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The SEC Is Out To Lunch

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August 27, 2009

Back on January 5, I wrote a piece entitled:  “Clean-Up Time On Wall Street” in which I pondered whether our new President-elect and his administration would really “crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis”.  I quoted from a December 15 article by Stephen Labaton of The New York Times, examining the failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitated such breakdowns.  Some of the highlights from the Times piece included these points:

.  .  .  H. David Kotz, the commission’s new inspector general, has documented several major botched investigations.  He has told lawmakers of one case in which the commission’s enforcement chief improperly tipped off a private lawyer about an insider-trading inquiry.

*  *  *

There are other difficulties plaguing the agency. A recent report to Congress by Mr. Kotz is a catalog of major and minor problems, including an investigation into accusations that several S.E.C. employees have engaged in illegal insider trading and falsified financial disclosure forms.

I then questioned the wisdom of Barack Obama’s appointment of Mary Schapiro as the new Chair of the Securities and Exchange Commission, quoting from an article by Randall Smith and Kara Scannell of The Wall Street Journal concerning Schapiro’s track record as chair of the Financial Industry Regulatory Authority (FINRA):

Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers . . .  said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul.  “The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.

*   *   *

In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings.

I also quoted from a two-part op-ed piece for the January 3  New York Times, written by Michael Lewis, author of Liar’s Poker, and David Einhorn.  Here’s what they had to say about the SEC:

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.  (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

Keeping all of this in mind, let’s have a look at the current lawsuit brought by the SEC against Bank of America, pending before Judge Jed S. Rakoff of The United States District Court for the Southern District of New York.  The matter was succinctly described by Louise Story of The New York Times:

The case centers on $3.6 billion bonuses that were paid out by Merrill Lynch late last year, just before that firm was merged with Bank of America.  Neither company disclosed the bonuses to shareholders, and the S.E.C. has charged that the companies’ proxy statement about the merger were misleading in their description of the bonuses.

To make a long story short, Bank of America agreed to settle the case for a mere $33 million, despite its insistence that it properly disclosed to its shareholders, the bonuses it authorized for Merrill Lynch & Co employees.  The mis-handling of this case by the SEC was best described by Rolfe Winkler of Reuters.  The moral outrage over this entire matter was best expressed by Karl Denninger of The Market Ticker.  Denninger’s bottom line was this:

It is time for the damn gloves to come off.  Our economy cannot recover until the scam street games are stopped, the fraudsters are removed from the executive suites (and if necessary from Washington) and the underlying frauds – particularly including the games played with the so-called “value” of assets on the balance sheets of various firms are all flushed out.

On a similarly disappointing note, there is the not-so-small matter of:  “Where did all the TARP money go?”  You may have read about Elizabeth Warren and you may have seen her on television, discussing her role as chair of the Congressional Oversight Panel, tasked with scrutinizing the TARP bank bailouts.  Neil Barofsky was appointed Special Investigator General of TARP (SIGTARP).  Why did all of this become necessary?  Let’s take another look back to last January.  At that time, a number of Democratic Senators, including:  Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington) voted to oppose the immediate distribution of the second $350 billion in TARP funds.  The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds.  Barack Obama had threatened to veto this resolution if it passed. The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it).  At that time, Obama was engaged in a game of “trust me”, assuring those in doubt that the second $350 billion would not be squandered in the same undocumented manner as the first $350 billion.  As Jeremy Pelofsky reported for Reuters on January 15:

To win approval, Obama and his team made extensive promises to Democrats and Republicans that the funds would be used to better address the deepening mortgage foreclosure crisis and that tighter accounting standards would be enforced.

“My pledge is to change the way this plan is implemented and keep faith with the American taxpayer by placing strict conditions on CEO pay and providing more loans to small businesses,” Obama said in a statement, adding there would be more transparency and “more sensible regulations.”

Although it was a nice-sounding pledge, the new President never lived up to it.  Worse yet, we now have to rely on Congress, to insist on getting to the bottom of where all the money went.  Although Elizabeth Warren was able to pressure “Turbo” Tim Geithner into providing some measure of disclosure, there are still lots of questions that remain unanswered.  I’m sure many people, including Turbo Tim, are uncomfortable with the fact that Neil Barofsky is doing “too good” of a job as SIGTARP.  This is probably why Congress has now thrown a “human monkey wrench” into the works, with its addition of former SEC commissioner Paul Atkins to the Congressional Oversight Panel.  Expressing his disgust over this development, David Reilly wrote a piece for Bloomberg News, entitled: “Wall Street Fox Beds Down in Taxpayer Henhouse”.  He discussed the cynical appointment of Atkins with this explanation:

Atkins was named last week to be one of two Republicans on the five-member TARP panel headed by Harvard Law School professor Elizabeth Warren.  He replaces former Senator John Sununu, who stepped down in July.

