Technological Incompetence Appears to be Intentional at Wall Street’s Top Cop

By Pam Martens and Russ Martens: September 25, 2017 

SEC Chairman, Jay Clayton

SEC Chairman, Jay Clayton

When we created the website for Wall Street On Parade, it took us about 30 minutes to add a free plug-in function so that our readers could search the text of every article we have ever written. (See Search box in upper right-hand corner of our menu at the top of this website.) But at Wall Street’s top cop, the Securities and Exchange Commission (SEC), if one wants to search corporate filings, one is limited to a four-year text search. This bizarre restriction inhibits investigative journalists from capably doing their job and connecting dots.

This might sound like a small complaint were it not part of a larger pattern of technological failures by the SEC which have allowed Wall Street firms to run amok for decades.

The biggest technological failure, of course, is the SEC’s inability to launch a Consolidated Audit Trail (CAT) over the 83 years of the SEC’s existence in order to spot manipulative or illegal trades by some of the most highly sophisticated trading houses in the world. While JPMorgan brags about having “more software developers than Google, and more technologists than Microsoft,” and Goldman Sachs is hiring the best Russian coders, Wall Street’s top cop is still driving a horse and buggy.

The CAT, if it is ever implemented, would show every trade in U.S. stock and option markets, including when it occurred and at what firm it originated. But don’t hold your breath.

Adding to the evidence that the SEC is technologically incompetent by design is what its own attorneys have said about its seemingly intentional failure to prosecute.

James Kidney retired from the SEC in 2014 following a quarter century as a trial lawyer there. He delivered a blistering speech at his retirement party on how SEC leadership functions. Not long thereafter, 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 indicated that Kidney had pushed the SEC to investigate up the chain of command in the Goldman Sachs Abacus 2007-AC1 investment scam. (Goldman Sachs had allowed a hedge fund, John Paulson & Co., to bet against the Abacus deal despite knowing that Paulson had helped to select investments in the deal that were likely to fail. Goldman then recommended Abacus to its own clients without disclosing this information.) The SEC only went after a mid-level employee in the matter, Fabrice Tourre, while settling with Goldman Sachs for $550 million.

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.”

In April of 2014, Kidney spoke with NPR on the demoralization of public servants at the SEC. Kidney said: “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…”

Before Kidney, there was SEC attorney Darcy Flynn. In 2011, Flynn had explained to 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 told investigators that by purging these files, it impaired the SEC’s ability to see the connections between related frauds.

The SEC knows that since the late 1920s, the biggest Wall Street firms have been engaging in collusion and cartel activity with each other. What possible honorable motive would there be for shredding the history of these crimes? In fact, the Federal Reserve Bank of St. Louis has taken just the opposite position. It has archived on its website known as Fraser the thousands of pages of hearing transcripts and exhibits from Wall Street’s prior crime of the century, the collusive corruption that led to the 1929 crash and the Great Depression.

Before Darcy Flynn there was Gary Aguirre, also a former SEC attorney. On June 28, 2006, Aguirre testified before the U.S. Senate Committee on the Judiciary. Aguirre explained that during his final days at the SEC, he had pushed to serve a subpoena on John Mack, the powerful former official at 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 Aguirre had contacted the Office of Special Counsel to discuss the filing of a complaint about the SEC’s protection of Mack.

Aguirre returned on December 5, 2006 to testify further before the Senate Judiciary Committee, stating:

“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.”

Then there was the anonymous whistleblower inside the SEC who triggered an SEC Inspector General investigation. It began when the SEC let the serial wrongdoer, Citigroup, off the hook for $75 million in settlement fines for falsely telling the public and shareholders it had $13 billion in subprime debt when it actually had over $50 billion. Instead of the SEC charging senior executives with securities fraud for lying about the bank’s financial condition, the SEC dropped its fraud charges and let the two involved Citi executives off the hook with $100,000 and $80,000 fines, respectively.

The SEC whistleblower had turned to Senator Chuck Grassley with written claims that this SEC settlement had been procured through untoward cronyism between Citigroup’s lawyers and the head of enforcement at the SEC at the time, Robert Khuzami. As we previously reported, according to the SEC’s Office of Inspector General which investigated the whistleblower’s claims against Khuzami, this is what transpired:

On June 28, 2010, Khuzami spoke on the phone with Mark Pomerantz, a partner at Paul, Weiss, Rifkind, Wharton & Garrison, the law firm representing Citigroup. Pomerantz and Khuzami knew each other from their work at the U.S. Attorney’s office in the Southern District of New York. SEC attorneys working under Khuzami had already decided to bring fraud claims against Citigroup’s CFO, Gary Crittenden, for misstating the amount of Citigroup’s exposure to subprime debt by almost $40 billion.

