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Corruption at the SEC

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Never forget that in 2004, the SEC raised the leverage limit for the largest investment banks from 12 to 1 to whatever they liked.

From comments to

Economics focus The dog that didn't bark
The Economist

  It's not the regulations, it's the regulators.

Jim Rogers

There are quite a lot of undisputable facts on the ground which suggest that SEC is a corrupt organization which should be investigated using RICO statute. The Greenspan era represents not only the triumph of blind ideology and economic pseudo-science over common sense but also the triumph of regulatory capture and regulatory corruption. Like the period of Bolshevism in Russia the USA lived through a strange, self-reinforcing political, social and academic delusion. Like Marx used to say "History repeats itself, first as tragedy, second as farce."

Corporate fraud has been an oxymoron under recent SEC leadership. Budget cuts and staffing issues are just an easy excuse, a smoke screen to hide their lack of integrity. How any SEC functionaries can explain with a strait face the rationale to go after Martha Steward instead of Bernie Madoff ?  Actually neither Levin (who helped to to kill nor Cox were prosecuted for the abdication of duty.

In The SEC's culture of regulatory capture  the point was made that SEc actually empowered the Ponzi schemers:

Just to make sure everybody agrees that $7-billion is a lot of money – keep in mind it exceeds the GNP of 40% of the nations on earth. Imagine putting a match to all the goods and services produced in one year by the people of Laos or Mongolia. Stanford is accused of doing that, and more. But because it’s just a tenth of the wealth destroyed by Madoff, Stanford may forever be regarded a Ponzi also-ran.

But dig a little deeper and you’ll find the Stanford case is the bigger outrage by far, not so much for the scam itself, but for the shocking behavior of the regulators tasked with preventing it. Where Madoff was enabled by SEC bureaucratic incompetence, Stanford was empowered by overt SEC indifference.

That’s right – indifference. Unlike Meghan Cheung, the former head of enforcement at the SEC’s New York branch, who didn’t know how to determine whether Madoff was running a Ponzi scheme, her counterpart in Fort Worth spent years swimming in evidence of Stanford’s scam, but simply preferred not to do anything about it.

The evidence, if you can stomach it, is oozing out of the report recently submitted by SEC Inspector General extraordinaire David Kotz. In it, we learn that SEC examiners spotted the red flags as early as 1997, and spent eight years lobbying then-chief of Fort Worth’s enforcement division, Spencer Barasch, to investigate. Barasch repeatedly declined, even as evidence of the Stanford scam – together with the size of the scam itself – grew exponentially.

The first referral by SEC examiners was sent to Barasch in 1998. According to the testimony of Julie Preuitt, who helped author the request, Barasch declined to investigate after discussing the matter with Stanford’s legal counsel at the time, former SEC Fort Worth District Administrator Wayne Secore.

According to the report:

Barasch told Preuitt “he asked Wayne Secore if there was a case there and Wayne Secore said that there wasn’t. So he was satisfied with that and decided not to pursue it further.”

Obviously, Barasch denies this, and such a claim would be difficult to believe were it not for the well-documented facts that follow.

Barasch finally left the SEC for a spot as partner in the law firm of Andrews Kurth in 2005, shortly after putting the kibosh on a third attempt by SEC examiners to investigate Stanford. Barasch’s replacement accepted a similar recommendation later that year, but the resulting inquiry was mismanaged and did not produce an enforcement case until February 2009, after the Commission’s hand was forced by Madoff’s admission two months earlier.

But it was what happened after Barasch’s departure from the SEC that casts his earlier actions in a much harsher light. As the investigation discovered:

[Barasch], who played a significant role in multiple decisions over the years to quash investigations of Stanford, sought to represent Stanford on three separate occasions after he left the Commission, and in fact represented Stanford briefly in 2006 before he was informed by the SEC Ethics Office that it was improper to do so.

The final of Barasch’s three attempts to represent Stanford was by far the most brazen, not to mention instructive. It happened in February 2009, immediately after the SEC filed suit against Stanford. Like the two before it, the third was also denied. When asked to justify the renewed request, Barasch replied,

“Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines.”

In email, veritas.

Not only was Barasch apparently numb to the definition of “ethical conflict,” he seems to have used it as a business development tool, at least that’s the impression left by an email not included in the Kotz report but acquired by the Dallas Morning News. According to the email, after Mark Cuban was sued by the SEC’s Fort Worth office for insider trading in 2008, Barasch told an associate of Cuban’s,

“I am friends with and helped promote two of the guys who signed the Complaint against Mark. Someone should tell Mark to look at my profile on my firm website, my SEC press releases, and advise Mark to add me to his defense team.”

It’s safe to say that Barasch plays the heavy in the IG’s report, but read it carefully, and you’ll find that he’s not the real villain. Instead, that role is played subtly but consistently by the broader SEC Enforcement Division’s flawed culture.

As the report stated,

We found that the Fort Worth Enforcement program’s decisions not to undertake a full and thorough investigation of Stanford were due, at least in part, to Enforcement’s perception that the Stanford case was difficult, novel and not the type favored by the Commission. The former head of the Fort Worth office told the OIG that regional offices were “heavily judged” by the number of cases they brought and that it was very important for the Fort Worth office to bring a high number of cases…The former head of the Examination program in Fort Worth testified that Enforcement leadership in Fort Worth “was pretty upfront” with the Enforcement staff about the pressure to produce numbers and communicated to the Enforcement staff, “I want numbers. I want these things done quick.” He also testified that this pressure for numbers incentivized the Enforcement staff to focus on “easier cases” – “quick hits.”

And these instructions were predictably manifest in the handling of the Stanford case, as evidenced by the reaction to an anonymous Stanford insider’s letter, first sent to the NASD, denouncing Stanford as a Ponzi scheme. The letter was forwarded to the SEC where Barasch saw and ignored it, saying,

“Rather than spend a lot of resources on something that could end up being something that we could not bring, the decision was made to not go forward at that time, or at least to not spend the significant resources and wait and see if something else would come up.”

The report also cites a former Fort Worth office administrator who says Barasch and others in his group had been subjected to criticism from high-level SEC staff in Washington DC for “bringing too many Temporary Restraining Order, Ponzi, and prime bank cases.”

Accordingly, Fort Worth was admonished to avoid investigating “mainstream” cases in favor of simple accounting fraud.

Now, let’s take a step back to see what insights into the SEC’s enforcement paradigm might be gleaned from what we’ve learned so far.

  1. Given his actions both prior to and after leaving the Commission, I suspect Spencer Barasch’s approach to regulating Stanford – and presumably other entities – was heavily influenced by a desire to maximize his eventual private sector opportunities. This is further evidence that the significance of regulatory capture and the revolving door ethic in the minds of SEC enforcement officials cannot be overstated.
  2. Whereas “Ponzi and prime bank cases” most often apply to investing institutions, while accounting fraud charges are most often leveled against public companies, I suspect the high-level mandate to prefer the latter over the former to be the root of the SEC’s long-suspected anti-issuer/pro-institutional investor bias – or at the very least, further evidence of it.
  3. This apparent anti-issuer bias, paired with the report’s well-documented evidence of the SEC’s preference of case quantity over quality, offers additional support for the widely-held belief that cases against public companies are seen as low-hanging (and career-protecting) fruit in the eyes of Enforcement Division staffers.

If my conclusions are correct, then the Stanford outrage is not really about Spencer Barasch, but the SEC’s flawed enforcement culture, from Washington DC on down. I further suspect this culture to be a key factor in explaining the SEC’s role as enabler of the stock manipulation schemes extensively documented here on Deep Capture.

But don’t take my word for it. Instead, consider the words of then-Director of the SEC’s Division of Enforcement, Linda Chatman Thomsen, responding to a question posed by a member of the audience following her keynote address at the US Chamber of Commerce’s 2008 Capital Markets Summit.

Audience member: “You spent a lot of time talking about insider trading and penny stock fraud, but you failed to mention an issue that’s of great concern to the Chamber, and that is naked short selling and the unsettled trades that can result from that. How can the Commission claim that it is serious about enforcement when millions of trades fail to settle every day and companies remain on Reg SHO Threshold Lists for years and years?”

Thomsen: “As to naked short selling, and more generally market manipulation generally, it is an area we are focused on. We have seen fewer cases in that arena because, often times, this is not necessarily with respect to naked shorts, but shorting or market manipulation more generally, because often the components of something that might look to be manipulative are all legal trades as you point out. So it’s a hard case to bring, which is not to say that it isn’t something that we don’t investigate, because we do. So I hear and understand the frustration of many on the subject of short selling generally. When we hear complaints about short selling—and, frankly, it is both short and naked short, it is a combination of both—we routinely hear from companies who’ve come in, who worry that they’re being shorted in an illegal way. We routinely take all that information in and look into it.

“And often times, as I think many defense counsel would be happy to tell you, when we dig in, what we find is that some of the information that has caused people to be shorting is actually true as to the company, and we may very well be confronted with two issues, one on the company and its disclosure side as well as on the trading side. But they’re very difficult cases, which is not to say that we aren’t focused on them and interested in them and indeed this new focus that we have on some smaller companies and smaller issuers will wrap some of those concerns into their focus as well.”

Thomsen’s answer needs to be examined from two angles: what she said and what she (meaning, her division) actually did.

What Thomsen said, was that when it comes to illegal, manipulative naked short selling, “it’s a hard case to bring,” and that it often it turns out the targeted company deserved to have its stock manipulated. But don’t worry…the SEC Division of Enforcement cares and regularly investigates complaints of illegal, manipulative short selling.

What Thomsen’s division actually did was quite different. We know this thanks to another outstanding report by SEC Inspector General David Kotz relating to the Commission’s handling of complaints of illegal, manipulative naked short selling between January 2007 and June 2008. What Kotz discovered was that of the more than 5,000 complaints received by the Division of Enforcement during that time, not one resulted in an investigation.

Kotz further found that while robust methods exist for dealing with complaints relating to “spam driven manipulations, unregistered online offerings and insider trading” (again, infractions typically committed by issuers), no written policies existed for dealing with complaints of illegal naked short selling. This “[has] the effect of naked short selling complaints being treated differently than other types of complaints.”

And in this case, “differently” meant “not at all.” This attitude closely mirrors that of the SEC’s Division of Enforcement as described in the Stanford report.

In my opinion, the best thing to happen to the SEC in many years is the arrival of Inspector General David Kotz. The second best thing is the February 2009 departure of Linda Thomsen. In the months following the arrival of Thomsen’s successor, Robert Khuzami, many encouraging developments have been observed, including two enforcement cases brought against manipulative naked short sellers, the permanent adoption of regulations greatly reducing instances of such manipulation, and the recent case brought against Goldman Sachs (NYSE:GS). Each of these represents an important departure from the SEC’s long-standing anti-issuer/pro-bank approach to regulation.

These positive developments notwithstanding, the dysfunctional culture at the SEC’s Division of Enforcement was undoubtedly a long time in the making. As a result, it will require a long time to root out. Unfortunately, we don’t have a long time. Investor confidence in the fundamental fairness of our capital markets must be restored now, not as long as it takes the old guard’s institutional memory to fade away. Having read the Stanford report, the only practical solution I see is a new beginning. Congress needs to sunset the SEC on an immovable — and ideally not too distant — date certain and instruct the Department of Justice to have a replacement ready to begin work the next day

"Revolving door" is a legalized corruption scheme for regulators, and it always served as such... Political appointees are essentially banksters Trojan horses. We need that  “ regulators be banned from going to work for their charges forever following completion of their regulatory role.”  Here is a proposal from StatsGuy Aug 15, 2009 post for An Inside Perspective on Regulatory Capture « The Baseline Scenario

Some specific agency suggestions if you want this thing to have some legs:

1) The regulatory agency needs to be self-funding through fees, so that Congress cannot issue threats in conventional spending legislation.

2) Strong anti-revolving door policy, written in law

3) Strong full disclosure and conflict of interest policy for employees

4) Specific mission statement that does not include health of the industry it’s regulating (no “benevolent” regulator”) – Coffey covers this

5) All political appointees do NOT serve at the whim of the President. Like the Fed, the institution is run by a governing board with long, overlapping appointments. For example, a board of 5, one person appointed every 3 years, 15 year appointments.

The board selects all the senior members of the agency, who in term hire the rest of the agency in accordance with civil service rules

6) A standing advisory committee consisting of 1/5 agency members, 2/5 consumer group representatives, and 2/5 financial firm representatives is required to publicly consult on major policy decisions or changes to rules

7) The agency’s powers should be specifically delimited, but should also include a broad statement giving it authority to expand its scope to cover its mission statement. Expansion of scope should be conducted on the advice of an advisory committee to help the agency extract information from the private sector (and avoid the isolation that can result from insulation).

8) Private consumer groups and others (even individuals) should be specifically granted standing to sue the agency for non-enforcement, including class action suit. Possibly even allow collection of reasonable monetary compensation, which will be made up through a temporary fee levy that must be administered on the offenders by the agency.

I’m skeptical any of this will happen, but an institution with these properties would complement the policy initiatives Mr. Coffey raises above.

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On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

[May 03, 2021] Elon Musk says U.S. SEC is sometimes too close to Wall Street hedge funds

May 03, 2021 |

Tesla Inc Chief Executive Elon Musk said on Tuesday the U.S. Securities and Exchange Commission was an important watchdog for investors but questioned why it was not more proactive against the growth of listed blank-check companies.

"They have an important role to play in protecting the public from getting swindled, but are sometimes too close to Wall St hedge funds imo (in my opinion)," Musk said on Twitter.

"Strange that they aren't taking more action on some of the SPACs (special purpose acquisition companies)," he added.

Reuters reported earlier on Tuesday that the SEC is considering new guidance to rein in growth projections made by SPACs, or listed blank-check companies, including clarification of when they qualify for certain legal protections. That would extend an SEC crackdown on a deal frenzy in SPACs, which the regulator worries is putting investors at risk.

Musk has had his own run-ins with the SEC. He reached a settlement with the regulator after he tweeted in August 2018 that he had "funding secured" to potentially take Tesla private in a $72 billion transaction. In reality, Musk was not close to acquiring funding.

[Mar 07, 2021] SEC Issues Devastating Risk Alert on Private Equity Abuses; Effectively Admits Failure of Last 5+ Years of Enforcement by Yves Smith

Notable quotes:
"... In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause. And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing, complex abuses. ..."
"... Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on private equity and hedge funds. ..."
"... The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing on." ..."
"... Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses ..."
"... Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. ..."
"... On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE engage in would happily fall under fraud, if SEC really wanted. ..."
"... Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals do not take their money and leave the gaming tables but pour it back in and the crime metastasizes. AKA, Kleptocracy. ..."
"... You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration. ..."
"... Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan. ..."
"... More banana republic level grift. What happens when investors figure out they can't believe anything they are told? ..."
"... Can we come up with a better descriptor for "private equity"? I suggest "billionaire looters". ..."
"... Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot service the loan and a BK is around the corner. ..."
"... Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and Feudalism for the rest of us. ..."
Jun 26, 2020 |

We've embedded an SEC Risk Alert on private equity abuses at the end of this post. 1 What is remarkable about this document is that it contains a far longer and more detailed list of private abuses than the SEC flagged in its initial round of examinations of private equity firms in 2014 and 2015. Those examinations occurred in parallel with groundbreaking exposes by Gretchen Morgenson at the New York Times and Mark Maremont in the Wall Street Journal.

At least some of the SEC enforcement actions in that era look to have been triggered by the press effectively getting ahead of the SEC. And the SEC even admitted the misconduct was more common at the most prominent firms.

Yet despite front-page articles on private equity abuses, the SEC engaged in wet noodle lashings. Its pattern was to file only one major enforcement action over a particular abuse. Even then, the SEC went to some lengths to spread the filings out among the biggest firms. That meant it was pointedly engaging in selective enforcement, punishing only "poster child" examples and letting other firms who'd engaged in precisely the same abuses get off scot free.

The very fact of this Risk Alert is an admission of failure by the SEC. It indicates that the misconduct it highlighted five years ago continues and if anything is even more pervasive than in the 2014-2015 era. It also confirms that its oft-stated premise then, that the abuses it found then had somehow been made by firms with integrity that would of course clean up their acts, and that now-better-informed investors would also be more vigilant and would crack down on misconduct, was laughably false.

In particular, the second section of the Risk Alert, on Fees and Expenses (starting on page 4) describes how fund managers are charging inflated or unwarranted fees and expenses. In any other line of work, this would be called theft. Yet all the SEC is willing to do is publish a Risk Alert, rather than impose fines as well as require disgorgements?

The SEC's Abject Failure

In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause. And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing, complex abuses.

Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on private equity and hedge funds.

The SEC has long maintained a division between the retail investors and so-called "accredited investors" who by virtue of having higher net worths and investment portfolios, are treated by the agency as able to afford to lose more money. The justification is that richer means more sophisticated. But as anyone who is a manager for a top sports professional or entertainer, that is often not the case. And as we've seen, that goes double for public pension funds.

Starting with the era of Clinton appointee Arthur Levitt, the agency has taken the view that it is in the business of defending presumed-to-be-hapless retail investors and has left "accredited investor" and most of all, institutional investors, on their own. This was a policy decision by the agency when deregulation was venerated; there was no statutory basis for this change in priorities.

Congress tasked the SEC with supervising the fund management activities of private equity funds with over $150 million in assets under management. All of their investors are accredited investors. In other words, Congress mandated the SEC to make sure these firms complied with relevant laws as well as making adequate disclosures of what they were going to do with the money entrusted to them. Saying one thing in the investor contracts and doing another is a vastly worse breach than misrepresentations in marketing materials, yet the SEC acted as if slap-on-the-wrist-level enforcement was adequate.

We made fun when thirteen prominent public pension fund trustees wrote the SEC asking for them to force greater transparency of private equity fees and costs. The agency's position effectively was "You are grownups. No one is holding a gun to your head to make these investments. If you don't like the terms, walk away." They might have done better if they could have positioned their demand as consistent with the new Dodd Frank oversight requirements.

Actively covering up for bad conduct . In 2014, the SEC started working at giving malfeasance a free pass. Specifically, the SEC told private equity firms that they could continue their abuses if they 'fessed up in their annual disclosure filings, the so-called Form ADV. The term of art is "enhanced disclosure". Since when are contracts like confession, that if you admit to a breach, all is forgiven? Only in the topsy-turvy world of SEC enforcement.

And the coddling of crookedness continued. From a January post :

The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing on."

Specifically, as we indicated, the SEC was giving advanced warning of the issues it would focus on in its upcoming exams, in order to give investment managers the time to get their stories together and purge files. And rather than view its periodic exams as being designed to make sure private equity firms comply with the law and their representations, the agency views them as "cooperative" exercises! Misconduct is assumed to be the result of misunderstanding and error, and not design.

It's pretty hard to see conduct like this, from the SEC's Risk Alert, as being an accident:

Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses

The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff observed that this failure to value a private fund's holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings .

Advisers failed to apply or calculate management fee offsets in accordance with disclosures and therefore caused investors to overpay management fees.

We're highlighting this skimming simply because it is easier for laypeople to understand than some of the other types of cheating the SEC described. Even so, industry insiders and investors complained that the description of the misconduct in this Risk Alert was too general to give them enough of a roadmap to look for it at particular funds.

Ignoring how investors continue to be fleeced . The SEC's list includes every abuse it sanctioned or mentioned in the 2014 to 2015 period, including undisclosed termination of monitoring fees, failure to disclose that investors were paying for "senior advisers/operating partners," fraudulent charges, overcharging for services provided by affiliated companies, plus lots of types of bad-faith conduct on fund restructurings and allocations of fees and expenses on transactions allocated across funds.

The SEC assumed institutional investors would insist on better conduct once they were informed that they'd been had. In reality, not only did private equity investors fail to demand better, they accepted new fund agreements that described the sort of objectionable behavior they'd been engaging in. Remember, the big requirement in SEC land is disclosure. So if a fund manager says he might do Bad Things and then proceeds accordingly, the investor can't complain about not having been warned.

Moreover, the SEC's very long list of bad acts says the industry is continuing to misbehave even after it has defined deviancy down via more permissive limited partnership agreements!

Why This Risk Alert Now?

