George Melloan’s Love-Hate Relationship With Nomi Prins’ New Book

By Pam Martens: April 16, 2014

As far as we can tell from his online bio, George Melloan has never worked a day inside a Wall Street firm – at least not in the past half century since that time has been spent writing or editing for the Wall Street Journal. But that small detail does not in any way inhibit Melloan from telling those of us who had long careers inside the belly of the beast how we should revise our thinking about what we saw and heard with our own eyes and ears.

Michael Lewis, Yves Smith, Frank Partnoy, Gretchen Morgenson, Greg Smith, Nomi Prins (all with a strong foundational basis for their writings from having worked on Wall Street) apparently need to be set straight by Melloan’s outsider views.

Nomi Prins has just came under the sharp pen of Melloan in a  Wall Street Journal review of her new book, “All the Presidents’ Bankers: The Hidden Alliances that Drive American Power.” As we have previously written, this book is so timely and important to the national discourse that even Melloan has a tough time hating it, writing that Prins “spins an enormous amount of research into a coherent, readable narrative. Even her frequent kvetches about the lifestyles of rich and famous bankers are entertaining.”

But then there’s that word “spins” in the above sentence. That’s what Melloan has been forced to convince himself of — that we Wall Street expats are spinning our facts and distorting his outsider’s narrative.

Melloan, who characterizes everyone who does not see things his way as a “populist,” says that Prins adheres to “populist tradition” and treats history “as a long-running conspiracy of powerful money lenders against ordinary folks like herself.”

Prins, like any ethical reporter, goes where her facts lead (and she backs up those facts with 69 pages of footnotes). If Prins found “a long-running conspiracy of powerful money lenders” it’s because every serious Senate or House investigation in the past century has found a Wall Street conspiracy.

Transcripts of the Congressional hearings of 1912 and 1913, when Arsene Pujo of the House Banking and Currency Committee investigated the “money trust,” found that a small group of Wall Street bankers had conspired to control many U.S. industries through interlocking directorates and other devious means.

The Pecora Senate hearings from 1932 to 1934, where counsel Ferdinand Pecora documented so many Wall Street conspiracies against the public interest that it outraged the entire nation and led to the critically important passage of the Glass-Steagall Act, separating insured depository banks from the speculative casinos on Wall Street. The repeal of that legislation in 1999, in the minds of many scholars who have carefully studied the issue, led to the financial collapse in 2008.

Today, there is overwhelming proof that Wall Street banks have been colluding with foreign global banks to rig everything from the Libor interest rate to physical commodity prices to foreign currency exchange. Call it a cartel or collusion or a conspiracy – the public is still the loser.

Melloan tries to breathe some life into that old failed notion that it was government-sponsored enterprises that caused the 2008 crash, not the heroic souls in the corner offices of Wall Street engaged in doing God’s work. He writes: “Mysteriously, Ms. Prins has almost nothing to say about Fannie and Freddie, even though they were the most political of banks and played the central role in creating the toxic securities that caused the 2008 market crash.” (The word “mysteriously” now combines with “spins” to subliminally shift the conspiracy to the doorstep of author Prins and away from the doorstep of Wall Street.)

It is well documented fact that Fannie and Freddie did not play “the central role” in the crash of 2008. The seminal work on the crash, the 662-page report from the Financial Crisis Inquiry Commission explained:

“The Commission also probed the performance of the loans purchased or guaranteed by Fannie and Freddie. While they generated substantial losses, delinquency rates for GSE [government-sponsored enterprise] loans were substantially lower than loans securitized by other financial firms. For example, data compiled by the Commission for a subset of borrowers with similar credit scores—scores below 660—show that by the end of 2008, GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages: 6.2% versus 28.3%.”

The report further notes that “By 2005 and 2006, Wall Street was securitizing one-third more loans than Fannie and Freddie. In just two years, private-label mortgage-backed securities had grown more than 30%, reaching $1.15 trillion in 2006; 71% were subprime or Alt-A.” By 2006, Fannie Mae and Freddie Mac’s market share had shrank to 37 percent.

