1 Boring Old Man

SEC Whistleblower Speaks on Madoff Fraud
by: Matt Renner, t·r·u·t·h·o·u·t
Monday 22 December 2008

After the revelation of a massive fraud scheme, a former government investigator has accused government law enforcement officials of repeatedly turning a blind eye to Wall Street crime and, in doing so, allowing the foundational trust of the global financial system to crumble. The Securities and Exchange Commission (SEC), the oversight body which was set up to enforce laws regulating finance in order to prevent a repeat of the stock market crash of 1929, has admitted to falling down on the job, missing the long-running scheme allegedly perpetrated by Bernard L. Madoff – potentially the largest scandal ever to rock Wall Street…

^{After a successful career as a trial lawyer, Gary Aguirre turned his attention to public service, trading in a lucrative practice to become a government lawyer tasked with investigating financial crimes.  In the course of an investigation into possible insider-trading by hedge fund Pequot Capital Management, Aguirre pushed to subpoena Wall Street star John Mack, now the chief executive of finance giant Morgan Stanley. The investigation was halted by Aguirre’s supervisor and the SEC allowed the case to die. A subsequent report by the internal SEC watchdog found that Aguire’s supervisors acted improperly in firing Aguirre and shutting down his investigation. While the report recommended punishment against four officials in the chain of command, Cox declined to hold them accountable…}

^{MR: What is it about the culture at SEC that steers them away from looking at the big Wall Street players?}

^{AG: All the agencies have to some extent or another a revolving door [where government employees rotate out to the private sector and earn more money]. But at the SEC, what you rotate into is an enormous salary leap. SEC managers may make $200,000. That same person may make $2 million as a starting salary on the outside and can move up from there. Now, when he leaves, I’m not sure he’s worth $2 million as lawyers, but he takes his Rolodex with him and that Rolodex is gold… Then, the departed employee calls back to his former colleagues and says, "you know I really don’t think there is much of a case against so-and-so, I’d like for you to take a look at it." And the case goes away; the system goes on in perpetuity.}

^{MR: Did you see the revolving door in action in your case?}

^{(On January 31, 2005, prior to the phone call mentioned below, an email beginning with the word "Yowza!" was sent from Jan Lower, an attorney at the Debevoise and Plimpton law firm, to Aguirre’s supervisor Paul Burger. The email described in detail the potential earnings that a former SEC official could receive at the Debevoise and Plimpton law firm – $2 million a year.)}

^{AG:Senior officials at the SEC got a call from Debevoise lawyer asking about a case I was handling. It was clear she wanted the investigation of John Mack to go away so he could become Morgan Stanley’s new CEO. And it did go away. SEC associate director Paul Berger derailed the investigation and when I questioned that decision, fired me. Within a few days of firing me, he made an inquiry through one of his colleagues to the Debevoise law firm to see if they were interested in hiring him. After the case against Mack was dead, Berger took a job with Debevoise and that is where he’s working now. I’ll let you draw your own inferences.}

^{What you have when you leave the SEC is contacts with the SEC, you have the Rolodex and the ability to call back to people you used to work with. I don’t want to single out Burger, I think that is really the culture there. A culture of ‘don’t rock the boat,’ the industry does not want ‘boy scouts,’ and if you can be effective with the SEC through your contacts, that is a very valuable asset you can bring to the table…}

^{MR: Do you have faith that SEC chairman Christopher Cox will listen to the SEC inspector general?}

^{AG: Cox will be leaving in a couple of weeks. Mary Shapiro will likely be coming in. It may be easier for IG to do a no-holds-barred report on what has happened in the Madoff case. There is an expectation that the SEC will face rigorous scrutiny by the new administration because the SEC’s failures were a primary cause of the deepening financial crisis… I think we’ve had a collapse of the markets caused by three different factors. The three factors all point to the failure of regulatory entities to carry out their missions.}

^{One area is the liquidity and capitalization of the major banks, which SEC was supposed to keep an eye on. We’ve had one bank fail after another. When you look at the scope of those failures, and the magnitude of those failures, you have to ask yourself, how could anybody miss the red flags that these banks were in deep trouble.}

^{The second factor is market manipulation and insider trading. It has been a colossal failure by the SEC. Its failure to investigate the big players gave them sense they were invulnerable. So, the just got bolder.}

^{The SEC seemed to be doing its best job on investment fraud, but some of the fraud that has surfaced before Madoff raised some questions about the SEC. Madoff is on a new scale… It was the SEC’s strong suit and they missed it. There has been a regulatory failure in this area; by the SEC, FBI, Department of Justice and local US attorneys’ offices…}

