February 19, 2011 posted by Veterans Today
Financial crooks brought down the world’s economy — but the feds are doing more to protect them than to prosecute them.
Illustration by Victor Juhasz
Over drinks at a bar on a dreary, snowy night in Washington this past
month, a former Senate investigator laughed as he polished off his
beer.
“Everything’s fucked up, and nobody goes to jail,” he said. “That’s
your whole story right there. Hell, you don’t even have to write the
rest of it. Just write that.”
I put down my notebook. “Just that?”
“That’s right,” he said, signaling to the waitress for the check.
“Everything’s fucked up, and nobody goes to jail. You can end the piece
right there.”
Nobody goes to jail. This is the mantra of the financial-crisis era,
one that saw virtually every major bank and financial company on Wall
Street embroiled in obscene criminal scandals that impoverished millions
and collectively destroyed hundreds of billions, in fact, trillions of
dollars of the world’s wealth — and nobody went to jail. Nobody, that
is, except Bernie Madoff, a flamboyant and pathological celebrity con
artist, whose victims happened to be other rich and famous people.
This article appears in the March 3, 2011 issue of Rolling Stone. The
issue is available now on newsstands and will appear in the online
archive February 18.
The rest of them, all of them, got off. Not a single executive who
ran the companies that cooked up and cashed in on the phony financial
boom — an industry wide scam that involved the mass sale of mismarked,
fraudulent mortgage-backed securities — has ever been convicted. Their
names by now are familiar to even the most casual Middle American news
consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan
Chase, Bank of America and Morgan Stanley. Most of these firms were
directly involved in elaborate fraud and theft. Lehman Brothers hid
billions in loans from its investors. Bank of America lied about
billions in bonuses. Goldman Sachs failed to tell clients how it put
together the born-to-lose toxic mortgage deals it was selling. What’s
more, many of these companies had corporate chieftains whose actions
cost investors billions — from AIG derivatives chief Joe Cassano, who
assured investors they would not lose even “one dollar” just months
before his unit imploded, to the $263 million in compensation that
former Lehman chief Dick “The Gorilla” Fuld conveniently failed to
disclose. Yet not one of them has faced time behind bars.
Invasion of the Home Snatchers
Instead, federal regulators and prosecutors have let the banks and
finance companies that tried to burn the world economy to the ground get
off with carefully orchestrated settlements — whitewash jobs that
involve the firms paying pathetically small fines without even being
required to admit wrongdoing. To add insult to injury, the people who
actually committed the crimes almost never pay the fines themselves;
banks caught defrauding their shareholders often use shareholder money
to foot the tab of justice. “If the allegations in these settlements are
true,” says Jed Rakoff, a federal judge in the Southern District of
New York, “it’s management buying its way off cheap, from the pockets
of their victims.”
Taibblog: Commentary on politics and the economy by Matt Taibbi
To understand the significance of this, one has to think carefully
about the efficacy of fines as a punishment for a defendant pool that
includes the richest people on earth — people who simply get their
companies to pay their fines for them. Conversely, one has to consider
the powerful deterrent to further wrongdoing that the state is missing
by not introducing this particular class of people to the experience of
incarceration. “You put Lloyd Blankfein in pound-me-in-the-ass prison
for one six-month term, and all this bullshit would stop, all over Wall
Street,” says a former congressional aide. “That’s all it would take.
Just once.”
But that hasn’t happened. Because the entire system set up to monitor and regulate Wall Street is fucked up.
Just ask the people who tried to do the right thing.
Wall Street’s Naked Swindle
Here’s how regulation of Wall Street is supposed to work. To begin
with, there’s a semigigantic list of public and quasi-public agencies
ostensibly keeping their eyes on the economy, a dense alphabet soup of
banking, insurance, S&L, securities and commodities regulators like
the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the
Office of the Comptroller of the Currency (OCC) and the Commodity
Futures Trading Commission (CFTC), as well as supposedly
“self-regulating organizations” like the New York Stock Exchange. All of
these outfits, by law, can at least begin the process of catching and
investigating financial criminals, though none of them has
prosecutorial power.
