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Can Whistleblowers ‘Cross-Examine’ the SEC? Part II

Posted by Larry Doyle on January 10, 2012 6:37 PM |

My commentary the other day entitled Can Whistleblowers ‘Cross-Examine’ the SEC? received a fair bit of attention and some rather interesting comments. In light of the very fluid developments within the realm of financial regulation, I strongly recommend that post.

The primary concern I raised within that commentary – and hence the title – was that a key panel at the upcoming 39th Annual Securities Regulation Institute consists solely of industry insiders. Why might that be such a concern?

Well, one of the main critiques of our financial regulatory system made by many, including Harry Markopolos, has been the revolving door between our regulators and the industry.

Why is a revolving door such a concern? Stick with me here. 

Who will be the individuals on the specific panel I referenced in my commentary? Please remember these names:

> Robert Khuzami, SEC Director of Enforcement
> Richard H. Walker, Managing Director and General Counsel, Deutsche Bank
> Mary Jo White, Debevoise & Plimpton LLP, New York City
> Stephen M. Cutler, Executive Vice President and General Counsel, JPMorgan Chase & Co.

For more on this “revolving” topic and specific to this conference, I thank a regular reader for sharing a commentary recently written by the San Diego Reader. In this piece, the writer Don Bauder provides an enlightening expose of the dealings between and amongst some of the panelists at the conference. Bauder is not bashful in writing Snug and Smug at the Hotel Del:

Gary Aguirre heads a San Diego law firm that since February has specialized in representing whistle-blowers, those who blow the whistle on financial fraud — often inside the companies they work for — and government employees who see wrongdoing within their agencies.

On January 20 at the Hotel del Coronado, a panel of nationally known securities silk-suiters will hold a seminar on what to do about whistle-blowers. Aguirre won’t be there. One reason is that he has blown the whistle loudly on some of those panelists while he battled the federal Securities and Exchange Commission.

More than almost anybody, Aguirre has publicly stated how this commission, born in the 1930s to protect the public from Wall Street, now protects Wall Street from the public. The mechanism is what Aguirre calls the “rotating door.” A law firm will dangle a juicy job in front of a securities commission lawyer who is investigating the law firm’s client. The rascal gets off and — voilà! — the agency lawyer gets a $2-million-a-year job with the law firm.

This works the other way, too. When the securities agency is looking for a lawyer to run its enforcement division, it is likely to select one from a powerful Wall Street law firm rather than from within its own ranks. These private-sector attorneys who take lofty temporary posts at the agency “are Wall Street players on sabbatical at the SEC,” says Aguirre.

This month, “the rotating door comes to San Diego,” says Aguirre. The 39th-annual Securities Regulation Institute will be held at the Hotel Del January 18–20. The seminar focusing on whistle-blowers will be from 9:00 to 10:30 a.m. January 20.

The panelists are Robert Khuzami, director of enforcement of the securities commission, formerly an attorney for the German giant Deutsche Bank; Richard Walker, a former securities-agency enforcement director who is now general securities counsel for Deutsche Bank; and Stephen Cutler, still another former enforcement director who is now general counsel at Wall Street’s JPMorgan Chase.

Mary Jo White of the Wall Street law firm Debevoise & Plimpton will moderate. She was once the U.S. attorney for the Southern District of New York, which prosecutes criminal securities cases.

You can see a pattern here. Some call it “Wall Street–Washington incest.” As Aguirre explains, this incestuous relationship between the regulators and the regulated is a major reason the Securities and Exchange Commission lets the Bernie Madoffs of the world off the hook.

As Matt Taibbi wrote in the August 17 issue of Rolling Stone, the route by which Walker left the securities agency and landed the remunerative job at Deutsche Bank is redolent of the rotating door. In 2000, Darcy Flynn, one of Aguirre’s current clients, was on a securities-agency team of investigators looking into possible violations by Deutsche Bank. Its chief executive had told the press that Deutsche Bank was not interested in acquiring New York–based Bankers Trust. The bank’s stock plunged on the news; ergo, Deutsche Bank could buy it at a lower price. It eventually bought it. Investigators considered the case a slam dunk. Deutsche Bank took the usual course: it hired still another former securities-agency enforcement chief, Gary Lynch, to argue the institution’s case.

Suddenly, commission investigators got word that Walker, the agency’s head of enforcement, had recused himself from the case, and two weeks later the inquiry was jettisoned. It soon became obvious why: Walker was named general counsel of Deutsche. Wrote Taibbi, “Less than 10 weeks after the SEC shut down its investigation of the bank, the agency’s director of enforcement was handed a cushy, high-priced job at Deutsche.”

