing to assume that Becker and Schapiro genuinely thought there was no real problem, that Becker was technically in a conflict, but that that conflict wouldn’t actually affect his ability to make the right decisions.
More likely, it seems to me, is that Becker and Schapiro, while understanding what conflict of interest is, how it is defined, etc., don’t really get the moral significance of the concept. They don’t see that conflict of interest isn’t about some personal interest actually having an influence on the integrity of the decision-maker. They don’t see that avoiding conflict of interest is about avoiding the shadow of doubt, a shadow that reduces people’s trust in the organization as a whole.
This sort of misunderstanding is alarmingly common in institutions that treat ethics as an administrative function. They focus on the rules, and on the processes and procedures that need to be built in order to enforce the rules. But too often, then forget why the rules are there in the first place.
Correction: The first version of this blog entry had a serious, repeat error, wrongly using Kotz’s name where Becker’s should have been.