The major federal agency on the Wall Street beat is the Securities
and Exchange Commission. The SEC watches for violations like insider
trading, and also deals with so-called “disclosure violations” — i.e.,
making sure that all the financial information that publicly traded
companies are required to make public actually jibes with reality. But
the SEC doesn’t have prosecutorial power either, so in practice, when it
looks like someone needs to go to jail, they refer the case to the
Justice Department. And since the vast majority of crimes in the
financial services industry take place in Lower Manhattan, cases
referred by the SEC often end up in the U.S. Attorney’s Office for the
Southern District of New York. Thus, the two top cops on Wall Street are
generally considered to be that U.S. attorney — a job that has been
held by thunderous prosecutorial personae like Robert Morgenthau and
Rudy Giuliani — and the SEC’s director of enforcement.
The relationship between the SEC and the DOJ is necessarily close,
even symbiotic. Since financial crime-fighting requires a high degree of
financial expertise — and since the typical
drug-and-terrorism-obsessed FBI agent can’t balance his own checkbook,
let alone tell a synthetic CDO from a credit default swap — the Justice
Department ends up leaning heavily on the SEC’s army of 1,100
number-crunching investigators to make their cases. In theory, it’s a
well-oiled, tag-team affair: Billionaire Wall Street Asshole commits
fraud, the NYSE catches on and tips off the SEC, the SEC works the case
and delivers it to Justice, and Justice perp-walks the Asshole out of
Nobu, into a Crown Victoria and off to 36 months of push-ups,
license-plate making and Salisbury steak.
That’s the way it’s supposed to work. But a veritable mountain of
evidence indicates that when it comes to Wall Street, the justice system
not only sucks at punishing financial criminals, it has actually
evolved into a highly effective mechanism for protecting financial
criminals. This institutional reality has absolutely nothing to do with
politics or ideology — it takes place no matter who’s in office or
which party’s in power. To understand how the machinery functions, you
have to start back at least a decade ago, as case after case of
financial malfeasance was pursued too slowly or not at all, fumbled by a
government bureaucracy that too often is on a first-name basis with
its targets. Indeed, the shocking pattern of nonenforcement with regard
to Wall Street is so deeply ingrained in Washington that it raises a
profound and difficult question about the very nature of our society:
whether we have created a class of people whose misdeeds are no longer
perceived as crimes, almost no matter what those misdeeds are. The SEC
and the Justice Department have evolved into a bizarre species of social
surgeon serving this nonjailable class, expert not at administering
punishment and justice, but at finding and removing criminal
responsibility from the bodies of the accused.
The systematic lack of regulation has left even the country’s top
regulators frustrated. Lynn Turner, a former chief accountant for the
SEC, laughs darkly at the idea that the criminal justice system is
broken when it comes to Wall Street. “I think you’ve got a wrong
assumption — that we even have a law-enforcement agency when it comes to
Wall Street,” he says.
In the hierarchy of the SEC, the chief accountant plays a major role
in working to pursue misleading and phony financial disclosures. Turner
held the post a decade ago, when one of the most significant cases was
swallowed up by the SEC bureaucracy. In the late 1990s, the agency had
an open-and-shut case against the Rite Aid drugstore chain, which was
using diabolical accounting tricks to cook their books. But instead of
moving swiftly to crack down on such scams, the SEC shoved the case
into the “deal with it later” file. “The Philadelphia office literally
did nothing with the case for a year,” Turner recalls. “Very much like
the New York office with Madoff.” The Rite Aid case dragged on for
years — and by the time it was finished, similar accounting fiascoes at
Enron and WorldCom had exploded into a full-blown financial crisis.
The same was true for another SEC case that presaged the Enron
disaster. The agency knew that appliance-maker Sunbeam was using the
same kind of accounting scams to systematically hide losses from its
investors. But in the end, the SEC’s punishment for Sunbeam’s CEO, Al
“Chainsaw” Dunlap — widely regarded as one of the biggest assholes in
the history of American finance — was a fine of $500,000. Dunlap’s net
worth at the time was an estimated $100 million. The SEC also barred
Dunlap from ever running a public company again — forcing him to retire
with a mere $99.5 million. Dunlap passed the time collecting royalties
from his self-congratulatory memoir. Its title: Mean Business.
The pattern of inaction toward shady deals on Wall Street grew worse
and worse after Turner left, with one slam-dunk case after another
either languishing for years or disappearing altogether. Perhaps the
most notorious example involved Gary Aguirre, an SEC investigator who
was literally fired after he questioned the agency’s failure to pursue
an insider-trading case against John Mack, now the chairman of Morgan
Stanley and one of America’s most powerful bankers.
