SEC Nominee Has Represented 8 of the 10 Largest Wall Street Banks in Past Three Years

By Pam Martens and Russ Martens: February 22, 2017

Jay Clayton, Law Partner at Sullivan & Cromwell, Has Been Nominated to Chair the SEC by Trump

Jay Clayton, Law Partner at Sullivan & Cromwell, Has Been Nominated to Chair the SEC by Trump

President Trump’s nominee to head the Securities and Exchange Commission, Walter J. (Jay) Clayton, a law partner at Sullivan & Cromwell, has represented 8 of the 10 largest Wall Street banks as recently as within the last three years.

Clayton’s current resume at his law firm is somewhat misleading. It lists under “Representative Engagements” in “Capital Markets/Leveraged Finance” the following:

Initial public offering of $25 billion by Alibaba Group Holding Limited;

Initial public offering of $190 million by Moelis & Company;

Initial public offering of $2.375 billion by Ally Financial.

All three of the above IPOs occurred in 2014 – less than three years ago. A quick check of the prospectuses for the IPOs that were filed with the Securities and Exchange Commission shows that Clayton, as a law partner at Sullivan & Cromwell, was representing the underwriters in the offering, which include the largest Wall Street banks. Put the three deals together and you have 8 of the 10 largest banks on Wall Street being represented by the SEC nominee within the past three years. These are the same banks that are serially charged by the SEC for increasingly creative means of fleecing the public.

If that’s not enough to conflict Clayton out of consideration to Chair the SEC post, then conflicts of interest have lost all meaning within the legal lexicon of the United States.

According to the IPO for Alibaba, the underwriters were Credit Suisse, Deutsche Bank, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Citigroup. The prospectus from Alibaba reads as follows:

“We are being represented by Simpson Thacher & Bartlett LLP with respect to certain legal matters of United States federal securities and New York State law. The underwriters are being represented as to United States federal securities and New York State law matters by Sullivan & Cromwell LLP.”

Lead underwriters in the Moelis IPO were Goldman Sachs and Morgan Stanley. The prospectus reads: “Sullivan & Cromwell LLP, New York, New York, is representing the underwriters in this offering.”

Lead underwriters on the Ally Financial deal were Citigroup, Goldman Sachs, Morgan Stanley and Barclays. Joint book-running managers were: Bank of America Merrill Lynch, Deutsche Bank Securities, JPMorgan. Co-Managers included Sandler O’Neill + Partners, Keefe, Bruyette & Woods, Credit Suisse, Evercore, RBC Capital Markets, Scotiabank, Credit Agricole, Raymond James, and Societe Generale.

The prospectus reads:

“The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Jeffrey Belisle, Esq., Ally Legal Staff, and certain other legal matters related to the common stock will be passed upon for us by Davis Polk & Wardwell LLP, New York, New York and by Cahill Gordon & Reindel LLP, New York, New York, for the underwriters. Sullivan & Cromwell LLP also has advised the underwriters with respect to certain matters. Sullivan & Cromwell LLP represents and has in the past represented the Company in certain matters.”

The only two mega banks missing from the past three-year lineup of representation by Clayton are UBS and Wells Fargo. However, Clayton lists under his “Representative Engagements” the IPO of Higher One. That deal came in 2010 and included UBS as an underwriter. The IPO prospectus notes: “The validity of the issuance of the common stock offered hereby will be passed upon for us by Cleary Gottlieb Steen & Hamilton LLP, New York, New York, and for the underwriters by Sullivan & Cromwell LLP, New York, New York.”

In 2009, Clayton represented the underwriters in an IPO for Artio Global Investors. Wachovia Securities, now part of Wells Fargo, was one of the underwriters.

If all of these conflicts weren’t enough, Clayton has been outside counsel to Goldman Sachs for years and is married to a Vice President at Goldman Sachs, Gretchen Clayton, who has worked there for 17 years. Under 18 U.S.C. § 208, the basic criminal conflict of interest statute, an executive branch employee is prohibited from participating personally and substantially in a government matter that will affect his own financial interests, as well as the financial interests of his spouse. This effectively means that the SEC Chair will have to recuse himself permanently from any matter involving Goldman Sachs.

