By Pam Martens and Russ Martens: February 22, 2017
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?