An SEC Attorney Weighs In . . .
Over the weekend, I received several very informative emails from a former SEC attorney. “C” just gave me permission to reproduce it here.
It is a little “inside baseball” as to the process of how the SEC decides to bring an action versus any company, more or less something as large and important as GS. Some of the language has been changed to maintain C’s anonymity.
Enjoy.
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C’s initial email.
Hi Barry,
I am an a avid reader of your blog although I don’t often comment. I spent some time at the SEC, and thought I could add a couple of points to your effort against the overwhelming stupidity in the MSM about this Goldman action by the agency.
After sitting in on every closed meeting of the Commission during my time there, it sure does seem that politics can (and often does) derail an investigation.
But, it doesn’t work the other way.
As you know, it’s up to the lower-level enforcement attorneys to decide when to bring the case to the Commissioners. It is possible that these attorneys saw that it was politically convenient to bring their action now — actually, 8 months ago when they got approval for the Wells notice — but their motivation was not political: It helps their careers (and mental well being) to get their cases approved.
Attorneys are unwilling to put a case up for a commission vote if they didn’t think it was strong enough. These attorneys are judged on the success of the actions they bring and wouldn’t jeopardize that to appease the politicians that are currently serving on the Commission. The senior people who make promotion decisions will see Commissioners and Presidents come and go but senior staff outlasts them all.
The Commissioners power is wielded not to instigate investigations but to kill them by not approving them — this was rampant during the Bush administration.
The other thing I was surprised about when I started at the SEC was how concerned the staff and (usually) the Commission is with precedent on punishment. I guarantee some low level staffer already has a memo prepared: Settlements, administrative decisions and court decisions from similar 10b-5 cases, including how they relate to the seriousness of what Goldman has done, the amount of money involved, etc. (I wrote a number of these when I first started at there).
One of the biggest goals of the enforcement division is to have consistent punishments so that the market players can act appropriately. It helps control behavior in the market and the side benefit is it makes the SEC’s job easier — defendants know when to settle and what punishment to accept. Unless they’re stupid, Goldman will eventually settle, and it will be consistent with other cases with similar circumstances. Goldman may have already made things more difficult for themselves because they’ve decided to play this up in the media. (That gets factored into any settlement as well).
If you’re wondering why I emailed this to you instead of just posting it 1) I didn’t think it was a great idea to publicize talking about closed commission meetings and 2) I don’t like to post anonymously. Anything I mentioned here is not confidential but I didn’t feel comfortable posting it with my name attached.
Keep up the great work on the blog.
Thanks,
C
And of course, I adore the PS:
PS: I should also add that I first found your blog while at the SEC. It was on an SEC list of recommended websites to read.
Awesome.
Lastly, here is C’s email granting permission to republish:
Barry:
Feel free to use what I sent. I’d prefer if you didn’t identify me, but as I said nothing in there is confidential.
To add a little nuance to what I wrote regarding the Commissioners killing investigations: Not surprisingly the reasons given are never overtly political but veteran enforcement attorneys were well aware of certain Commissioners “tendencies” on certain types of investigations and certain types of defendants (if you know what I mean). With these types of investigations it was always easy enough for a Commissioner to find something in the evidence or assumptions that “concerned” them enough to not approve going forward with a Wells notice or the filing of a case.
“C”
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April 27th, 2010 at 7:15 am
Two caveats to add:
C was not a very senior attorney at the SEC — but he was involved in seeing these cases work their way through the system.
And second, he was not a career attorney there — some folks spend decades at the agency — C wasn’t one of them
April 27th, 2010 at 7:36 am
“…PS: I should also add that I first found your blog while at the SEC. It was on an SEC list of recommended websites to read…”
Looks like Darrel Issa will be subpoenaing after BP…
“… how many hours a day did SEC staffers spend on this blog?”
“…here on your site you refer to ‘chart porn’ quite frequently…”
“…were these thousand dollar wagers on outcome of the SEC/GS fraud case designed to fail?”
April 27th, 2010 at 7:39 am
I am watching CNBC discuss this right now — they are embarrassing themselves with how ignorant they are — about the law, the specifics of the case, and about how things work.
The entire 7:30 segment is simply horrific.
April 27th, 2010 at 7:50 am
“It helps control behavior in the market and the side benefit is it makes the SEC’s job easier — defendants know when to settle and what punishment to accept. Unless they’re stupid, Goldman will eventually settle, and it will be consistent with other cases with similar circumstances. ”
And this is why the SEC IS a joke. When defendants know when to settle and what the punishment will be then it all becomes a cost of doing business. The “will be consistent” is not a “feature” it is a disgrace that allows banks to account for “SEC loses” into the P&L. BTW as it has been fully demonstrated by the crisis, employees of these firms don’t give a damn about sinking the firm for their own personal benefit. Until criminal charges are embedded into transgressions nothing will change.