The banks with whom Clayton has conflicts are not Eagle Scouts that require no ongoing oversight. They are, for the most part, serial recidivists who are charged time and again by their regulators for breaking the law. Four of the banks named above pled guilty to criminal felony charges brought by the U.S. Justice Department in 2015. Citicorp, a unit of Citigroup, JPMorgan Chase & Co., and Barclays were charged with the rigging of foreign currency trading. UBS pled guilty to a felony charge related to rigging the interest rate benchmark known as Libor.

The majority of the above banks have also been fined billions of dollars by the Justice Department for issuing illegal mortgage securities that helped to bring on the U.S. financial crisis in 2008. Just last month Deutsche Bank settled its claims for $7.2 billion. In its announcement, the Justice Department noted:

“ ‘This resolution holds Deutsche Bank accountable for its illegal conduct and irresponsible lending practices, which caused serious and lasting damage to investors and the American public,’ said Attorney General Loretta E. Lynch.  ‘Deutsche Bank did not merely mislead investors: it contributed directly to an international financial crisis…

“ ‘This $7.2 billion resolution – the largest of its kind – recognizes the immense breadth of Deutsche Bank’s unlawful scheme by demanding a painful penalty from the bank, along with billions of dollars of relief to the communities and homeowners that continue to struggle because of Wall Street’s greed,’ said Principal Deputy Associate Attorney General Bill Baer. ‘The Department will remain relentless in holding financial institutions accountable for the harm their misconduct inflicted on investors, our economy and American consumers.’ ”

The SEC has no criminal powers. It brings only civil actions against Wall Street lawbreakers. We have to rely on the SEC to refer potential criminal matters to the Justice Department in a forthright manner. Can we really expect Jay Clayton, who will more than likely follow in the footsteps of his predecessor Mary Jo White and return to his law firm when his government stint is over, to aggressively pursue his former clients or the current clients of Sullivan & Cromwell?

Who Would Sell This Money Guzzling Product to Retail Clients? The Biggest Names on Wall Street.

By Pam Martens and Russ Martens: February 21, 2017

Wall Street Street SignThere’s a very old joke on Wall Street that goes like this: “How do you make a small fortune on Wall Street? Answer: Start with a large one.” Unfortunately, millions of Americans have discovered since 2008 that this is no laughing matter.

There are now more than 1,000 articles on this website that address the failure of our Congress and regulators to rein in the serial and frequently, conspiratorial, abuses of Wall Street against the investing public. There are brilliantly written books on the fleecing and insatiable greed of Wall Street; there are movies and documentaries on how Wall Street’s reign of financial terror brought the U.S. to the brink of financial collapse in 2008. And yet, the public continues to play the role of sucker at the big trading houses on Wall Street.

Just last week the Securities and Exchange Commission (SEC) provided a glimpse into more nefarious shenanigans on Wall Street that it has allowed to shrivel the life savings of retail clients for years. The SEC fined Morgan Stanley a meaningless $8 million for selling high risk, non-traditional Exchange Traded Funds (ETFs) to retail clients without adequate disclosures and safeguards, thus violating antifraud provisions of the Investment Advisors Act.

The SEC Order focused on a product called a “single inverse ETF,” which, it turns out, was not the worst kind of non-traditional ETF that Morgan Stanley had sold to its clients. A single inverse ETF is a product that seeks to deliver the opposite performance of a benchmark index like the S&P 500 on a “single” basis meaning a 1-to-1 basis. The single nomenclature is necessary because there are also leveraged ETFs that seek to provide to 2-to-1 or even 3-to-1 performance of the index (inverse or regular). Based on a review of arbitration claims filed against Morgan Stanley and other big banks on Wall Street, leveraged and inverse ETFs have been savaging the life savings of retail investors for years, while the industry’s self regulator, FINRA, has allowed the parties in the arbitration claims to settle quietly. It has also agreed to expunge the charges from the broker’s official record in many of the cases.

