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Can Whistleblowers ‘Cross-Examine’ the SEC?

Posted by Larry Doyle on January 9, 2012 7:09 AM |

Later this month, Northwestern Law will be hosting its 39th Annual Securities Regulation Institute in Coronado, California. In light of everything that has occurred on Wall Street and in Washington, one might think this could be a lively conference as it looks to provide:

A timely analysis of recent laws and developments in the corporate and securities law fields presented by senior SEC officials and leading practitioners.

While reviewing the conference invitation, I am particularly intrigued by one workshop to be held on Friday morning, January 20th. What is this workshop? Who is involved? Why am I so intrigued? Please stick with me here as we preemptively try to connect some dots.

The specific session which intrigues me is as follows:

8:00–9:00 a.m.
SEC Senior Staff Workshop

Division of Enforcement Robert S. Khuzami, Director
Moderated by Richard H. Walker, Managing Director and General Counsel, Deutsche Bank AG, New York City

9:00–10:30 a.m.Enforcement and Criminal Investigations
• Enforcement risks for lawyers
• Whistleblowers and their impact on compliance programs
• The SEC’s new enforcement tools: How are they working?
• Enforcement highlights and trends

Session Chair: Mary Jo White, Debevoise & Plimpton LLP, New York City
Stephen M. Cutler, Executive Vice President and General Counsel, JPMorgan Chase & Co.,
Robert S. Khuzami
Richard H. Walker

I am especially interested in this session given the widely publicized and high profile SEC follies over the last decade in conjunction with the limited scope of cases emanating from our current crisis.

Do I need to remind anybody of the following names and situations—Madoff, Stanford, Art Samberg and Pequot, SEC attorney Darcy Flynn’s internal whistle-blowing, and more—which have not reflected well on our nation’s primary securities regulator?

However, while intrigued by this session I am also concerned that this gathering may not include a sufficiently comprehensive list of participants to aggressively explore all aspects of financial whistle-blowing circa 2012. Why so?

All of the participants are insiders.

Why is that such a concern? Well, let’s navigate back to mid-February 2011 when I wrote, Matt Taibbi Exposes Wall Street’s Regulatory Capture, in which the writer reported on another financial regulatory conference. I wrote and highlighted:

Is Wall Street’s regulatory capture a thing of the past? Not so fast.

The most troubling part of Taibbi’s article highlights a recent financial law enforcement conference at which senior representatives of the SEC and DOJ (Department of Justice) were present. Let’s review. I strongly encourage you to read this through, as there is a bombshell in the midst of it.

Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion.

Jurors had an e-mail between the defendants admitting that “there is simply no way for us to make money — ever” just three days before assuring investors that “there’s no basis for thinking this is one big disaster.” Yet the case still somehow ended in acquittal — and the Justice Department hasn’t taken any of the big banks to court since.

All of which raises an obvious question: Why the hell not?

Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.

Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country’s leading lawyers who represent Wall Street, as well as some of the government’s top cops from both the SEC and the Justice Department.

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it’s a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats.

At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. “They were chummier in that environment,” says Aguirre, who plunked down $2,200 to attend the conference.

Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Preet Bharara, her old pal from the U.S. attorney’s office.

“I want to first say how pleased I am to be here,” Bharara responded. Then, addressing White, he added, “You’ve spawned all of us. It’s almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein.”

Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. “I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year,” he said. “They’ve done a real service to the country, to the financial community, and not to mention a lot of your law practices.”

Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC’s director of enforcement, talked about a new “cooperation initiative” the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed.

From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC. (LD’s highlight)

Are you kidding me? How the hell does that work? The SEC will effectively tip off a potential defendant?

“We are going to try to get those individuals answers,” Khuzami announced, as to “whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client.”

Aguirre, listening in the crowd, couldn’t believe Khuzami’s brazenness. The SEC’s enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time.

Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. “First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC,” Aguirre says. “Then the Justice Department commits itself to pass, so that the player knows he’s ‘safe.’ Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department.”

When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants “get answers” regarding the status of their criminal cases, he initially doesn’t believe it. Then I send him a transcript of the comment. “I am very, very surprised by Khuzami’s statement, which does seem to me to be contrary to past practice — and not a good thing,” the former prosecutor says.

Earlier this month, when Sen. Chuck Grassley found out about Khuzami’s comments, he sent the SEC a letter noting that the agency’s own enforcement manual not only prohibits such “answer getting,” it even bars the SEC from giving defendants the Justice Department’s phone number. “Should counsel or the individual ask which criminal authorities they should contact,” the manual reads, “staff should decline to answer, unless authorized by the relevant criminal authorities.”

How fascinating. So, little more than a year ago our SEC Director of Enforcement Robert Khuzami offers insights on how the SEC plans on engaging the counsel of prospective defendants. Do you think that such a process of engagement will engender a system promoting meaningful transparency and real integrity? Strikes me that Khuzami et al are offering a Get Out of Jail Cheap card. How does that work?

If, in fact, this practice is being implemented by the SEC, how does that impact whistleblowers? If you are a whistleblower, would you think the SEC would be fully committed to protecting you in light of Khuzami’s statement?

Will Khuzami and others on this panel address this topic at the San Diego conference? I think it should be the FIRST question to be addressed. Why wouldn’t there be anybody on the panel to effectively cross-examine Khuzami and the other regulators on this point and others like it?

Are there any whistle-blowers or other individuals in our audience who might like to put forth this question or others while raising issues and topics which Sense on Cents welcomes promoting? Please comment on this post.

Questions, comments, constructive criticisms always encouraged and appreciated.

Larry Doyle

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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.





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