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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.

  • Ron Larson

    Isn’t it obvious? The regulators are there to protect Wall Street. Not the public.

  • LD

    Agreed, to me and you and those who come here but I am hoping the WSJ reporter reads my commentary so he can edit his story where he writes,

    … inadvertently revealed the identity


    The gaffe by the Securities and Exchange Commission…

    Once we get the reporter on board, then I think we should be all set…(haha)…if it were only that easy and actually that comical.

  • Patricia

    It turns out the regulators ARE Wall Street. It must get awfully ‘cozy’ with Wall Street and the regulators all sleeping in the same bed. This leaves Main Street out in the cold for sure not to mention the global impact from all of this ‘coziness’. It can’t help but make us feel ill. Let us keep ripping the sheets back and exposing the filth and perhaps that way we stand a chance of cleaning it up.

  • Jim

    Wow, the hits just keep on comin……..very good report,..thx

  • EBrown

    Thank you for the article which gives new meaning to the phase “Fox Watching the Hen House.” How pathetic can you be to show the handwritten note of the whistleblower to the fraudsters. That was no accident. It was dangerous. Mr. Earle might have been murdered. Reckless by the SEC.

    For those who don’t believe whistleblowers should be protected…then don’t complain about your tax bill or the bail outs or the debt ceiling or that poison pill manufactured by a pharmaceutical company that bought their way out of a false claims act suit which ripped you off via Medicare fraud.

    We wouldn’t know half the harm being done by corporations and our own government if it weren’t for the few who are brave enough to speak truth to power. That power took action recently in rejecting Citigroup’s Vikram Pandit comp package. That power also stopped buying “Pink Slime” meat because advocate groups informed the public they were eating garbage. That power may break up the GSA. People should remember that a whistleblower may save your life!

    Just like Mr. Aguirre found out during the course of his work, the SEC does not have an arms length relationship required for oversight. Based on the comments from Khuzami, he has forgotten public service is a public trust. Can you imagine being a whistleblower at the SEC? Essentially we are paying people to tip off tax and investment thieves. Meanwhile back at the ranch…the SEC goes after Judge Rakoff. What the SEC needs is a whistleblower at the top.

    Many hard working PUBLIC servants learn the hard way the federal government does not protect employees from whistleblower retaliation. The unvarnished truth can be read in this Senate report.

    The true shame is that we don’t have a legal defense fund for whistleblowers. Can you imagine taking on the federal government to show corruption within when they have an unlimited budget—YOUR MONEY! There should be serious consequences for outing whistleblowers including criminal charges and claw backs on the bonuses at the federal level.

    Yes, federal employees and political appointees receive bonuses—Neeley got one after the 2010 GSA conference and so did the SEC lawyers who refused to take a look at Madoff for 9 years. Thanks to the determination of Markopolos, the truth came out. Thanks to Aguirre we know the SEC is back scratching. Thanks to Mr. Earle investors know the truth. Praise be the whistleblowers.

  • LD: Recommended

    How do you think whistleblowers on Wall Street feel about today’s developments?

    Mr. Earle said the events could have a “chilling” effect on whistleblowers. “It’s unfortunately possible that would-be whistleblowers will see my situation, think twice and not come forward at all,” Mr. Earle said.

    Sen. Grassley told the SEC that its “staff compromised this whistleblower’s identity,” and asked whether the regulator considered handwriting “to be information which could betray a whistleblower’s identity,” and why or why not.

    “How are SEC staff trained to ensure that they do not disclose confidential information?” the senator asked in his letter, which also asked whether the regulator has “the power to discipline a staff member who showed the target of an investigation identifiable handwriting from a cooperating source.”

    Mr. Earle said in an earlier interview that he was “disappointed” that the SEC took steps in its probe that ended up disclosing his identity to Pipeline.

    His experience immediately raised concerns among other whistleblowers who haven’t been named, lawyers said.

    On Tuesday night, three clients of New York securities lawyer Rebecca Katz—all themselves whistleblowers—emailed her the Journal story asking about the potential for their own confidentiality to be compromised, she said.

    “On Wall Street, if you’re a whistleblower, you can kiss your career goodbye,” said Ms. Katz, a former senior enforcement lawyer for the SEC who said she was surprised the SEC would show a whistleblower’s handwritten notes to anyone at a company under investigation.

    “There are so many ways to ask questions” while not exhibiting identifying documents, Ms. Katz said, adding that in her experience, SEC lawyers “are really careful, and worried about protecting confidentiality.”

    Ms. Katz and other lawyers said it shouldn’t matter if employees of a company under investigation express theories about who is talking to regulators. To the SEC, she said, “it doesn’t matter if the company has suspicions. Their investigations are confidential.”

    One lawyer, Richard Holwell, who this year resigned as a New York federal judge and is launching a law firm, said the SEC made a mistake that will cost it informants.

    “It’s a blunder, and it will inevitably scare off some whistleblowers, particularly those who are still employed,” said Mr. Holwell, who as a judge presided over last year’s insider-trading trial of Raj Rajaratnam. “The cleanest response would have been, this was a mistake and it will never happen again.”

    SEC Faces Question About Tipster Policy

  • Peter Sivere


    Thanks for keeping this in the light. Truly pathetic – but still fighting the incest…

  • Peter Sivere
  • Bill

    Thanks for illuminating this. More DC mafia in action.

  • Mary Jacobs

    The SEC needs to be fined for any disclosure resulting in the outing of an informant. And a whistleblowers
    legal fund needs to be set up to protect whistleblowers. If we can spend
    billions to provide Afghanistan citizens with infrastructure, we should be able to afford protection for those brave individuals who save us from corporate greed and criminal fraud.
    I once had an experience with department of human services where i was being anonymously accused. I found out the basis of the accusations and easily
    deduced the source person, and was able to defuse the stupid charges. The more information given about charges the easier to defend against them.
    But in the case of Wall Street, recently it is easier to assume smoke means fires, so evidence should be kept for indictments not cozy warning conferences. imho.

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