The history of these abuses are long and sordid. On May 1, 2012, FINRA fined and sanctioned the following firms for abuses in selling leveraged and inverse ETFs:

  • Wells Fargo – $2.1 million fine and $641,489 in restitution;
  • Citigroup – $2 million fine and $146,431 in restitution;
  • Morgan Stanley – $1.75 million fine and $604,584 in restitution;
  • UBS – $1.5 million fine and $431,488 in restitution.

At the time, FINRA noted the following: “…the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.”

The operative words here are “billions of dollars.” This wasn’t one or two brokers screwing up. “Billions of dollars” of inappropriate investments were being sold to the gullible investing public.

Wall Street is required by law to sell investments that are suitable to its customers. According to FINRA arbitration records, on October 22, 2012 an investor brought an arbitration claim against Morgan Stanley for selling him, among other things, “a Direxion triple leveraged inverse ETF.” The client sought $383,334.64 in compensatory damages, meaning the losses were significant. (The case was settled in secrecy with no settlement amount disclosed to the public.)

Direxion has this to say about its leveraged and inverse ETFs:

“Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments.”

When a product “should not be expected to track the underlying index over periods longer than one day” it is effectively created for a day trader and not a retail client of a big Wall Street bank.

Here’s another big problem for Morgan Stanley. According to the SEC complaint filed last week, in March 2010 Morgan Stanley put compliance policies and procedures in place to deal with non-traditional ETFs. One of those procedures required “that the positions be monitored on an ongoing basis, that the purchase of single-inverse ETFs be a hedge, and that financial advisors complete single-inverse ETF training.”

As with all of the big Wall Street firms that have a retail broker sales force, the brokers are required to take and pass a Series 7 licensing exam before they handle client money. It typically takes months of study to pass this exam and it is frequently compared in difficulty to the CPA exam. If that comprehensive understanding of securities is inadequate to sell these non-traditional ETFs, and Morgan Stanley has mandated that the broker must take extra training to sell these non-traditional ETFs, then how can it blame a retail client who has no Series 7 license or special ETF training for his losses? And yet that is exactly what Morgan Stanley did time and again in the arbitration hearings.

We are not alone in thinking that this is one of the worst products for a retail investor. In 2011, Howard Gold wrote a brilliant analysis on leveraged ETFs for Dow Jones’ MarketWatch. Stating that the products had “blossomed like poison mushrooms,” Gold wrote further:

“Leveraged ETFs purport to give investors two or three times the return of the underlying indexes on which they’re based. Inverse leveraged ETFs let you do the same thing on the short side.

“The problem is, these instruments are designed to be used as daily hedging and trading vehicles, but investors are holding them much longer than a day, which is particularly dicey in today’s volatile markets.

“That’s why I think these are the single worst product for individual investors I’ve seen in two decades of covering markets.

“There are plenty of other ways investors can hedge their portfolios with less risk, like using certain simple options strategies. Successful investing in leveraged funds requires the discipline of a computer-driven hedge fund or a steely eyed professional trader. Using them improperly is all too easy.”

In 2015, the Attorney General of Massachusetts, Maura Healey, also agreed that leveraged ETFs are “unsuitable for retail investors in most cases.” Healey fined LPL Financial $1.8 million over its sale of leveraged ETFs to retail clients. Healey stated at the time:

“The leveraged ETFs at issue are complex investment funds that try to perform at a multiple of the daily returns of an index like the Standard & Poor’s (S&P) 500. For reasons normally not known to casual investors, holding investments in these funds for long periods of time can produce unexpected outcomes. Even an investor who bets correctly on the direction of the index can lose money when holding a leveraged ETF…LPL also failed to supervise its financial advisors who caused clients to hold these investments for extended periods of time, and did not consistently adhere to its policy of imposing fines on financial advisors who exceeded concentration limits.”