*   *   *

And while a power-broker within the commission, Atkins was also seen as the sharp tip of the deregulatory spear during George W. Bush’s presidency.

Atkins didn’t waver from his hands-off position, even as the credit crunch intensified.  Speaking less than two months before the collapse of Lehman Brothers Holdings Inc., Atkins in one of his last speeches at the SEC warned against calls for a “new regulatory order.”

He added, “We must not immediately jump to the conclusion that failures of firms in the marketplace or the unavailability of credit in the marketplace is caused by market failure, or indeed regulatory failure.”

When I spoke with him yesterday, Atkins hadn’t changed his tune.  “If the takeaway by some people is that deregulation is the thing that led to problems in the marketplace, that’s completely wrong,” he said.  “The problems happened in the most heavily regulated areas of the financial-services industry.”

Regulated by whom?

In Pursuit Of The TARP Thieves

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February 12, 2009

On Wednesday, February 11, the Senate Judiciary Committee held a hearing on a subject of concern to many taxpayers: “The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn”.  With trillions of dollars being expended in bailouts while the corporate beneficiaries of this government largesse allow their executives to line their pockets with those very dollars, the outrage felt by the working (or unemployed) public has found its way to Capitol Hill.  What we learned from this hearing is that there is plenty of fraud taking place while the FBI and other branches of law enforcement are understaffed to cope with the immense rise in reported fraud cases.

The Committee heard testimony from John Pistole, Deputy Director of the FBI.  Pistole explained how the current economic crisis resulted in numerous areas of FBI scrutiny, only one of which is the overwhelming subject of mortgage fraud:

For example, current market conditions have helped reveal numerous mortgage fraud, Ponzi schemes and investment frauds, such as the Bernard Madoff alleged scam. These schemes highlight the need for law enforcement and regulatory agencies to be ever vigilant of White Collar Crime both in boom and bust years.

The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations. The number of open FBI mortgage fraud investigations has risen from 881 in fiscal year 2006 to more than 1,600 in fiscal year 2008. In addition, the FBI has more than 530 open corporate fraud investigations, including 38 corporate fraud and financial institution matters directly related to the current financial crisis. These corporate and financial institution failure investigations involve financial statement manipulation, accounting fraud and insider trading. The increasing mortgage, corporate fraud, and financial institution failure case inventory is straining the FBI’s limited White Collar Crime resources.

The most disgusting activity covered during this hearing concerned fraud related to the ongoing $700 billion TARP bailout.  Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (SIGTARP) provided testimony concerning his plans to establish a mechanism for bringing TARP thieves to justice:

The SIGTARP Hotline is operational and can be accessed through the SIGTARP website at www.SIGTARP.gov by telephone at (877) SIG-2009, as well as through email. Plans are being formulated to develop a “fraud awareness program” with the objective of informing potential whistleblowers of the many ways available to them to provide key information to SIGTARP on fraud, waste and abuse involving TARP operations and funds, and explaining how they will be protected.

Mr. Barofsky’s testimony was largely a plea for passage of the Fraud Enforcement and Recovery Act, sponsored by Senators Patrick Leahy (D., Vt.) and Senator Chuck Grassley (R., Iowa) as well as the SAFE Markets Act, sponsored by Senators Charles Schumer (D., N.Y.) and Richard Shelby (R., Ala.).  The latter bill would authorize hiring of the following personnel to investigate and prosecute “fraud relating to the financial markets”:  500 FBI agents, 50 Assistant United States Attorneys and 100 additional Securities and Exchange Commission enforcement staff members.  Mr. Barofsky’s explanation of the need for this legislation was an illustration of using “experience as our guide”:

Now, with $700 billion going out the door under TARP, additional hundreds of billions (if not trillions) of credit being provided through the Federal Reserve, and additional hundreds of billions through the proposed stimulus bill, we stand on the precipice of the largest infusion of Government funds over the shortest period of time in our Nation’s history.  Unfortunately, history teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally.  One need not look further than the recent outlay for Hurricane relief, Iraq reconstruction, or the not-so-distant efforts of the RTC as important lessons.