Aguirre joined the SEC in September 2004. Two days into his career as
a financial investigator, he was asked to look into an insider-trading
complaint against a hedge-fund megastar named Art Samberg. One day,
with no advance research or discussion, Samberg had suddenly started
buying up huge quantities of shares in a firm called Heller Financial.
“It was as if Art Samberg woke up one morning and a voice from the
heavens told him to start buying Heller,” Aguirre recalls. “And he
wasn’t just buying shares — there were some days when he was trying to
buy three times as many shares as were being traded that day.” A few
weeks later, Heller was bought by General Electric — and Samberg
pocketed $18 million.
After some digging, Aguirre found himself focusing on one suspect as
the likely source who had tipped Samberg off: John Mack, a close friend
of Samberg’s who had just stepped down as president of Morgan Stanley.
At the time, Mack had been on Samberg’s case to cut him into a deal
involving a spinoff of the tech company Lucent — an investment that
stood to make Mack a lot of money. “Mack is busting my chops” to give
him a piece of the action, Samberg told an employee in an e-mail.
A week later, Mack flew to Switzerland to interview for a top job at
Credit Suisse First Boston. Among the investment bank’s clients, as it
happened, was a firm called Heller Financial. We don’t know for sure
what Mack learned on his Swiss trip; years later, Mack would claim that
he had thrown away his notes about the meetings. But we do know that as
soon as Mack returned from the trip, on a Friday, he called up his
buddy Samberg. The very next morning, Mack was cut into the Lucent deal
— a favor that netted him more than $10 million. And as soon as the
market reopened after the weekend, Samberg started buying every Heller
share in sight, right before it was snapped up by GE — a suspiciously
timed move that earned him the equivalent of Derek Jeter’s annual
salary for just a few minutes of work.
The deal looked like a classic case of insider trading. But in the
summer of 2005, when Aguirre told his boss he planned to interview Mack,
things started getting weird. His boss told him the case wasn’t likely
to fly, explaining that Mack had “powerful political connections.”
(The investment banker had been a fundraising “Ranger” for George Bush
in 2004, and would go on to be a key backer of Hillary Clinton in
2008.)
Aguirre also started to feel pressure from Morgan Stanley, which was
in the process of trying to rehire Mack as CEO. At first, Aguirre was
contacted by the bank’s regulatory liaison, Eric Dinallo, a former top
aide to Eliot Spitzer. But it didn’t take long for Morgan Stanley to
work its way up the SEC chain of command. Within three days, another of
the firm’s lawyers, Mary Jo White, was on the phone with the SEC’s
director of enforcement. In a shocking move that was later singled out
by Senate investigators, the director actually appeared to reassure
White, dismissing the case against Mack as “smoke” rather than “fire.”
White, incidentally, was herself the former U.S. attorney of the
Southern District of New York — one of the top cops on Wall Street.
Pause for a minute to take this in. Aguirre, an SEC foot soldier, is
trying to interview a major Wall Street executive — not handcuff the
guy or impound his yacht, mind you, just talk to him. In the course of
doing so, he finds out that his target’s firm is being represented not
only by Eliot Spitzer’s former top aide, but by the former U.S.
attorney overseeing Wall Street, who is going four levels over his head
to speak directly to the chief of the SEC’s enforcement division — not
Aguirre’s boss, but his boss’s boss’s boss’s boss. Mack himself,
meanwhile, was being represented by Gary Lynch, a former SEC director
of enforcement.
Aguirre didn’t stand a chance. A month after he complained to his
supervisors that he was being blocked from interviewing Mack, he was
summarily fired, without notice. The case against Mack was immediately
dropped: all depositions canceled, no further subpoenas issued. “It all
happened so fast, I needed a seat belt,” recalls Aguirre, who had just
received a stellar performance review from his bosses. The SEC
eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.
Rather than going after Mack, the SEC started looking for someone
else to blame for tipping off Samberg. (It was, Aguirre quips, “O.J.’s
search for the real killers.”) It wasn’t until a year later that the
agency finally got around to interviewing Mack, who denied any
wrongdoing. The four-hour deposition took place on August 1st, 2006 —
just days after the five-year statute of limitations on insider trading
had expired in the case.
“At best, the picture shows extraordinarily lax enforcement by the
SEC,” Senate investigators would later conclude. “At worse, the picture
is colored with overtones of a possible cover-up.”
Episodes like this help explain why so many Wall Street executives
felt emboldened to push the regulatory envelope during the mid-2000s.