Given this background, one can see why Wall Street is fighting so hard to keep the “suitability standard” that it can game so easily in its industry-run private justice system of mandatory arbitration and gut the Labor Department’s new Fiduciary Rule that was set to take effect in April. The Fiduciary Rule, hated by the big banks on Wall Street, would force brokers to put the interests of clients above the interests of the firm. Even that rule doesn’t go nearly far enough. It covers just retirement accounts – not all customer accounts.

Why Did SEC Acting Chair Take an Ax to Enforcement Unit’s Subpoena Power?

By James A. Kidney: February 20, 2017

The Trump administration assault on investor protections put in place following the 2007-08 financial crisis continues apace.  The war on investors takes place in arenas both large and small.

The large issues get the attention, of course.  These include repeal of much of the Dodd-Frank law and regulations of the biggest Wall Street banks, limiting or eliminating the Consumer Financial Protection Bureau, which actually helps individual customers abused by giant financial institutions, and preventing adoption of fiduciary standards for financial professionals recommending securities that line their pockets but are risky to customers.

But Washington is not merely a swamp of self-interest with large, highly visible alligators munching on small fish to satisfy their insatiable greed.  Another apt metaphor is a field of giant weeds — weeds of rules, processes and procedures that can be manipulated for the interests of the Fat Cats.

These weeds are everywhere in Washington. Whether your particular self-interest lies in financial dealings regulated by the Federal Reserve and the Securities and Exchange Commission, looser regulations at the Environmental Protection Agency, exercising greater control of your employees by removing Labor Department regulations, or a host of other rules, processes and procedures, powerful interests with highly paid lawyers can push back easily against the much-maligned bureaucracy every day.

This is especially the case when there is one-party government and the president appoints those at the center of the oligarchy to head government agencies, as is true today.

What goes on hidden by these weeds is not usually paid attention to by either the press or the public.

Case in point:  Although the SEC currently has three vacancies on its five-person commission, the designated temporary chairman, Republican Michael S. Piwowar, has quietly restricted the authority of the SEC’s civil servants in the Enforcement Division to issue subpoenas for witnesses and documents when investigating whether securities laws have been violated.  A small number of news articles suggest this unwarranted reversal of an eight-year-old policy delegating authority to the supervisors in the Enforcement Division may remove Division discretion in its use of civil investigative powers completely.

There is zero evidence that this power has been abused.  Rather, reinstating a requirement that all investigations be approved in advance by the commissioners before a subpoena can be issued is simply an opportunity to allow the Wall Street lawyers (some of whom generally end up as chairman of the SEC and head of the Division of Enforcement, then return to the fold) to intervene to slow or kill an investigation deemed worthy by those who actually conduct the investigations and have long experience at the SEC.

A little background is in order.

Until 2009, SEC rules required that the Commissioners themselves vote to approve issuance of a “Formal Order.” Approval permitted the Commission staff to employ the power of a subpoena to obtain witness testimony and documents.  Absent a formal order, the Division of Enforcement staff only could open an “informal investigation” to seek voluntary compliance with requests for witnesses to appear and documents to be produced.  Obtaining a formal order to issue subpoenas required circulating a memo to all commissioners, meeting with some or all of them, and, sometimes, appearing in a closed commission meeting to defend the request.  Doing so was time consuming and clearly an opportunity for lobbying by the investigation target.

As in any bureaucracy with built-in routines, many formal orders were obtained without controversy and in relatively short order.  For that very reason, authority was finally delegated.

Voluntary production was usually not a problem when the SEC went after minor league fraudsters.  They are often scared to death of the cost of hiring a lawyer to run interference for them in a run-of-the-mill case of insider trading.  The cost of defending an investigation for the average guy or gal can quickly exceed the likely penalty imposed if insider trading profits were small.  (As an aside, the Division of Enforcement spends a lot of time on such small stuff.) In my experience, many small insider traders came clean without a formal order or subpoena because they wanted to put the personal disruption behind them quickly.