Keep in mind what a Risk Alert is and isn't. The best way to conceptualize it is as a press release from the SEC's Office of Compliance Inspections and Examinations. It does not have any legal or regulatory force. Risk Alerts are not even considered to be SEC official views. They are strictly the product of OCIE staff.

On the first page of this Risk Alert, the OCIE blandly states that:

This Risk Alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs, and also to provide investors with information concerning private fund adviser deficiencies.

Cutely, footnotes point out that not everyone examined got a deficiency letter (!!!), that the SEC has taken enforcement actions on "many" of the abuses described in the Risk Alert, yet "OCIE continues to observe some of these practices during examinations."

Several of our contacts who met in person with the SEC to discuss private equity grifting back in 2014-2015 pressed the agency to issue a Risk Alert as a way of underscoring the seriousness of the issues it was unearthing. The staffers demurred then.

In fairness, the SEC may have regarded a Risk Alert as having the potential to undermine its not-completed enforcement actions. But why not publish one afterwards, particularly since the intent then had clearly been to single out prominent examples of particular types of misconduct, rather than tackle it systematically? 2

So why is the OCIE stepping out a bit now? The most likely reason is as an effort to compensate for the lack of enforcement actions. Recall that all the OCIE can do is refer a case to the Enforcement Division; it's their call as to whether or not to take it up.

The SEC looks to have institutionalized the practice of borrowing lawyers from prominent firms. Mary Jo White of Debevoise brought Andrew Ceresney with her from Debeviose to be her head of enforcement. Both returned to Debevoise.

Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. Clayton made clear his focus was on "mom and pop" investors, meaning he chose to overlook much more consequential abuses by private equity firms and hedgies. The New York Times determined that the average amount of SEC fines against corporate perps fell markedly in 2018 compared to the final 20 months of the Obama Administration. The SEC since then levied $1 billion fine against the Woodbridge Group of Companies and its one-time owner for running a Ponzi scheme that fleeced over 8,400, so that would bring the average penalty up a bit. But it still confirms that Clayton is concerned about small fry, and not deeper but just as pickable pockets.

David Sirota argues that the OCIE was out to embarrass Clayton and sabotage what Sirota depicted as an SEC initiative to let retail investors invest in private equity. Sirota appears to have missed that that horse has left the barn and is in the next county, and the SEC had squat to do with it.

The overwhelming majority of retail funds is not in discretionary accounts but in retirement accounts, overwhelmingly 401(k)s. And it is the Department of Labor, which regulates ERISA plans, and not the SEC, that decides what those go and no go zones are. The DoL has already green-lighted allowing large swathes of 401(k) funds to include private equity holdings. From a post earlier this month :

Until now, regulations have kept private equity out of the retail market by prohibiting managers from accepting capital from individuals who lack significant net worth.

Private equity firms have succeeded in storming that barricade. The Department of Labor published a June 3 information letter that allows private equity funds, or more accurately funds of funds, to be included in certain 401(k) plan offerings, namely, target date funds and balanced funds. This is significant because despite the SEC regularly calling out bad practices with target date funds, they are the strategy used to manage the majority of 401(k) assets .

Moreover, even though Sirota pointed out that Clayton had spoken out in favor of allowing retail investors more access to private equity investments, the proposed regulation on the definition of accredited investors in fact not only does not lower income or net worth requirements (save for allowing spouses to combine their holdings) it in fact solicited comments on the idea of raising the limits. From a K&L Gates write up :

Previously, the Concept Release requested comment on whether the SEC should revise the current individual income ($200,000) and net worth ($1,000,000) thresholds. In the Proposing Release, the SEC further considered these thresholds, noting that the figures have not been adjusted since 1982. The SEC concluded that it does not believe modifications to the thresholds are necessary at this time, but it has requested comments on whether the final should instead make a one-time increase to the thresholds in the account for inflation, or whether the final rule should reflect a figure that is indexed to inflation on a going-forward basis.

It is not clear how many people would be picked up by the proposed change, which was being fleshed out, that of letting some presumed sophisticated but not rich individuals, like junior hedge fund professionals and holders of securities licenses, be treated as accredited investors. In other words, despite Clayton's talk about wanting ordinary investors to have more access to private equity funds, the agency's proposed rule change falls short of that.

Moreover, if the OCIE staff had wanted to undermine even the limited liberalization of the definition of accredited investor so as to stymie more private equity investment, the time to do so would have been immediately before or while the comments period was open. It ended March 16 .

The New York Times reported that Senate Republicans deemed Clayton's odds of confirmation as US Attorney for the Southern District of New York as remote even before the Trump fired Geoffrey Berman to clear a path for Clayton. So the idea that a technical release by the OCIE would derail Clayton's confirmation is a stretch.

So again, why now? One possibility is that the timing is purely a coincidence. For instance, the SEC staffers might have been waiting until Covid-19 news overload died down a bit so their work might get a hearing (and Covid-19 remote work complications may also have delayed its release).

The second possibility is that OCIE is indeed very frustrated with the enforcement chief Peikin's inaction on private equity. The fact that Peikin's boss and protector Clayton has made himself a lame duck meant a salvo against Peikin was now a much lower risk. If any readers have better insight into the internal workings of the SEC these days, please pipe up.


1 Formally, as you can see, this Risk Alert addresses both private equity and hedge fund misconduct, but on reading the details, the citing of both types of funds reflects the degree to which hedge funds have been engaging in the buying and selling of stakes in private companies. For instance, Chatham Asset Management, which has become notorious through its ownership of American Media, which in turn owns the National Enquirer, calls itself a hedge fund. Moreover, when the SEC started examining both private equity and hedge funds under new authority granted by Dodd Frank, it described the sort of misconduct described in this Risk Alert as coming out of exams of private equity firms, and its limited round of enforcement actions then were against brand name private equity firms like KKR, Blackstone, Apollo, and TPG. Thus for convenience as well as historical reasons, we refer only to private equity firms as perps.

2 Media stories at the time, including some of our posts, provided substantial evidence that particular abuses, such as undisclosed termination of monitoring fees and failure to disclose that "senior advisers" presented as general partner "team members" were in fact consultants being separately billed to fund investments, were common practices. Yet the SEC chose to lodge only marquee enforcement actions against one prominent firm for each abuse, as if token enforcement would serve as an adequate deterrent. The message was the reverse, that the overwhelming majority of the abuses were able to keep their ill-gotten gains and not even face public embarrassment.

skippy , June 26, 2020 at 4:27 am

Peter Sellers I'll say now – ????

vlade , June 26, 2020 at 4:35 am

TBH, in the view of Calpers ignoring its advisors, I do have a little understanding of the SEC's point "you're grown ups" (the worse problem is that the advisors who leach themselves to the various accredited investors are often not worth the money.

On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE engage in would happily fall under fraud, if SEC really wanted.

Susan the other , June 26, 2020 at 11:43 am

Yes, the SEC conveniently claims a conflicted authority – 1. to regulate compliance but without an "enforcement authority", and 2. report egregious behavior to their "enforcement authority". So the SEC is less than a permissive nanny. Sort of like "access" to enforcement authority. Sounds like health care to me.

Yves Smith Post author , June 26, 2020 at 4:06 pm

No, this is false. The SEC has an examination division and an enforcement division. The SEC can and does take enforcement actions that result in fines and disgorgements, see the $1 billion fine mentioned in the post. So the exam division can recommend enforcement to the enforcement division. That does not mean it will get done. Some enforcement actions originate from within the enforcement division, like insider trading cases, and the SEC long has had a tendency to prioritize insider trading cases.

The SEC cannot prosecute. It has to refer cases that it thinks are criminal to the DoJ and try to get them to saddle up.

Maritimer , June 26, 2020 at 5:04 am

Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals do not take their money and leave the gaming tables but pour it back in and the crime metastasizes. AKA, Kleptocracy.

Thus in 2008 and thereafter the criminal damage required 2-3 trillion, now 7-10 trillion.

Any economic expert who does not recognize crime as the number one problem in the criminogenic US economy I disregard. Why read all that analysis when, at the end of the run, it all just boils down to bailing out the criminals and trying to reset the criminogenic system?

(Can I get my economics degree now?)

Adam Eran , June 26, 2020 at 1:33 pm

You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration.

The Rev Kev , June 26, 2020 at 5:17 am

The SEC has been captured for years now. It was not that long ago that SEC Examination chief Andrew Bowden made a grovelling speech to these players and even asked them to give his son a job which was so wrong-

But there is no point in reforming the SEC as it was the politicians, at the beck and call of these players, that de-fanged the SEC – and it was a bipartisan effort! So it becomes a chicken-or-the-egg problem in the matter of reform. Who do you reform first?

Can't leave this comment without mentioning something about a private equity company. One of the two major internal airlines in Oz went broke due to the virus and a private equity buyer has been found to buy it. A union rep said that they will be good for jobs and that they are a good company. Their name? Bain Capital!

Yves Smith Post author , June 26, 2020 at 5:44 am

We broke the story about Andrew Bowden! Give credit where credit is due!!!! Even though Taibbi points to us in his first line, linking to Rolling Stone says to those who don't bother clicking through that it was their story.

Plus we transcribed his fawning remarks.

And he resigned three weeks later.

The Rev Kev , June 26, 2020 at 5:56 am

Of course I remember that story. I was going to mention it but thought to let people see it in virtually the opening line of that story where he gives you credit. More of a jolt of recognition seeing it rather than being told about it first.

Jesper , June 26, 2020 at 6:36 am

Of the three branches of government which ones are not captured by big business? If two out of three were to captured then does it matter what the third does?

In my opinion too much power has been centralised, too much of the productivity gains of the past 40 years have been monetised and therefore made possible to hoard and centralise. SEC should (in my opinion) try to enforce more but without more support then I do not believe (it is my opinion, nothing more and nothing less) that they can accomplish much.

Susan the other , June 26, 2020 at 11:57 am

The SEC is a mysterious agency which (?) must fall under the jurisdiction of the Treasury because it is a monetary regulatory agency in the business of regulating securities and exchanges. But it has no authority to do much of anything. The Treasury itself falls under the executive administration but as we have recently seen, Mnuchin himself managed to get a nice skim for his banking pals from the money Congress legislated.

That's because Congress doesn't know how to effectuate a damn thing – they legislate stuff that morphs before our very eyes and goes to the grifters without a hitch. So why don't we demand that consumer protection be made into hard law with no wiggle room; that since investing is complex in this world of embedded funds and glossy prospectuses, we the consumer should not have to wade through all the nonsense to make decisions – that everything be on the table. And if PE can't manage to do that and still steal its billions then PE should be declared to be flat-out illegal.

Yves Smith Post author , June 26, 2020 at 4:08 pm

Please stop spreading disinformation. This is the second time on this post. The SEC has nada to do with the Treasury. It is an independent regulatory agency. It however is the only financial regulator that does not keep what it kills (its own fees and fines) but is instead subject to Congressional appropriations.

Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan.

Edward , June 26, 2020 at 7:16 am

More banana republic level grift. What happens when investors figure out they can't believe anything they are told?

RJMc, MD , June 26, 2020 at 8:43 am

It should be noted that out here in the countryside of northern Michigan that embezzlement (a winter sport here while the men are out ice fishing), theft and fraud are still considered punishable felonies. Perhaps that is simply a quaint holdover from a bygone time. Dudley set the tone for the C of C with his Green Book on bank deregulation. One of the subsequent heads of C of C was reported as seeing his position as "being the spiritual resource for banks". If bank regulation is treated in a farcical fashion why should be the SEC be any different?

Susan the other , June 26, 2020 at 12:08 pm

I was shocked to just now learn that ERISA/the Dept of Labor is in regulatory control of allowing pension funds to buy PE fund of funds and "balanced PE funds". What VERBIAGE. Are "PE Fund of Balanced Funds" an actual category? And what distinguishes them from good old straightforward Index Funds? And also too – what is happening before our very glazed-over eyes is that PE is high grading not just the stock market but the US Treasury itself. Ordinary investors should be buying US Treasuries directly and retirement funds should too. It will be a big bite but if it knocks PE out of business it would be worth it. PE is in the business of cooking its books, ravaging struggling corporations, and boldly privatizing the goddamned Treasury. WTF?

Kouros , June 26, 2020 at 12:27 pm

I want to bring this to Yves' attention: the recent SCOTUS decision on Thole v. U.S. Bank that opens the doors wide for corporate America to steal with impunity from the pension plans:

Glen , June 26, 2020 at 12:51 pm

Can we come up with a better descriptor for "private equity"? I suggest "billionaire looters".

Olivier , June 26, 2020 at 2:00 pm

What about the wanton destruction of the purchased companies? If this solely about the harm done to the poor investors? If so, that is seriously wrong.

flora , June 26, 2020 at 3:27 pm

If, you know, the neoliberal "because markets" is the ruling paradigm then of course there is no harm done. The questions then become: is "because markets" a sensible paradigm? What is it a sensible paradigm of? Is "because markets" even sensible for the long term?

flora , June 26, 2020 at 3:19 pm

an aside: farewell, Olympus camera. A sad day. Farewell, OM-1 and OM-2. Film photography is really not replicated by digital photography but the larger market has gone to digital. Speed and cost vs quality. Because markets. Now the vulture swoop.

Stan Sexton , June 26, 2020 at 8:17 pm

Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot service the loan and a BK is around the corner.

Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and Feudalism for the rest of us.

[Jan 01, 2014] The Financial Crisis Why Have No High-Level Executives Been Prosecuted by Jed S. Rakoff

The New York Review of Books

Of course, while the FBI has substantial responsibility for investigating mortgage fraud, the FBI is not the primary investigator of fraud in the sale of mortgage-backed securities; that responsibility lies mostly with the SEC.

But at the very time the financial crisis was breaking, the SEC was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes that emerged in the wake of the financial crisis, along with cases involving misallocation of assets (such as stealing funds from a customer), which are among the easiest cases to prove. Indeed, as Professor John Coffee of Columbia Law School has repeatedly documented, Ponzi schemes and misallocation-of-asset cases have been the primary focus of the SEC since 2009, while cases involving fraud in the sale of mortgage-backed securities have been much less frequent.

More recently, moreover, the SEC has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led the SEC enforcement staff to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.

[Oct 20, 2011] Citigroup Deal to Go to Judge Critical of S.E.C. Practices by PETER LATTMAN

October 20, 2011 |

Judge Jed S. Rakoff has taken the S.E.C. to task for resolving cases without making defendants admit wrongdoing.It is boilerplate language found in nearly every settlement with the Securities and Exchange Commission: A company settles its case "without admitting or denying" wrongdoing.

There it was again in the S.E.C.'s announcement on Wednesday that Citigroup had agreed to pay $285 million to settle a civil complaint that it had defrauded investors in a mortgage securities deal. The bank did so "without admitting or denying" the government's accusations.

But the S.E.C.'s longstanding policy of using this phrase in its settlements is likely to come under scrutiny by the federal judge who must approve the Citigroup settlement - and it could, legal experts say, cause the deal to come undone.

That is because the judge presiding over the S.E.C.'s action against Citigroup is Judge Jed S. Rakoff of Federal District Court in Manhattan, a jurist whom many consider the agency's bête noire.

"Given his recent jurisprudence, if anyone's going to rattle the S.E.C.'s cage on this issue, it's Judge Rakoff," said Michael Koehler, a professor of business law at Butler University who has written about the S.E.C.'s settlement practices.

Judge Rakoff is known for a scathing ruling in September 2009, when he rejected a proposed $33 million settlement between the agency and Bank of America over its acquisition of Merrill Lynch. The judge called it a sweetheart deal for the bank that had been done "at the expense, not only of the shareholders, but also of the truth." (He later grudgingly approved a $150 million settlement.)

More broadly, Judge Rakoff has sharply criticized the agency's practice of resolving cases without forcing the defendant to admit any wrongdoing. In a little-noticed ruling in March, he raised the specter of scuttling the next S.E.C. settlement in his courtroom that included such language.

Judge Rakoff said the use of the "without admitting or denying wrongdoing" language created "a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C."

By using the boilerplate phrase, "only one thing is left certain: the public will never know whether the S.E.C.'s charges are true, at least not in a way that they can take as established by these proceedings," he wrote.

Judge Rakoff's disapproval of the agency's settlement practices came in an accounting fraud case against the technology company Vitesse Semiconductor and two of its former executives.

He ultimately approved the Vitesse settlement, finding it fair and reasonable, but not before criticizing the commission on a number of fronts. He chafed at the S.E.C.'s lack of explanation for why he should approve the settlement and described the agency as treating the court as a "rubber stamp."

But much of his opinion was aimed at the "neither confirm nor deny the allegations" phrase, which he called "troubling."

Judge Rakoff looked back at the history of the practice and found that the S.E.C. had permitted defendants to settle without admitting wrongdoing because that made obtaining settlements much easier. And defendants preferred it, he noted, because if they were forced to acknowledge their bad behavior, private plaintiffs would pile on with civil actions seeking monetary damages far greater than anything regulators were likely to impose. Then, in the 1970s, the S.E.C. began prohibiting defendants who settled from publicly denying the accusations. That was intended to prevent them from engaging in public relations campaigns to contend that they had settled only to avoid protracted litigation.

Those historical reasons were met with scorn by the judge. "The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them, either," the judge wrote.

He suggested that permitting the defendant to neither admit nor deny the misconduct was indefensible.

"An agency of the United States is saying, in effect, 'Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,' " he said.

Such strong language is the norm for Judge Rakoff, one of the more colorful judges on the federal bench in Manhattan. Judge Rakoff, 68, is a former federal prosecutor who also spent years as a criminal defense lawyer before he was named to the bench. He is currently presiding over a number of major cases, including several of the insider trading prosecutions and a dispute between the trustee for the victims of Bernard L. Madoff's fraud and the owners of the New York Mets baseball team.

Judge Rakoff is not alone in his discomfort over the "neither confirm nor deny" language. The Justice Department has long not permitted defendants, except in the most unusual circumstances, to plead guilty to a crime without admitting or denying the charges.

William F. Galvin, the top financial regulator in Massachusetts, has also been a critic of the "neither admit nor deny" language and has forced companies that settle to admit they engaged in unlawful conduct.

And at least one top agency official has expressed concern. In a speech earlier this year, Luis A. Aguilar, an S.E.C. commissioner, worried that defendants who settled with the agency were issuing press releases after settlements that amounted to "revisionist history." If this continued, he said, "it may be worth revisiting the commission's practice."

[Feb 21, 2011] SEC Expert on Why It is a Wuss at Litigation

naked capitalism


at 4:23 am SEC lawyers have a strong incentive to win cases, as it builds their resume, but it is far easier to win cases by way of settlements on minor charges, than by way of judgments on major charges, for obvious reasons, namely that the charged parties are much more likely to cooperate in the former case than in the latter.

Yes, major cases that set precedent are fantastic…..

The commonly held perception expressed by readers on your blog as elsewhere–that SEC staff have an incentive to go soft on industry in order to land cushy jobs–is not entirely fiction, but is much less widespread than outside observers believe.

But the phony enforcement described above doesn't build any reality-based resume. Any reasonable person would scoff at it, as for example Yves always does here. So if it's not true that this "resume" is meant to be sent to the corporate complex on the other side of the revolving door, then where is it supposed to be sent?

That could actually be true, particularly since the game plan here over the last 30 years seems to have been to make government less competent as a justification for shrinking it further.

I wish you wouldn't repeat the lie that anyone has "shrunk" government or ever intended to. Government, as a bipartisan project, only gets bigger and more aggressive. But it gets bigger and more aggressive on behalf of the corporations and the rich and against the people. Only the good civics, ostensibly public interest part of government is being destroyed.

One of the two glaring parallels between this regime and the Ancien Regime is how government is incompetent or negligent at doing anything worthwhile but overbearing in its worthless, pointless assertions of power, so that more and more people experience it as nothing but pointless oppression. The Food Tyranny bill just passed threatens a radical escalation of this worthless oppression. (And then there's the looming insurance Stamp mandate.)

Anyone who feels oppressed, cramped, bottlenecked is realizing that the reason for this is a worthless but oppressive government, including the worthless extensions of government known as corporations. These government entities also do nothing but impose ever more taxes and regulations while providing ever fewer and worse services.