On the call, Pomerantz told Khuzami that Citigroup would experience collateral damage if a key executive were charged with fraud. Shortly after this call, another Citigroup lawyer, Lawrence Pedowitz of Wachtell, Lipton, Rosen & Katz (the law firm that helped former Citigroup CEO Sandy Weill maneuver the repeal of the Glass-Steagall Act) told SEC Associate Enforcement Director, Scott Friestad, that Khuzami had agreed to drop the fraud charges against Crittenden. The Inspector General’s report says that Khuzami denies ever making this promise.

But the fraud charges were dropped and the deeply redacted Inspector General’s report does not inform the public as to how they came to be dropped. The report essentially whitewashes the claims against Khuzami, ensuring that fewer and fewer whistleblowers within or outside the SEC will go to the trouble of reporting wrongdoing.

The SEC’s Inspector General’s report is dated September 27, 2011 but it was not released to the public until November 17, 2011 – at which time it was obvious that someone had demanded confidential treatment for large swaths of the report, at times making the language unintelligible. One gets the feeling that the delay was caused by those same Citigroup lawyers who seem to have their way at the SEC and took a machete to the findings.

There was further evidence residing inside the SEC that Citigroup’s CFO, Gary Crittenden, should have been charged with fraud. On October 23, 2007, the SEC’s Kevin Vaughn sent a letter to Citigroup, writing as follows:

“We note your response to our prior comment 2 in our letter dated July 3, 2007 in which you state that you did not disclose the amount of mortgage backed securities and residual interests collateralized by non-prime mortgages held by U.S. Consumer due to immateriality. From your disclosures in your Forms 8-K filed on October 15, 2007 and October 1, 2007, it appears that you do have a material exposure to non-prime instruments as these instruments caused you to record a $1.56 billion loss in the third quarter.  Please revise to disclose the specific amount of your exposure to these types of instruments.  Please separately quantify the amount of exposure related to loans held for investment, loans held for sale, investments held as a result of securitizations, and any other types of instruments you may hold for each segment in which you have exposure.  Quantify the amount of non-prime loans you hold in your loan warehousing facility at each period end.”

Citigroup did not respond to that SEC demand for further information until December 14, 2007 and then, at that time, asked the SEC to protect its responses from the prying eyes of reporters or members of the public who might file a Freedom of Information Act Request (FOIA).

Pages 23 through 36 of this correspondence have been fully redacted with the notation “The following information has been redacted in accordance with Citigroup’s request for confidential treatment,” with no explanation at all as to why the SEC is still cowering to the secrecy demands of this serial miscreant which received the largest taxpayer bailout in U.S. financial history following its collapse in 2008. It is now almost a decade later and the redactions remain on the SEC’s web site, further denying the public and investigative reporters the ability to connect the dots on Wall Street’s serial crimes.

And, finally, there is the ongoing pattern of the Chair of the Securities and Exchange Commission coming fresh from a top Wall Street law firm.

The current SEC Chair, nominated by President Donald Trump and confirmed by the U.S. Senate, is Jay Clayton. During the three years prior to his nomination, Clayton had represented 8 of the 10 largest Wall Street banks as a law partner at Sullivan & Cromwell where he had been employed for two decades. When Clayton’s name was first announced as Trump’s nominee, Senator Sherrod Brown, the Democrat’s ranking member of the Senate Banking Committee, sent out a press release with this statement:

“It’s hard to see how an attorney who’s spent his career helping Wall Street beat the rap will keep President-elect Trump’s promise to stop big banks and hedge funds from ‘getting away with murder.’ I look forward to hearing how Mr. Clayton will protect retirees and savers from being exploited, demand real accountability from the financial institutions the SEC oversees, and work to prevent another financial crisis.”

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

Before Clayton, there was President Obama’s SEC Chair, Mary Jo White. As we previously reported, “Between White’s career at law firm Debevoise and Plimpton and her husband John W. White’s long term career at the international law firm Cravath, Swaine & Moore LLP, the two had represented every major Wall Street bank. John White went right on representing them after his wife took her seat as SEC Chair,” despite the fact that under Federal Executive Branch law the conflicts of the spouse become the conflicts of the government official.

Watching the U.S. devolve into a third-world-level of corruption and cronyism is deeply painful for those who love their country. It’s time for those collective voices to demand a formal, independent Federal investigation of the SEC. No other industry in America has done more to bankrupt the U.S. than Wall Street and no other cop on the beat has done less to stop it.

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