But the bigger cases, especially those involving a large institution such as a broker-dealer firm or a public company, could be delayed for months by “voluntary production.”  Pricey lawyers can stretch out matters without actually telling the SEC staff that no material documents or witnesses will be forthcoming.   Lawyers know how to “voluntarily” bury the staff in irrelevant documents and produce witnesses low on the totem pole who can honestly testify they know nothing about improprieties arranged by those higher up in the organization.

The power of a subpoena, enforceable by going to court and publicly exposing that an investigation is in process, is a substantial lever for the Division of Enforcement.  Subpoenas enable investigators to more quickly get to the heart of a matter and assess whether a rule or law has been violated.  That is why, beginning in 2009, the SEC delegated authority to issue investigative subpoenas to supervisory staff in the Enforcement Division.

In announcing a new SEC rule delegating subpoena power to the Division of Enforcement, then Division Director Robert Khuzami said, “This means that if defense counsel resist the voluntary production of documents or witnesses, or fail to be complete and timely in responses or engage in dilatory tactics, there will very likely be a subpoena on your desk the next morning.”

The SEC release announcing the change of rules (originally for one year, but later made permanent) stated that “this delegation will expedite the investigative process by reducing the time and paperwork previously associated with obtaining Commission authorization prior to issuing subpoenas.”

At least two sources (here and here) report that Piwowar, who is an economist, not a lawyer, and worked for very conservative Republicans on the Senate Banking Committee before arriving at the Commission, reportedly already has restricted authority to issue a subpoena to the Division director alone and is considering eliminating the authority altogether.

The question, which Piwowar and the SEC have thus far declined to answer, is why retract the delegation?

There is no evidence that the Division of Enforcement has gone mad with its authority.  In fact, the Division of Enforcement under Khuzami is mostly known for having applied its investigative powers very sparingly to the big Wall Street banks, as evidenced by the few cases brought, low sums in settlements relative to much larger settlements by the Department of Justice, and the near total absence of individuals named in civil SEC complaints arising from the financial collapse.

Nor did the Commission under Chairman Mary Jo White and Khuzami’s successor, Andrew Ceresney, run amuck with investigations.  To the contrary, White preached the notion of “broken windows” during her run.  She claimed that if the SEC went after small violators, the big financial institutions would be fearful of the “cop on the street.”  There is no evidence that Fat Cats looking on the Street from the 60th floor were especially concerned about those souls on the sidewalk grabbing the attention and resources of their regulator.

If there is evidence of large, unwarranted investigations in which the Division of Enforcement has used its delegated powers irresponsibly, Piwowar and the SEC should let the public know about them if they want to change the rules.

If there is no such evidence, the only reason for reversing the rule is the old one:  Let’s give the lawyers for the biggest potential defendants a way to continue exhausting Commission time and effort on meaningless “voluntary” production of evidence.  If, despite the delays, an exhausted staff pushes for Commission approval to use tougher enforcement tools, the lawyers and their clients can get an audience with the commissioners themselves to push their defense. The commissioners might then tell the SEC staff to back off or to restrict their investigation.

This would allow unscrupulous financiers to pursue their real work — fleecing the public.

The weeds are tall in Washington. Just know that the harmful insects are alive and working hard.


James A. Kidney, Former SEC Trial AttorneyJames Kidney retired as trial counsel in the Division of Enforcement of the Securities and Exchange Commission in 2014 after a 25 year career.  You can read more of his work at

Republicans Need to Have That Nixon Conversation With Trump — Now

By Pam Martens and Russ Martens: February 17, 2017

President Donald Trump Berates the Media in a Hastily Called Press Conference on February 16, 2017

President Donald Trump Berates the Media in a Hastily Called Press Conference on February 16, 2017

It was Tuesday, August 6, 1974. New evidence had surfaced showing that the President of the United States, Richard Nixon, had lied to the nation about his knowledge of the Watergate burglary and attempted coverup. Senator Barry Goldwater blurted out in frustration at a Republican luncheon: “There are only so many lies you can take, and now there has been one too many. Nixon should get his ass out of the White House — today!”