Conscience of a conservative
at 5:47 am The email listed sounds a lot more on the money than the conspiracy theories, but I can't help think the writer left one thing out. The SEC does not get the budget it needs to persue all cases to their full conclusion. AS the former insider says, these cases take a great deal of time and money and the outcome is not guaranteed. If the SEC was properly funded it would be in a better position to retain their talent and fund legal battles instead of always settling.
at 7:39 am "SEC lawyers have a strong incentive to win cases"

Really? How does that assessment square with Judge Rakoff's observations during S.E.C. v. BAC over the SEC's proposed settlement for BAC's fraudulent concealment of MER bonuses prior to the shareholder vote on the BAC-MER merger? A sampling…

"In other words, the parties were proposing that the management of Bank of America-having allegedly hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy-would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money.",15

"The S.E.C., while also conceding that its normal policy in such situations is to go after the company executives who were responsible for the lie, rather than innocent shareholders, says it cannot do so here because "[t]he uncontroverted evidence in the investigative record is that lawyers for Bank of America and Merrill drafted the documents at issue and made the relevant decisions concerning disclosure of the bonuses." Id. But if that is the case, why are the penalties not then sought from the lawyers? And why, in any event, does that justify imposing penalties on the victims of the lie, the shareholders?"


"Overall, indeed, the parties' submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry-all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair."


"The S.E.C. also claims it was stymied in determining individual liability because the Bank's executives said the lawyers made all the decisions but the Bank refused to waive attorney-client privilege. But it appears that the S.E.C. never seriously pursued whether this constituted a waiver of the privilege, let alone whether it fit within the crime/fraud exception to the privilege. And even on its face, such testimony would seem to invite investigating the lawyers. The Bank, for its part, claims that it has not relied on a defense of advice of counsel and so no waiver has occurred. But, as noted earlier, the Bank has failed to provide its own particularized version of how the proxies came to be and how the key decisions as to what to include or exclude were made, so its claim of not relying on an advice of counsel is simply an evasion." Id. n.3.

Judge Rakoff makes the S.E.C. lawyers sound like a bunch of pussy cats, not people who want to win.

Wild Bill
at 8:17 am "The commonly held perception expressed by readers on your blog as elsewhere–that SEC staff have an incentive to go soft on industry in order to land cushy jobs–is not entirely fiction, but is much less widespread than outside observers believe." We're not wrong! We know what we see! We know what's going on! Linda Thompson was hired because she knew the game, not because she litigated Enron. This should have been your first point, and you should have expounded upon it with examples and reasoning. Instead you buried it in the middle of a bunch of crap. You're a former SEC lawyer - YOU DID THE SAME THING SHE DID! I'm starting to hate this blog.
at 8:24 am I think it's safe to say that the model of regulatory enforcement is completely broken. We have had a paradigm shift in the industry. It's time for one in enforcement.

Wall Street has become like organized crime. So the question is, how did the FBI break the mob? It professionalized its ranks, making them incorruptible, or nearly so. It sent in moles who gave law enforcement a clear picture of what was going on and who was doing what. It had a powerful agency head who protected all levels of its staff from political interference. And it had an aura and a mission. TV shows, movies. Kids wanted to be G-men, and it was not about the money.

In short, ask yourself, how did Elliot Ness bring down Al Capone? That's what we need to rein in Wall Street. That's our model.

Conscience of a conservative
at 9:33 am Wall Street has not become like the mob. A better analogy would be the cigarette industry. Think of how much more profitable Tobacco would be if lobbyists could convince politicians to defund the FDA. Wall Street's business is not unlike Tobacco , they source product at the cheapest price and attempt to package at the highest price. The prospectus is like the warning label on a pack. Wall Street wants to make sure the warning label says as little as possible and enforcement is not there if they break the rules.

People will always leave the SEC for other jobs, but more people would stay if the pay was better. And the SEC has to go for quick wins and settle or they risk running out of scarce funding.

I,m sure there's some regulatory capture and pressure from the Fed or Treasury ,etc to back off on certain prosecutions, but money is a big issue here and to pretend it's not an issue and blame it 100% on corruption in my view fails to accept the realities of the situation.

One reason why the FDIC is more effective is because their funding situation is better.

at 9:52 am "Ironically, a simple model for clean government comes from Singapore."

Well, at least you've always been straightforward about your desire for authoritarianism.

at 10:07 am Do you expect banks or bank officers to be prosecuted? Take a look at who is the Secretary of the Treasury (Tim Geithner-Goldman Sachs), the Budget Director (Jacob Lew-Citigroup) and the Chief of Staff (William Daley-JP Morgan Chase). Let's face it. The banks are a huge source of political patronage and that's why nobody has been prosecuted for this fiasco. The banks are very glad to hire those who have served them well in office.

The bankruptcy trustee sues JP Morgan Chase because of its complicity in the Madoff scandal. Does the government do anything as a result of potential money laundering? Absolutely not. The Obama administration people are looking out for their futures. Not prosecuting JP Morgan Chase, Citigroup and Goldman Sachs is likely to result in large future rewards.

at 10:10 am Sorry, but I'm skeptical.

First of all, I don't understand why settling a lot of easy cases should impress a top law firm, if indeed what impresses them is outstanding skill.

Secondly, it seems to me the best and most aggressive law enforcers are never primarily motivated by money. They tend to be the kind of people whose spirit would die if they had to work in support of a corrupt organization.

In fact, most of us would much prefer doing something we can believe in rather than something that makes us feel dirty.

I believe the problem at the SEC, as with many government agencies, lies at the top. Good, aggressive staff is drawn to (and often literally loves) a leader who is just like them, and who encourages them and protects them from political efforts to hobble them. And a leadership that doesn't want to rock the boat will find reasons to reject any job applicants who don't "fit in."

Cynical Mumble
at 10:40 am This has always been clear to see for years – that the agencies are captured and do what they're told. In truth, these guys are under considerable pressure to do what they are told, I like the passing discussions on what motivates this mode of operation. I think some SEC lawyers already consider their Government jobs as the proverbial "greener pasture" and simply don't want to fuck that up by offending the industry. I don't believe the budget issues are an issue in why the SEC won't do it's "imaginary" job. Look at the Defense Contractors lining up to feed at the trough to "modernize" the SEC's infrastructure, even if nothing gets done – it is extremely lucrative.
F. Beard
at 11:29 am Why not just give SEC attorneys a percentage of the fines for a successful prosecution plus an extra bounty on criminal convictions? Why not make the SEC itself a lucrative career so there would be little temptation to move to private industry?

Still, I would bet that fundamental reform in money creation would do more to ensure an honest and stable financial system than any amount of regulation.

Independent Accountant
at 11:54 am Full disclosure: I have never worked at the SEC. However, I have been "on the other side of the table" from the SEC for 36 years. The SEC almost invariably selects insigificant cases to pursue and settles them quickly. Most of its lawyers have no understanding of evidence and couldn't try a case if their lives depended on it. The go to the SEC for 3-5 years, get their tickets punched, then leave for law firms which they gave "passes" to as SEC employees. The SEC needs a housecleaning from top to bottom. The SEC has enough money to do its job. It needs to reallocate resources. I had a client with $196 in assets and 32 stockholders, a shell, get an SEC comment letter. Why is the SEC even looking at registrants with less than say $250 million in market cap? Why? Because by spending time on obscure, non-connected firms, it can avoid looking at large connected ones. My bottom line: anyone at the SEC who worked on Wall Street or for a NY BigLaw or Big 87654 firm at any time in the last ten years should be exited. Now. "But the SEC will lose all that valuable expertise". Are you kidding?
at 12:44 pm Do you think the system would be better off with no regulation whatsoever? I ask because I am gradually coming to think that everything eventually gets gamed and corrupted. Thus, since Wall St.'s main occupation apparently is to game the system, the best thing is just to take away the game, i.e. end the charade that there are any rules at all. This means closing the SEC. The system then goes back to Laissez-faire and everyone must rely on their reputation to survive-which means apart from the microsecond trading and other shenanigans, Wall St. goes under because they don't have a shred of good reputation left. If you, or anyone else here has any thoughts I'd like to hear it.
at 12:57 pm The SEC is an important element of the con. It gives the impression that there is a regulatory apparatus out there when, in fact, there is none.

Ineffectual regulation is useful to our looting elites as a distraction. We are left discussing whether the SEC is doing its job or if it is doing its job well enough. Well, the SEC is doing its job and a very good one at that. It is meant to blow smoke at the rubes and give cover to the looters, and it does. It is pure kabuki, the appearance of regulation without any real regulation. It is a Trojan horse. It portrays itself as on the side of reform, of the people, but it is really just an instrument of Wall Street meant to screw over those selfsame people as much as possible.

at 1:49 pm There are two mechanisms to revitalise the SEC:

1) Whistle blowers get 15-30% of fine imposed, a la IRS;

2) A portion of the fine is also distributed to the investigative team.

This should focus minds on large and winnable cases.

Mat Albert 5416
at 2:15 pm In a single paragraph Hugh managed to say pretty much everything that anyone needs to know about the SEC.

There's a pattern which connects all of this, as Hugh has pointed out a number of times before:

from Wikipedia: KLEPTOCRAC­Y

Kleptocrac­y, alternativ­ely cleptocrac­y or kleptarchy­, from Greek kleptes (thieves) and kratos (rule), is a term applied to a government that takes advantage of government­al corruption to extend the personal wealth and political power of government officials and the ruling class (collectiv­ely, kleptocrat­s), via the embezzleme­nt of state funds at the expense of the wider population­, sometimes without even the pretense of honest service. The term means "rule by thieves"."

The only question that remains is how long will the ruling thieves bother with "even the pretense of honest service"?

[Oct 21, 2010] Open Letter To The SEC's Worthless Enforcement Division Tyler Durden

Oct 21, 2010 | zero hedge

From reader QevolveQ Holdings

Sent 10-21-10 to SEC Enforcement Division

To Whom It May Concern,

I have a question. Why does the SEC allow high frequency traders/co-location traders/etc., to front run retail orders every day in almost every security? When I say front run, I mean the practice of utilizing sub-penny orders whereby these so called traders step in front of real bids and offers by 1/100th of a penny to get the trade done, knowing there's a bid or offer right behind them. This has happened to me at least fifty times in the last year. It is particularly a problem on illiquid issues in which the sub-penny order that front runs my orders may be the only business done at that level. And so my order just sits there and never gets filled.

This exact scenario in fact happened again today, as I was a 700 share bid at $6.10 in PROV from 11:39am till the close. At 2:26pm 450 shares were executed at 6.1007. On 450 shares that is equivalent to just 31 cents better than my 6.10 bid. And that sub-penny trader got the order instead of me because they were able to front run me without even showing a bid in the market (i.e. the 6.1007 print just magically appears on the tape with no bid having been shown there in the Level II system). I would gladly have paid that price, but of course I'm retail and cannot use sub-penny increments.

I hope somebody at the SEC actually reads this. I would very much appreciate a response as well. Please tell me, why is this practice (among others) allowed for some market participants and not others? It is a complete ripoff in my opinion. Our equity market has become a total farce because such practices are allowed. I have little to no faith that I am operating on a fair and level playing field. The marketplace has become dominated by machines and those with the highest levels of capital to deploy. The average retail investor like myself is simply left to be exploited by the robots of greed. These practices are not going unnoticed, and I want to voice my opinion that this nonsense happens in the equity market every day. In my opinion, it is deplorable and likely responsible for investors' seeming lack of confidence in this rigged financial system we are forced to operate in.

Regards, MQ

Selected Comments


Thank you. It is an unbelieveable screw job [not to mention the other corrupt Shenanigans]. Does the CME allow CME Members to front run? NO! The electronic Futures markets are the only reasonably fair markets there now are. The SEC is just Dumb and Stupid. Thank you ZH.

aint no fortuna:

It happens because the Too Big To Jails WANT it to happen. They own the fucken SEC and you don't and that's the end of it. When you own the Administration, the CONgress and the fucking regulators you too can trade subpennies and get a husky ripping off honest people. Do yourself a favor - I wrote them a couple of times years ago to complain about various egregious shit and they never even acknowledged the letters, which made me start thinking about doing the kind of shit that gets the black helicopters filing flight plans over my house. It just ain't worth the time and negative energy. Let the fucken helicopters go looking for Tyler... he drives them batshit. Drive on, and when the time comes maybe, just maybe the shoe will be on the other foot.

system failure:

SEC no longer functions as a regulatory agency. Hence worth, you are wasting your time by complaining to them. However, I applaud your efforts as the obvious response to your inquiry form the SEC will be that they want all robots trading the markets only, since they are essentially fairy tale land anyway. Nobody trades the markets and retailers are pulling their money out of the rigged game faster than the SEC can download the lastest porn available on the net.

Bankster T Cubed :

LOL! The SEC doesn't give a fuck about anything other than protecting their masters, the big broker/dealers like GFS, JPFM, MFS, etc.

Here is their response to you: fuck off go away


Please stop bothering us at the SEC we are investigating new porn sites. Really.


DANG! You beat me to it. I was going to post that there is som Brazilian Fart Porn or Jaoanese Vomit porn that the SEC has not "tossed off " to yet. The "investigation" is incomplete.

I mean REALLY? The SEC is not going to take out this obvious fraud corrupt crap? Really? The level to wit these twits bury their heads in the sand or just "go through the motions" of showing up for a paycheck everyday is astounding.

You would think somebody ther has some iota of Pride or Ethics? I mean, REALLY? Something this obvious and they can't or won't stop it?

Audit the Fed do away with it and shut down the SEC. They don't enforce, investigate, and apparently the last two judges rejected every investor complaint for the last 20 years.

When is it time to start shooting idiots, sycophants, and go alongs in the f-ing head???? Voting sure doesn't work and apparently neither does the law.


Perhaps the SEC never helps because people fail to include hot new porn links with their complaints.

And if anyone tries this and succeeds, a whole new market of porn trolling the web to appease the unholy appetites of the SEC could be created.........

or not.

zen0 :

Letters to bureaucrats and Department heads copied to political reps. That is how the system works.

Most of you write copious amounts of opinion, but it is all air unless you back it up with hard copy.

In a stamped envelope with a return address.


HFT's the SEC KNOWS about and they are quite aware of it and even the institutional traders are sick of this shit. They are looking the other way out of impotence, incoherence, incopentence, INCONTENCE, or they are being paid.

Any way you slice it is a plie os steaming shit! OH, I forgot of the scat porn that the SEC Investigators like?


[Oct 21, 2010] Smoking Gun New Evidence of How Wall Street Shafted Pension Funds by Misrepresenting Mortgages; Rep Miller Calls for Full Audit of Fannie Mae

"SPITZER: Why is the SEC not jumped all over this to see if these mortgages were safe and secure..."
Mish's Global Economic Trend Analysis

SPITZER: What I would be doing right now would be to drop a subpoena on every investment bank saying, I want to track this information, these documents came from Clayton, the due diligence firm, see where in the company they went, who saw them, who knew about them, who had a conversation about them, and what did they do? And somebody who saw these documents, and as Josh said, saw that there was 29 percent noncompliance and still pushed these mortgages into the security, boom, charge them right there -- failure to apply the rigorous standards. Charge them, recover all the money. And this time, I would hope the ax comes done, no bailout, we claim every...

ROSNER: Eliot raised an interesting question: What if the trading desk saw the due diligence documents, knew that 29 percent didn't meet the underwriting standards, knew that those were sold as securities to investors and then with that knowledge traded against that by going short these securities.

SPITZER: Let me explain what you're saying, because this is such a huge point. At the hearings and in this movie, there is an outtake of Lloyd Blankfein saying, we traded against the very documents and very mortgages that we sold to the entire investment community, meaning we shorted them, we were betting on them going down, not up. If they did that when they had knowledge from these documents that they we're now talking about, that in fact they were going to blow up because 29 percent or more were not compliant, that is trading on inside information, could create critical liability. So again, the critical issue is who saw these documents, when, what did they do with that information? This is a swamp, a cesspool and somebody should be dropping 1,000 subpoenas right now on this.

ROSNER: And by the way, this information has been sort of floating around in the ether, in the public ether, in the law enforcement ether, for the past three years and there's been...

SPITZER: Why is the SEC not jumped all over this to see if these mortgages were safe and secure...

ROSNER: True. Very good question.

SPITZER: You know, I'm just flabbergasted when, you know, you called me a while back and you had seen about these things and we began to talk. This is, it seemed to me, the Holy Grail that explains and is the blueprint for unmasking how absolutely venal the behavior was inside these investment banks.

[Oct 19, 2010] PIMCO, NY Fed Notifies Countrywide of Failures

October 19, 2010 | The Big Picture


Hey..there are no coincidences around here…

1) Yes, a sufficient few insiders knew that this could all end very badly

2) Funny how the SEC just settled last week its case against Mozilo from Countrywide (usual nonsense of no guilt, small relative fine).

Folks this is just disgusting…maybe this case will be the start of some form of accountability? Unfortunately it just looks like the powers that be are now fighting over who gets how much of the taxpayers dollars.

Maybe some of us should learn a little french..and say "Non!"

[Oct 18, 2010] Countrywide CEO Mozilo settles with SEC for $67.5M

No criminal charges from SEC means a complete travesty of justice....Perhaps it is time to get out the guillotines!And Mozilo's debt of 10's of millions of dollars should never be allowed to be paid by Bank of America… And neither should the Bank cover David Sambo's $5 million owing. While now he can cross "settle SEC case" off his to-do list, Mozilo isn't out of the woods yet. A criminal probe into Countrywide by the U.S. Attorney's office in Los Angeles continues.

Two other former Countrywide executives also settled before trial next week on charges filed by the Securities and Exchange Commission. But employment agreements that protect the men from lawsuits involving the failed lender mean Bank of America Corp., which bought Countrywide in July 2008, will pick up most of the tab.

The settlement announced Friday spares the executives the risk of a verdict that could have been used against them in lawsuits by shareholders, or by prosecutors if a criminal probe into their activities leads to charges.

It also gives the SEC (News - Alert) the right to brag about what it said is the biggest financial penalty ever against a public company's senior executive. The agency has been criticized for doing little to prevent much of the risky behavior that led to the financial meltdown and for failing to detect Bernard Madoff's massive investment fraud.

"This settlement is a desirable result for all the parties," said Jacob Frenkel, a former SEC enforcement attorney now in private practice. "The SEC claims victory. The defendants get closure while preserving their ability to fight" lawsuits by shareholders.

The agreement requires Mozilo to repay $45 million in ill–gotten profits and $22.5 million in civil penalties. Former Countrywide President David Sambol owes $5 million in profits and $520,000 in civil penalties, and former Chief Financial Officer Eric P. Sieracki will pay $130,000 in civil penalties.

It's "the fitting outcome for a corporate executive who deliberately disregarded his duty to investors by hiding what he saw in the executive suite," SEC Enforcement Director Robert Khuzami said in a conference call with reporters.

But $25 million of Mozilo's restitution will come from an escrow fund the company set up to cover shareholder litigation and Mozilo has no obligation to pay the remaining amount, according to the settlement agreement.

The Charlotte, N.C.–based bank, through its Countrywide subsidiary, will pay that $20 million, according to a person familiar with the matter who wasn't authorized to speak publicly and spoke on condition of anonymity.

Sambol's agreement stipulates that his entire $5 million forfeiture will come from the escrow fund.

The payments come on top of an $8.4 billion settlement Bank of America made with 12 states in 2008 over Countrywide's lending practices. The company also agreed in August to pay $600 million to end a class–action case from former Countrywide shareholders.

The penalty represents a striking turn for Mozilo, the son of a Bronx butcher who 41 years ago co–founded what grew into the nation's largest home loan originator. In 2006, Countrywide was writing one in six of the nation's mortgages, totaling more than $490 billion, court records showed.

The Calabasas, Calif.–based company spiraled into disaster as investors suddenly realized many homeowners wouldn't be able to repay mortgages that required no proof of income or down payment, and offered adjustable rates that quickly made monthly payments unaffordable.

Regulators portrayed Countrywide's massive size in court documents as the result of the three executives' single–minded pursuit of market dominance, even if it meant taking disastrous risks.

"The credit losses experienced by Countrywide in 2007 not only were foreseeable by the proposed defendants, they were in fact foreseen at least as early as September 2004," the SEC said in its filing.

