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SEC Exposes Whistleblower: Inadvertent? STOP IT!!

Posted by Larry Doyle on April 25, 2012 10:24 AM |

News this morning that an SEC attorney, in the midst of an investigation, blew the cover of a whistleblower might have been formerly thought of as inadvertent or unfortunate. America is no longer so naive.

The Wall Street Journal’s lead story today highlights, Source’s Cover Blown by SEC:

Federal securities regulators, in a sensitive breach, inadvertently revealed the identity of a whistleblower during a probe of a firm that ran a stock trading platform. 

The gaffe by the Securities and Exchange Commission occurred during an investigation of Pipeline Trading Systems LLC when an SEC lawyer showed an executive who was being questioned a notebook from the whistleblower filled with jottings about trades, calls and meetings. The executive says he recognized the handwriting.

Pipeline, the operator of an alternative trading system known as a “dark pool,” reached a settlement in October with the SEC, which asserted in findings released at the time that Pipeline had misled investors about how their orders were filled.

Pipeline, which didn’t admit or deny the allegations, was the subject of a page-one Wall Street Journal article earlier this month. The article didn’t name the whistleblower, but he has now agreed to be publicly identified. He is Peter C. Earle, 41, a former employee of a Pipeline trading affiliate. Mr. Earle said he was “disappointed” the SEC took steps in its probe that ended up disclosing his identity to Pipeline.

One would have to be exceptionally gullible to think that this interaction between regulator and the executive — along with the open display of written whistleblower notes — was anything but designed and accomplished its intended effect.

While the SEC may like to think it is promoting its new whistleblower program as part of Dodd-Frank, let us never forget that our nation’s lead financial cop has prior experience in exposing and actually terminating whistleblowers. Lest we forget . . .

1. Peter Sivere, former compliance officer and whistleblower at JP Morgan, had his cover blown by SEC attorney George Demos. None other than then SEC Inspector General David Kotz brought that travesty to light. I wrote in January 2010, SEC IG Report: George Demos Pimped Peter Sivere.

2. Gary Aguirre, former SEC attorney and ultimate whistleblower, was actually terminated in the midst of pursuing a case against noted hedge fund titan Art Samberg. To his credit, Mr. Aguirre utilized the Freedom of Information Act to continue pursuing the case which led to Pequot paying a $28 million fine and shutting its doors. I wrote, Connecting the Dots: The US Attorney, the SEC, Art Samberg, Pequot Capital, Hush Money, Lying, and More.

Aside from the SEC’s prior poor track record, why else do I really think this exposing of the whistleblower’s cover was not inadvertent? Let’s go back to early 2011 and review my commentary, Matt Taibbi Exposes Wall Street’s Regulatory Capture:

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.

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.”

Thus, I ask, if the SEC and Department of Justice want to ‘play ball’ with the firms on Wall Street so that these firms will self- report, what gums up the wheels? Whistleblowers. How do you move them out of the equation? Expose them.

Add Mr. Earle’s name to the list.

Inadvertent? Come on . . . after all we have seen over the last three years, they think we’ll buy that?

Navigate accordingly.

Thoughts, comments, constructive criticisms 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 so that investor confidence and investor protection can be achieved.

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