The next day, Goldwater led a delegation of Republican leaders to the White House. They told Nixon he had lost the confidence of his party; he did not have the votes in the House to ward off impeachment or the votes in the Senate to avoid conviction. The very next day, Thursday, August 8, 1974, Nixon addressed the nation and announced his resignation as President.

One could see August 2017 playing out in a similar vein if Republicans in our current Congress do not quickly find the mettle to meet with President Trump and demand that he starts behaving in a manner befitting the Oval Office.

Yesterday’s hastily called press conference by Trump and its tortuous 80 minutes of “alternative facts,” berating the media, and painfully embarrassing bouts of unhinged braggadocio, should have been the last straw for Republicans in Congress who love their country more than they fear becoming the target of Trump’s next Twitter rant.

Robyn Urback of the Canadian Broadcasting Corporation summed up the disaster as “unpresidential,” noting the following low points of the press conference:

“Don’t get me wrong; from a safeguarding-democracy perspective it was horrific. Trump dismissed legitimate questions about Russian influence over his now-former national security adviser as ‘fake news’; told reporters he disagrees with ‘everyone in this country,’ all of whom apparently want him to torpedo a Russian spy ship sitting 30 miles off the Connecticut coast; deflected questions about his team’s connections to Russia by attacking no-longer-rival Hillary Clinton; and most alarmingly, declared that he recently learned from a briefing that a ‘nuclear holocaust would be like no other.’

“Sleep well tonight, everyone.”

According to the transcript of the press conference provided by CNBC, Trump’s remarks about blowing up the Russian spy ship went like this:

“I didn’t do anything for Russia. I’ve done nothing for Russia. Hillary Clinton gave them 20 percent of the uranium. Hillary Clinton did a reset, remember, with the stupid plastic button made us look like a bunch of jerks. Here take a look. He looked at her, like, what the hell is she doing, with that cheap plastic button? Hillary Clinton — that was a reset. Remember it said reset. Now, if I do that, oh, I’m a bad guy, but if we could get along with Russia, that’s a positive thing. We have a very talented man, Rex Tillerson, who is going to be meeting with them shortly and I told them, I said, I know politically it’s probably not good for me. Hey, the greatest thing I could do is shoot that ship that’s 30 miles offshore right out of the water. Everyone in this country is going to say, oh, it’s so great. That’s not great. That’s not great. I would love to be able to get along with Russia. Now, you had a lot of presidents that have not taken that tack.”

Presenting the entire people of the United States as a war-mongering pack of crazies who would jump to their feet and shout “oh, it’s so great,” if Trump bombed a Russian ship traveling in international waters, is unpresidential. Period.

The President’s remarks on nuclear holocaust were as follows:

“We’re a very powerful nuclear country and so are they [Russia]. I’ve been briefed. I can tell you one thing about a briefing, that we’re allowed to say because anybody that ever read the most basic book can say it, nuclear holocaust would be like no other. They’re a very powerful nuclear country, and so are we. If we have a good relationship with Russia — believe me — that’s a good thing, not a bad thing.”

Trump’s interest in an amicable relationship with Russia is, indeed, a good thing. A newly installed President uttering the words “nuclear holocaust” in a rambling, frequently unhinged press briefing is a bad thing. It frightens the American people and sucks confidence out of business leaders.

Trump also lapsed into more of his alternative facts about his electoral college win to buttress his mantra that he has a huge mandate from the American people to carry out his agenda. Trump stated at the press conference: “We got 306 [electoral college votes] because people came out and voted like they’ve never seen before so that’s the way it goes. I guess it was the biggest electoral college win since Ronald Reagan.”