The SEC accused the men of misleading shareholders about the quality of the loans on Countrywide's books. The civil complaint also accused Mozilo of acting on his inside knowledge of the company's precarious state when he sold shares between November 2006 and October 2007 ahead of its collapse, reaping more than $139 million.

Under the settlement, the three men did not admit wrongdoing.

"Mr. Sambol has agreed to settle the SEC lawsuit and put the matter behind him for the benefit of his family and loved ones," Sambol's attorney Walter Brown said in a statement.

Sieracki's lawyer, Shirli Fabbri Weiss, said in a news release that all fraud–based claims against her client had been dropped and that his civil penalty was to settle negligence–based charges.

Mozilo, who was not in court when the settlement was announced, was the nation's highest–profile defendant yet to face trial for risky business practices leading to the housing collapse that sent the country into recession.

[Oct 15, 2010] Is The SEC Still Working For Wall Street?

with 54 comments

By Simon Johnson

The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy – over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.

The SEC's case against Goldman Sachs may mark a return to a more effective role; certainly bringing a case against Goldman took some guts. But it is entirely possible that the Goldman matter is a one off that lacks broader implications. And in this context the SEC's handling of concerns about "high frequency trading" (HFT) – following the May 6 "flash crash", when the stock market essentially shut down or rebooted for 20 minutes – is most disconcerting. (See yesterday's speech by Senator Ted Kaufman on this exact issue; short summary.) Read the rest of this entry "

[Apr 27, 2010] An SEC Attorney Weighs In . . . By Barry Ritholtz

April 27, 2010

Over the weekend, I received several very informative emails from a former SEC attorney. "C" just gave me permission to reproduce it here.

It is a little "inside baseball" as to the process of how the SEC decides to bring an action versus any company, more or less something as large and important as GS. Some of the language has been changed to maintain C's anonymity.


C's initial email.

Hi Barry,

I am an a avid reader of your blog although I don't often comment. I spent some time at the SEC, and thought I could add a couple of points to your effort against the overwhelming stupidity in the MSM about this Goldman action by the agency.

After sitting in on every closed meeting of the Commission during my time there, it sure does seem that politics can (and often does) derail an investigation.

But, it doesn't work the other way.

As you know, it's up to the lower-level enforcement attorneys to decide when to bring the case to the Commissioners. It is possible that these attorneys saw that it was politically convenient to bring their action now - actually, 8 months ago when they got approval for the Wells notice - but their motivation was not political: It helps their careers (and mental well being) to get their cases approved.

Attorneys are unwilling to put a case up for a commission vote if they didn't think it was strong enough. These attorneys are judged on the success of the actions they bring and wouldn't jeopardize that to appease the politicians that are currently serving on the Commission. The senior people who make promotion decisions will see Commissioners and Presidents come and go but senior staff outlasts them all.

The Commissioners power is wielded not to instigate investigations but to kill them by not approving them - this was rampant during the Bush administration.

The other thing I was surprised about when I started at the SEC was how concerned the staff and (usually) the Commission is with precedent on punishment. I guarantee some low level staffer already has a memo prepared: Settlements, administrative decisions and court decisions from similar 10b-5 cases, including how they relate to the seriousness of what Goldman has done, the amount of money involved, etc. (I wrote a number of these when I first started at there).

One of the biggest goals of the enforcement division is to have consistent punishments so that the market players can act appropriately. It helps control behavior in the market and the side benefit is it makes the SEC's job easier - defendants know when to settle and what punishment to accept. Unless they're stupid, Goldman will eventually settle, and it will be consistent with other cases with similar circumstances. Goldman may have already made things more difficult for themselves because they've decided to play this up in the media. (That gets factored into any settlement as well).

If you're wondering why I emailed this to you instead of just posting it 1) I didn't think it was a great idea to publicize talking about closed commission meetings and 2) I don't like to post anonymously. Anything I mentioned here is not confidential but I didn't feel comfortable posting it with my name attached.

Keep up the great work on the blog.



And of course, I adore the PS:

PS: I should also add that I first found your blog while at the SEC. It was on an SEC list of recommended websites to read.


Lastly, here is C's email granting permission to republish:


Feel free to use what I sent. I'd prefer if you didn't identify me, but as I said nothing in there is confidential.

To add a little nuance to what I wrote regarding the Commissioners killing investigations: Not surprisingly the reasons given are never overtly political but veteran enforcement attorneys were well aware of certain Commissioners "tendencies" on certain types of investigations and certain types of defendants (if you know what I mean). With these types of investigations it was always easy enough for a Commissioner to find something in the evidence or assumptions that "concerned" them enough to not approve going forward with a Wells notice or the filing of a case.


[Apr 13, 2010] Investigation Begins Into E&Y's Role In Connection With Lehman's Repo 105 Scam by Tyler Durden


Fox Business reports that the investigation around Lehman is intensifying. Surely the SEC, now generically equated with objects that float around in sewers in formal conversation, has realized it has to do something, anything, to find at least one scapegoat for the financial collapse. Which is why we read with little surprise Gasparino's report that "thee SEC has ramped up its inquiry into Lehman's fall, particularly after court-appointed bankruptcy examiner Anton Valukas issued a lengthy report stating that Lehman's top executives were "grossly negligent" in possibly hiding the risky nature of the firm's finances during its final day." What we find much more interesting is that "yet another investigative agency, the Public Accounting Oversight Board -- created under the 1992 Sarbanes-Oxley law to investigate and discipline public accounting firms -- has launched an inquiry into the role of Lehman's auditor, Ernst & Young, following the examiner's report, which accused the big accounting firm of "professional malpractice," for its work in approving accountings techniques Lehman used during its dying days in the summer of 2008." In the absence of any Wall Street villains, which it is now all too clear have endless diplomatic immunity from prosecution by the corrupt regulators, will the auditor, together with Dick Fuld, be made into the sacrificial lambs? Or will we continue the farce that anything even remotely related to capital markets integrity and reporting is real and valid? Judging by the nearly 60 days of no S&P downticks, the market has answered that question for us.

casino capitalism:

Unfortunately, the financial system has moved beyond where it was when Enron and Arthur Anderson blew up. Now, the criminals have a stranglehold on the system and there is absolutely no way any of them will be held accountable. Legalized fraud and theft, starting on wall street, is the dominant force now.

Camtender :

"1992 Sarbanes-Oxley law", it was passed in 2002.

Does it really matter? The SOX law does not work, only made the Big 4 tons of money for a few years. I sure hope E&Y purchased a "Prepaid Legal" policy with all that SOX dough they got........

[Apr 06, 2010] Guest Post: Proof that Regulators Knew of and Allowed Debt-Hiding Accounting Tricks Like Lehman's Repo 105

Regulators like the Fed and SEC have said they didn't know about Lehman's use of Repo 105s to hide its mountain of debt.

But in a must-read New York Times Op-Ed, law school professors Susan P. Koniak, George M. Cohen, David A. Dana, and Thomas Ross point out:

Our bank regulators were not, as they would like us to believe, outside the disco, deaf and blind to the revelry going on within. They were bouncing to the same beat. In 2006, the agencies jointly published something called the "Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities." It became official policy the following year.

What are "complex structured finance" transactions? As defined by the regulators, these include deals that "lack economic or business purpose" and are "designed or used primarily for questionable accounting, regulatory or tax objectives, particularly when the transactions are executed at year end or at the end of a reporting period."

How does one propose "sound practices" for practices that are inherently unsound? Yet that is what our regulatory guardians did. The statement is powerful evidence of the permissive approach bank regulators took toward the debt-dissolving financial products that our banks had been developing, hawking and using themselves for years. And it's good reason for Americans to be outraged by the "who me, what, where?" reaction of Mr. Bernanke and the S.E.C. to the revelation of Lehman's Repo 105 scam.


The interagency statement on "sound practices" of 2006 … was greeted with effusive praise from bankers, their lawyers and accountants. Gone was the requirement [proposed by the law professors and others] to ensure that customers understood these instruments and that the banks document that they would not be used to phony-up a company's books.

The focus on complexity was also gone, as was the concern over transactions "with significant leverage" - that is, deals with little real cash underneath, another unfortunate deletion because attending to excessive leverage would have served us well.

Instead, the only products that the banks were asked to handle with special care were so narrowly defined and so obviously fraudulent that suggesting that they could be sold at all was outrageous. These included "circular transfers of risk … that lack economic substance" and transactions that "involve oral or undocumented agreements that … would have a material impact on regulatory, tax or accounting treatment." [and these weren't banned, but apparently only required special disclosures by the banks]

Just as troubling, at least in retrospect, the new statement specifically exempted C.D.O.'s from the need for any special care ..

Only two years later, these same regulators were explaining that the complexity and opaqueness of instruments like C.D.O.'s had contributed significantly to the economic collapse…

Moreover, the collapse was characterized by institutions supposedly healthy one day and on the verge of collapse the next, due in no small part to their extraordinary debt burdens - debt burdens that complex instruments magically removed from the books.

To this day, that final interagency statement (which was adopted in 2007) has not been repealed or replaced. It can still be found on the S.E.C. Web site, along with the letters from industry representatives praising the 2006 draft.

As the law professors point out, you can have all sorts of laws on the books, but if regulators aren't enforcing them, they are not worth the paper they are written on.

[Dec 30, 2009] Wall Street Waits as SEC Fails to Bring Madoff-Inspired Reforms -

Dec 30, 2009 | Bloomberg

Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, said she wanted to show that her agency was cracking down after missing Bernard Madoff's $65 billion Ponzi scheme. In May, she proposed that almost 10,000 money managers undergo surprise inspections to make sure they weren't ripping off clients.

"Investors are looking to the SEC to assure the safekeeping of their assets," Schapiro said at the time. "We cannot let them down."

On Dec. 16, she settled for something less sweeping. Schapiro joined four other commissioners in approving a rule that requires about 1,600 U.S. fund managers to submit to unannounced audits, 83 percent fewer than seven months ago. The revision came after lobbying by fund companies, including executives from T. Rowe Price Group Inc., who met with Schapiro, and Legg Mason Inc., who met with another commissioner, SEC records show.

The diminished inspections rule is one of at least four Schapiro announced as a way to protect investors and boost confidence, then later scaled back or delayed. In August, she bought herself more time on a rule to rein in short-sellers, after lobbying by hedge funds. In October, Schapiro put off plans to give investors more power to decide who sits on corporate boards after the U.S. Chamber of Commerce questioned the SEC's jurisdiction.

'Driving Hard'

"I've been driving people very, very hard in this building," Schapiro said in a Dec. 22 interview. "We just don't have the capacity to move any faster. We're still at, I think, a very good pace."

Schapiro became SEC chairman in January, having been nominated by President-elect Barack Obama to attack Wall Street's "culture of greed" and bring the "new ideas, new reforms and new spirit of accountability" to an agency whose failures, Obama said, helped spur the 2008 market meltdown.

In her first year in office, Schapiro's found that issuing proposals is easier than completing rules. "You get zero points in history for what you proposed," said former SEC Chairman Richard Breeden, who now manages a hedge fund that tries to remove directors at companies he says are underperforming. "You get points for what you get over the goal line."

The SEC under Schapiro, 54, has suffered some setbacks, including a public humiliation in September by a federal judge who called a proposed $33 million settlement of an enforcement case with Bank of America Corp. a "contrivance."

Democratic Relations

Even Schapiro's attempts to maintain good relations with Democrats in Congress have prompted SEC Commissioner Kathleen Casey, a Republican, to caution against politicizing an independent agency. Regulation "needs to be driven by data, not politics or unfounded assumptions," the SEC commissioner said at an October public meeting.

"If you go back to my days there were attempts to bring political pressure over some of our cases," said Stanley Sporkin, a retired federal judge who in the 1970s led the SEC unit that investigates corporate fraud. "Everybody at the SEC knows you've got to fight it off. Mary knows that."

Schapiro, who graduated from Franklin and Marshall College in Lancaster, Pennsylvania, before receiving a law degree from George Washington University, has spent more than two decades in financial regulation. She was first a staff attorney at the Commodity Futures Trading Commission, followed by stints as an SEC commissioner, chairman of the CFTC and then chief executive officer of the Financial Industry Regulatory Authority, a Wall Street-funded overseer of more than 5,000 U.S. brokerages.

Image Rehabilitated

Former SEC officials say Schapiro's strategy of proposing rules and pursuing cases against industries and executives involved in the financial crisis helped rehabilitate the agency's image -- even if she has had to change her mind on occasion.

"Sometimes you shoot too fast and you find out there are things you should have thought about first," said Edward Fleischman, a former SEC commissioner who's now a senior counsel at the Linklaters law firm in New York. "She doesn't appear to be a steamroller who says 'I made the proposal so it must be right.'"

At a time when lawmakers were threatening to strip the SEC of power because of failures in policing Wall Street, she helped restore its credibility, former officials said, by cleaning up units that missed Madoff's crimes and proposing regulations for credit-rating companies that assigned top grades to toxic mortgage securities.

"Mary has behaved admirably," said David Ruder, a Republican SEC chairman under President Ronald Reagan who now teaches law at Northwestern University in Chicago. "She has really made an effort to show the commission is revitalizing itself."

Unfinished Rules

The SEC is reviewing public comments on the still- unfinished credit-rating rules, which would require companies such as Moody's Investors Service and Standard & Poor's to disclose how much revenue they get from their biggest clients and subject their employees to the same liability standards as auditors.

Schapiro also has yet to complete work on rules for money market funds. After last year's collapse of the $62.5 billion Reserve Primary Fund, the Obama administration called the industry a "significant source of systemic risk." SEC commissioners plan to vote next year on a proposal to force funds to hold a bigger share of their assets in investments that are easy to liquidate.

Other regulatory initiatives, however, are stuck in limbo. After saying in April that she would consider curbs on short- selling, which lawmakers blame for pushing down stock prices, Schapiro has postponed any rules until next year.

Hedge Fund Push Back

The decision followed push back from hedge funds, including Citadel Investment Group LLC, D.E. Shaw & Co. LP, and Renaissance Technologies Corp. They told the SEC in letters that there was little evidence that bearish traders caused the steep decline of share prices in 2008. The fund managers also said the SEC's plans would damage markets.

Schapiro, in the interview, said the SEC in August sought a second round of comment because it was considering an alternative approach to the short-selling rules proposed four months earlier.

On the surprise audits, fund managers complained in private meetings that the agency was unfairly punishing an entire industry for the sins of one of history's biggest fraudsters, according to attendees who requested anonymity to discuss the private sessions.

Exams Unnecessary

The exams weren't necessary, the money managers also argued, because most investment firms hire banks to safeguard customer funds. And they said it would cost them at least double the SEC's $8,100 estimate to pay for the annual exams.

"My view is always, if we are a bit more aggressive in proposing, we have more leeway," Schapiro said in the interview.

In May, she proposed a rule that would give shareholders more power to choose board directors by making it easier to wage proxy fights.

Under the proposal, groups of shareholders who collectively own 1 percent of the biggest companies could nominate board members directly on corporate ballots, rather than absorbing the cost of printing and mailing a second proxy statement.

She linked the proposal to the global financial crisis, saying bank losses raised "serious questions" about the oversight performed by directors.

'Unworkable' Plan

The U.S. Chamber of Commerce, which represents more than 3 million companies, called the SEC plan "unworkable" in an August letter. The nation's largest business lobby has also been discussing with Gibson, Dunn & Crutcher LLP attorneys a strategy for suing the SEC, said Tom Quaadman, a Chamber executive director.

By September, Schapiro's staff began telling investors that the so-called proxy-access rules wouldn't be in place for 2010 director elections. In October, the SEC publicly announced the delay.

Schapiro said the SEC still hopes to approve the rule in the first three months of 2010. "It's a pretty profound change to the fabric of corporate governance," she said in the interview. "We need to do it carefully and thoughtfully."

Her agenda has sometimes been driven by political pressure, said James Angel, a finance professor at Georgetown University in Washington who has served as an adviser to stock exchanges.

Lawmaker Lobbying

The effort to curtail short-selling, in which traders borrow stock and sell it, hoping to profit by replacing the shares at a lower price, followed lobbying from Democratic lawmakers after the Standard & Poor's 500 Index fell 19 percent in the first two months of the year.

Representative Barney Frank, chairman of the House Financial Services Committee -- the SEC's overseer in the House -- announced Schapiro's plans for her at a March 10 press conference. The Massachusetts Democrat said he was "hopeful," after speaking with the SEC boss, that she'd reinstate the uptick rule "within a month." The SEC in 2007 had scrapped the rule, which required investors to wait for the price of a stock to rise before executing short sales.

In July, the prodding came from Senator Charles Schumer. The New York Democrat urged Schapiro, a political independent, to ban flash orders, which such trading venues as Direct Edge Holdings LLC were using to take market share from NYSE Euronext.

Two-Tiered Market

Schumer said the practice, in which brokers get a split-second advance peek at buy and sell orders for stock, risked creating a two-tiered market that favored those with sophisticated computer systems over retail investors.

Schapiro, after a telephone conversation with Schumer, told her staff to get to work on a ban. To make sure she honored the commitment, the senator put out a press release disclosing their phone conversation and Schapiro's pledge. The SEC proposed a prohibition on flash trades in September and the agency's staff is now reviewing public comments.

Schumer spokesman Brian Fallon didn't respond to requests for comment.

SEC Commissioner Casey and Senator Robert Menendez, a New Jersey Democrat, are among those who want the SEC to resist what they consider political influence. Menendez, whose state is home to Jersey City, New Jersey-based Direct Edge, sent Schapiro a letter on Dec. 9 advising her to base decisions about whether to ban trading practices on data, not input from "commentators."

Schapiro said she's not worried "at all" about the level of congressional feedback. "I welcome hearing their views just like I welcome hearing the views of the stock exchanges and the clearinghouses, retail investors and the institutional investors," she said in the interview. "It's all part of the mix."

Weakened Clout

Her responsiveness to the concerns of lawmakers may reflect the weakened clout of the SEC after the agency missed Madoff's fraud and politicians accused it of failing to police Wall Street, said former SEC General Counsel Ralph Ferrara.

"What's being done now is to build credibility," said Ferrara, a partner at Dewey & LeBoeuf LLP in Washington. "If the goal is to protect the agency, then what you do when the bear comes to the mouth of the cave is feed the bear."

There's evidence that the strategy is working. In May, the Treasury Department was mulling a recommendation to Congress that the SEC relinquish oversight of the $10 trillion mutual- fund industry.

Derivatives Regulation

Seven months later, the House approved legislation that would increase, not shrink, the SEC's authority by adding regulation of derivatives to its plate and doubling its $1 billion budget. Senate Banking Committee Democrats also want to give the SEC authority over derivatives.

Traders use the mostly unregulated contracts to speculate on everything from interest rates to oil prices, and companies use them to protect against losses. Obama administration officials say a lack of transparency in the $605 trillion derivatives market exacerbated the credit crisis and contributed to the near-failure of American International Group Inc., once the world's biggest insurer.

Under lawmakers' plans, banks and investors would trade contracts on regulated platforms that are monitored by the SEC and Commodity Futures Trading Commission. Having won the battle to share oversight of derivatives with the CFTC, Schapiro now must prove that her agency can manage the new responsibility. In preparation, she has hired economists and former Wall Street traders to add market expertise to an agency staff made up mostly of attorneys.

Headline-Grabbing Cases

Meanwhile, new SEC Enforcement Director Robert Khuzami has tried to restore the prestige Madoff stripped from the agency by focusing on headline-grabbing cases, said Peter Henning, a former SEC attorney who now teaches at Wayne State University Law School in Detroit. The strategy went awry when U.S. District Judge Jed Rakoff questioned why the SEC settlement with Bank of America didn't accuse any executives of wrongdoing.

The proposed settlement would have resolved allegations that the Charlotte, North Carolina-based bank misled its investors about billions of dollars in bonus payments during the acquisition of Merrill Lynch & Co.

The $33 million fine reflected a "cynical relationship" that allowed the SEC to say it exposed wrongdoing and permitted Bank of America to say it had been "coerced into an onerous settlement," Rakoff wrote in a Sept. 14 decision.

The SEC now must square off against Bank of America in court next year and has requested a jury trial.

