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The SEC's Next Shoe By: Frank J. Gaffney Jr.
Washington Times | Wednesday, December 24, 2008


The Securities and Exchange Commission has had a very bad couple of months. As a result of its successive oversight failures and selective enforcement of the nation's securities laws and regulations, so have the nation's financial sector, economy and taxpayers. Unfortunately, there is reason to believe that the SEC has another - and potentially even more problematic - "shoe" about to drop.

First, there were the successive meltdowns of publicly traded financial corporations for which the SEC must bear some measure of responsibility. As the Associated Press put it, the agency's own "inspector general determined that the agency's monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking." Everyone also recalls Warren Buffet's warning that derivatives such as subprime mortgage securities were "financial products of mass destruction."

Then came last week's revelations by the SEC's chairman, former California Rep. Christopher Cox, that the agency had repeatedly had "credible and specific allegations" brought to its attention "since at least 1999" concerning the self-confessed shyster-financier Bernard Madoff. Had the staff of the SEC (which included an attorney married to Mr. Madoff's niece) not persistently looked the other way, these warnings should have been sufficient to prevent what ultimately became a ruinous $50 billion Ponzi scheme.

The next fiasco for the Securities and Exchange Commission may prove to be its systematic failure to address the insinuation into the U.S. capital markets of financial products that, by their reckoning, do not conform to American securities laws and regulations. These products have come to be known collectively as Shariah-Compliant Finance (SCF) and further threaten what is left of the integrity of our free market system. Worse yet, they - and the theo-political-legal doctrine, Shariah, from which they spring - pose a real threat to our society and form of government, as well.

Just as with Bernie Madoff and the subprime fiasco, the SEC has been warned about SCF. A legal memorandum prepared last spring for the Center for Security Policy by David Yerushalmi, an attorney specializing in securities law, determined that Shariah-Compliant Finance entails both civil liability and criminal exposure. These risks arise principally from the inherent character of what authoritative Islam calls Shariah. It espouses, among other unsavory things, the establishment of a global theocracy through the violent overthrow of all other governments, including that of the United States.

Specifically, the study found that SCF operates as a kind of "black box" whereby Shariah advisers - some of whom describe their business as an instrument of "financial jihad" - operate in a highly non-transparent manner and investors are denied the disclosure and accountability to which they are entitled. Consequently, Shariah-Compliant Finance involves some or all of the following crimes: racketeering, antitrust, securities and consumer fraud, material support for terror and sedition.

The results of this study were briefed earlier this year on two separate occasions to SEC officials, without apparent effect. The lack of response prompted a senior member of the Senate Finance Committee, Sen. Jon Kyl, Arizona Republican, to write the SEC chairman on Aug. 14 asking a series of pointed questions about Shariah-Compliant Finance and seeking an assessment of the issues raised by the Yerushalmi memorandum. (The senator, who is second-ranking Republican in the Senate, also sent similar letters to Federal Reserve Board Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Attorney General Michael Mukasey.)

On Oct. 6, Mr. Cox replied with a letter that can only be described charitably as a non-answer. With the assurance that, "the SEC vigilantly investigates potential violations of laws and enforces them vigorously," the commission chairman averred that "U.S.-registered issuers offering SCF products must comply fully with the applicable disclosure requirements of the federal securities laws." The same could have been said of Bernie Madoff, Bear Sterns and AIG, to name just a few.

Mr. Cox also sought to allay Mr. Kyl's concerns by serving up a report on Islamic finance by the International Organization of Securities Commissions. This document simply reflects the same myopic view taken by the SEC and other U.S. government agencies: It fails to address the incompatibility of Shariah with not just Western financial institutions but with our political system and legal code.

The truth of the matter is that the Bush administration - led by the Treasury Department - and apparently even the SEC's regulators have been completely preoccupied with shoring up the beleaguered U.S. financial sector. One way to do that has been by recycling petrodollars now in the hands of Shariah-promoting states like Saudi Arabia and others in the Persian Gulf.

This requires, however, that official Washington ignore the real national security risks associated with allowing sovereign wealth funds, governments, princes and others bent on insinuating Shariah into America to exercise growing control over the capital and credit flows of our markets. To the extent that the U.S. government now owns and controls many of the financial institutions offering SCF products, such conduct is not only enabling seditious behavior. It explicitly violates the Constitution's establishment clause which prohibits state sponsorship of or preference for any religion. (As noted in this space last week, U.S. ownership of a Shariah-compliant subsidiary of the giant AIG insurance conglomerate has already prompted a federal lawsuit on these grounds.)

The highly publicized past failures of the Securities and Exchange Commission may prompt its dismantling or reorganization by the new Obama administration and 111th Congress. The SEC's next shoe to drop - namely, its failure to enforce the body of laws and regulations that would preclude Shariah-Compliant Finance in this country - may, unless corrected forthwith, contribute materially to Shariah adherents' efforts to dismantle the United States.

Frank J. Gaffney, Jr. is the founder, president, and CEO of The Center for Security Policy. During the Reagan administration, Gaffney was the Assistant Secretary of Defense for International Security, the Deputy Assistant Secretary of Defense for Nuclear Forces and Arms Control Policy, and a Professional Staff Member on the Senate Armed Services Committee, chaired by Senator John Tower (R-Texas). He is a columnist for The Washington Times, Jewish World Review, and Townhall.com and has also contributed to The Wall Street Journal, USA Today, The New Republic, The Washington Post, The New York Times, The Christian Science Monitor, The Los Angeles Times, and Newsday.


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