PolitiFact quickly shot that down with the following reality-based facts:

“Trump received a smaller share of the Electoral College votes (56.88 percent) than former presidents George H. W. Bush (79.18 percent), Bill Clinton (68.77 percent in 1992, and 70.45 percent in 1996) and Barack Obama (67.84 percent in 2008 and 61.71 percent in 2012).

“So that’s five elections since Reagan and in which the winner got a larger percentage of the Electoral College votes than Trump.”

Another cringe-worthy moment came when a reporter asked about an upsurge in anti-Semitic threats in the United States. Trump’s response was truly bizarre:

Trump: “It’s not a fair question. Sit down. I understand the rest of your question. So here’s the story, folks. Number one, I’m the least anti-Semitic person you’ve seen in your entire life. Number two, racism, the least racist person… Quiet, quiet, he lied about getting up asking a straight, simple question, so, you know, welcome to the world of the media.”

Senator John McCain, who has already shown courage in publicly chiding Trump, needs to muster the guts of Senator Barry Goldwater on August 7, 1974 and take a delegation of Republican leaders to meet with Trump. At that meeting, in the most strident of terms, the Republican leadership needs to explain to Trump that he must cast his narcissistic tendencies aside, behave in a Presidential manner, verify his facts before he presents them to the American people, or step aside for the good of the country.

Mary Jo White Seriously Misled the U.S. Senate to Become SEC Chair

By Pam Martens and Russ Martens: February 16, 2017 

President Obama Nominating Mary Jo White for Chair of the Securities and Exchange Commission, January 24, 2013

President Obama Nominating Mary Jo White for Chair of the Securities and Exchange Commission,
January 24, 2013

Less than two weeks after Mary Jo White was nominated to become Chair of the Securities and Exchange Commission by President Barack Obama on January 24, 2013, White filed an ethics disclosure letter advising that she would “retire” from her position representing Wall Street banks at the law firm Debevoise & Plimpton. White wrote on this subject in great detail, stating:

“Upon confirmation, I will retire from the partnership of Debevoise & Plimpton, LLP. Following my retirement, the law firm will not owe me an outstanding partnership share for either 2012 or any part of 2013. As a retired partner, I will be entitled to the use of secretarial services, office space and a blackberry at the firm’s expense. For the duration of my appointment, I will forgo these three benefits, though I may pay for some secretarial services at my own expense. Pursuant to the Debevoise & Plimpton, LLP Partners Retirement Program, I will receive monthly lifetime retirement payments from the firm commencing the month after my retirement. However, within 60 days of my appointment, the firm will make a lump sum payment, in lieu of making monthly retirement payments for the next four years. Within 60 days of my appointment, I also will receive payouts of my interest in the Debevoise & Plimpton LLP Cash Balance Retirement plan and my capital account.”

Yesterday it was widely reported in the business press that Mary Jo White is returning to her former law firm as a partner representing clients who face government investigations. She will also fill the newly created position of Senior Chair of the law firm.

This news is highly significant because it would appear that the U.S. Senate was seriously misled by White’s ethics letter in its deliberations to confirm her as the top cop of Wall Street.

The news is also highly significant because it will mark the fourth time in four decades that Mary Jo White has spun through the revolving doors of Debevoise & Plimpton (where she represented serial law violators) to government service (prosecuting serial law violators). The timeline is as follows:

2002 to 2013: White is a Debevoise & Plimpton partner, representing some of Wall Street’s serially charged banks: JPMorgan Chase, UBS, Bank of America, Morgan Stanley;

1993 to 2002: White is U.S. Attorney for the Southern District of New York (where Wall Street is located);

1990 to 1993: White serves as First Assistant United States Attorney and Acting United States Attorney in the Eastern District of New York;

1983 to 1990: White is litigation partner at Debevoise & Plimpton, where she focuses on white collar defense work, SEC enforcement matters and other corporate work;

1978 to 1981: White works as Assistant United States Attorney in the Southern District of New York, where she became Chief Appellate Attorney of the Criminal Division;

1976 to 1978: White is Associate at Debevoise & Plimpton.