Lengthy Court Battles

The agency may also face lengthy court battles against Angelo Mozilo, the Countrywide Financial Corp. co-founder sued for inappropriate stock sales, and billionaire investor Raj Rajaratnam, who was accused of insider trading. Like some of Schapiro's rule proposals, she can't declare victory until those cases wend their way through the legal system.

"She's taken on the job under extraordinarily difficult conditions, given constant demands from lawmakers and the evolving financial crisis," said Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America. "That's had an impact on what she's been able to accomplish. The next year will be a real proving ground."

[Sep 30, 2009] Matt Taibbi - Taibblog – An Inside Look at How Goldman Sachs Lobbies the Senate - True-Slant

"It's the conspicuousness of the crime that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn't a better example of "regulatory capture," i.e. the phenomenon of regulators being captives of the industry they ostensibly regulate, than this issue."

The SEC is holding a public round table Tuesday to explore several issues around securities lending, which has expanded into a big moneymaker for Wall Street firms and pension funds. Regulation hasn't kept pace, some industry participants contend. Securities lending is central to the practice of short selling, in which investors borrow shares and sell them in a bet that the price will decline. Short sellers later hope to buy back the shares at a lower price and return them to the securities lender, booking a profit. Lending and borrowing also help market makers keep stock trading functioning smoothly.

via SEC Weighs New Rules for Lending of Securities –

Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned - when I first started looking at the story months ago, I had some other issues in mind, but it turns out that there's no way to talk about Bear and Lehman without going into the weeds of naked short-selling, and to do that takes up a lot of magazine inches. So among other things, this issue takes up a lot of space in the upcoming story.

Naked short-selling is a kind of counterfeiting scheme in which short-sellers sell shares of stock they either don't have or won't deliver to the buyer. The piece gets into all of this, so I won't repeat the full description in this space now. But as this week goes on I'm going to be putting up on this site information I had to leave out of the magazine article, as well as some more timely material that I'm only just getting now.

Included in that last category is some of the fallout from this week's SEC "round table" on the naked short-selling issue.

The real significance of the naked short-selling issue isn't so much the actual volume of the behavior, i.e. the concrete effect it has on the market and on individual companies - and that has been significant, don't get me wrong - but the fact that the practice is absurdly widespread and takes place right under the noses of the regulators, and really nothing is ever done about it.

It's the conspicuousness of the crime that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn't a better example of "regulatory capture," i.e. the phenomenon of regulators being captives of the industry they ostensibly regulate, than this issue.

In that vein, starting tomorrow, the SEC is holding a public "round table" on the naked short-selling issue. What's interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.

In particular, there are very few panelists - in fact only one, from what I understand - who are in favor of a simple reform called "pre-borrowing." Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.

It's been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement for the shares of 19 fat cat companies (no other companies were worth protecting, apparently). Naked shorting of those firms dropped off almost completely during that time.

The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.

In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts of late. Goldman Sachs in particular has been making its presence felt.

Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss's office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.

Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman's fact sheet.

Now, the mere fact that two different congressional aides were so disgusted by Goldman's performance that they both called me on the same day - and I don't have a relationship with either of these people - tells you how nauseated they were.

I would later hear that Senate aides between themselves had discussed Goldman's lobbying efforts and concluded that it was one of the most shameless performances they'd ever seen from any group of lobbyists, and that the "fact sheet" the company had had the balls to hand to sitting U.S. Senators was, to quote one person familiar with the situation, "disgraceful" and "hilarious."

I'm including the Goldman fact sheets here. They will not make a whole lot of sense to people outside of the finance world, but if you can fight through them, what you'll find is the statistical equivalent of a non-sequitur. Goldman here is lobbying against restrictions to naked short-selling, and in arguing that point they include a graph showing the levels of "short interest" during two time periods, September-October 2008 (when there was a temporary ban on all short-selling, naked or otherwise) and January-March 2009.

Goldman's point seems to be that short-selling declined during a period when the market fell sharply, and short-selling went up when the market rallied. I guess on some planet, perhaps not on earth but some other spherical space-boulder, this is supposed to indicate that short-selling is good for the market overall.

(Which, incidentally, it might be. But we're not talking about short-selling here. We're talking about naked short-selling).

The thing is, you can't deduce anything at all about naked short-selling by looking at a graph showing levels of normal short selling. This is like trying to draw conclusions about the frequency of date rape by looking at the number of weddings held. The two things have absolutely nothing to do with one another.

I was so sure that I was missing something that I started asking around. "If you are confused, you are not alone," one economist wrote back to me. "I have no idea why they are conflating short selling and naked short selling. Members of Congress are probably confused as well."

The thing is, the only way to draw conclusions about whether or not naked short-selling is a problem is to look at individual cases of individual declines in the share prices of specific companies, and then check to see if there have been large numbers of failed trades in those stocks.

Goldman is not only not doing that here, they're taking two statistics with no relation to naked short-selling (short interest and stock prices), stats cherry-picked during two seemingly random time-periods, and then slapping them underneath a cover sheet full of platitudes like "The US equities market is increasingly efficient and broadly regarded as the best in the world." It's not so much that this is a bad argument, it's just… not really an argument at all. It's lazy, really. It makes you wonder what's going on at that company.

Anyway, I've got to run. I've got some more stuff coming out in the next few days, including some transcripts of compliance officers from certain banks blabbing about this issue.

[Sep 30, 2009] Fixing the SEC By Barry Ritholtz

September 30th, 2009

The problems at the SEC were decades in the making.

Essentially the largest prosecutor's office in the country, they have been undercut at every turn: Their staffing was far too small to handle the jurisdiction (Wall Street and corporate criminality), their budgets were sliced, failing to keep up with the explosion in corporate crime. A series of disasterous SEC chairs were appointed to be "kindler and gentler" to Wall Street. Many key positions were left unfilled, morale was severely damaged.

The SEC is supposed to be an investor's advocate and a law enforcement agency.

Gee, go figure that under those circumstances, they sucked at their jobs.

This was a rich vein mined by the Inspector General of the U.S. Securities and Exchange Commission (SEC), H. David Kotz. His sweeping report on the SEC proposes 58 changes to be made.

I'd start with adequate funding and staffing . . .

I am sure the two reports outlining 58 steps to improve the agency's enforcement and inspections units are perfectly adequate. But they do not address the key problem: A decade of neglect.

Yes, we need to overhaul how investigators scrutinize tips, plan probes, tap expertise, verify information and train employees, etc. None of these various recommendations are groundbreaking (giving examiners access to industry publications and databases? Establishing protocol for how to analyze this outside information?)

The bottom line of the SEC is this: If we are serious about corporate fraud, about violations of the SEC laws, about a level playing field, then we fund the agency adequately, hire enough lawyers to prosecute the crimes, and prevent Congress critters from interfering with the SEC doing its job.

To be blunt: I don't think we are serious about it.

Congress sure hasn't been. Staffing levels have been ignored, budgeting has been cut over the years. And its the sort of administrative issue that does not lend itself to bumper sticker aphorisms or tea party slogans.

The SEC doing its job correctly is about good government - like picking up the trash, haivng the trains run on time, or hiring quality teachers. Its not sexy, its not fun, its administrative policy wonk junk. This is something we have become increasingly lousy at doing as a society as we have become ideologically polarized. And as the government has gotten demonized, it becomes even less likely for departments to get proper funding, or to accomplish their basic goals.

Give me a good pragmatic technocrat any day . . .>

Fee Collections and Spending Authority

Fees SEC

graphic via SEC

Testimony Before the U.S. Senate Committee on Banking, Housing and Urban Affairs
by H. David Kotz
Inspector General
U.S. Securities and Exchange Commission
September 10, 2009

Written Testimony of
H. David Kotz Inspector General of the SEC

Other Coverage:

SEC's Watchdog Proposes 58 Improvements After Madoff
David Scheer
Bloomberg, Sept. 29 2009

SEC Investigators Say Regulator Is 'Dog Chasing Its Own Tail
Jesse Westbrook
Bloomberg, Sept. 30 2009

SEC Watchdog Releases Post-Madoff Recommendations
Sarah N. Lynch
DOW JONES NEWSWIRES, September 29, 2009

In Harsh Reports on S.E.C.'s Fraud Failures, a Watchdog Urges Sweeping Changes
NYT, September 29, 2009

SEC Inspector General Tells Agency What It Must Do To Catch Next Madoff
Frank Ahrens
WaPo/The Ticker, September 29, 2009

9 Responses to "Fixng the SEC"

1. VennData Says:
September 30th, 2009 at 7:35 am

Privatize it.

Sell it to individual investors with less than 5M in investable assets. They get to vote on the rules and regs. They get to elect the head. One- investor, One vote (It's America.) Then we'll see some new vigor aimed at private-jet romping CEOs and their frat-buddy boards.

BR: heh heh - anything to keep corrupt Congress out of it?

2. Marcus Aurelius:

Disband the SEC, turn the investigative responsibilities over to the FBI (who will be given funding to hire CPAs), and appoint Special Prosecutors to seek the harshest civil AND criminal penalties possible for those on the wrong side of the law. No deals will be made, no plea bargains, and no non-disclosure of the findings of the investigations (names will not be withheld to protect the guilty, and financial penalties include all of the ill-gotten gins, plus seizure of future income of any convicted party).

The penalties must outweigh any potential gains from the crime committed.

Before we do any of that, we need to remove the corporate shield (an artifact of Judicial law-making if there ever was one. Sarbanes-Oxley isn't working).

Why can't we do the right thing any more?

3. Wes Schott:

…it is not a an economic crisis/problem per se, as much as it is, more fundamentally, a moral crises – that is we "we can't do the RIGHT thing anymore"


If you are going to increase staffing you need to increase the sophistication of the investigators as was shown by the Markopolous reports re Madoff. The SEC is very good at investigating insider trading. Aside from that they are usually way behind.

5. willid3:

it depends. if we really want to have investors be able to actually make reasonable and informed investments, that aren't subject to the powers that be on wall street, then you have have the SEC do the jobs it was created to do (you know have a free market kind if thing, not be a casino, or have the decks stacked against them, keep corporate crime down to a low level. on the plus side I suppose we haven't heard about any corporation having hired thugs to kill any body or beat them up like in the old days)
. as it is we have the worst of all worlds. investors have no clue really wants going in the corporate world, and in reality have little control over those same corporations they have invested in. so they have changed the game to just try to make money on the buying and selling side since thats how little control they have . and the game we have is the same as the rest of the world, which it used to not be. we used to be the gold standard of investing (or at least much better than the rest!). and privatization wouldn't help. without government powers (filing criminal complaints, enforcing regulations etc) you would end up in worse shape than now. and there would be a lot less money available to fund enforcement.

6. catman:

The Office of the Inspector General has prioritized boots on the ground in pursuit of letter carriers walking too slowly and the like. Corporate fraud has been an oxymoron under our recent leadership. A change would be welcome and cost effective, but i"m not sure I can hold my breath that long.

7. bsneath:

With all due respect, $1 billion should be adequate funding for a watchdog organization. Money and staffing should not be the problem. Money and staffing are simply excuses.

8. beaufou:

I don't expect to see a serious attempt at fixing the SEC for a while, if ever.
The "recovery" and the new health of banks comes from mark to fantasy and stimulus money, nothing else, if banks were really healthy, credit wouldn't contract.
So right now the strategy seems to be "wait and see" and let the financiers do what they want to make it look rosey again, no restrictions, no rules.

And we're supposed to trust that bunch.

To fix it, I'm with MA.

9. gloppie:

Sorry. I have no sympathy for the SEC. They are corrupt. Budget cuts and staffing issues are just an easy excuse, a smoke screen to hide their lack of integrity.

I've been dealing with budget constrains all my life, and when money is tight, one has to prioritize, it's dead simple. Pray tell me what the rationale was to go after Martha Steward instead of Bernie Maddof ?

[Sep 27, 2009] Think that the SEC Is Corrupt ? Meet Gary Aguirre

Aug 7, 2008

I've always had an inkling that the SEC as an organization is largely corrupt. There are quality people working at the agency to be sure, but when the people at the top of the SEC are willing to un-do months and months of work by their own people and kowtow to rich and powerful people with high-powered lawyers and political connections, there is something seriously wrong. The story of Gary Aguirre involves one person trying to pursue the truth and do the right thing, only to be thwarted and eventually fired by those in power.

The story starts with Pequot Capital. Pequot Capital is a multi-billion dollar hedge fund that is run by Arthur Samberg.

Arthur Samberg is a rich and powerful man with many connections. One of those connections was John Mack, current chairman and CEO of Morgan Stanley and also known as "Mack the Knife." Mack is very friendly with the Bush Administration, and is a major Republican party contributor. John Mack is probably one of the most powerful men in America.

Before we get into the Samberg/Mack story, let's meet Gary Aguirre. Gary is a new hire for the SEC, and is a staff attorney. Aguirre will spend years investigating Samberg and Mack. Aguirre can be a little gruff and hard to deal with, but he has the best of intentions and believes that he can make a difference when it comes to policing the securities market. Aguirre is extremely bright and works tirelessly at his job.

Aguirre alleges that Mack and Samberg are friendly. Mack is an investor in several of Samberg's funds. Mack has access to information that most of the public would not have.

Aguirre alleges that Mack tipped Samberg off to an upcoming acquisition of Heller Financial by GE. Aguirre points to the fact that the two of them had gotten friendly, and just a few weeks later, Samberg had made a major purchase of Heller Financial (over a million shares) and had shorted GE. On the day that Heller Financial was in fact purchased, Samberg unloaded his entire Heller Financial position for about $18 million dollars of profit. If Mack did in fact tip Samberg off, Mack would have profited as well, not only financially, but he also would have curried favor with Samberg. At the time, Mack had just left Morgan Stanley.

The SEC identified 17 "suspicious" transactions involving Pequot Capital (oh really?). The SEC decided to just focus on a few of the transactions, including the Heller Financial purchase. Gary Aguirre, a fresh SEC hire who was on a one year probation, was assigned to the case.

Now, the point of this article isn't to try to determine whether or not Samberg and Mack are guilty. The point of this article is to detail the lengths to which the SEC went to protect these two men and besmirch the good name of a person who was just seeking the truth. Is Samberg guilty? Probably. Samberg confessed to have not followed Heller Financial, and couldn't point to any one analyst report that would have tempted him to take a long position. I find it highly unlikely that someone would take a huge position in a company if they were unfamiliar with it, especially someone that runs a multi-billion dollar hedge fund.

Now, years went by, and in Gary Aguirre's opinion, he was building up a pretty solid case against both Samberg and Mack. The investigation seemed to be gaining momentum, with several higher-ups at the SEC signifying that they thought the accusations of a tip-off involving the two men had merit, and that a criminal investigation could soon be launched.

This is where attorneys for Pequot and Morgan Stanley stepped in. They took their conversations straight to the Director and Associate Director of the SEC. Gary Aguirre's bosses, who had just recently strongly supported his case, suddenly had an about-turn. SEC managers ordered the investigation to be narrowed.

Gary Aguirre and other underlings at the SEC had wanted to subpoena and interview John Mack. Aguirre had once been warned by a higher-up in the SEC that Mack had "juice", meaning that he would be able to talk directly to the Director and Associate Director of the SEC. This is exactly what happened. Suddenly, SEC managers were dragging their feet in regards to interviewing Mack. Through a variety of excuses and delays, SEC managers managed to delay the interviewing of Mack until just days after the statute of limitations had expired. At that point, there was really no point in conducting an interview.

Mack eventually did testify in this matter, but only when this case has become public and the Senate started to investigate. Without the Senate becoming involved, Mack never would have been interviewed and would have remained protected by the SEC managers.

Aguirre raised a stink about the turn of events to his bosses at the SEC. Why, Aguirre asked, were we dumping this investigation after you had just told me that criminal charges were probable against Samberg and Mack? His managers never replied.

Aguirre received positive commendations during his time at the SEC, and had been recommended for a "merit increase" (pay raise) due to his hard work. He received glowing words from his boss at the SEC. Aguirre then went on vacation, and by the time he had come back, he had been fired from his job, despite glowing reviews and a recommendation for an increase in pay. Technically Aguirre was still under probation and could be fired for any reason. Aguirre contends this was done to punish him because he was forceful in wanting to continue the investigation against Mack and Samberg. It's hard to argue when you read the Senate findings.

The SEC decided to "re-evaluate" Aguirre, which is very unusual for them. Suddenly Aguirre received a negative evaluation. Only one other time had the SEC taken this course and negatively re-evaluated an employee, and it was for the same reason; this employee had complained about lawyers for someone under investigation talking directly with the director of the SEC. In this case as well, the employee was fired.

When Aguirre complained about being fired, his letters and emails were largely ignored. Aguirre was to be swept under the rug, along with the case against Mack and Samberg.

On October 5th, 2006, the SEC recommended that no action be taken against Mack. In November, the SEC notified both Mack and Samberg that the file had been closed, and that they would not be facing charges.

Last summer, news of this potential insider trading scandal broke, but was almost immediately buried. Now, more and more is coming out about this story, and it is a story that must be told. Where there is smoke, there's fire, and I believe that there is something here. With the Wall Street Journal recently reporting on this story, it has the potential to become a major news item once again.

The questions I have are:

1. Is the SEC and its senior managers that beholden to the current administration of the United States?

2. Why was Aguirre fired if, by all accounts, he was a model employee?

3. What will happen with the other "suspicious transactions" that Pequot Capital was involved in?

4. How much of this high-level negotiating between high-powered lawyers and SEC directors takes place every day? What potential explosive investigations are being buried?

5. How are we supposed to effectively police our markets if this kind of corruption is taking place?

6. How are we supposed to hire quality people to work at the SEC if they are going to be muzzled and subsequently fired for asking the wrong questions?

7. How does Samberg account for the Heller Financial purchase? Why did he also choose to short GE at the very same time?

8. If Mack were in fact innocent, why all the hassle to avoid having him interviewed by SEC staff? And why is SEC management going to all this trouble to have Mack not be interviewed?

9. Why did high-level SEC managers disclose sensitive information regarding the investigations to the lawyers of those under scrutiny?

10. Will anything be done about this case or will it simply fall through the cracks?

Filed under: Stock Market Scandals

Corruption at the SEC

W.C. Varones Blog
The San Diego Reader's Don Bauder has a good article on corruption at the SEC. SEC attorney Gary Aguirre wanted to interview John Mack of Pequot Capital Management about possible insider trading...
But his boss said Mack had big Washington connections - specifically, to President George W. Bush. Aguirre protested. Just weeks after he had been given a strongly positive job review, Aguirre was fired. The Senate's Committee on Finance and Committee on the Judiciary did a 108-page study on the matter.

There were some hair-raising findings. While Aguirre was trying to get the Mack interview, an attorney at the Debevoise and Plimpton law firm sent Paul Berger, Aguirre's boss, an email with the opening words "Yowza!" It described how an ex-SEC lawyer could make $2 million a year with the firm. One of the top attorneys at the Debevoise firm contacted a senior official of the securities agency on behalf of Mack and behind Aguirre's back. After he fired Aguirre, Berger took a job with Debevoise. Similar quid pro quos are called the "revolving door" phenomenon - agency officials do dirty work while at the commission and then go with a big law firm representing the crooks who got off.

Read the whole thing. It gets worse, including blatant cover-ups at high levels of the SEC. And now the SEC wants to be in charge of investigating itself regarding its failure to do anything about Bernie Madoff even when it was repeatedly and specifically told Madoff was running a Ponzi scheme.

Good riddance to the Bush Administration! Unfortunately, the Obama Administration is putting insider holdovers in charge at the key SEC, Treasury, and FDIC positions (I include the FDIC because it has departed from its legal role as protector of small depositors and become a slush fund to guarantee bad assets for Wall Street). Change we can believe in, indeed!

[Sep 26, 2009] Self-Probe Ha!

Jan 21, 2009 | San Diego Reader

The Securities and Exchange Commission, the federal agency that is supposed to protect investors from Wall Street predators, says it is going to investigate how it missed the Bernie Madoff scam. San Diego's Gary Aguirre, speaking from personal experience, knows that's impossible. Any securities agency probe will be a cover-up.

New York's Madoff ran a $50 billion Ponzi scheme. The securities commission admits that allegations about Madoff's scheme had been repeatedly brought to the agency's attention since 1999. "I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations," proclaimed the agency's Bush-era chairman, Christopher Cox, last month, announcing the supposed self-probe.

