Santelli to Chilton: Will the SEC Serve Itself a Wells Notice Regarding an MF Global Bond Offering?

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Last week on February 12th we witnessed a short, but really testy exchange between CNBC floor reporter, Rick Santelli and CFTC Commissioner Bart Chilton.  In the usual blitz fashion, Santelli asked Chilton where was the CFTC on Halloween and why the agency allowed the SEC to dictate policy over the it’s own regulatory mandate?  We wrote about that development on MFG Facts just a few weeks ago.  Chilton demurred and  professed that was not his “understanding of what was going on.”  But he did not answer what did happen.

You can watch it here.

Let’s highlight two important points  that came out of this lightning interview:  Questions on evidence of material documents withheld from the public, which we might hear more about in the next weeks and months. (This was first reported by Bob English on the blog,, and expanded upon by Mark Melin of Opalesque here.) And that the SEC should send itself a “Wells letter.”

Santelli states in the interview that two Wells notices just went out to bond dealers.  A Wells notice is when the SEC informs an entity that is to be the subject of investigation. It is just a heads up there might be an investigation. These are generally sent when a firm did not make timely or complete material required public disclosures.

Santelli asks, “I noticed this morning that the wells notices went out, and that’s because the SEC said they didn’t give enough information on some bond deals. My next question is if the SEC knew in August which many documents seem to show that the $6.3 billion position existed in MF, a primary dealer, no less! Why did the August issuance of $300 million in new paper from that company not disclose that? And why doesn’t the SEC send themselves to Wells notice?"

Here Santelli is asking why absolutely material information was not disclosed in the offering, and at the same time alluding to the revelations published here on MFG and Opalesque that SEC had this information in hand before the bond offering.  So if the SEC knew of the information and knew that it withheld in the offering disclosures, why didn’t MF Global receive a Wells noticed right after the offering?  Or as the SEC also withheld this information, why isn’t the SEC sending itself a Wells notice?

Chilton defers saying he cannot speak for the SEC but agrees that this must be investigated.  In the same breath, he then quickly and defensively brushes Santelli off, stating that this is not how investigations are done.  But Santelli asked about a Wells notice, not an investigation.

Chilton answered: "Two things. first of all, and this little bit is going to sound like a bureaucrat. the sec is the sec. I’m not the Sec. I can’t speak to them. second, these are all issues that need to be looked into. I don’t disagree with you at all. But the way that these things are done, you have an investigation. You develop a case, and then you go forward as you see appropriate."

Why was this exchange important? For the first time we have a Commissioner of a Federal Regulatory Agency stated that because the SEC withheld material information from the public before a bond offering, it must be at least “looked at.”  (He does not go so far as to say investigated.)

Why is this important here?

1.)  Three short months after those bonds were cast into the market, they were worthless and investors lost everything.  If that information was out there, MF Global may not have been able to raise the money they did not deserve from public investors such as state run retirement funds and endowments.

2.) It is yet another demonstration of “regulator capture” where the regulated catch the regulators.

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