And up pops yet another well documented conspiracy from a man on the inside. According to the report, Richard Bowen was a veteran banker in the consumer lending group at Citigroup – the Wall Street bank that received the largest bailout assistance from the government. According to the report, Bowen “would go on to oversee loan quality for over $90 billion a year of mortgages underwritten and purchased by CitiFinancial. These mortgages were sold to Fannie Mae, Freddie Mac, and others. In June 2006, Bowen discovered that as much as 60 % of the loans that Citi was buying were defective. They did not meet Citigroup’s loan guidelines and thus endangered the company… Bowen told the Commission that he tried to alert top managers at the firm by ‘email, weekly reports, committee presentations, and discussions’; but though they expressed concern, it ‘never translated into any action.’ ”

Back in August, Melloan was tilting at windmills again with a rant in the Wall Street Journal about overly zealous regulators who are  “encouraged by the Obama administration” to blame the nation’s economic ills “on the rich, Wall Street, moneybags bankers, deal makers like Mitt Romney or almost anyone else who still wears a suit to work.”

Melloan wrote:

“Have bankers all gone rogue? Populists would have you think so, and apparently a sizable majority of Americans hold that view as well, judging from opinion polls. But this is not plausible. Bankers are more likely to exercise extreme discretion in an era when they are being constantly reviled by leftist politicians, writers and placard-carriers in the streets.”

“Extreme discretion”? Does Melloan never read the investigative reporting in the very newspaper in which he writes his opinion pieces? Just two years ago JPMorgan was caught red-handed gambling with hundreds of billions of bank deposits in exotic derivatives in London and losing at least $6.2 billion of those deposits on soured bets. For the first time in history, a major Wall Street bank (JPMorgan again) has been charged with two felony counts for aiding and abetting the Madoff fraud and received a deferred prosecution agreement.

Money laundering charges are swirling again – for the umpteenth time – around Citigroup. Criminal investigations are underway for a bank cartel rigging foreign exchange rates. And Michael Lewis has just published an insider’s account in his book, “Flash Boys,” featured on 60 Minutes two weeks ago, documenting how today’s stock market is outrageously rigged against the little guy.

There’s really only one conspiracy that Wall Street didn’t adequately perfect. It let some of us depart the corrupted corridors of power without signing non-disparagement contracts. But rest assured, it is rapidly trying to plug the hole in that dike.

Jamie Dimon’s Top Women and Their Missing Licenses

By Pam Martens: April 15, 2014

Ina Drew, Former Head of the Chief Investment Office at JPMorgan, Testifying at the March 15, 2013 Senate Hearing on the London Whale Trading Losses

In the past two years, two of the most senior, long-tenured and talented women at JPMorgan, Ina Drew and Blythe Masters, have bid adieu to the bank and its CEO, Jamie Dimon, under less than ideal circumstances. Questions are now emerging as to whether Dimon required that these senior supervisors hold proper industry licenses for the work they performed for the bank.

Ina Drew, the former head of the Chief Investment Office, who supervised the traders responsible for losing $6.2 billion of the bank’s deposits in exotic derivatives trading in London, resigned from the firm over that firestorm on May 14, 2012. Drew had been with JPMorgan and its predecessor banks for 30 years.

In Drew’s testimony before the U.S. Senate’s Permanent Subcommittee on Investigations on March 15, 2013, Drew told the hearing panel that beginning in 1999, she “oversaw the management of the Company’s core investment securities portfolio, the foreign-exchange hedging portfolio, the mortgage servicing rights (MSR) hedging book, and a series of other investment and hedging portfolios based in London, Hong Kong and other foreign cities.”

Drew told the Senate Committee that the investment securities portfolio exceeded $500 billion during 2008 and 2009 and as of the first quarter of 2012 was $350 billion. But during the 13 years that Drew supervised massive amounts of securities trading, she had neither a securities license nor a principal’s license to supervise others who were trading securities.

We asked numerous Wall Street regulators to explain how this is possible at today’s too-big-to-fail banks. One regulator who spoke on background only told us that Drew could not hold a securities license because she worked for the bank not its broker-dealer. Only employees of broker-dealers are allowed to hold securities licenses. But apparently, not having a securities license does not stop one from supervising a $500 billion portfolio of securities that are, most assuredly, traded by someone.

It is an uncontested reality on Wall Street that if you are going to supervise persons holding a securities license, you must also hold the appropriate securities licenses yourself. Drew, sans license, was supervising traders in London who were registered with the Financial Services Authority (now Financial Conduct Authority). Included among those traders was the now infamous, Bruno Michel Iksil, the so-called London Whale.