Balderdash. The only thing Cox is "gravely concerned" about is that the American public might finally understand the agency's actual mission. For as Aguirre, a former attorney for the agency, points out, the Securities and Exchange Commission (SEC) does not exist to protect investors from Wall Street predators. It exists to protect powerful Wall Street predators from investors.

The notion that the agency can probe its own officials is hilarious - a real knee-slapper. In late December, Senator Arlen Specter (R-PA) heaped scorn on the securities agency's ability to investigate itself in the Gary Aguirre case. Now the agency says it will open that probe again. "Reopening the investigation marks a new embarrassment for the beleaguered S.E.C., suggesting that, as in the Bernard Madoff case, it may have failed earlier to follow up adequately on strong indications of possible wrongdoing," says

Aguirre puts it more strongly: the securities agency "cannot be trusted with an investigation of itself, especially when the investigation [involves] the highest levels of the SEC."

Aguirre's case lays bare everything that the securities agency is: a whorehouse catering to Wall Street's elite. After a long and successful career practicing law in San Diego, Aguirre, brother of former City Attorney Mike Aguirre, decided to try public service. He joined the agency and began looking into a possible insider-trading case. A hedge fund, Pequot Capital Management, had made a bundle buying up stock in a firm just before the announcement that the firm would be acquired by another company. Pequot had also made money betting that the stock of the acquiring company would go down, as is normal. Before Pequot made those bets, John Mack, the hedge fund's former chairman and a current investor, had talked with both the investment banking firm handling the acquisition and with Pequot's current chairman, a close personal friend.

Aguirre wanted to interview Mack. But his boss said Mack had big Washington connections - specifically, to President George W. Bush. Aguirre protested. Just weeks after he had been given a strongly positive job review, Aguirre was fired. The Senate's Committee on Finance and Committee on the Judiciary did a 108-page study on the matter.

There were some hair-raising findings. While Aguirre was trying to get the Mack interview, an attorney at the Debevoise and Plimpton law firm sent Paul Berger, Aguirre's boss, an email with the opening words "Yowza!" It described how an ex-SEC lawyer could make $2 million a year with the firm. One of the top attorneys at the Debevoise firm contacted a senior official of the securities agency on behalf of Mack and behind Aguirre's back. After he fired Aguirre, Berger took a job with Debevoise. Similar quid pro quos are called the "revolving door" phenomenon - agency officials do dirty work while at the commission and then go with a big law firm representing the crooks who got off. Mack wiggled off the hook and went on to become chief executive of Wall Street's Morgan Stanley.

The two Senate committees vindicated Aguirre, denouncing his firing and concluding it was logical that he interview Mack. Then the agency's inspector general, H. David Kotz, authored a 191-page study of the case. Kotz basically agreed with the two Senate committees. He recommended that the agency discipline its enforcement director and one other official. Kotz, too, blasted the ease by which the Wall Street law firm got special access to securities agency officials. He questioned the "impartiality and fairness" of the agency's handling of the Mack investigation and firing of Aguirre.

Then the agency's cover-your-ass team went into action. An administrative law judge, one Brenda Murray, was assigned to second-guess Kotz's report. Just a few weeks later, her 15-page paper exonerated the two officials who Kotz said should be disciplined. Kotz was shocked and said so publicly.

Now we get to the heart of the agency's double-dealing. As Senator Specter stated, Brenda Murray "was described in press accounts as an administrative law judge, and it was not until further inquiry that the SEC admitted she was not acting in a judicial capacity in issuing her decision." In short, the agency picked a loyal staffer who happened to have the title "administrative law judge" and had her exonerate the officials who had been sharply criticized by the Senate committees and by the inspector general. But she was not acting as a judge at all - just a soldier taking orders.

Murray's quickie report "was completely irregular in every detail," says Aguirre. "It was outside the jurisdiction of an administrative law judge. The SEC pulled a scam."

Senator Charles Grassley (R-Iowa), who spearheaded the investigation with Specter, said, "[I]t looked like the lawyers for the wrongdoers wrote the decision."

Columnist Bruce Carton of Compliance Week wrote that agency staffers were stunned at the whitewash; Murray did not use the standard procedures for reviewing an internal-discipline recommendation. "Murray made her decision that discipline was not appropriate based almost exclusively on the one-sided information she received from counsel for the various subjects," wrote Carton. "This information was not subject to any cross-examination or any follow-up by the [inspector general's] office or other parties involved, and additionally was not provided under oath."

One prominent attorney said that in Murray's whitewash, the securities agency had merged "the functions of prosecutor, judge, jury, and appellate tribunal" under the same roof.

It gets even worse. One reason the Pequot case is being reopened is that a divorce suit has revealed that the hedge fund agreed to pay $2.1 million to a former Microsoft employee who was apparently feeding information on his former employer. "Pequot made a boatload of money" betting on Microsoft securities, based on such information, says Aguirre, but the agency found a way to drop the Microsoft angle of the investigation. But Aguirre has come up with new facts that have forced the agency to reopen the probe.

There's more: In the same report in which she cleared Aguirre's nemeses, Brenda Murray vindicated an agency official who closed an investigation into the derivatives dealings of Wall Street's Bear Stearns in 2007. Early the next year, the Wall Street firm was rescued from bankruptcy when it was forced into J.P. Morgan, backed by $29 billion of federal money. Bear's derivatives gambling was to blame. The agency missed it and then exonerated itself.

And the agency is going to look into whether it did its job properly in the Madoff case? Come now.

[Aug 29, 2009] Why The SEC Is Irreperably Conflicted On The Issue Of High Frequency Trading zero hedge

Dear Senator Kaufman, we at Zero Hedge applaud your effort to bring transparency to, and evaluate the various new forces that, for better or worse, determine the modern market landscape. However, we would like to bring to your attention a fact which renders your entire approach of seeking fair and unbiased commentary from the SEC irrevocably moot. The reason is that the SEC, in alignment with many of the very industry players who may be abusing market structure for their own tiered benefit, stands to benefit significantly from an increased amount of daytrading volume across all markets, and, in fact, based on actions as recent as 4 months ago by the SEC, the regulator is well aware of the monetary benefits that ever-increasing churn creates for the commission and is fully intent on capitalizing on them. We thus suggest you bypass any protocol that has an SEC intermediation and go directly to penning a Bill which, we trust, will prove to be more fair and objective than anything the SEC would ever provide you with. The reason for the SEC's insurmountable conflict of interest is the so-called Section 31.

Section 31

As Mary Schapiro has often noted, the SEC is "woefully" underfunded, regardless that for its $900 million FY 2009 budget, which comes to over $250,000 per commission worker, the agency has terminally underperformed and has been the object of repeated and justified public ridicule due to its countless lapses, backward looking methodology and overall lack of "regulating" any improprieties in the market. A fresh example of the SEC's pathological incapacity to uncover malfeasance on its own (and, what's potentially worse - pandering cronyism), is its reliance on media sources such as the recent Wall Street Journal article highlighting potential client-abusive practices at none other than Goldman Sachs.

Yet for all its complaining about being underfunded (and one can argue for hours about whether there even is a need for an agency to exist whose primary purpose these days it seems, in the words of Judge Jed Rakoff, is to "curry favor" with various prominent TARP recipients) the SEC is well aware that it needs to be self-sufficient in order to exist. Enter Section 31.

From the definition of Section 31

When you sell a stock, you may have noticed that a small transaction fee, often just a few pennies, appears on your confirmation slip. Although some broker-dealers have described this charge as an "SEC Fee," the SEC does not actually impose this fee on individual investors.

The SEC does not impose or set any of the brokerage fees that investors must pay. Instead, under Section 31 of the Securities Exchange Act of 1934, self-regulatory organizations (SROs) -- such as the Financial Industry Regulatory Authority (FINRA) and all of the national securities exchanges (including the New York Stock Exchange and the American Stock Exchange) -- must pay transaction fees to the SEC based on the volume of securities that are sold on their markets. These fees recover the costs incurred by the government, including the SEC, for supervising and regulating the securities markets and securities professionals.

The SROs have adopted rules that require their broker-dealer members to pay their fair share of these fees. Broker-dealers, in turn, pass the responsibility of paying the fees to their customers. Thus, a broker-dealer that has questions about how its fees are calculated should contact its SRO, and a customer who has questions about how his or her fees are calculated should contact the broker-dealer.

Section 31 requires the SEC to make annual and, in some cases, mid-year adjustments to the fee rate. These adjustments are necessary to make the SEC's total collection of transaction fees in a given year as close as possible to the amount stipulated for that year by Section 31. If transaction volume in a given year increases, the SEC will lower the fee rate because each transaction has to contribute less to the target collection amount. But if transaction volume falls, each transaction will have to be charged a higher fee in order for the SEC to collect the target amount required by Section 31. To find the current rate for Section 31 transaction fees, please visit the Division of Market Regulation's Frequently Requested Documents webpage, and click on the most recent Fee Rate Advisory under "Section 31 Fees." You'll also find Fee Rate Advisories in the Press Releases section of our website. For official Commission Orders concerning fee rate adjustments, please visit the Other Commission Orders, Notices, and Information section of our website.

The charges on most securities transactions are known as Section 31 "fees." But the charges imposed by Section 31 on transactions in security futures are termed "assessments." As of fiscal year 2007, the assessment charged is $0.0042 for each round turn transaction (i.e., one purchase and one sale of a contract of sale for future delivery).

Now Section 31 fees are nothing new. However, a recent quiet amendment that slipped under the radar indicates just why the SEC sees HFT as the money cow it is, for a select group of investors, and for the Securities and Exchange Commission itself.

On March 4, 2009, the SEC issued a Fee Rate Advisory #3 for Fiscal Year 2009. The jist of the advisory is the following:

Washington, D.C., March 4, 2009 - Effective on April 1, 2009, or 30 days after the date of enactment of the Commission's regular appropriation for FY 2009, whichever is later, the Section 31 fee rate applicable to securities transactions on the exchanges and over-the-counter markets will increase to $25.70 per million dollars. Until that date, the current rate of $5.60 per million dollars will remain in effect. The Section 31 assessment on security futures transactions will remain unchanged at $0.0042 per round turn transaction.

Time for a little math.

Using the same back of the envelope analysis we did when we evaluted the cost of high frequency trading, and focusing exclusively on exchange traded stocks (and for the purpose of simplicity ignoring OTC transactions and other OTC products), we postulate 6 billion shares traded daily at a $20 average price for 250 trading days per year. Applying the old fee of $5.60 per million dollars results in an annual revenue stream of $168 million to the SEC. Applying the new fee of $25.70 per million dollars, and the SEC now would receive $750 million dollars- three quarters of a billion, and more than 80% of the SEC's annual budget. And keep in mind we did not include all other various exchange traded and OTC products that the SEC collects fees on. Did the SEC specifically request the fee increase in March as it became aware of the potential windfall that HFT driven churn, pardon, liquidity provisioning, could be for the Commission?

Now Senator Kaufman, you obviously realize, in referencing your letter to the SEC, that High Frequency Trading in its various forms now accounts for well over half of total volume in domestic and international markets. An objective analysis of HFT, as you have demanded of Ms. Schapiro, could have one of two outcomes: a favorable one, and an unfavorable one. Assuming a hypothetical outcome is indeed, unfavorable, it would have dramatic repercussions not only on the market landscape, but on overall market transaction volume, potentially impacting it to the tune of the estimated 70% of volume that HFT accounts for.

At this point it bears pointing out the flagrant conflict of interest that the SEC is faced with. An objective, unbiased and impartial analysis of HFT would leave the "cash strapped" Commission exposed to losing up to 70% of this primary revenue stream. Using the conservative estimate above, do you, Senator Kaufman, realistically believe, that Ms. Schapiro and her assistants would be able or willing to provide unbiased data on information that could impair over half a billion worth of annual revenue for the SEC.

We think not. As would no other rational human being.

Which is why, while we applaud your effort for a data mining mission with the SEC, the results ultimately presented to you by Ms. Schapiro will be highly conflicted, irrelevant and moot. We hope and are confident that you have a contingency plan for this situation, which is nothing less than one in which conflicts of interest will play the primary role in shaping the data mining and presentation.

And, as an aside, this example merely goes to show just what a cash cow HFT has become not just for governmental agencies but by implication, the key market players, as it is no secret that the government is always most willing to extract its tithe out of industries that are significant cash cows in their private sector context and would not be impaired by such comparable "fee increases." We hope you manage to read between the lines in any and all interactions you have with proponents and regulators of HFT. Yet we are confident that you do, based on your admirable dedication to your noble cause to date.

Selected comments

by Anonymous
on Fri, 08/28/2009 - 18:59

the sec is irreparably conflicted over telling the truth
and enforcing the law.....

Trader Joe

Let's not forget who the first SEC commish was....none other than Joe P. Kennedy.

Kennedy made a large fortune as a stock market and commodity investor and by investing in real estate and a wide range of industries. He never built a significant business from scratch, but his timing as both buyer and seller was usually excellent. Sometimes he made ne magazine published its first list of the richest people in the United States in 1957 it placed him in the $200–400 million band, meaning that it estimated him to be between the ninth and sixteenth richest person in the United States at that time.


Roosevelt rewarded him with an appointment as the inaugural Chairman of the U.S. Securities and Exchange Commission (SEC). Kennedy had hoped for a Cabinet post, such as Treasury. After Franklin Roosevelt called Joe to Washington to clean up the Securities and Exchange Commission, somebody asked F.D.R. why he had tapped such a crook. "Takes one to catch one," replied Roosevelt.[7]

Kennedy's reforming work as SEC Chairman was widely praised on all sides, as investors realized the SEC was protecting their interests. His knowledge of the financial markets equipped him to identify areas requiring the attention of regulators. One of the crucial reforms was the requirement for companies to regularly file financial statements with the SEC, which broke what some saw as an information monopoly maintained by the Morgan banking family. He left the SEC in 1935 to take over the Maritime Commission, which built on his wartime experience in running a major shipyard.,_Sr.

by Anonymous

You're "framing" the context to meet your personal bias.

What about Landis and Douglas? Do you even know who these guys were and what role they played in SEC's history?

"...under Landis we were taught how to get things done. And we're now going to go ahead and get them done." - Douglas

The bias of commentators on this website is so wingnut.

Here, go learn some history:

by m3c

I have seen the evolution of honest liquidity providing strategies morph into a manipulative science.

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

by topshelfstuff

too dark to be a joke, actually the stuff i'll post here was found after doing some googling after reading a post asking who the new SEC Head, Shapiro, was, and who first appointed her. i'm a bit shocked that this new Admin would let the puppet strings show so early, and appoint yet another puppet. this is a lot to post, but you can just scan over and do some research 'cause there's so much more, and btw, you can use either Shapiro or Schapiro, she is listed under both. as best i could find from the scant info on here early life, i believe one is her maiden name. Her appointments began with Reagan and continues with every Pres since Excuse the length. I knew none of this before i began the search, pastes below:

As head of the Financial Industry Regulatory Authority, it is charged that Mary Shapiro led a "very corrupt," and incompetent organization, which failed under her leadership to protect investors from predatory money managers. See a video below discussing Shapiro's failures.

Her reward? Promotion to SEC Chief by Barack Obama, the very organization she failed to oversee.

Money Manager and former NASDAQ Chairman, Bernard Madoff, was arrested in December 2008 for stealing millions from his investor clients in what is considered the biggest pyramid scheme (Ponzi scheme) ever with estimated losses to his clients of $50 billion.

Whistleblower, Harry Markopolos tried for a decade to get the SEC to stop Madoff's operation. According to Markopolos, the SEC refused to take on an influential Wall-Streeter like Madoff.

What you'll see is the SEC is busy protecting the big financial predators from investors, and that's their modus operandi right now."

Markopolos and high-level SEC officials both testified at the U.S. House Financial Services subcommittee yesterday. Subcommittee Chair, Representative Paul Kanjorski (D-PA) accused the SEC officials of "impeding" the Madoff investigation by refusing to talk because the case is under investigation.

The "officials" said the SEC is looking at "possible" changes, with "more frequent examinations" of fund managers and investment advisers.

Harry Markopolos is a securities industry executive and fraud investigator, but no one wanted to examine what this fraud investigation revealed. He alerted the SEC in agency offices in Boston, Washington and New York - all to no avail. The regulators never acted. Bloomberg News reports that Markopolos feared retribution from Madoff and feared for his life and the safety of his family during the nine years he followed and reported on Madoff.

Thu, 12/18/2008

"Prior to assuming the CFTC chairmanship, Ms. Schapiro served for six years as a Commissioner of the Securities and Exchange Commission. She was appointed in 1988 by President Reagan, reappointed by President Bush in 1989 and named Acting Chairman by President Clinton in 1993.

In January 2008, Ms. Schapiro was appointed by President George W. Bush to the President's Advisory Council on Financial Literacy, a 19-member council formed to promote and enhance financial literacy among Americans. She is also an active member of the International Organization of Securities Commissions (IOSCO) and was Chairman of the IOSCO SRO Consultative Committee from 2002 until 2006.

A 1977 graduate of Franklin and Marshall College in Lancaster, PA, Ms. Schapiro earned a Juris Doctor degree (with honors) from George Washington University in 1980. She is a member of the Board of Trustees of Franklin and Marshall College. She is also a member of the Boards of Directors of Duke Energy and Kraft Foods. Ms. Schapiro was named the Financial Women's Association Public Sector Woman of the Year in 2000. In 2008, she received a Visionary Award from the National Council on Economic Education (NCEE), honoring her as a "champion of economic empowerment." Ms. Schapiro serves on the RAND Corporation's LRN-RAND Center of Corporate Ethics, Law and Governance Advisory Board."

I have a very bad feeling about this.

Thu, 12/18/2008

Snip - Mary L. Schapiro is CEO of the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for all securities firms doing business with the U.S. public. Ms. Schapiro also serves as Chairman of the FINRA Investor Education Foundation, the largest foundation in the U.S. dedicated to investor education.

Amended: She was appointed by President Clinton in 1994. The CFTC is responsible for regulating the US futures markets, including financial, agricultural and energy markets. As Chairman, she participated in the President's Working Group on Financial Markets with the Secretary of the Treasury and the Chairmen of the Federal Reserve Board and the SEC. -- "Plunge Protection Team" + The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 ("Black Monday") to give recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence". She is not a novice, that's for sure. The FINRA is, and was, responsible for monitoring Bear Stearns, Goldman Sachs, Lehman Brothers, et al. How is it that Mary Shapiro gets rewarded and Chris Cox gets the shoe?

Shapiro responsible for Madoff

Wed, 02/04/2009 - 12:41

The New head of the SEC is responsible for the Madoff fraud. Mary Shapiro has been the CEO of the NASD and FINRA for the last 13 Years. It is those two regulatory firms to oversee all broker dealers to make sure investors are not being swindled. THIRTEEN YEARS! If she had been doing her job instead of sitting on the Board of Kraft and Duke Energy maybe some of the people who lost their life savings would have been spared. SHE SHOULD BE THE NEXT TO GO. BTW she will receive between $5-$25 Million from Finra on her exit (what did Obama say about "shameful bonuses") she also made millions sitting on boards and as CEO of Finra. In the SEC filings against Madoff the SEC said; [T]he SEC has alleged that Madoff and the broker-dealer, operated a Ponzi scheme, and violated the federal securities laws. They have shut down the broker-dealer because of this alleged fraud. The SEC has also alleged, quoting from their court papers in support of an injunction - "[t]hrough the investment adviser services of BMIS [Madoff's broker-dealer] Madoff has conducted a ponzi-scheme, whereby he has false [sic] represented to investors that returns were being earned on their accounts at BMIS..."

That alleged conduct is directly under FINRA's jurisdiction. FINRA is the primary regulator for the broker-dealer. FINRA is responsible for oversight of its account statements, which the SEC alleges were fraudulent. FINRA is also responsible for reviewing the firm's financial statements. If the customer account statements were fraudulent, the firm's financials were fraudulent, since they incorporate financial information from the customer accounts. In order to produce fraudulent account statements, the firm's back office and clearing operations had fraudulent information.