Over and over, even the most obvious cases of fraud and insider dealing
got gummed up in the works, and high-ranking executives were almost
never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125
million after it was caught misreporting its earnings by $5 billion;
nobody went to jail. In 2006, Fannie Mae was fined $400 million, but
executives who had overseen phony accounting techniques to jack up their
bonuses faced no criminal charges. That same year, AIG paid $1.6
billion after it was caught in a major accounting scandal that would
indirectly lead to its collapse two years later, but no executives at
the insurance giant were prosecuted.
All of this behavior set the stage for the crash of 2008, when Wall
Street exploded in a raging Dresden of fraud and criminality. Yet the
SEC and the Justice Department have shown almost no inclination to
prosecute those most responsible for the catastrophe — even though they
had insiders from the two firms whose implosions triggered the crisis,
Lehman Brothers and AIG, who were more than willing to supply evidence
against top executives.
In the case of Lehman Brothers, the SEC had a chance six months
before the crash to move against Dick Fuld, a man recently named the
worst CEO of all time by Portfolio magazine. A decade before the crash, a
Lehman lawyer named Oliver Budde was going through the bank’s proxy
statements and noticed that it was using a loophole involving Restricted
Stock Units to hide tens of millions of dollars of Fuld’s
compensation. Budde told his bosses that Lehman’s use of RSUs was dicey
at best, but they blew him off. “We’re sorry about your concerns,”
they told him, “but we’re doing it.” Disturbed by such shady practices,
the lawyer quit the firm in 2006.
Then, only a few months after Budde left Lehman, the SEC changed its
rules to force companies to disclose exactly how much compensation in
RSUs executives had coming to them. “The SEC was basically like, ‘We’re
sick and tired of you people fucking around — we want a picture of what
you’re holding,’” Budde says. But instead of coming clean about eight
separate RSUs that Fuld had hidden from investors, Lehman filed a proxy
statement that was a masterpiece of cynical lawyering. On one page, a
chart indicated that Fuld had been awarded $146 million in RSUs. But
two pages later, a note in the fine print essentially stated that the
chart did not contain the real number — which, it failed to mention,
was actually $263 million more than the chart indicated. “They fucked
around even more than they did before,” Budde says. (The law firm that
helped craft the fine print, Simpson Thacher & Bartlett, would
later receive a lucrative federal contract to serve as legal adviser to
the TARP bailout.)
Budde decided to come forward. In April 2008, he wrote a detailed
memo to the SEC about Lehman’s history of hidden stocks. Shortly
thereafter, he got a letter back that began, “Dear Sir or Madam.” It was
an automated e-response.
“They blew me off,” Budde says.
Over the course of that summer, Budde tried to contact the SEC
several more times, and was ignored each time. Finally, in the fateful
week of September 15th, 2008, when Lehman Brothers cracked under the
weight of its reckless bets on the subprime market and went into its
final death spiral, Budde became seriously concerned. If the government
tried to arrange for Lehman to be pawned off on another Wall Street
firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up
footing the bill for a company with hundreds of millions of dollars in
concealed compensation. So Budde again called the SEC, right in the
middle of the crisis. “Look,” he told regulators. “I gave you huge
stuff. You really want to take a look at this.”
But the feds once again blew him off. A young staff attorney
contacted Budde, who once more provided the SEC with copies of all his
memos. He never heard from the agency again.
“This was like a mini-Madoff,” Budde says. “They had six solid months of warnings. They could have done something.”
Three weeks later, Budde was shocked to see Fuld testifying before
the House Government Oversight Committee and whining about how poor he
was. “I got no severance, no golden parachute,” Fuld moaned. When Rep.
Henry Waxman, the committee’s chairman, mentioned that he thought Fuld
had earned more than $480 million, Fuld corrected him and said he
believed it was only $310 million.
The true number, Budde calculated, was $529 million. He contacted a
Senate investigator to talk about how Fuld had misled Congress, but he
never got any response. Meanwhile, in a demonstration of the
government’s priorities, the Justice Department is proceeding full force
with a prosecution of retired baseball player Roger Clemens for lying
to Congress about getting a shot of steroids in his ass. “At least
Roger didn’t screw over the world,” Budde says, shaking his head.