Blythe Masters, Head of Global Commodities at JPMorgan

The situation with Blythe Masters is even more puzzling. Masters, who has worked at the bank for 27 years and announced her resignation this month, was named to the post of head of Global Commodities in 2007 and has held that post ever since. Masters has never held a Series 3 license to trade commodities nor a Series 30 to supervise commodity traders according to industry records.

Even more puzzling, according to Financial Industry Regulatory Authority records, Masters is employed at JPMorgan Securities, LLC, a broker dealer – not the bank — and holds a full roster of securities licenses – but no commodity licenses.

According to the firm’s web site: “Blythe Masters is J.P. Morgan’s head of Global Commodities, responsible for the global team that provides integrated physical and financial commodity solutions products for clients. The business provides market-making, structuring, risk management, financing and warehousing capabilities across a full spectrum of commodity asset classes.”

Despite the reference to a “full spectrum” of commodity asset classes, the National Futures Association shows that Masters was approved only as a principal for JPMorgan Ventures Energy Corporation on February 20, 2013. Commodities trading encompasses far more than just energy, e.g., metals, agricultural products, etc.

Last July, the Federal Energy Regulatory Commission fined JPMorgan $410 million for manipulating power markets in California and the midwest. Masters oversaw the division that was charged with the manipulation.

Today, the Wall Street Journal has a front page article revealing its findings that Wall Street employees who repeatedly failed the required exam to sell securities “have on average worse disciplinary records.”

What about those who never take the licensing exams at all?

Insiders Tell All: Both the Stock Market and the SEC Are Rigged

By Pam Martens: April 14, 2014

President Obama Nominates Mary Jo White for Chair of the Securities and Exchange Commission

Since bestselling author Michael Lewis appeared on 60 Minutes on March 30 to promote his new book, “Flash Boys,” and explained how the U.S. stock market is rigged; and Brad Katsuyama, the head of IEX, an electronic trading platform who plays a central role in the Lewis book, did the same on CNBC a few days later, the debate has gone viral.

But Lewis and Katsuyama were not the first to blow the whistle on rigged U.S. stock markets. Sal Arnuk and Joseph Saluzzi, Wall Street insiders and co-founders of Themis Trading LLC literally wrote the book on “Broken Markets” in 2012 and have been exposing details of the rigging  on their blog ever since.

Wall Street Journal reporter, Scott Patterson, mapped out the exotic and corrupt order types permitted by the stock exchanges to fleece the little guy in his 2012 book, “Dark Pools,” which follows the trading career of Haim Bodek, who has set up his own web site to blow the whistle on just how badly the stock market is rigged.

Following all the media hoopla, the FBI has recently announced that it has opened an investigation into the allegations. But under the Securities Exchange Act of 1934, the FBI is not in charge of rigged stock exchanges — the Securities and Exchange Commission is. But according to insiders, the SEC has stood down in much the same fashion that it ignored warnings about Bernard Madoff from whistleblower Harry Markopolos for years. The explanation for the SEC’s inaction, many traders feel, is that the SEC itself is rigged against Main Street in favor of big Wall Street firms. That view has found support among the SEC’s own insiders.

Since 2006, four attorneys at the Securities and Exchange Commission have put their reputations and family interests on the line by blowing the whistle on corrupt cronyism that is now so ingrained at the Nation’s regulator of stock exchanges and securities markets that it’s become part of the SEC’s business model.

Last week, James Kidney, an SEC trial attorney who retired at the end of March, set off pandemonium inside the SEC by giving an interview with Bloomberg News and releasing the full text of his March 27 retirement speech in which he castigated the SEC’s upper management for policing “the broken windows on the street level” while ignoring the “penthouse floors.” Kidney said in his speech 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.”

News of the speech was quickly amplified by the New York Times and multiple business press outlets.

Kidney blamed the demoralization at the agency on its revolving door to Wall Street as the best and brightest “see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or corporate job punched.” (Retirement Remarks of SEC Attorney, James Kidney (Full Text).)

Kidney’s interview with Bloomberg came one day after American Lawyer published excerpts from 2,000 pages of documents it had obtained from the SEC under a Freedom of Information Act (FOIA) request, which showed that Kidney had pushed the SEC to investigate up the chain of command in the Goldman Sachs Abacus 2007-AC1 investment scam. Goldman Sachs knew that Abacus was designed to fail and allowed a hedge fund, John Paulson & Co., to bet against it while recommending it as a good investment to its own clients. The SEC only pursued a mid-level employee, Fabrice Tourre, while settling with Goldman Sachs for $550 million.

