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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

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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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