In July 1990, then-SEC Commissioner Schapiro was appointed chairman of the Task Force on Administrative Proceedings. The Task Force revised the entire Rules of Practice, and in March 1993 issued its final report, Fair and Efficient Administrative Proceedings. In November 1993, an SEC release solicited comment on the Task Force proposals, some of which were later adopted as SEC guidelines [6] on June 9, 1995.

In October 1993, Schapiro gave a speech in Lugano, Switzerland, "The Derivatives Revolution and the World Financial System," concerning potential regulation of the unregulated derivatives market in which she cited "the benefits to financial innovation that may result from a more flexible regulatory paradigm," and stated that she was "not convinced that consolidated regulatory supervision of securities firms and their affiliates is necessary or appropriate at this time."

Case in point -- how about all these buddies, cronies and otherwise less-than-arms-lengths dealings amongst the guys who apparently were running out and out frauds and/or ponzi schemes and the non-elected bureaucrats who were supposed to be regulating them. And more to the point, as I'll highlight later -- remember that these same folks are BEING PROMOTED right now under the latest Republican/Democrat Socialist Regime in power.

First up, we broke this story on Happy Hour last week when we had Congressman Dennis Kucinich on talking about his probe to find out why FINRA "stood down" on their investigation of Stanford a few years ago --

Yeah, that's right, Stanford had not one but two moles inside the FINRA.

And do you remember who was mentioned up above as running FINRA when it decided not to punish and/or shut down Stanford for its crimes other than a fine of about $10,000? Mary Schapiro, that's who. Sounds like someone who should be fired in disgrace, no?

As a bonus kicker, of course, she ran the NASDAQ where that bigger, more infamous Bernie Madoff character became chairman.


The Obama administration is missing the forest for the trees as it focuses on regulatory overhaul of the SEC. While giving the Federal Reserve the power to supervise large financial firms is a step in the right direction, the real problem is Mary Schapiro, the newly appointed Chairman of the SEC.

Ms. Schapiro has spent her career protecting brokerage firms from investors, and thwarting efforts to reform a thoroughly corrupt securities industry.

Ms. Schapiro joined the NASD in 1996 as President of NASD Regulation. She was named its Chairman and CEO in 2006, and remained in that position until her appointment to her present position. In 2007, she led the effort to consolidate the NASD and the NYSE into FINRA. FINRA, like its predecessors, purports to "self regulate" brokerage firms.

During her tenure as the NASD, Ms. Schapiro was a strong advocate of the industry's mandatory arbitration system which routinely re-victimizes investors by denying them redress for broker misconduct.

"Self-regulation" overseen by Ms. Schapiro resulted in the greatest abuses by brokerage firms in history, bringing the world's economies to the brink of total collapse.

Ms. Schapiro's shaky start at the SEC confirms the view that she will do nothing to reign in the insatiable greed of brokers, who continue to plunder the savings of hapless investors.

The irony is that it would be so simple to demonstrate a real commitment to investor rights.

Everyone in the industry knows that Mary Shapiro is owned by the brokerage firms. They are the root of the problem. They make crappy, high commission products and sell them to investors. There are tons of conflicts of interest.
Her mission is to protect the big brokerage houses from investors and independent firms. Some of her first actions at SEC were to go after small independents at the behest of the big firms. When the big firms are busted she slaps them with a small fine and lets them go on their way.
Where was she when Madoff went down? I bet she was on his rolodex. Madoff was a big brokerage firm that invented its own brokerage statements. Custody and statements did not match. This should not have been hard to catch. Where are the prosecutions? We all know Maddoff is protecting others.
We need a Spitzer type at SEC to give us a conga line of perps.
We cannot reform the business from within. Mary Shapiro must go!!

An Inside Perspective on Regulatory Capture

The Baseline Scenario

We received the following email from Jim Coffey in response to Bond Girl's recent guest post, "Filling the Financial Regulatory Void." Coffey agreed to let us publish the email. As he says below, he spent 27 years in the enforcement division of the SEC.

Bond Girl's "Filling the Financial Regulatory Void" provided insight into human deficiencies in the current financial regulatory system. But it overplays the human failings of regulators and concludes with a proposed solution that, in all likelihood, would turn out worse than the current situation. But first, in the interest of full disclosure, I should tell you that I retired two years ago from a management position in the enforcement division at the SEC after 27 years. So I was (and in my heart, I suppose I still am) a financial regulator. That background probably should be taken into account by anyone who reads this response.

There is no doubt that "regulatory capture" exists and is a meaningful factor in the recent failures of our regulatory system. Many of us in the enforcement division dealt with the problem regularly when we sought input from those in the agency who were responsible for regulating aspects of the securities markets. Over time, regulatory policies and practices had emerged that seemed to contradict the purpose if not the letter of the law. In other cases, over-arching issues (e.g., increases in fees charged by investment companies despite growth that should have resulted in economies of scale and decreasing fees) simply were not addressed in any meaningful way.

But the majority of regulators I worked with were critics of the problem of "capture," not victims. Much of the problem arose from decades of deregulation dating back to the beginning of the Reagan administration. Elected deregulators appointed their own kind to head regulatory agencies and they, in turn, removed career regulators from management positions and replaced them with appointees who had worked in or represented the regulated industries. These new managers and, in many cases,the people they recruited and promoted, advanced or adhered to a regulatory scheme that, at least with respect to the most important issues, advanced the interests of regulated.

Bond Girl is right, the industry "captured" the regulators and the regulatory system. But not in the passive sense that true regulators over time came to identify too closely with the interests of the regulated. This is not a case of financial regulators falling victim to the Stockholm syndrome. The vast majority of capture resulted from intentional efforts by the finance industry to advance their narrow interests at all costs and defeat meaningful regulation. Unfortunately, we live in a country that can be bought from the top down and the finance industry exploited the situation very successfully. But do not blame the regulators. Career regulators are as much the victims of these events as the public's economic welfare.

The creation of paid social entrepreneurs to perform regulatory functions will not enhance regulation nor reduce "capture". I've sued too many CPA's over the years for bad audits to believe the answer lies in creating a new class of auditors. Audit clients often "capture" their auditors. The result is bad audits resulting in uncorrected and undisclosed financial fraud. The victims are always the shareholders and the market. Besides, using money to "incentivize" a new, private class of regulators plays directly into the hands of the finance industry. No matter what the regulatory fee structure may be, government will never be in a position to compete with the financial industry when it comes to "incentivizing" regulators-for-hire.

We need to look elsewhere for solutions to the problems that hamper our financial regulatory system.

By Jim Coffey

Update: Bond Girl responds.

  1. Yakkis

    With an attitude like that, how do you expect to exploit the lucrative revolving door of government service?

  2. Eric B

    I would add another: "Require that regulators be banned from going to work for their charges forever following completion of their regulatory role." In my mind this is Timmy Geithner personified…career public servant who knows full-well his road to riches for his family runs straight through 85 Broad, Pimco, etc. He is pre-emptively bribed. See: Greenspan. While I'm sure Pimco values his insightful fixed income investment advice, more important is the signaling effect ("look here, Ben, see what awaits you!") to the regulators in place now.

  3. Bond Girl

    I appreciate the sentiments presented in this post, and even more so that Mr. Coffey had the courage to write it.

    But – and I am truly, truly trying not to be mean here – the suggestion that our path can be reversed by reinforcing existing institutions seems quaint and idealistic. No one in power, regardless of political persuasion, wants to protect "career regulators." No one. When Obama has a question about the financial industry, he calls Jamie Dimon. Think about that for a second. We have an entire culture that does not respect what you do. People may think bankers are greedy and evil, but they also think they are smarter than everyone else.

    What we have is not just the replacement of career regulators with cronies. It is a decision not to meddle in the affairs of financial institutions at all. I've managed money at one of the major financial institutions made notorious by this crisis, and it wears on you if you are an even remotely honest person. Most of the problems people view en masse, they do not see the day-to-day stuff that a career regulator never sees because government has let the securities industry go. Compliance officers see it, but let me tell you where they stand with respect to the man with the sapphire cufflinks.

    The financial industry is running circles around the whole system of regulation in this country, and it amazes me the degree to which people do not understand the sheer magnitude of this problem. Add all you want to the ranks of career regulators. The White House is actually debating whether or not a guy at one of these firms is going to receive a $100 million bonus for last year. We are so far beyond "let's improve the current system" it is terrifying.

  4. StatsGuy

    "Much of the problem arose from decades of deregulation dating back to the beginning of the Reagan administration."

    "We have an entire culture that does not respect what you do."

    All of this goes back to ideology, and the strategic support of a specific economic paradigm in the political sphere… The regulatory infrastructure pre-1980 bought us 20 years of extra time. Not bad, really. Creating institutions that can insulate against a mass shift in public opinion (and a dominant paradigm in the social sciences) for longer than 2 decades simply is asking a lot.

    This does not mean we should not rebuild these institutions… 20 years is better than nothing. Maybe we can try to improve, perhaps borrow some "checks and balances" wisdom from the writers of the Constitution. But if Obama continues to manage his Presidency so poorly, the opportunity to move to a more neutral and pragmatic policy stance will be lost for another three decades.

    The lunatic fringe is already finding its voice again, arguing (as do many here) that the problem wasn't insufficient govt. intervention, but rather too much…

    And here we have SJ making the aggressively populist argument that the key to fixing our country is to "break the power of the oligopolistic elite"… So much for the hope of moderate transition, especially with a President so fearful of writing his own legislation that he shifts everything to Congress and consistently cedes the initiative on every critical national debate to a parochial, nepotistic, gridlocked Congress.

    I'm feeling particularly pessimistic today. Those who rally for revolution rarely find it as delightful as they expect.

Judge Takes SEC and Bank of America Lawyers to Woodshed Over Merrill Bonus Settlement

Rolfe Winkler of Reuters and Louise Story of the New York Times sat in on the hearings on the SEC-Bank of America settlement today. Those who have followed this little drama may recall:

Merrill paid its employees bonuses of $3.6 billion prior to the close of the deal with Bank of America. It was very clear BofA had to have authorized it (if you know anything about deals, it was inconceivable that they hadn't)

Bank of America failed to disclose the bonus payment in the proxy filing for the deal

Judge Jed Rakoff pummeled both sides, with his questions focusing on basic issues;
Who exactly knew what when?

Why were not individuals paying fines? This failure to disclose did not drop from the sky.

Why was the settlement so low? ($33 million versus $3.6 billion)

The New York Times depicted the judge's treatment of both sides as harsh:
During a hearing in New York that was heated at times, the judge was scathing about the settlement, in which the S.E.C. accused Bank of America of misleading its shareholders. Bank of America neither admitted nor denied wrongdoing.

Bank of America and Merrill Lynch, Judge Rakoff said, "effectively lied to their shareholders." The $3.6 billion in bonuses paid by Merrill as the ailing brokerage giant was taken over by the bank was effectively "from Uncle Sam."

What is amusing but also annoying is the cluelessness of both sides. I have a bit more sympathy for the SEC, only because from what little I can tell, the agency's staff has been discouraged from taking a tough line in enforcement for a very long time. Under Arthur Levitt (1003-2001), the SEC was keen to go after certain issues (Levitt, ironically, was big on accounting, for instance), but Congress repeatedly threatened to cut the SEC budget to force Levitt to curb his efforts. The SEC during the Bush Administration was hardly a hotbed of aggressive action. It got on the dot bomb bandwagon because it was impossible not to, given Eliot Spitzer's aggressive stance.

The SEC lawyers at least seem to be embarrassed and don't try offering lame defenses. According to Winkler:

The judge wondered immediately why, given the "serious questions" raised in its complaint, the SEC wasn't going after more facts. If BofA and Merrill conspired to lie to shareholders about bonuses that had been agreed to when the merger was signed, then why isn't the SEC trying to figure out who is responsible? "Was it some sort of ghost? Who made the decision not to disclose [the bonuses]?" said Rakoff.

The lead lawyer for the SEC meekly replied that they haven't made any allegations against specific individuals. This clearly didn't satisfy Rakoff...

So who led the merger negotiations when the discussion of bonuses came up? The SEC offered two names: Greg Curl for BofA and Greg Fleming for Merrill. Of which the SEC says it has only spoken to one: Fleming.

Were details of those negotiations circulated to top management? Yes, Merill CEO John Thain and BofA CEO Ken Lewis were aware of them according to the SEC's lawyers....

The judge also asked the SEC lawyers about the pathetic size of the settlement ($33 million) relative to the size of the alleged misconduct ($3.6 billion of bonuses paid). SEC lawyer David Rosenfeld seemed badly prepared for this question. He cited the Wachovia/First Union case, saying that $37 million settlement was the right precedent for this case. Again the judge was skeptical, noting it revolved around $500 million worth of misconduct. Here you have $3.6 billion.

But more to the point, Rakoff asked "why isn't this a grossly unfair amount?" And why is it being collected from the corporation and "not from individuals responsible for orchestrating the misleading [SEC filing]?" Rosenfeld mumbled something about the degree of misconduct, the need for deterrence and finding the closest precedent in their determination that the $33 million figure is "reasonable."

Now some readers will argue that this is proof that regulation is hopeless, and that misses key issues. First, we did once have effective regulation in the US. There has been an over 30 year effort by corporate interests and those ideologically attuned with their views to neuter regulation, by weakening rules, by undermining regulators' moral authority, by keeping enforcers starved of budget.

This is no different than what happens when staffing is inadequate. You have too many cases spread over too few people. The pressure is to wrap up things quickly and move on. Or you get the other syndrome: extreme multitasking, with nothing done very well and everything taking too long.

And the presumed to be more on-the-ball private sector BofA counsel does not comport himself any better. And remember, BofA is the one who stands to lose here. The tone of the judge's filing denying the settlement and calling for the hearing signaled that he regarded the settlement as inadequate. But is there any sign of real preparation in these interactions? Again, from WInkler:

But according to BofA's lawyer Lewis Liman, they [Thain and Lewis] apparently weren't aware of what was in "the disclosure schedule" which would have had details regarding bonuses. That schedule was supposed to be attached to the SEC filing detailing the merger. Conveniently, it wasn't....

Liman offered some pretty pathetic arguments of his own…
People shouldn't have been surprised by the Merrill bonuses because the company had already accrued $12 billion for that purpose through Q3.

What do you do with this? Merrill ...wouldn't have lasted long enough to PAY the bonuses had it not been for bailouts.

He argued that $3.6 billion wasn't a lot of money. After all it worked out to an average of $91k per recipient.

"I'm glad you think $91k isn't a lot of money," retorted the judge...

Liman also trotted out the cliché about bonuses being necessary for "retention." To this Rakoff responded with the obvious: "how many banks were hiring people when the bonuses were paid?"...

Last Liman argued that no one could have been misled by the bonuses because they weren't a surprise. He waved his hands in the air suggesting it would be impossible to find anyone, anywhere in the press who didn't expect Merrill employees to get incentive comp. This is Wall Street(!) he protested.

The judge wasn't buying that either. From Story at the New York Times:
"Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?"
Notice that. The attorneys have bought completely into the Wall Street entitlement argument. I genuinely don't think this is posturing; I think BofA counsel believes it and that was a factor in the lack of serous responses.

And why shouldn't they? Those high pay levels form a rising tide that elevates the pay of all professionals serving the high-end financiers They have a vested interest in promoting the idea that these payments were warranted, even from an effectively bankrupt firm when the industry's health was still very poor.

The judge ordered the two sides to reconvene in two weeks. He is also considering holding a separate hearing to determine whether the bonuses were justified.

Judge Refuses to Approve SEC Settlement Over Merrill-Bank of America Bonuses

New York Subpoenas Bank of America CEO on Merrill Bonuses (and Where is the SEC?)

Merrill Execs Pay Selves Bonuses Ahead of Schedule (and Before BofA Closing)

S.E.C. Chief Says Staff Ignored Warnings on Madoff - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Amazing. In 2003 I started the web site that was a petition of investors who felt the SEC was not looking out for our best interests. when it was handed to Congress in 2005 there were nearly 10,000 signatures. Missing in the signatures was SEC Chairman Chris Cox. Today he is effectively signing that petition recognizing what a colossal screw up and captured agency it has become.

But what Cox has not yet seen is the tsunami that is about to wash them away as the Chairman will be asked to explain his decision on subpoenas against members of the media, decisions to not seek enforcement against David Rocker or Gradient Analystics, and allowed SEC enforcement attorneys to take their orders from hedge funds. The story - and e-mail data is now available at and through court discovery exposes the criminal enterprise.

- Posted by Dave

SEC Investigator Raised Madoff Concerns Years Ago, Was Asked to Look Elsewhere -

By Zachary A. Goldfarb Washington Post Staff Writer
Thursday, July 2, 2009

An investigator at the Securities and Exchange Commission warned superiors as far back as 2004 about irregularities at Bernard L. Madoff's financial management firm, but she was told to focus on an unrelated matter, according to agency documents and sources familiar with the investigation.

Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, sent e-mails to a supervisor, saying information provided by Madoff during her review didn't add up and suggesting a set of questions to ask his firm, documents show. Several of these questions directly challenged Madoff activities that much later turned out to be elements of his massive fraud.

But with the agency under pressure to look for wrongdoing in the mutual fund industry, she wasn't able to continue pursuing Madoff, according to documents and two people familiar with the investigation, and her team soon concluded its work on the probe.

Walker-Lightfoot's supervisors on the case were Mark Donohue, then a branch chief in her department, and his boss, Eric Swanson, an assistant director of the department, said two people familiar with the investigation. Swanson later married Madoff's niece, and their relationship is now under review by the agency's inspector general, who is examining the SEC's handling of the Madoff case.

Madoff confessed in December to running "a giant Ponzi scheme" worth potentially $50 billion, and he was sentenced Monday to 150 years in prison after victims told a judge about how Madoff had destroyed their lives. Authorities are continuing to investigate other people and firms that might have abetted the fraud.

The SEC's inability to detect Madoff's fraud was a high-profile embarrassment for the agency, which was already under scrutiny for the collapse of investment banks under its watch, helping fuel the financial crisis. SEC Chairman Mary L. Schapiro, who took over shortly after the Madoff case came to light, has acknowledged that the agency's performance was a failure, saying the SEC needed to improve enforcement and its surveillance of financial markets.

At least five times over nearly 20 years, the SEC has investigated Madoff's business, but it never discovered the tremendous fraud. In 2007, for instance, the agency reviewed his activities after warnings from a one-time rival, Harry Markopolos, that Madoff was probably running a Ponzi scheme.

Three years before, in early 2004, Walker-Lightfoot was assigned to examine Madoff's relationship with various hedge funds. The SEC suspected that Madoff may have been allowing the funds to trade ahead of his own trades, which would give them an unfair advantage.

The agency asked Madoff to turn over reams of information -- accounting statements, trade confirmations and other documents -- and told him to detail his strategy, called "split-strike conversion." Madoff told the SEC that he used sophisticated trading practices to buy and sell stocks, employing stock options as hedges to limit losses. He told investors he never lost money.

Walker-Lightfoot, a staff lawyer, had previously worked at the American Stock Exchange, where she developed an expertise in specialized trading strategies. When she reviewed the paper documents and electronic data supplied by Madoff, she found it full of inconsistencies, according to documents, a former SEC official and another person knowledgeable about the 2004 investigation.

For example, the standard industry practice was that a firm buying a security must pay for it -- or "settle" -- within three days. But Madoff's settlements were erratic. Sometimes he settled only a day later after the purchase, sometimes seven days later.

She was also focused on his claim that he was using the same strategy for all his investors, which would involve trading stocks and hedges at the same time. On review, he seemed to be following different approaches on different accounts.

Her concerns would later prove to be on the mark. Earlier this year, the Justice Department accused Madoff of fabricating his strategy, generating false account statements and trade confirmations, and lying to investigators.

In early March 2004, Walker-Lightfoot shared her concerns with her supervisors, said a former SEC official and another person aware of the conversation.

Donohue, who still works for the SEC, was not available to comment for this article, an agency spokesman said. Swanson, no longer with the agency, declined to comment.

In response to Walker-Lightfoot's concerns, Donohue asked her to describe what additional information she wanted from Madoff, a person familiar with the discussion said.

So she sent Donohue an e-mail with nine follow-up questions she wanted to ask Madoff's firm, documents show. Several focused on the unusual trading patterns she had noticed. Others touched more broadly on questions about how Madoff ran his business.