Fuld has denied any wrongdoing, but his hidden compensation was only a
ripple in Lehman’s raging tsunami of misdeeds. The investment bank
used an absurd accounting trick called “Repo 105″ transactions to
conceal $50 billion in loans on the firm’s balance sheet. (That’s $50
billion, not million.) But more than a year after the use of the Repo
105s came to light, there have still been no indictments in the affair.
While it’s possible that charges may yet be filed, there are now
rumors that the SEC and the Justice Department may take no action
against Lehman. If that’s true, and there’s no prosecution in a case
where there’s such overwhelming evidence — and where the company is
already dead, meaning it can’t dump further losses on investors or
taxpayers — then it might be time to assume the game is up. Failing to
prosecute Fuld and Lehman would be tantamount to the state marching
into Wall Street and waving the green flag on a new stealing season.
The most amazing noncase in the entire crash — the one that truly
defies the most basic notion of justice when it comes to Wall Street
supervillains — is the one involving AIG and Joe Cassano, the nebbishy
Patient Zero of the financial crisis. As chief of AIGFP, the firm’s
financial products subsidiary, Cassano repeatedly made public statements
in 2007 claiming that his portfolio of mortgage derivatives would
suffer “no dollar of loss” — an almost comically obvious
misrepresentation. “God couldn’t manage a $60 billion real estate
portfolio without a single dollar of loss,” says Turner, the agency’s
former chief accountant. “If the SEC can’t make a disclosure case
against AIG, then they might as well close up shop.”
As in the Lehman case, federal prosecutors not only had plenty of
evidence against AIG — they also had an eyewitness to Cassano’s actions
who was prepared to tell all. As an accountant at AIGFP, Joseph St.
Denis had a number of run-ins with Cassano during the summer of 2007. At
the time, Cassano had already made nearly $500 billion worth of
derivative bets that would ultimately blow up, destroy the world’s
largest insurance company, and trigger the largest government bailout of
a single company in U.S. history. He made many fatal mistakes, but
chief among them was engaging in contracts that required AIG to post
billions of dollars in collateral if there was any downgrade to its
credit rating.
St. Denis didn’t know about those clauses in Cassano’s contracts,
since they had been written before he joined the firm. What he did know
was that Cassano freaked out when St. Denis spoke with an accountant at
the parent company, which was only just finding out about the time
bomb Cassano had set. After St. Denis finished a conference call with
the executive, Cassano suddenly burst into the room and began screaming
at him for talking to the New York office. He then announced that St.
Denis had been “deliberately excluded” from any valuations of the most
toxic elements of the derivatives portfolio — thus preventing the
accountant from doing his job. What St. Denis represented was
transparency — and the last thing Cassano needed was transparency.
Another clue that something was amiss with AIGFP’s portfolio came
when Goldman Sachs demanded that the firm pay billions in collateral,
per the terms of Cassano’s deadly contracts. Such “collateral calls”
happen all the time on Wall Street, but seldom against a seemingly
solvent and friendly business partner like AIG. And when they do happen,
they are rarely paid without a fight. So St. Denis was shocked when
AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it
was still contesting the payments — an indication that something was
seriously wrong at AIG. “When I found out about the collateral call, I
literally had to sit down,” St. Denis recalls. “I had to go home for the
day.”
After Cassano barred him from valuating the derivative deals, St.
Denis had no choice but to resign. He got another job, and thought he
was done with AIG. But a few months later, he learned that Cassano had
held a conference call with investors in December 2007. During the call,
AIGFP failed to disclose that it had posted $2 billion to Goldman
Sachs following the collateral calls.
“Investors therefore did not know,” the Financial Crisis Inquiry
Commission would later conclude, “that AIG’s earnings were overstated by
$3.6 billion.”
“I remember thinking, ‘Wow, they’re just not telling people,’” St.
Denis says. “I knew. I had been there. I knew they’d posted collateral.”
A year later, after the crash, St. Denis wrote a letter about his
experiences to the House Government Oversight Committee, which was
looking into the AIG collapse. He also met with investigators for the
government, which was preparing a criminal case against Cassano. But the
case never went to court. Last May, the Justice Department confirmed
that it would not file charges against executives at AIGFP. Cassano, who
has denied any wrongdoing, was reportedly told he was no longer a
target.
Shortly after that, Cassano strolled into Washington to testify
before the Financial Crisis Inquiry Commission. It was his first public
appearance since the crash. He has not had to pay back a single cent
out of the hundreds of millions of dollars he earned selling his insane
pseudo-insurance policies on subprime mortgage deals. Now, out from
under prosecution, he appeared before the FCIC and had the enormous
balls to compliment his own business acumen, saying his atom-bomb swaps
portfolio was, in retrospect, not that badly constructed. “I think the
portfolios are withstanding the test of time,” he said.