White’s representation in 2013 that she was retiring proved very financially beneficial to her. Her Partners Retirement Program entitled her to receive $42,500 per month or $510,000 per year. But as White writes in her ethics letter, (ostensibly as a gesture toward removing the conflict of receiving ongoing monies from her old law firm), Debevoise was going to give her a “lump sum” for four years of payments, or more than $2 million. The Partner’s plan was unfunded, meaning the law firm had to stay in business to make those payments. Getting a cool $2 million out of harm’s way is a smart financial move. On top of that, White indicated in her ethics letter that she was cashing out of the “Debevoise & Plimpton LLP Cash Balance Retirement plan and my capital account.”

Not only was Mary Jo White a deeply conflicted candidate for SEC Chair but her husband, John White, also represented the big Wall Street banks as a partner at Cravath, Swaine & Moore LLP. Under Federal ethics rules, the conflicts of the spouse become the conflicts of the government employee. None of this persuaded members of the U.S. Senate Banking Committee (many of whom are richly financed in their political campaigns by Wall Street) to reject Mary Jo White’s nomination. The lone dissenter in the Committee’s 21-1 vote was Senator Sherrod Brown, who stated:

“At a time when our Attorney General says that the biggest Wall Street banks are in many ways above the law and the SEC is blocking shareholders’ efforts to break up the banks that they own, we need regulators who will fight every day for taxpayers, Main Street investors, and retirees. But too often we have seen public servants who settle for the status quo, instead of demanding accountability.

“I don’t question Mary Jo White’s integrity or skill as an attorney. But I do question Washington’s long-held bias towards Wall Street and its inability to find watchdogs outside of the very industry that they are meant to police. Mary Jo White will have plenty of opportunities to prove me wrong. I hope she will.”

Mary Jo White did not prove Senator Brown wrong. During her tenure, the long-awaited Consolidated Audit Trail (CAT) failed to get up and running – allowing all of those high frequency traders and Dark Pools on Wall Street to continue to loot the investing public with impunity. White also allowed the big banks to continue their jaded practice of engaging in capital relief trades as her former law firm gushed that the deals could be “effective use of balance sheet capital as banking organizations adjust to the post-crisis regulatory paradigm.”

During White’s tenure, a 25-year veteran trial lawyer at the SEC, James Kidney, retired in March 2014. At his retirement party, he delivered a scathing critique of SEC management. Kidney said that “On the rare occasions when Enforcement does go to the penthouse, good manners are paramount. Tough enforcement – risky enforcement – is subject to extensive negotiation and weakening.” White brought along her Enforcement Chief at the SEC, Andrew Ceresney, from Debevoise & Plimpton. He also returned to the law firm.

By June of 2015, White’s management of the SEC was so problematic that Senator Elizabeth Warren sent her a harsh 13-page critique of her performance. Warren called out White’s failure to finalize rules requiring disclosure of the ratio of CEO pay to the median worker; her continuing use of waivers for companies that violate securities law; the SEC’s continued practice of settling the vast majority of cases without requiring meaningful admissions of guilt; and White’s repeated recusals from investigations because of her prior employment and her husband’s current employment at law firms representing Wall Street.

In February 2015, the New York Times reported that the conflicts of White and her husband had resulted in her recusing herself “from more than four dozen enforcement investigations.” Instead of an SEC Chair, that sounds like a part-time worker.

Given this demoralizing experience with the gold-plated Washington-Wall Street revolving door, one would have expected that President Trump, the man promising to drain the swamp in Washington, to have come up with a better plan for stewardship of the SEC. Instead, Trump’s doubling down. His nominee for SEC Chair is Jay Clayton, a law partner at Sullivan & Cromwell, which has represented Goldman Sachs since the late 1800s. On top of that, Clayton’s wife is a Vice President of (wait for it) Goldman Sachs.

Until there is meaningful legislative reform of political campaign financing and revolving door appointments, Americans will continue to be relegated to the status of dumb tourist in their own country. (See related articles below.)

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