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Matt Taibbi bringing the Fande

* Chilling…I feel un-nerved after finishing that article.

source: http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=1

Why Isn’t Wall Street in Jail?

Financial crooks brought down the world’s economy — but the feds are doing more to protect them than to prosecute them

By Matt Taibbi
FEBRUARY 16, 2011 9:00 AM ET
EXCERPTS in italics from Rolling Stone:

 

The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he questioned the agency’s failure to pursue an insider-trading case against John Mack, now the chairman of Morgan Stanley and one of America’s most powerful bankers.

 

Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. “It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller,” Aguirre recalls. “And he wasn’t just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day.” A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million. 

After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg’s who had just stepped down as president of Morgan Stanley. At the time, Mack had been on Samberg’s case to cut him into a deal involving a spinoff of the tech company Lucent — an investment that stood to make Mack a lot of money. “Mack is busting my chops” to give him a piece of the action, Samberg told an employee in an e-mail.

A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank’s clients, as it happened, was a firm called Heller Financial. We don’t know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move that earned him the equivalent of Derek Jeter’s annual salary for just a few minutes of work.

The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn’t likely to fly, explaining that Mack had “powerful political connections.” (The investment banker had been a fundraising “Ranger” for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.)

Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank’s regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn’t take long for Morgan Stanley to work its way up the SEC chain of command. Within three days, another of the firm’s lawyers, Mary Jo White, was on the phone with the SEC’s director of enforcement. In a shocking move that was later singled out by Senate investigators, the director actually appeared to reassure White, dismissing the case against Mack as “smoke” rather than “fire.” White, incidentally, was herself the former U.S. attorney of the Southern District of New York — one of the top cops on Wall Street.

Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target’s firm is being represented not only by Eliot Spitzer’s former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC’s enforcement division — not Aguirre’s boss, but his boss’s boss’s boss’s boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.

Aguirre didn’t stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. “It all happened so fast, I needed a seat belt,” recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.

Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, “O.J.’s search for the real killers.”) It wasn’t until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.

“At best, the picture shows extraordinarily lax enforcement by the SEC,” Senate investigators would later conclude. “At worse, the picture is colored with overtones of a possible cover-up”….

Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.

Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country’s leading lawyers who represent Wall Street, as well as some of the government’s top cops from both the SEC and the Justice Department.

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it’s a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. “They were chummier in that environment,” says Aguirre, who plunked down $2,200 to attend the conference.

Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn’t see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.

Two of the government’s top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC’s current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street’s favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney’s office, before Mary Jo went on to become a partner at Debevoise. What’s more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.

“It wasn’t just one rotation of the revolving door,” says Aguirre. “It just kept spinning. Every single person had rotated in and out of government and private service.”

The Revolving Door isn’t just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? “You take one of these jobs,” says Turner, the former chief accountant for the SEC, “and you’re fit for life.”

Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney’s office.

“I want to first say how pleased I am to be here,” Bharara responded. Then, addressing White, he added, “You’ve spawned all of us. It’s almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein.”

Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. “I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year,” he said. “They’ve done a real service to the country, to the financial community, and not to mention a lot of your law practices.”

Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC’s director of enforcement, talked about a new “cooperation initiative” the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.

“We are going to try to get those individuals answers,” Khuzami announced, as to “whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client.”

Aguirre, listening in the crowd, couldn’t believe Khuzami’s brazenness. The SEC’s enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. “First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC,” Aguirre says. “Then the Justice Department commits itself to pass, so that the player knows he’s ‘safe.’ Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department.”

When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants “get answers” regarding the status of their criminal cases, he initially doesn’t believe it. Then I send him a transcript of the comment. “I am very, very surprised by Khuzami’s statement, which does seem to me to be contrary to past practice — and not a good thing,” the former prosecutor says.

Earlier this month, when Sen. Chuck Grassley found out about Khuzami’s comments, he sent the SEC a letter noting that the agency’s own enforcement manual not only prohibits such “answer getting,” it even bars the SEC from giving defendants the Justice Department’s phone number. “Should counsel or the individual ask which criminal authorities they should contact,” the manual reads, “staff should decline to answer, unless authorized by the relevant criminal authorities.” Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. “We collaborate with the SEC, but they do not consult with us when they resolve their cases,” Assistant Attorney General Lanny Breuer assured Congress in January. “They do that independently.”

Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank’s executives. According to a letter that was sent to Sen. Grassley’s office, Khuzami had a “secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend” of his and “who was counsel for the company.” The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.

All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it’s well known that all the best legal minds go to the big corporate law firms, while the “bottom 20 percent go to the SEC.” Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld’s compensation.

“It’s such a mismatch, it’s not even funny,” Budde says.

But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.

As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. “The betrayal that this represents by Obama to everybody is just — we’re not ready to believe it,” says Budde, a classmate of the president from their Columbia days. “He’s really fucking us over like that? Really? That’s really a JP Morgan guy, really?”

Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would “demean the seriousness” of the offenses.

So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It’s not a crime. Prison is too harsh. Get them to say they’re sorry, and move on. Oh, wait — let’s not even make them say they’re sorry. That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

The mental stumbling block, for most Americans, is that financial crimes don’t feel real; you don’t see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They’re crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

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