John Paulson was never charged officially by the government but he was named in the Securities and Exchange Commission’s outline of the crime. New York University, which has followed closely in the footsteps of the SEC’s brand of crony capitalism, allows Paulson to serve as a Trustee and has named the first floor lobby of Tisch Hall and the Stern School of Business auditorium in Paulson’s honor.

In the documents obtained by American Lawyer, Kidney is quoted as stating that “This was not a case where there was only one low-level vice president involved.”

At the end of last week, Kidney expanded further with NPR on the demoralization of public servants who are genuinely interested in doing an honest job, stating: “Washington has become — and I think everybody knows it — a bathtub full of cash. As long as you just go in the bathtub you’re going to come out with cash stuck on you – if you’re at least a certain, have certain jobs and have certain roles. And that’s why the revolving door is such a problem. It’s cultural, it’s the culture of Washington, it’s the culture of Wall Street and it hollows out the civil service…”

On June 28, 2006, Gary Aguirre, a former SEC attorney, testified before the U.S. Senate on the Judiciary. During his final days at the SEC, Aguirre had pushed to serve a subpoena on John Mack, the powerful former official of Morgan Stanley, to take testimony about his potential involvement in insider trading. Mack was protected; Aguirre was fired via a phone call while on vacation — just three days after contacting the Office of Special Counsel to discuss the filing of a complaint about the SEC’s protection of Mack.

Aguirre told the Senate hearing that the SEC had thrown a “roadblock” in his investigation because the suspected insider trader had “powerful political connections.” Aguirre returned on December 5, 2006 to testify further before the Senate Judiciary Committee, providing the following additional insights:

“My testimony today will focus on a favor. Senior SEC officials gave it. Morgan Stanley and its CEO, John Mack (Mack), accepted it.

“The favor had positive effects for some. It cleared the way for Mack’s return on June 30, 2005, as Morgan Stanley’s CEO. Without the favor, Mack would have faced the risk of an SEC lawsuit for insider trading over the next year…

“Few principles are more deeply engrained in Title 17 of the Code of Federal Regulations, which regulates the SEC’s operation, than the mandates obligating the SEC to handle all of its affairs, including the enforcement of the securities laws, with impartiality. No conduct would stray farther from those mandates than a double set of laws: one for the politically well connected and another for everyone else.”

Next in line was Darcy Flynn, also an attorney at the SEC. In 2011, Flynn told Congressional investigators and the SEC Inspector General that for at least 18 years, the SEC had been shredding documents and emails related to its investigations — documents that it was required under law to keep. Flynn explained to investigators that by purging these files, it impaired the SEC’s ability to see the connections between related frauds – a big benefit for the mega banks on Wall Street known for serial and elaborate frauds.

Up next was an anonymous whistleblower from inside the bowels of the SEC. On September 27, 2011, the SEC Inspector General released a heavily redacted report suggesting that SEC attorneys have come to understand that whistleblowing can be hazardous to their career so they now operate incognito.

The case involved an employee at the SEC who had sent an anonymous letter to the Inspector General, blowing the whistle on the SEC Director of Enforcement, Robert Khuzami, (now handsomely compensated as a partner at the law firm, Kirkland & Ellis). The anonymous whistleblower was complaining about Khuzami’s handling of charges that Citigroup executives had intentionally misled public investors about its exposure to subprime mortgages, understating the amount by $37 billion in the fall of 2007. According to the Inspector General’s report, the whistleblower alleged that:

 “…just before the staff’s recommendation was presented to the Commission, Enforcement Director Robert Khuzami had a ‘secret conversation’ with his ‘good friend’ and former colleague, a prominent defense counsel representing Citigroup, during which Khuzami agreed to drop the contested fraud charges against the second individual. The complaint further alleged that the Enforcement staff were ‘forced to drop the fraud charges that were part of the settlement with the other individual,’ and that both individuals were also represented by Khuzami’s friends and former colleagues, creating the appearance that Khuzami’s decision was ‘made as a special favor to them and perhaps to protect a Wall Street firm for political reasons.’