The Fraud Enforcement and Recovery Act (S 386) addresses TARP fraud, fraud related to economic stimulus funds, mortgage fraud and fraudulent activities in the commodities markets.  The measure will:

  • Amend the definition of “financial institution” to extend federal fraud laws to mortgage lending business not directly regulated or insured by the Federal government.
  • Amend the major fraud statute to protect funds expended under the Troubled Asset Relief Program (TARP) and the economic stimulus package.
  • Authorize funding to hire fraud prosecutors and investigators at the Department of Justice, the FBI, and other law enforcement agencies, and authorize funding for U.S. Attorneys’ Offices to help staff FBI mortgage fraud task forces.
  • Amend the federal securities statute to cover fraud schemes involving commodities futures and options.
  • Amend the criminal money laundering statute to make clear that the proceeds of specified unlawful activity include the gross receipts of the illegal activity, and not just the profits of the activity.
  • Improve the False Claims Act to clarify that the Act was intended to extend to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, whether or not the government has physical custody of the money, and whether or not the defendant specifically intended to defraud the government.

Once these new measures are implemented, I would love to see the Feds bust those miscreants whom I (and others) suspect were manipulating the equities markets with TARP money in the month after Thanksgiving.  During that time, we saw an almost-daily spate of “late day rallies” when stock prices would be run up during the last fifteen minutes of the trading day, before those numbers could have a chance to settle back down to the level where the market would normally have them. The inflated “closing prices” for the day were then perceived as the market value of the stocks.  This process was taking place despite the constant flow of dire news reports, which would normally have sent stock prices tumbling.  News services covering the action on Wall Street were using the same three words to start each day’s headline:  “Stocks rally despite …”  This pattern ceased as legislators and commentators demanded to know what was being done with the first $360 billion of TARP money.  Hmmm . . .

At this point, we can only speculate as to who has been pilfering TARP money and what could have been done with a few billion here and a few billion there.  Perhaps in the not-too-distant future, we will be watching movies about the sleazoids who stole money intended to save the world economic system from ruin.

Clean-Up Time On Wall Street

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January 5, 2009

As we approach the eve of the Obama Administration’s first day, across America the new President’s supporters have visions of “change we can believe in” dancing in their heads.  For some, this change means the long overdue realization of health care reform.  For those active in the Democratic campaigns of 2006, “change” means an end to the Iraq war.  Many Americans are hoping that the new administration will crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis.

On December 15, Stephen Labaton wrote an article for the New York Times, examining the recent failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitates such breakdowns.  Some of the highlights from the piece included these points:

.   .   .    H. David Kotz, the commission’s new inspector general, has documented several major botched investigations.  He has told lawmakers of one case in which the commission’s enforcement chief improperly tipped off a private lawyer about an insider-trading inquiry.
*   *   *
There are other difficulties plaguing the agency.  A recent report to Congress by Mr. Kotz is a catalog of major and minor problems, including an investigation into accusations that several S.E.C. employees have engaged in illegal insider trading and falsified financial disclosure forms.
*   *   *
Some experts said that appointees of the Bush administration had hollowed out the commission, much the way they did various corners of the Justice Department.  The result, they say, is hobbled enforcement and inspection programs.

On December 18, Barack Obama announced his intention to name Mary Schapiro as the Chair of the Securities and Exchange Commission.  Many news outlets, including National Public Radio, presented an enthusiastic look toward the tenure of Ms. Schapiro in this office:

Speaking at the news conference on Thursday, Schapiro said there must be “consistent and robust enforcement” of regulations to protect investors, saying it will be her top priority as SEC chief.

On the other hand, in the December 18 Wall Street Journal, Randall Smith and Kara Scannell provided us with a more informative analysis of the SEC nominee’s track record:

She was credited with beefing up enforcement while at the National Association of Securities Dealers and guiding the creation of the Financial Industry Regulatory Authority, which she now leads.  But some in the industry questioned whether she would be strong enough to get the SEC back on track.
*  *  *
Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers  . . .  said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul. ” The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.

Since Ms. Schapiro took over Finra in 2006, the number of enforcement cases has dropped, in part because actions stemming from the tech-bubble collapse ebbed and the markets rebounded from 2002 to 2007.  The agency has been on the fringe of the major Wall Street blowups, and opted to focus on more bread-and-butter issues such as fraud aimed at senior citizens.

Out of the gate, Ms. Schapiro faces potential controversy.  In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings.  Both sons of Mr. Madoff have denied any involvement in the massive Ponzi scheme their father has been accused of running.