^{I’m not sure that all of the dirt has come to light at this point. I think one reason for that is because [Federal Reserve Chairman Henry] Paulson, a representative of Wall Street, has been pumping money into the system. We’re transferring trillions of dollars from taxpayer’s pockets to Wall Street to try to stem the downward cycle that we are in and perhaps to some extent we have. But that may help conceal the extent of the fraud. It is when the veneer is completely stripped away; that’s when you discover the fraud. To the extent that we are pouring trillions into the capital markets, we may delay, postpone or even prevent the full extent of the fraud from surfacing. But I think it is out there and I don’t think the downward cycle has ended yet. As long as it continues, we’ll discover more.}

Monica Goodling in the DoJ? Bradley Schlozman in the Civil Rights Division? Henry Paulson as Secretary of Treasury? Michael "you’re doing a heck of a job" Brown with F.E.M.A.? Lorita Doan in the G.S.A.? Christopher Cox at the S.E.C.? Douglas Feith in the DoD? Alberto Gonzales anywhere? The list is without end. Public servants serving something other than the public. Yet the whistleblower count has been extremely low. How come?

June 23, 2006

GAP Statement Regarding Gary Aguirre

^{In a front-page article in today’s New York Times, Gary Aguirre, a client of GAP Attorney Joanne Royce, was identified as the S.E.C. lawyer who ran an investigation of Pequot Capital Management, a major hedge fund, until last summer.}

^{As stated in the article, “The S.E.C.’s handling of the Pequot inquiry has itself come under scrutiny by Congress and the Office of Special Counsel, a federal agency that examines whistle-blower complaints. These officials are examining charges by Gary J. Aguirre, the S.E.C. lawyer who ran the Pequot investigation until last summer, that senior S.E.C. officials had backed his inquiry – including the issuance of scores of subpoenas – until he sought the testimony of an influential Wall Street executive.”}

^{The Senate is also focusing on the circumstances surrounding Aguirre’s termination last September. The article continues “Senate investigators want to know, among other things, whether political considerations played a role in the S.E.C.’s firing of Mr. Aguirre only 11 days after awarding him a two-step merit pay increase and after his supervisor had praised his work on the Pequot investigation”…}

Insider trading accusations

^{Mack was accused by former SEC investigator Gary Aguirre of insider trading. Mack allegedly tipped off hedge fund Pequot Capital Management about a 2001 merger deal between GE Capital and Heller Financial. In the testimony by Aguirre at a Senate Judiciary Committee hearing in June 2006, Aguirre said that Pequot had amassed a short position in General Electric shares in the weeks before the deal and a long position in Heller, and the $7 billion hedge fund earned some $18 million in profit once the deal was announced. Aguirre said that he was fired from the SEC on September 1, 2005 because he was aggressively pursuing the investigation and wanted to interview Mack about the findings. According to Aguirre, his efforts to talk to the politically well-connected Mack were blocked by senior SEC officials. The delay in the probe allowed Mack enough time to secure his position as CEO of Morgan Stanley. Had he been investigated in mid-2005 by the SEC, Mack would not have been a viable CEO candidate for the firm.}

^{On August 22, 2006, Senate Finance Committee Chairman Charles Grassley stepped up pressure on the SEC to provide documents related to a congressional inquiry into why the agency ended an investigation into hedge fund firm Pequot Capital Management. Grassley said that the SEC hasn’t responded quickly enough to requests for documents and interviews and complained about the agency’s practice of prohibiting employees from disclosing information about ongoing investigations, according to a copy of a letter he sent to SEC Chairman Christopher Cox. The letter was distributed to news organizations.}

^{On October 5, 2006, the SEC recommended no action be taken against Mack. In late November, it notified Mack and Pequot that the investigation had been closed and no action would be taken against them. On December 5, 2006, in written testimony before the Senate Judiciary Committee Linda Thomsen, the SEC’s top enforcer, two other SEC investigators, and one former associate director of her division denied that that Mack was shielded from questioning. SEC investigators interviewed Mack on August 1, 2006.}

^{Grassley has asked the Government Accountability Office to open a probe of the SEC’s enforcement division and compliance department. The Senate Finance and Judiciary Committees conducted an investigation of Aguirre’s allegations. On August 3, 2007, they issued a comprehensive joint staff report concluding the year-long investigation.}