BusinessTN

Integrity is a crucial ingredient in the auditing business, but for the law firm of Bass, Berry & Sims, being incorporated far away from the object of its audit played an equally important role in landing a sweet, multi-year contract.

In April 2005, the Securities and Exchange Commission (SEC) slapped the New York Stock Exchange with cease-and-desist order No. 51524. The order capped a three-year investigation into an illegal practice at the iconic Wall Street organization called “interpositioning,” in which some traders and market-making specialists at the NYSE repeatedly bought and sold shares ahead of customers’ orders. The SEC estimated that the illicit activity allowed traders to reap $158 million in profits between 1999 and 2003. Furthermore, the SEC determined that NYSE managers “failed to adequately monitor and police” their own shops, allowing the vast majority of the swindling to go undetected.

The only constructive way to address the problem, in the SEC’s view, was to hire an outside auditor—preferably a firm well-versed in the intricacies of trading, yet far removed from the special interests of Wall Street. In the bureaucratic lingo of the SEC’s order, a third-party regulatory auditor deemed “not unacceptable” to the SEC was to take a good look at the traders and trading practices on NYSE’s floor, and submit four audit reports to the commission between 2005 and 2011. Price tag for that work? Twenty million dollars, paid by the New York Stock Exchange.

That December, the SEC chose Bass, Berry & Sims to do the audits. It’s not that surprising of a selection, all things considered. Though the Nashville law firm has no offices beyond Tennessee, its chief securities attorney, Jim Cheek, has been a fixture on Wall Street for decades, including his three-year stint as chair of the NYSE Legal Advisory Committee. And then there are also the 50 public companies or so that he has represented before the SEC.

Bass Berry’s Allen Overby has himself traveled between Nashville and New York City at least 50 times during the past year while working on the first audit, which is due this March. “We have been declared ‘not unacceptable’ to the commission,” Overby says, clearly enjoying the understated gloss on this corporate coup bestowed by the SEC’s language.

To do its job, Bass Berry retained KPMG as information technology consultant, and hired a recently retired NYSE broker and a specialist to better understand how things really work on the trading floor. While working out of KPMG’s offices and at 20 Broad Street, Overby prefers not to comment on the attitude of NYSE personnel toward the presence of outside attorneys in their midst. “We are boring, hamstrung lawyers who won’t comment on anything, but we are proud of this project,” he says. Nonetheless, there are signs that the Nashville auditors are learning the subtleties of life in the Big Apple—Overby says that there’s a food cart between 5th and 6th avenue near New York Hilton that has excellent chicken over rice, which “at $6 is quite a bargain.”