It appears as though we might see Ms. Schapiro face some grilling about the Madoff appointment, when she faces her confirmation hearing.  Beyond that, the points raised by Randall Smith and Kara Scannell underscore the question of whether Mary Schapiro will really be an agent of change on Wall Street or just another “insider” overseeing “business as usual”.  To assuage such concern, many commentators have emphasized that Ms. Schapiro has never worked for a brokerage firm or investment bank.  Her Wall Street experience has been limited to regulatory activity.  Despite this, one must keep in mind a point made by Michael Lewis and David Einhorn in the January 3 New York Times:

It’s not hard to see why the S.E.C. behaves as it does.  If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

Michael Lewis is the author of Liar’s Poker, a non-fiction book about his own Wall Street experience as a bond salesman.  With David Einhorn, he wrote a two-part op-ed piece for the January 3 New York Times.  The above-quoted passage was from the first part, entitled:  “The End of the Financial World as We Know It”.  The second part is entitled:  “How to Repair a Broken Financial World”.  The first section looked at the Bernie Madoff Ponzi scheme, using it to underscore this often-ignored reality about the Securities and Exchange Commission and its inability to prevent or even cope with the current financial crisis:

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.  (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

In the second section of their commentary, Lewis and Einhorn suggest six changes to the financial system “to prevent some version of what has happened from happening all over again”.  Let’s hope our new President, the Congress and others pay serious attention to what Lewis and Einhorn have said.  Cleaning up Wall Street is going to be a dirty job.  Will those responsible for accomplishing this task be up to doing it?

Dirty Rotten Scoundrels

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December 18, 2008

The Ponzi Scheme case involving Bernie Madoff is only the latest example of scumbaggery on Wall Street.  Madoff helped found the NASDAQ Exchange and established a reputation for himself as one of the captains of the financial world.  Now we know that he pilfered over 50 billion dollars from sophisticated investors, colleges, charitable institutions, banks and plain-old, rich people.  Worse yet, when he couldn’t get enough co-signers to back his ten-million dollar bail, he was placed under “house arrest” and confined to his $7,000,000 home.  When a car thief can’t make bail, he sits in jail until his case is tried.  Why is it that when someone is charged with stealing ten million times that much, he gets treated as though he was driving on an expired license?    By the way:  How does somebody hide fifty billion dollars?  Is he going to claim that he lost it or that he blew it all on lottery tickets?

The knaves who held themselves out as financial magicians have made pimps and drug dealers seem like Red Cross volunteers, by comparison.  Beyond that, the government institutions and officials charged with protecting the integrity of our financial system have been out to lunch for several years.  Worse yet, these hacks continue to facilitate the theft of trillions of dollars of taxpayer money and, for this reason, I believe they all belong in prison.  On second thought, they should be placed before a firing squad along with the swindlers whom they enabled.  After the Enron treachery was exposed to the light of day, one would have thought that the Securities and Exchange Commission might have started doing its job.  It didn’t.  People have to start forcing our elected officials to find out why.  I think I know the answer.  I believe it’s because many of the people entrusted to regulate the financial system are crooks themselves.

On December 16, Brent Budowsky posted an important article on The Hill website concerning the bailout bungle.  Mr. Budowsky is a gentleman who earned an LL.M. degree (that’s something you work on after graduating from law school) in International Financial Law from the London School of Economics.  He was a former aide to Senator Lloyd Bentsen and Representative Bill Alexander.  Mr. Budowsky pointed out that:

Government agencies have poured close to $8 trillion into banking bailouts.  The Treasury secretary has promoted massive government support of troubled, failed and corrupted institutions.

This program is a 100 percent top-down exercise involving the largest amount of money in history.

Virtually none of this money directly helps average Americans. Virtually none of it trickles down to the people who suffer the most and pay for the program.

*   *   *

The Securities and Exchange Commission is discredited.  The Federal Reserve has failed in its duty as banking regulator. Congress has failed in its duty of oversight.  The most wise and citizen-friendly regulator, Sheila Bair of the Federal Deposit Insurance Corporation, is treated with contempt by the Treasury secretary.

*   *   *

Today the Federal Reserve Board refuses to disclose information regarding some $2 trillion provided to financial institutions.  Bloomberg business news has filed a historic freedom-of-information case seeking disclosure.  Congress and the president-elect should support it.

Bailout money is not a private account that belongs to Fed Chairman Ben Bernanke, Fed governors, the Treasury secretary or the banks.  It is the people’s money.  It should be used to benefit the people.  It should be monitored through the checks and balances of the democratic process.

Secrecy is the enemy of equity, integrity and common sense. Secrecy is the friend of negligence, misjudgment and corruption.  There are probably selected instances where the Fed should not disclose, but show me $2 trillion of secretly spent money and I will show you trouble.

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock.  This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.  Perhaps we can thank him when “vigilante justice” comes to Wall Street.