Then, in 2004, Walker hired a young federal prosecutor to become his protégé at Deutsche. His name: Robert Khuzami.

Well, it came to pass that on May 18 of this year, Khuzami, now himself head of enforcement at the securities commission, shot out a mass email to agency staffers saying he wanted examples of “lawyers behaving badly.” Actually, Khuzami wanted examples of outside lawyers misbehaving.

But Flynn thought Khuzami wanted examples of wayward attorneys inside the Securities and Exchange Commission. So Flynn sent him a decade-old example: the dumping of the Deutsche Bank investigation right before Walker departed as enforcement chief to become a lawyer for the big German bank.

“When Flynn sent his letter to Khuzami complaining about misbehavior by Walker, he was calling out Khuzami’s own mentor,” wrote Taibbi.

Flynn has gone on to become a nationally famous whistle-blower and still has a job at the agency, thanks in part to Aguirre. In July, Flynn told Congress that the Securities and Exchange Commission since 1993 has been destroying information on so-called “Matters Under Inquiry,” or preliminary look-sees into possible securities fraud. The agency earlier had worked out an arrangement with the National Archives and Records Administration that all records, including those related to preliminary investigations, should be maintained for 25 years. But the securities commission has ignored — possibly illegally — this agreement.

It has destroyed preliminary files on Ponzi schemer Bernie Madoff, the now-bankrupt Lehman Brothers, and beleaguered Goldman Sachs, among many miscreants.

That’s why Flynn, knowing the agency’s proclivity for getting revenge on whistle-blowers, hired Aguirre. Senator Chuck Grassley, senior Republican on the Senate Judiciary Committee, believes the Securities and Exchange Commission “might have sanctioned some level of case-related document destruction.”

Back in 2005, Aguirre worked for the securities commission and was fired after he wanted to pursue an insider trading case against a Wall Street hotshot. Grassley’s committee, and one other Senate committee, along with the agency’s inside investigator, sided with Aguirre in the matter. He got a generous settlement from the agency. And who do you think stabbed Aguirre in the back when he wanted to go after the hotshot? Mary Jo White, the ex–government prosecutor, now big-shot Wall Street lawyer, who will moderate the whistle-blowing seminar at the Del.


Down goes Frazier!! Talk about a hard hitting, pull no punches, straight to the gut, “How do you really feel?” sort of commentary! Bauder gains immediate induction into the Sense on Cents Hall of Fame with this work.

Might it be possible that the panel would be willing to address some of the points Mr. Bauder raises? Can somebody from Northwestern Law submit Bauder’s work asking for comment? I don’t know, but I am guessing some people at the conference and across America may care to hear how the panelists might respond. Might also make for a lively discussion.

I’d love to have the popcorn concession.

I thank the reader who shared Mr. Bauder’s commentary.

Questions, comments, constructive criticism always encouraged and appreciated.

Larry Doyle

Isn’t it time to subscribe to all my work via e-mailRSS feed, on Twitter or Facebook?

Do your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

  • Bill

    The SEC needs to be abolished and just start over. The place is just inbred with corruption. Barring that, why must the SEC chairman be an industry shill? Why is that? How about naming a lawyer who represents plaintiffs in securities cases?
    Someone who has no fealty to the big Wall St. firms and banks.
    Answer–the big Wall St. firms and banks who pay the big bucks to the politicians would never stand for it.

  • Peter Sivere

    Linda Chatman Thomsen of Davis Polk & Wardwell will co chair the session on Ethical Considerations in an Era of Whistleblowers and Increased Government Investigations.

  • Peter Sivere

    Stephen Cutler of JP Morgan will be a panelist discussing Whistleblowers and their impact on compliance programs.

  • Mark J. Novitsky

    Here’s an idea. Why not have the Panel on Whistleblowing / Whistleblowers made up of actual Whistleblowers? Maybe a group should get together for our own parallel conference Chaired by Harry Markopolos, Gary Aguirre and Andrew MacGuire? — I certainly would be willing to help.

  • Peter Sivere

    The public is on top of this issue. Sadly, there will not be much in the way of transparency this year at this forum.