“They offered him an excellent opportunity to redeem himself,” St. Denis jokes.
In the end, of course, it wasn’t just the executives of Lehman and
AIGFP who got passes. Virtually every one of the major players on Wall
Street was similarly embroiled in scandal, yet their executives skated
off into the sunset, uncharged and unfined. Goldman Sachs paid $550
million last year when it was caught defrauding investors with crappy
mortgages, but no executive has been fined or jailed — not even Fabrice
“Fabulous Fab” Tourre, Goldman’s outrageous Euro-douche who gleefully
e-mailed a pal about the “surreal” transactions in the middle of a
meeting with the firm’s victims. In a similar case, a sales executive at
the German powerhouse Deutsche Bank got off on charges of insider
trading; its general counsel at the time of the questionable deals,
Robert Khuzami, now serves as director of enforcement for the SEC.
Another major firm, Bank of America, was caught hiding $5.8 billion
in bonuses from shareholders as part of its takeover of Merrill Lynch.
The SEC tried to let the bank off with a settlement of only $33 million,
but Judge Jed Rakoff rejected the action as a “facade of enforcement.”
So the SEC quintupled the settlement — but it didn’t require either
Merrill or Bank of America to admit to wrongdoing. Unlike criminal
trials, in which the facts of the crime are put on record for all to
see, these Wall Street settlements almost never require the banks to
make any factual disclosures, effectively burying the stories forever.
“All this is done at the expense not only of the shareholders, but also
of the truth,” says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of
America … who did we leave out? Oh, there’s Citigroup, nailed for
hiding some $40 billion in liabilities from investors. Last July, the
SEC settled with Citi for $75 million. In a rare move, it also fined two
Citi executives, former CFO Gary Crittenden and investor-relations
chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping
$180,000.
Throughout the entire crisis, in fact, the government has taken
exactly one serious swing of the bat against executives from a major
bank, charging two guys from Bear Stearns with criminal fraud over a
pair of toxic subprime hedge funds that blew up in 2007, destroying the
company and robbing investors of $1.6 billion. Jurors had an e-mail
between the defendants admitting that “there is simply no way for us to
make money — ever” just three days before assuring investors that
“there’s no basis for thinking this is one big disaster.” Yet the case
still somehow ended in acquittal — and the Justice Department hasn’t
taken any of the big banks to court since.
All of which raises an obvious question: Why the hell not?
Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.
Last year, Aguirre noticed that a conference on financial law
enforcement was scheduled to be held at the Hilton in New York on
November 12th. The list of attendees included 1,500 or so of the
country’s leading lawyers who represent Wall Street, as well as some of
the government’s top cops from both the SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys
of the world, is not adversarial combat, with cops and crooks duking it
out in interrogation rooms and courthouses. Instead, it’s a cocktail
party between friends and colleagues who from month to month and year to
year are constantly switching sides and trading hats. At the Hilton
conference, regulators and banker-lawyers rubbed elbows during a series
of speeches and panel discussions, away from the rabble. “They were
chummier in that environment,” says Aguirre, who plunked down $2,200 to
attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple
reason: Many of the SEC regulators he had worked with during his failed
attempt to investigate John Mack had made a million-dollar pass through
the Revolving Door, going to work for the very same firms they used to
police. Aguirre didn’t see Paul Berger, an associate director of
enforcement who had rebuffed his attempts to interview Mack — maybe
because Berger was tied up at his lucrative new job at Debevoise &
Plimpton, the same law firm that Morgan Stanley employed to intervene in
the Mack case. But he did see Mary Jo White, the former U.S. attorney,
who was still at Debevoise & Plimpton. He also saw Linda Thomsen,
the former SEC director of enforcement who had been so helpful to
White. Thomsen had gone on to represent Wall Street as a partner at the
prestigious firm of Davis Polk & Wardwell.