"Do you hold any other form of brokerage account statements or accounting documents for these accounts?" Walker-Lightfoot asked. "Do you have the prime brokerage or custodial banking agreements for these accounts?"

If pursued, these questions may have led to discovery of the fraud. That's because Madoff was in fact maintaining personal custody of investors' assets, unlike the practice followed by many investment companies. These firms use a third-party custodian to hold investors' funds, and that helps assure investors that their funds are where the companies say they are.

In a separate e-mail to Donohue later in March, Walker-Lightfoot put some of her suspicions in writing.

For instance, documents show, she detailed her findings on two accounts at Madoff's firm. One belonged to a hedge fund called Tremont and the other to a smaller hedge fund called Sway.

Madoff had told the SEC that all his accounts traded based on the same specific conditions. But in her e-mail, which she copied to colleague Jacqueline Wood, Walker-Lightfoot noted "significant differences between the Tremont and Sway account transactions." The variation in the dates of trades seemed to contradict a key part of his strategy and "does not make sense," she wrote.

She also flagged other doubts about Madoff's strategy. He was supposed to buy and sell stocks and then trade options as a hedge against any loss. But his financial records suggested that he often completed trades without the corresponding hedges or hedged without completing the corresponding trades. As she wrote, "the corresponding equity activity/or hedge restructuring" didn't occur. In reality, the later criminal complaint said, many of the trades never happened at all.

One month after Walker-Lightfoot raised her concerns, Donohue told her to focus on a separate probe into mutual funds, documents show. At the time, there was intense pressure to investigate this industry. The press and other regulators, such as then-New York Attorney General Eliot L. Spitzer, were challenging industry practices. About a dozen of her colleagues were already assigned to pursue the issue.

Walker-Lightfoot e-mailed Donohue, saying she was "not sure what you want [J]acqui [Wood] and I to do concerning Madoff, but I'm focusing on the mutual fund project, as requested." She asked, "Should we just focus on mutual funds and return to Madoff when we're done?"

The next morning, Donohue responded: "Concentrate on mutual funds for the time being."

A few weeks later, Donohue told Walker-Lightfoot to turn over her work on Madoff to Wood, according to a person familiar with the matter. Not long after that, the material was boxed by Wood for transfer, this person said.

Many of the people interviewed for this story, including current and former SEC officials, spoke on the condition of anonymity because of the agency's ongoing investigation into its handling of the Madoff case.

A spokesman at the law firm where Wood now works said she would be unavailable to comment.

Walker-Lightfoot's lawyer, Julie Grohovsky of Wheat Wu, declined to comment, except to say her client had been "a dedicated and exemplary SEC employee who had been uniquely qualified to work on the investigations conducted by the Office of Compliance Inspections and Examinations." Walker-Lightfoot left the SEC in 2006 after filing a complaint with the agency alleging that she'd been subjected to a hostile workplace. A person familiar with the complaint said it was settled in Walker-Lightfoot's favor.

SEC spokesman John Nester declined to comment, citing an ongoing investigation by the agency's inspector general, H. David Kotz.

Kotz said he is reviewing "all the circumstances surrounding the SEC's various examinations of Mr. Madoff, including the 2004 examination" and said he is interviewing more than 100 former and current SEC officials. He said he has reviewed Walker-Lightfoot's story. "While we are considering all information provided, it would be incorrect to assume that the OIG's final report or analysis of any particular examination or personnel decision will be based on the input of any single source," he said.

The investigation includes a review of Swanson's relationship with Madoff's niece, Shana. Kotz said earlier this year that he was looking into "allegations of conflicts of interest regarding relationships between any SEC officials and members of the Madoff family and whether such relationships in any way affected the manner in which the SEC conducted its regulatory oversight of Bernard Madoff."

Swanson married Shana Madoff in 2007. The SEC has said he worked on reviews related to Madoff in 1999 and 2004 but he never did while he was involved with his future wife. SEC officials are not permitted to work on matters that involve people with whom they're romantically linked.

Madoff boasted at a business roundtable discussion about his close relationship with SEC regulators, saying "my niece just married one."

In a letter this week to a congressional committee, Kotz recommended several steps to avoid a repeat of the Madoff debacle, including better oversight of auditors, independent custodians and bounty programs to encourage whistleblowers to come forward.

After Walker-Lightfoot's inquiry concluded, the Madoff investigation was transferred to the SEC's New York office, and the documents collected by the Washington office were shipped there. The Office of Compliance Inspections and Examinations in Washington was too busy working on mutual funds and other cases deemed to be of higher priority, according to agency officials.

A New York team, building on the work done in Washington, then began looking into Madoff's firm, reporting in 2005 that it had found three violations of minor rules, officials said. The probe found no evidence of fraud. Madoff received a private deficiency letter from the agency, warning him to improve certain practices.

According to a person familiar with the matter, Walker-Lightfoot never was consulted on the case again.

[Mar 19, 2009] Naked Short Sales Hint Fraud in Bringing Down Lehman By Gary Matsumoto

March 19 | Bloomberg

The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year's peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn't settle within three days.

"We had another word for this in Brooklyn," said Harvey Pitt, a former SEC chairman. "The word was 'fraud.'"

While the commission's Enforcement Complaint Center received about 5,000 complaints about naked short-selling from January 2007 to June 2008, none led to enforcement actions, according to a report filed yesterday by David Kotz, the agency's inspector general.

The way the SEC processes complaints hinders its ability to respond, the report said.

Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue.

After the 158-year-old investment bank collapsed in bankruptcy on Sept. 15, listing $613 billion in debt, former Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm's demise.

Gasoline on Fire

Members of the House Committee on Government Oversight and Reform weren't buying that explanation.

"If you haven't discovered your role, you're the villain today," U.S. Representative John Mica, a Florida Republican, told Fuld.

Yet the trading pattern that emerges from 2008 SEC data shows naked shorts contributed to the fall of both Lehman Brothers and Bear Stearns Cos., which was acquired by JPMorgan Chase & Co. in May.

"Abusive short selling amounts to gasoline on the fire for distressed stocks and distressed markets," said U.S. Senator Ted Kaufman, a Delaware Democrat and one of the sponsors of a bill that would make the SEC restore the uptick rule. The regulation required traders to wait for a price increase in the stock they wanted to bet against; it prevented so-called bear raids, in which successive short sales forced prices down.

Driving Down Prices

Reinstating the rule would end the pattern of fails-to- deliver revealed in the SEC data, Kaufman said.

"These stories are deeply disturbing and make a compelling case that the SEC must act now to end abusive short selling -- which is exactly what our bill, if enacted, would do," the senator said in an e-mailed statement.

Short sellers arrange to borrow shares, then dispose of them in anticipation that they will fall. They later buy shares to replace those they borrowed, profiting if the price has dropped. Naked short sellers don't borrow before trading -- a practice that becomes evident once the stock isn't delivered. Such trades can generate unlimited sell orders, overwhelming buyers and driving down prices, said Susanne Trimbath, a trade- settlement expert and president of STP Advisory Services, an Omaha, Nebraska-based consulting firm.

The SEC last year started a probe into what it called "possible market manipulation" and banned short sales in financial stocks as the number of fails-to-deliver climbed.

'Unsubstantiated Rumors'

The daily average value of fails-to-deliver surged to $7.4 billion in 2007 from $838.5 million in 1995, according to a study by Trimbath, who examined data from the annual reports of the National Securities Clearing Corp., a subsidiary of the Depository Trust & Clearing Corp.

Trade failures rose for Bear Stearns as well last year. They peaked at 1.2 million shares on March 17, the day after JPMorgan announced it would buy the investment bank for $2 a share. That was more than triple the prior-year peak of 364,171 on Sept. 25.

Fuld said naked short selling -- coupled with "unsubstantiated rumors" -- played a role in the demise of both his bank and Bear Stearns.

"The naked shorts and rumor mongers succeeded in bringing down Bear Stearns," Fuld said in prepared testimony to Congress in October. "And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers."

Devaluing Stock

Failed trades correlate with drops in share value -- enough to account for 30 to 70 percent of the declines in Bear Stearns, Lehman and other stocks last year, Trimbath said.

While the correlation doesn't prove that naked shorting caused the lower prices, it's "a good first indicator of a statistical relationship between two variables," she said.

Failing to deliver is like "issuing new stock in a company without its permission," Trimbath said. "You increase the number of shares circulating in the market, and that devalues a stock. The same thing happens to a currency when a government prints more of it."

Trimbath attributes the almost ninefold growth in the value of failed trades from 1995 to 2007 to a rise in naked short sales.

"You can't have millions of shares fail to deliver and say, 'Oops, my dog ate my certificates,'" she said.

Explanation Required

On its Web site, the Federal Reserve Bank of New York lists several reasons for fails-to-deliver in securities trading besides naked shorting. They include misunderstandings between traders over details of transactions; computer glitches; and chain reactions, in which one failure to settle prevents delivery in a second trade.

Failed trades in stocks that were easy to borrow, such as Lehman Brothers, constitute a "red flag," said Richard H. Baker, the president and CEO of the Washington-based Managed Funds Association, the hedge fund industry's biggest lobbying group.

"Suffice it to say that in a readily available stock that is traded frequently, there has to be an explanation to the appropriate regulator as to the circumstances surrounding the fail-to-deliver," said Baker, who served in the U.S. House of Representatives as a Republican from Louisiana from 1986 to February 2008.

"If it's a pattern and a practice, there are laws and regulations to deal with it," he said.

Fines and Penalties

Lehman Brothers had 687.5 million shares in its float, the amount available for public trading. In float size, the investment bank ranked 131 out of 6,873 public companies -- or in the top 1.9 percent, according to data compiled by Bloomberg.

While naked short sales resulting from errors aren't illegal, using them to boost profits or manipulate share prices breaks exchange and SEC rules and violators are subject to penalties. If investigators determine that traders engaged in the practice to try to influence markets, the Department of Justice can file criminal charges.

Market makers, who serve as go-betweens for buyers and sellers, are allowed to short stock without borrowing it first to maintain a constant flow of trading.

Since July 2006, the regulatory arm of the New York Stock Exchange has fined at least four exchange members for naked shorting and violating other securities regulations. J.P. Morgan Securities Inc. paid the highest penalty, $400,000, as part of an agreement in which the firm neither admitted nor denied guilt, according to NYSE Regulation Inc.

Enforcement 'Reluctant'

In July 2007, the former American Stock Exchange, now NYSE Alternext, fined members Scott and Brian Arenstein and their companies $3.6 million and $1.2 million, respectively, for naked short selling. Amex ordered them to disgorge a combined $3.2 million in trading profits and suspended both from the exchange for five years. The brothers agreed to the fines and the suspension without admitting or denying liability, according a release from the exchange.

Of about 5,000 e-mailed tips related to naked short-selling received by the SEC from January 2007 to June 2008, 123 were forwarded for further investigation, according to the report released yesterday by Kotz, the agency's internal watchdog. None led to enforcement actions, the report said.

Kotz, the commission's inspector general, said the enforcement division "is reluctant to expend additional resources to investigate" complaints. He recommended in his report yesterday that the division step up analysis of tips, designating an office or person to provide oversight of complaints.

Schapiro's Plans

"Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling," the report said.

The enforcement division, in a response included in the report, said "a large number of the complaints provide no support for the allegations" and concurred with only one of the inspector general's 11 recommendations.

SEC Chairman Mary Schapiro, who took office in January, has vowed to reinvigorate the enforcement unit after it drew fire from lawmakers and investors for failing to follow up on tips that New York money manager Bernard Madoff's business was a Ponzi scheme. She has "initiated a process that will help us more effectively identify valuable leads for potential enforcement action," John Nester, a commission spokesman, said in response to the Kotz report.

Last September, the agency instituted the temporary ban on short sales of financial stock. It also has announced an investigation into "possible market manipulation in the securities of certain financial institutions."

No Effective Action

Christopher Cox, who was SEC chairman last year; Erik Sirri, the commission's director for market regulation; and James Brigagliano, its deputy director for trading and markets, didn't respond to requests for interviews. John Heine, a spokesman, said the commission declined to comment for this story.

"It has always puzzled me that the SEC didn't take effective action to eliminate naked shorting and the fails-to- deliver associated with it," Pitt, who chaired the commission from August 2001 to February 2003, said in an e-mail. The agency began collecting data on failed trades that exceed 10,000 shares a day in 2004.

"All the SEC need do is state that at the time of the short sale, the short seller must have (and must maintain through settlement) a legally enforceable right to deliver the stock at settlement," Pitt wrote. He is now the CEO of Kalorama Partners LLC, a Washington-based consulting firm. In August, he and some partners started, a Web-based service that locates stock to help sellers comply with short-selling rules.

Postponed 'Indefinitely'

Pitt began his legal career as an SEC staff attorney in 1968, and eventually became the commission's general counsel. In 1978, he joined Fried Frank Harris Shriver & Jacobson LLP, where as a senior corporate partner he represented such clients as Bear Stearns and the New York Stock Exchange. President George W. Bush appointed him SEC chairman in 2001.

The flip side of an uncompleted transaction resulting from undelivered stock is called a "fail-to-receive." SEC regulations state that brokers who haven't received stock 13 days after purchase can execute a so-called buy-in. The broker on the selling side of the transaction must buy an equivalent number of shares and deliver them on behalf of the customer who didn't.

A 1986 study done by Irving Pollack, the SEC's first director of enforcement in the 1970s, found the buy-in rules ineffective with regard to Nasdaq securities. The rules permit brokers to postpone deliveries "indefinitely," the study found.

The effect on the market can be extreme, according to Cox, who left office on Jan. 20. He warned about it in a July article posted on the commission's Web site.

Turbocharged Distortion

When coupled with the propagation of rumors about the targeted company, selling shares without borrowing "can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions," he said in the article.

"'Naked' short selling can turbocharge these 'distort-and- short' schemes," Cox wrote.

"When traders spread false rumors and then take advantage of those rumors by short selling, there's no question that it's fraud," Pollack said in an interview. "It doesn't matter whether the short sales are legal."

On at least two occasions in 2008, fails-to-deliver for Lehman Brothers shares spiked just before speculation about the bank began circulating among traders, according to SEC data that Bloomberg analyzed.

On June 30, someone started a rumor that Barclays Plc was ready to buy Lehman for 25 percent less than the day's share price. The purchase didn't materialize.

'Green Cheese'

On the previous trading day, June 27, the number of shares sold without delivery jumped to 705,103 from 30,690 on June 26, a 23-fold increase. The day of the rumor, the amount reached 814,870 -- more than four times the daily average for 2008 to that point. The stock slumped 11 percent and, by the close of trading, was down 70 percent for the calendar year.

"This rumor ranks up there with the moon is made of green cheese in terms of its validity," Richard Bove, who was then a Ladenburg Thalmann & Co. analyst, said in a July 1 report.

Bove, now vice president and equity research analyst with Rochdale Securities in Lutz, Florida, said in an interview this month that the speculation reflected "an unrealistic view of Lehman's portfolio value." The company's assets had value, he said.

'Obscene' Leverage

During the first six days following the Barclays hearsay, the level of failed trades averaged 1.4 million. Then, on July 10, came rumors that SAC Capital Advisors LLC, a Stamford, Connecticut-based hedge fund, and Pacific Investment Management Co. of Newport Beach, California, had stopped trading with Lehman Brothers.

Pimco and SAC denied the speculation. The bank's share price dropped 27 percent over July 10-11.

Banks and insurers wrote down $969.3 billion last year -- and that gave legitimate traders plenty of reason to short their stocks, said William Fleckenstein, founder and president of Seattle-based Fleckenstein Capital, a short-only hedge fund. He closed the fund in December, saying he would open a new one that would buy equities too.

"Financial stocks imploded because of the drunkenness with which executives buying questionable securities levered-up in obscene fashion," said Fleckenstein, who said his firm has always borrowed stock before selling it short. "Short sellers didn't do this. The banks were reckless and they held bad assets. That's the story."

'Market Distress'

On May 21, David Einhorn, a hedge fund manager and chairman of New York-based Greenlight Capital Inc., announced he was shorting stock in Lehman Brothers and said he had "good reason to question the bank's fair value calculations" for its mortgage securities and other rarely traded assets.

Einhorn declined to comment for this story. Monica Everett, a spokeswoman who works for the Abernathy Macgregor Group, said Greenlight properly borrows shares before shorting them.

Even when they're legitimate, short sales can depress share values in times of market crisis -- in effect turning the traders' negative bets into self-fulfilling prophecies, says Pollack, the former SEC enforcement chief who is now a securities litigator with Fulbright & Jaworski in Washington.

The SEC has been concerned about the issue since at least 1963, when Pollack and others at the commission wrote a study for Congress that recommended the "temporary banning of short selling, in all stocks or in a particular stock" during "times of general market distress."

Airport Runway

On Sept. 17, two days after Lehman Brothers filed for Chapter 11 bankruptcy, the number of failed trades climbed to 49.7 million, 23 percent of overall volume in the stock.

The next day, the SEC announced its ban on shorting financial companies in 2008. The number of protected stocks ultimately grew to about 1,000. On Sept. 19, the commission announced "a sweeping expansion" of its investigation into possible market manipulation.

The ban, which lasted through Oct. 17, didn't eliminate shorting, according to data from the SEC, the NYSE Arca exchange and Bloomberg. Throughout the period, short sales averaged 24.7 percent of the overall trading in Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. on NYSE Arca. In 2008, short sales averaged 37.5 percent of the overall trading on the exchange in the three companies.

To date, the commission hasn't announced any findings of its investigation.

Pollack, the former SEC regulator, wonders why.

"This isn't a trail of breadcrumbs; this audit trail is lit up like an airport runway," he said. "You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock and you've got your manipulators."

To contact the reporter on this story: Gary Matsumoto in New York at [email protected].

Ideas for Glenn

Glenn, here is a useful vein for you to mine since you are now so smitten with FIRE's manipulation of the rule of law.

Here is the farewell press release of Stephen Cutler, the SEC's Director of Enforcement from Oct. 2001 until May, 2005.

Notice how most of the highlights are initiatives that took place AFTER the damage had been or that had been begun by others (mostly Spitzer) and the SEC was forced to act.

Basically Cutler was a shill for Wall Street and surprise, surprise were do we find him today? JPMorgan - as Executive Vice President, General Counsel and head of the company's Legal and Compliance activities worldwide, reporting directly to CEO Jamie Dimon, and sitting on the firm's Operating Committee. He has been there since Feb 2007 after a 15 month stint at WilmerHale where he "washed" himself so he could get the big bucks from the bankers whose bidding he did for so long without raising too many eyebrows. Isn't that great that powerful law firms let a firm poach its top talent, just like that...hah! I would love to see WilmerHale's billing revenues from JPMorgan since Cutler arrived. Probably off the charts!

Isn't it interesting that the SEC's allegedly formidable Director of Enforcement finds his way to the very top of the banking industry after less than 2 years of being the financial industry's top cop (and with the banking crisis going full tilt, isn't it interesting that JPMorgan is considered the healthiest of the big banks, maybe even more so than Goldman Sachs).

Cutler's biggest claim to fame while at the SEC was his "War on Conflicts" which he kicked off on September 9, 2003 in a speech:

In the wake of this speech, Cutler made a lot of noise about forcing financial firms to do "conflicts audits." Basically the SEC did very little but make noise. The goal was always to SOUND like it was doing real enforcement and regulation but all it was doing was laying down a thick layer of fog so the pirates could slip out of harbor to fight another day.

But the real red meat they were after was to allow the SEC to waive its excessive leverage rule. Lucky for Cutler he helped get the job done at the end April 2004 just as his SEC tenure was coming to a close.

But can you really prosecute complete, total regulatory capture? Think about it Glenn. After some research and a few hard-hitting columns, I would say you have the makings of a bestseller. Maybe get John Coffee to help you or get a few of your Wachtell buddies to talk off the record about how this all went down.

Oh, JPMorgan loves Democrats way more than the GOP. The NYTimes has a nice chart today showing that. So no one gets out of this alive...

Recommended Links

Why The SEC Is Irreperably Conflicted On The Issue Of High Frequency Trading zero hedge

SEC corruption

SEC Investigator Raised Madoff Concerns Years Ago, Was Asked to Look Elsewhere -



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