  • Mark J. Novitsky

    It’s hardly a forum. It’s more like a Job Fair and a party. (A response to the previous story / Part 1).– The construct of this annual PR stunt has got to be an insider joke at the expense of the 99%. I first blew the whistle to Congress regarding my documented experiences (Congressional, SEC, SEC FOIA, SEC OIG records) dealing with the SEC / CEO “Hotline” to stop or stall SEC investigations in 2007. It was later confirmed by MA. Congressman Stephen Lynch during the 2009 House Finance “investigation” of SEC “failures” associated to the Madoff “fraud”. Express Testimony — Mr.Lynch: “The other thing I keep hearing from some current SEC – and former – is that, well, there is a whistle — let me rephrase that. There is a hotline. I was told that Senior SEC management had actually gone to an industry — a financial services industry conference and basically said to the firms out there, if you feel that you are being too aggressively investigated, then I want you to call this office. And that was a Senior person, two Senior people at the SEC. I know these employees took that message as meaning, you know, we have to back off a little bit, in that Senior Management at the SEC was actually captured by the industry and that it wasn’t doing the intense investigating that we would expect from them…It just struck me, there was a hotline to stop an investigation or to slow it down at the SEC, but there wasn’t one to speed it up or initiate it. It just seemed counterintuitive to me, given the mission of the agency itself.” Yes…so now do something. – I tried giving that documented evidence and that quote from a colleague to my Congressman Keith Ellison who is also on the House Finance Committee, whom I had warned about this very thing years earlier and whose only action (documented) has been to protect the SEC corruption and my former employer / govt. contractor Tele-Tech Holdings (TTEC), and pretty much the entire major MSM about what was said…you know…given the 2008 “crisis”. And nobody but ran with it. — Only the people can stand against such injustice when the politicians / regulators / judiciary / media are patently bought off lock, stock, and barrel to protect the 1%. – So…when Khuzami “joked” about the CEO/SEC “Hotline” to stop or stall investigations it isn’t new. Matt Taibbi should next write “Is the Congress & DOJ Protecting the SEC Protecting Wall Street Crimes.” (rhetorical question) — Peter…perhaps we should exchange war stories. – (fpvsff)

  • Mark J. Novitsky
  • Peter S.

    Continued from “Can Whistleblowers ‘Cross-Examine’ the SEC?” Part 1

    [Let me again inform all readers that every event I will share is backed up with emails, internal documents, newspaper accounts and newspaper mutual fund listings, senate testimony (mine and others involved), and EDGAR filings – all rock solid – and have been in the possession of the SEC Enforcement Division during and after my deposition with the SEC-OIG in February of 2009. The resulting report, SEC-OIG Report 09-38, is so highly redacted by the Commission that it makes no mention of the second fraud that resulted from my first whistle blowing. The securities fraud and extraordinary breaches of fiduciary duty are contained in my response to the highly redacted report in a component of the document titled, “What Are The Odds, a Fiduciary Event, Or A Sinister Betrayal.”]

    I met again with who I assumed was my now new attorney and the firm’s name sake senior partner in his office on Monday, September 8th 2003. Something very frightening occurred to me as I walked into Boston’s Federal Reserve building where the law office was located on the upper floors. I passed through security, having shown my ID and security confirming my appointment. As I approached the elevator to the law offices, I walked by a gentleman seated with his back to me next to this walkway with a large portfolio open on his lap. I could not miss the open photo on the right page – it was a headshot of me from my firms ID. The photo was blown up significantly and in full view on the right hand page. No one walking by could miss it, I was staggered, I walked a little farther towards the elevators when I decided to turn around and approach the man. He was already up and gone from the lobby. Stunned, I got on the elevator and though of who knew of my meeting other than the attorney. I decided to keep this to myself.

    I met only briefly the attorney and told him that earlier in August I began numerous communications with New York’s Attorney General’s Office. Attorney General Elliot Spitzer was investigating securities involving mutual fund trades. The trades mostly involved brokers altering trades for influential hedge fund clients of a mutual fund after the markets closed; essentially giving their client the winning ticket to the horse after it passed finish line. Spitzer office was intrigued with my concerns, but instead suggested I approach the Commonwealth of MA Securities Regulator, Secretary William Galvin.

    The attorney said he would contact Galvin. He also said he would like to contact the SEC and let them know I was going to the state’s securities regulator as a professional courtesy. I looked him dead in the eye and forbid him to make that communication. I told him it has been months since I met with the SEC and they have done nothing – I am well aware that the securities fraud is still flourishing at the firm. I still had contact.

    Later in the day the lawyer called me and informed me that he set up a meeting for Thursday, September 11th.