Two of the government’s top cops were there as well: Preet Bharara,
the U.S. attorney for the Southern District of New York, and Robert
Khuzami, the SEC’s current director of enforcement. Bharara had been
recommended for his post by Chuck Schumer, Wall Street’s favorite
senator. And both he and Khuzami had served with Mary Jo White at the
U.S. attorney’s office, before Mary Jo went on to become a partner at
Debevoise. What’s more, when Khuzami had served as general counsel for
Deutsche Bank, he had been hired by none other than Dick Walker, who had
been enforcement director at the SEC when it slow-rolled the pivotal
fraud case against Rite Aid.
“It wasn’t just one rotation of the revolving door,” says Aguirre.
“It just kept spinning. Every single person had rotated in and out of
government and private service.”
The Revolving Door isn’t just a footnote in financial law
enforcement; over the past decade, more than a dozen high-ranking SEC
officials have gone on to lucrative jobs at Wall Street banks or
white-shoe law firms, where partnerships are worth millions. That makes
SEC officials like Paul Berger and Linda Thomsen the equivalent of
college basketball stars waiting for their first NBA contract. Are you
really going to give up a shot at the Knicks or the Lakers just to find
out whether a Wall Street big shot like John Mack was guilty of insider
trading? “You take one of these jobs,” says Turner, the former chief
accountant for the SEC, “and you’re fit for life.”
Fit — and happy. The banter between the speakers at the New York
conference says everything you need to know about the level of
chumminess and mutual admiration that exists between these supposed
adversaries of the justice system. At one point in the conference, Mary
Jo White introduced Bharara, her old pal from the U.S. attorney’s
office.
“I want to first say how pleased I am to be here,” Bharara responded.
Then, addressing White, he added, “You’ve spawned all of us. It’s
almost 11 years ago to the day that Mary Jo White called me and asked me
if I would become an assistant U.S. attorney. So thank you, Dr.
Frankenstein.”
Next, addressing the crowd of high-priced lawyers from Wall Street,
Bharara made an interesting joke. “I also want to take a moment to
applaud the entire staff of the SEC for the really amazing things they
have done over the past year,” he said. “They’ve done a real service to
the country, to the financial community, and not to mention a lot of
your law practices.”
Haw! The line drew snickers from the conference of millionaire
lawyers. But the real fireworks came when Khuzami, the SEC’s director of
enforcement, talked about a new “cooperation initiative” the agency
had recently unveiled, in which executives are being offered incentives
to report fraud they have witnessed or committed. From now on, Khuzami
said, when corporate lawyers like the ones he was addressing want to
know if their Wall Street clients are going to be charged by the Justice
Department before deciding whether to come forward, all they have to
do is ask the SEC.
“We are going to try to get those individuals answers,” Khuzami
announced, as to “whether or not there is criminal interest in the case —
so that defense counsel can have as much information as possible in
deciding whether or not to choose to sign up their client.”
Aguirre, listening in the crowd, couldn’t believe Khuzami’s
brazenness. The SEC’s enforcement director was saying, in essence, that
firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be
able to get the SEC to act as a middleman between them and the Justice
Department, negotiating fines as a way out of jail time. Khuzami was
basically outlining a four-step system for banks and their executives to
buy their way out of prison. “First, the SEC and Wall Street player
make an agreement on a fine that the player will pay to the SEC,”
Aguirre says. “Then the Justice Department commits itself to pass, so
that the player knows he’s ‘safe.’ Third, the player pays the SEC — and
fourth, the player gets a pass from the Justice Department.”
When I ask a former federal prosecutor about the propriety of a
sitting SEC director of enforcement talking out loud about helping
corporate defendants “get answers” regarding the status of their
criminal cases, he initially doesn’t believe it. Then I send him a
transcript of the comment. “I am very, very surprised by Khuzami’s
statement, which does seem to me to be contrary to past practice — and
not a good thing,” the former prosecutor says.
Earlier this month, when Sen. Chuck Grassley found out about
Khuzami’s comments, he sent the SEC a letter noting that the agency’s
own enforcement manual not only prohibits such “answer getting,” it even
bars the SEC from giving defendants the Justice Department’s phone
number. “Should counsel or the individual ask which criminal authorities
they should contact,” the manual reads, “staff should decline to
answer, unless authorized by the relevant criminal authorities.” Both
the SEC and the Justice Department deny there is anything improper in
their new policy of cooperation. “We collaborate with the SEC, but they
do not consult with us when they resolve their cases,” Assistant
Attorney General Lanny Breuer assured Congress in January. “They do that
independently.”