“The complaint also alleged that Khuzami’s decision had the effect of protecting Citigroup from private litigation, and that by not telling the staff about his secret conversation, Khuzami ‘directly violated recommendations by Inspector General Kotz in previous reports about how such special access and preferential treatment can cause serious appearance problems concerning fairness and integrity of decisions that are made by the Enforcement Division.’ ”

The Inspector General’s report effectively whitewashed the claims against Khuzami, throwing more demoralization at the veteran attorneys in the SEC.

Any hope that President Obama would demonstrate a breath of fresh air by making independent appointments to the SEC and in cleaning up Wall Street were dashed to shreds with the appointment of Mary Jo White as SEC Chair early last year. White has now spun through the revolving door four times in 36 years, always returning to her corporate law firm, Debevoise & Plimpton. Between herself and her husband, John W. White, of corporate law firm Cravath, Swaine & Moore LLP, they or their law firms have represented every major Wall Street mega bank. Under Federal law, the conflicts of the SEC Chair’s spouse become her own conflicts.

Adding further outrage to the situation, Mary Jo White quickly named her close associate at Debevoise & Plimpton, Andrew Ceresney, to be the Co-Director of the SEC’s Division of Enforcement – the unit that decides who gets prosecuted and who gets an unfettered license to steal.

Ceresney is now the sole Director of Enforcement as his co-director, George Canellos, has left to rejoin the (wait for it) big Wall Street law firm, Milbank, Tweed, Hadley & McCloy, as a partner and head of litigation.

Just one year prior to moving into the top cop slot at the SEC, Ceresney had pulled off a major coup for Wall Street firms JPMorgan Chase, Citigroup, Wells Fargo, Bank of America and Ally. Ceresney was directly employed as counsel to JPMorgan Chase, but he also played a key role in the negotiations between the U.S. Justice Department, 49 state attorneys general and an army of Federal regulators to settle charges of mortgage, foreclosure and servicing fraud – all melded into the National Mortgage Settlement – a deeply flawed deal for defrauded homeowners.

A nonpartisan Congressional watchdog has also weighed in on the abysmal personnel practices at the SEC. On July 18 of last year, the Government Accountability Office (GAO) issued a stunning report on the declining morale among SEC employees. The report found that the SEC ranked 19 out of 22 similarly sized Federal agencies in overall satisfaction and commitment.

The GAO said its findings were consistent with the Partnership for Public Service’s analysis of the Office of Personnel Management’s 2012 Employee Viewpoint Survey. That analysis found that “SEC’s overall index score—which measures staff’s general satisfaction and commitment—declined from 73.1 in 2007 to 56 in 2012.”

The danger for the U.S. economy and our financial markets is that a system this tainted cannot stand – as we learned so well in 2008. It is inevitably destined to collapse under the weight of its own corruption.

The writings of economist Joseph Schumpeter explain creative destruction: failed systems and business models are meant to collapse in order to be replaced with more efficient, innovative ones. Studies indicate that impediments to the process of creative destruction have severe economic consequences.

The SEC is both an impediment to change on Wall Street and an impediment to regulatory reform. It is a dark pool of redactions and shredded documents; it has fired the truth-tellers and retained the timid; it is Wall Street’s top legal defense team in temporary quarters.

Jamie Dimon to JPMorgan Shareholders: Don’t Believe Your Lying Eyes

By Pam Martens: April 10, 2014

Jamie Dimon, Chairman and CEO of JPMorgan Chase, Testifying Before Congress on the London Whale Trading Losses

Too-big-to-fail Wall Street mega banks are now one part bank, one part legal defense and one part confidence-game.

JPMorgan’s Chairman and CEO, Jamie Dimon, whose career has now survived more scandals in the past two years than most business titans ever see in a lifetime, has penned a masterful 32-page head-fake to shareholders.

Dimon tells shareholders that the company has “consistently shown good financial performance” while distancing himself from the $30 billion the company has paid out in fines and settlements for a rash of misdeeds since January 2013. The word “fortress” appears five times in the letter with the oft-expressed “fortress balance sheet” morphing additionally into the “fortress control system” and the “fortress company.” Dimon’s photo appears alongside the letter, clad in a navy jacket and blue shirt. Next year he might want to complete the fortress analogy by donning a Knight’s metal armor.

Dimon says the year was “marred by significant legal settlements largely related to mortgages.” In fact, just 7 days after the 2013 fiscal year ended, JPMorgan paid $2 billion and made history in being the first Wall Street mega bank to be charged with two felony counts and receive a deferred prosecution agreement. The matter had nothing to do with mortgages. The bank was charged with aiding and abetting the Madoff fraud – the largest Ponzi scheme in the history of modern finance.