    On September 11th 2003, I brought to the meeting the evidence – a concise anthology of the massive securities fraud. The attorney, I, and the state’s deputy secretary, and another state securities enforcement officer were present. I presented them with the evidence that included a summary of the securities fraud that occurred in my three years with the firm, a spread sheet documenting hundreds of millions of dollars of mutual fund transactions by a select group of ten market-timers in one single fund (I told them I isolated this group for clarity, I told all present that hundreds of market-timers were active at the firm for the years I have been there. I told them billions of dollars in mutual fund transaction occurred in over a dozen different funds), and internal documents showing that management was distinctly aware of the harm all mutual fund investors in the funds suffering who were not market-timers. And I showed them the firm’s prospectus of the fund, which publically confirmed the prohibited transactions were to the detriment of all shareholders. So much so, the prospectus went on, that management reserved the right to suspend the exchange privilege of those who violate the fund agreement between the shareholder and the fund they purchased – it went on, “the SEC requires that” it states.
    At first the regulators did not get it – they were looking for altered after hours mutual fund transactions. I told him what I trying to expose is much more insidious, it is an entirely different effort to defraud mutual fund investors by shareholders with money, or influence with the firm. He was about to get up and leave when I convinced him to read my anthology of the fraud. The deputy began reading my fairly lengthy personal account. Fifteen minutes went by. We all sat silent. When he finished reading, he reached for opened prospectus, and read the transaction agreement between mutual fund shareholders and the mutual fund firm that I had laid out. He looked at me and asked for the spread sheet.

    From the initial disappointment on his face twenty minutes earlier, when he realized I had no altered mutual fund transactions, it now had changed to a growing awe. He began to ask a number of insightful questions – he got it! And so did the others present. With his faced change to an expression of great interest, I told him that I had been to the SEC with the same story and evidence months previous and the activity was still taking place at the firm. It was at that point the attorney whose office we were meeting in stood up and told all present four things. He stated that he needed to leave. He was not representing me in this matter. He represented brokers of another firm in matters before the SEC involving securities fraud with mutual funds. And last, he stated that he could be call on to testify as witness to this meeting. My jaw dropped. The others thanked him as he left.

    Our one hour meeting lasted four. It was intense. I told them where, when, and how to find the transaction histories I provided. I gave them dozens of names of dutiful Preferred Services Specialist like myself, licensed brokers (possessing NASD 6, 63, 7) who had the same concerns that I had. I also gave him the names of the whom I thought to be soul seller; supervisors, assistant vice presidents, senior vice-presidents, and a managing director, all who I knew were aware of the fraudulent activity.
    During the meeting I could not help but wonder what that other drama was all about with who I thought was somehow my attorney. I had no contract with him – I was just transferred to him by another attorney at the firm without my asking– not being an attorney, it all sounded staged. I immediately remembered the lobby. The meeting, almost four hours long was complete. The two regulators left thanking me in a way that that gave me great concern – it was not that they weren’t utterly sincere – they knew I had no idea of the impact this was going to have on my life.

    In later published accounts of my whistle – blowing, of which I have never spoken at great length (for reasons that will be explained later) in the print media which was covered on the front pages USA Today, the Wall Street Journal, The Boston Globe, and on, and on; one account of that meeting the deputy secretary had participated in with Boston Magazine quoted him regarding their leaving the office hastily to get subpoenas –“ they both looked at each other with the deputy saying, holy shit.”

    LD, gotta go, to be continued.

    • Phil Johnson

      Originally blew the whistle on Corzine and Dan Tishman a couple of years ago. Called the Manhattan DA, Tishman filed a libel and defamation lawsuit agaist me. His attorney secretly went into court and they were given a permanent restraining order against me. Philip A. Johnson 970-708-9572

  • Peter S.

    Continued from “Can Whistleblower’s Cross-Examine the SEC? Part II

    Weeks went by; it was gut wrenching (like every single day of the last four years). One of my last comments to the Deputy Secretary of Securities in the meeting that change my life for ever was, “you’re not going to blow me off like the SEC? His response looking me directly in the eye was, “We are the Division of Securities for the Commonwealth not the SEC.”

    I had significant contact with the office, both at the MA Securities Boston Office and on the phone. They trusted me, and I trusted them. Talking to the deputy was like talking to anyone of my six brothers, the living, the dead, and the catastrophically brain injured. There was no bullshit.

    A few weeks after our meeting, I am stunningly told that the SEC was at the firm as well. There evidently was a race to get in the door of the firm first– it was not a race between investors.

    Dumfounded is my recollection. The state’s recollection was “they’re not surprised.”The SEC had said they to receive a tip and were at Putnam Investments one step ahead of MA Securities every step of the way. Where did the SEC come from? That was my question – it had been months. The answer was Ah hmnn…the Director of Enforcement of the Securities and Exchange Commission… Stephen M. Cutler… got a phone tip from a… confidential… informant …that bad thing were happening at the mutual fund firm; or something to that affect if you catch my drift.


    LD, gotta go – I’ll continue later today.

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