Around the same time that Breuer was testifying, however, a story
broke that prior to the pathetically small settlement of $75 million
that the SEC had arranged with Citigroup, Khuzami had ordered his staff
to pursue lighter charges against the megabank’s executives. According
to a letter that was sent to Sen. Grassley’s office, Khuzami had a
“secret conversation, without telling the staff, with a prominent
defense lawyer who is a good friend” of his and “who was counsel for the
company.” The unsigned letter, which appears to have come from an SEC
investigator on the case, prompted the inspector general to launch an
investigation into the charge.
All of this paints a disturbing picture of a closed and corrupt
system, a timeless circle of friends that virtually guarantees a
collegial approach to the policing of high finance. Even before the
corruption starts, the state is crippled by economic reality: Since law
enforcement on Wall Street requires serious intellectual firepower, the
banks seize a huge advantage from the start by hiring away the top
talent. Budde, the former Lehman lawyer, says it’s well known that all
the best legal minds go to the big corporate law firms, while the
“bottom 20 percent go to the SEC.” Which makes it tough for the agency
to track devious legal machinations, like the scheme to hide $263
million of Dick Fuld’s compensation.
“It’s such a mismatch, it’s not even funny,” Budde says.
But even beyond that, the system is skewed by the irrepressible pull
of riches and power. If talent rises in the SEC or the Justice
Department, it sooner or later jumps ship for those fat NBA contracts.
Or, conversely, graduates of the big corporate firms take sabbaticals
from their rich lifestyles to slum it in government service for a year
or two. Many of those appointments are inevitably hand-picked by
lifelong stooges for Wall Street like Chuck Schumer, who has accepted
$14.6 million in campaign contributions from Goldman Sachs, Morgan
Stanley and other major players in the finance industry, along with
their corporate lawyers.
As for President Obama, what is there to be said? Goldman Sachs was
his number-one private campaign contributor. He put a Citigroup
executive in charge of his economic transition team, and he just named
an executive of JP Morgan Chase, the proud owner of $7.7 million in
Chase stock, his new chief of staff. “The betrayal that this represents
by Obama to everybody is just — we’re not ready to believe it,” says
Budde, a classmate of the president from their Columbia days. “He’s
really fucking us over like that? Really? That’s really a JP Morgan guy,
really?”
Which is not to say that the Obama era has meant an end to law
enforcement. On the contrary: In the past few years, the administration
has allocated massive amounts of federal resources to catching
wrongdoers — of a certain type. Last year, the government deported
393,000 people, at a cost of $5 billion. Since 2007, felony immigration
prosecutions along the Mexican border have surged 77 percent; nonfelony
prosecutions by 259 percent. In Ohio last month, a single mother was
caught lying about where she lived to put her kids into a better school
district; the judge in the case tried to sentence her to 10 days in
jail for fraud, declaring that letting her go free would “demean the
seriousness” of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one.
Bankers: zero. The math makes sense only because the politics are so
obvious. You want to win elections, you bang on the jail-able class. You
build prisons and fill them with people for selling dime bags and
stealing CD players. But for stealing a billion dollars? For fraud that
puts a million people into foreclosure? Pass. It’s not a crime. Prison
is too harsh. Get them to say they’re sorry, and move on. Oh, wait —
let’s not even make them say they’re sorry. That’s too mean; let’s just
give them a piece of paper with a government stamp on it, officially
clearing them of the need to apologize, and make them pay a fine
instead. But don’t make them pay it out of their own pockets, and don’t
ask them to give back the money they stole. In fact, let them profit
from their collective crimes, to the tune of a record $135 billion in
pay and benefits last year. What’s next? Taxpayer-funded massages for
every Wall Street executive guilty of fraud?
The mental stumbling block, for most Americans, is that financial
crimes don’t feel real; you don’t see the culprits waving guns in liquor
stores or dragging coeds into bushes. But these frauds are worse than
common robberies. They’re crimes of intellectual choice, made by people
who are already rich and who have every conceivable social advantage,
acting on a simple, cynical calculation: Let’s steal whatever we can,
then dare the victims to find the juice to reclaim their money through a
captive bureaucracy. They’re attacking the very definition of property
— which, after all, depends in part on a legal system that defends
everyone’s claims of ownership equally. When that definition becomes
tenuous or conditional — when the state simply gives up on the notion of
justice — this whole American Dream thing recedes even further from
reality.
Source: Rolling Stone
...when
a potential VA borrower has bad credit or even a bankruptcy in his or
her history it can sometimes prevent qualification...