In September of last year, JPMorgan settled its London Whale fiasco for $920 million in penalties. That had nothing to do with mortgages either. It involved using insured deposits from its commercial bank to gamble in exotic derivatives in London; hide the losses from its shareholders initially and then misstate the amount of the losses to regulators. Early on when the press got wind of the matter, Dimon called it a “tempest in a teapot.” The losses totaled at least $6.2 billion when the company stopped reporting them.

Then there were settlements related to rigging electric rates, rigging the interest rate benchmark Libor, and abusing credit card customers. Zip, zip, and zip to do with mortgages.

Dimon’s letter carries no reference to the words “Madoff,” “London Whale,” or “Libor.” Instead, he goes with: “There is much to say and a lot to be learned in analyzing what happened, but I am not going to do so in this letter — more distance and perspective are required.”

Good idea. Distance shareholders from the sordid details and now infamous frauds and use mind-twisting axioms instead. Here’s an example: “When I look back at our company last year with all of our ups and downs, I see it as A Tale of Two Cities: ‘It was the best of times, it was the worst of times.’ We came through it scarred but strengthened — steadfast in our commitment to do the best we can.”

According to the online Random House Dictionary, “scarred” means a “lasting after effect of trouble”; “strengthened” means to “grow stronger.” How exactly does one grow stronger by permanently scarring their reputation?

Next Dimon takes us into the nitty-gritty figures of a global bank operating in 60 countries that moves “up to $10 trillion a day” and lends or raises “capital of over $500 billion each quarter” in markets covering “5.6 billion people who speak 100+ languages and use close to 50 currencies.”

How is all that helping the growing problem of the long-term unemployed in America? Out of total deposits of $1.3 trillion, Dimon says that a mere $19 billion of credit was extended to U.S. small businesses last year. And yet, that’s a key U.S. engine of job growth. In contrast, the bank “provided $274 billion of credit to consumers,” raising the concern that the weak job market and stagnating wages are forcing more households into deeper debt.

Dimon also said the bank plans to slim down in some areas. Here’s the businesses JPMorgan is exiting. (Dimon admits that some are “not customer friendly” while others are just too small. The thought immediately arises, what took JPMorgan so long to figure out some businesses weren’t “customer friendly”? Did regulators or Congress have to explain it to them? In the case of identity theft protection, and physical commodities, two categories listed below, it seems the revelation did come from regulators and the U.S. Senate.)

Businesses Being Exited:

  • One Equity Partners
  • Physical Commodities
  • Global Special Opportunities Group
  • Student Lending Originations
  • Canadian Money Orders
  • Co-Branded Business Debit Cards and Gift Cards
  • Rationalization of Products in Mortgage Banking
  • Identity Theft Protection
  • Credit Insurance

Goldman Sachs Drops a Bombshell on Wall Street

By Pam Martens: April 9, 2014

The caribou have vanished on Wall Street and the wolves are in a feeding frenzy against each other. Yesterday, the Wall Street Journal reported that Goldman Sachs is considering shuttering its Sigma X dark pool, a business that brought in $7.17 billion from equity trading in 2013, before accounting charges.

There are only three reasons that a Wall Street mega bank shutters a $7 billion business instead of selling it: it’s crazy; its regulators told it to shutter it; there’s more bad news ahead about this business and the firm is trying to get out in front of the fallout. We know Goldman Sachs is only crazy like a fox, so that leaves options two and three.

On March 13, Bloomberg News reported that Goldman Sachs sent refund checks to some of its customers for trades that had occurred in August 2011 where it had failed to execute trades at the National Best Bid and Offer (NBBO), a requirement under U.S. securities laws. Whether that is happening routinely within dark pools is anyone’s guess since…well, they’re dark…and the Securities and Exchange Commission still doesn’t have a consolidated audit mechanism able to keep up with the market it is charged with overseeing.

What triggered this benevolent refund action on the part of Goldman Sachs has yet to be explained. Who discovered the errors is left unanswered as is why we are just learning about something that occurred in 2011 three years later.

There is also the major Goldman snafu that disrupted markets last summer. On August 20, 2013, Goldman sent thousands of erroneous trading orders for options into the exchanges, wildly moving prices in the opening minutes of trading. The problem was blamed on a computer systems upgrade gone awry. Most of the trades were cancelled by the exchanges involved but the matter evoked outrage at the top of the firm since it put Goldman’s customers on the other sides of those trades at risk and could have resulted in big trading losses and/or lawsuits to Goldman and alienation of key clients.

Ten days before author Michael Lewis went on 60 Minutes to discuss his new book, “Flash Boys: A Wall Street Revolt,” in which Goldman Sachs’ high frequency trading operations come under scrutiny, the President and COO of the firm, Gary Cohn, wrote an OpEd for the Wall Street Journal. In the piece, Cohn says that “A fragmented trading landscape, increasingly sophisticated routing algorithms, constant software updates and an explosion in electronic-order instructions have made markets more susceptible to technology failures and their consequences.”

Just how susceptible Goldman might be gathers some sunlight in “Flash Boys.” Two full chapters of the book are devoted to the prosecution of Sergey Aleynikov, a sympathetic character who loses his marriage, his home, his freedom, his career, his savings and is sentenced to eight years in prison for taking some high frequency trading code that he had created at Goldman Sachs when he left for another job. Aleynikov was arrested by the FBI on July 3, 2009 and despite an overturned conviction, he is still being pursued by Manhattan prosecutors.

Goldman’s high frequency trading system is characterized as a “bulky, inefficient system” and the code as “slow and clunky” in the book. Lewis writes: “Goldman had bought the core of its system fifteen years earlier in the acquisition of one of the early electronic trading firms, Hull Trading. The massive amounts of old software (Serge guessed that the entire platform had as many as 60 million lines of code in it) and fifteen years of fixes to it had created the computer equivalent of a giant rubber-band ball. When one of the rubber bands popped, Serge was expected to find it and fix it.”

Aleynikov’s conviction in December 2010 was overturned in a stunning decision by the Second Circuit Appeals Court which found that Aleynikov had neither taken a tangible good from Goldman nor had he stolen a product involved in interstate commerce – noting that at oral argument the government “was unable to identify a single product that affects interstate commerce.”

The Second Circuit’s detailed decision was delivered on April 11, 2012 by Dennis Jacob, the Chief Judge. There was the distinct impression that the three-judge panel was interested in sending a message to Goldman Sachs that it understood fully the nuances of this big Federal government prosecution.

Chief Judge Jacob wrote:

“Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce. Goldman had no intention of selling its HFT system or licensing it to anyone. It went to great lengths to maintain the secrecy of its system.  The enormous profits the system yielded for Goldman depended on no one else having it.  Because the HFT system was not designed to enter or pass in commerce, or to make something that does, Aleynikov’s theft of source code relating to that system was not an offense under the EEA [Economic Espionage Act of 1996].”

Since Lewis provides a birds eye view into the inner workings of Goldman’s high frequency trading system in those two book chapters, even taking Aleynikov to a two-night dinner feast to discuss it with other Wall Street programmers in a mock trial to see if he really was guilty of anything in the eyes of a jury of his actual peers, Goldman’s secrets are now an open book and its slow, clunky system has lost a lot of its resale value. Goldman has also lost its programming genius. Lewis shares the fact that a head hunter on Wall Street says that there are only 20 people on Wall Street that can do what Aleynikov does – and he is the best at it. Which might explain why the hounds of prosecutory hell have been unleashed on him.

Rather than allowing Aleynikov to get on with his life, he is now being pursued by the Manhattan District Attorney, Cyrus Vance, in what looks to some like malicious prosecution. (Only mid level people have been prosecuted at any of the mega Wall Street banks while settlements and deferred prosecutions are handed out for far more egregious crimes.)

An appeal to dismiss Vance’s new charges on the basis of double jeopardy was rejected by a New York State court, finding that the state’s charges were different from the Federal ones, even though they were based on the same allegations. Aleynikov did win one court battle last October in the new case: Goldman Sachs will have to pay his legal expenses since he held the title Vice President. The court found that Goldman’s own bylaws require it to pay the legal fees of any officer named in a civil or criminal complaint related to their position at the bank.

Given the scrutiny that the Lewis book is drawing to Aleynikov’s prosecution, exactly what the firm was using this secret code to do in its proprietary trading operations, expect Vance to fold up his tent any day now in this highly questionable pursuit of “justice.”