April 27th, 2010 at 7:50 am
BR, how does Dierdre Bolton look in person? I can’t quite figure out if she’s hot or not from TV.
April 27th, 2010 at 7:54 am
Maybe ” C ” would comment on the John Gavin suit against the SEC ?
http://www.nytimes.com/2006/05/28/business/yourmoney/28gavin.html
Maybe he would comment on Einhorn’s bizarre experience at the hands of the SEC ? Or the SEC subpeona of the press in the OSTK case ?
April 27th, 2010 at 8:13 am
Spectacular.
In additon to cheekbones that could cut glass, her eyes are gorgeous.
April 27th, 2010 at 8:17 am
“C”‘s added nuance is true about governmental bodies in general when politics and judgment are involved (which is most of the time). A Commissioner, Senator, the President, whomever makes it known, however subtly, that a certain action would not be a good idea and senor employees (who are more politically astute, or they would not be senor employees) find a way to accommodate. Or as “C” wrote, just understanding the tendencies of those above you is normally enough.
No one is directed to take a position, it just happens. Counter arguments with at least a thread of legitimacy can always be found.
The timing of the SEC charge against Goldman Sachs could have been the result of this phenomenon. No one instructed the SEC on when to make the charge, it just happened.
Goldman Sachs probably benefited from this phenomenon back in the “good old days” when regulatory actions were frowned upon. If so we are now witnessing a clear cut case of “paybacks are hell”.
April 27th, 2010 at 8:33 am
Barry, can you offer any explanation why Goldman is playing this silly PR game in the press instead of just quietly saying “Mea culpa, here’s a settlement offer, without admission of wrongdoing…”?
It would seem to me that Goldman is doing nothing but digging a deeper hole with their current actions, and the longer this drags on, the more suits and investigations that will be brought against them on both sides of the Atlantic.
April 27th, 2010 at 9:02 am
I’d love to see a political cartoon with Cuomo holding two wet index fingers up in the air, one to gauge voter popularity for filing a criminal suit against GS and the other to gauge financial support from Wall Street after he charges GS. Hard to imagine GS will be the only firm caught in this vortex. Remember the outcome of the WSJ article about the backdating of options? There’s seldom just one rat.
April 27th, 2010 at 9:02 am
A very interesting article on Dodd’s program:
http://www.financialpost.com/opinion/story.html?id=2954842
April 27th, 2010 at 9:05 am
Yesterday, Joe Scarborough went on and on about the “political” nature of the timing of the SEC complaint. Erin Burnett, to her credit, was careful not to take sides but to simply lay out the arguments for and against bringing a cause of action against GS. The implicit argument used by those who defend GS, if not the explicit one, seems to be “The only reason the SEC filed the complaint against GS is that the Obama administration wants to pass the Dodd bill.” It seems to me that while it is obvious that the WH would like something LIKE the Dodd bill to pass rather than do nothing, the argument is specious. Moreover, the MSM always has an easier time turning every substantive issue into a “political”, Ds vs. Rs, Obama vs. the Tea Party, etc. rather than reporting on the issue itself. One longs to hear someone say in response to the argument that the SEC action was “political”, something like, “As Freud said, sometimes a cigar is just a cigar.”
April 27th, 2010 at 9:07 am
“Barry, can you offer any explanation why Goldman is playing this silly PR game in the press instead of just quietly saying “Mea culpa, here’s a settlement offer, without admission of wrongdoing…”?”
Ignorant speculation mode: On
Perhaps, extrapolating from C’s description of how things work at the Commission level, they have some very cozy off the record relationships with some of the upper level muckity mucks in the SEC hierarchy. They seem to everywhere else, why not in the place it matters most. They might have some reason to think that they already know what their settlement amount is going to be upfront, and they are just going about their business of after the fact PR.
April 27th, 2010 at 9:16 am
The Commissioners power is wielded not to instigate investigations but to kill them by not approving them — this was rampant during the Bush administration.
Above statement by ‘C’ is the most critical point in understanding how misguided ideology undermines the regulatory mission and provides cover for later claiming that the ‘regulators’ failed as if it were not by design. The cynicism is startling.
April 27th, 2010 at 9:23 am
The thing I fear IS that GS will settle and we won’t know the amount and/or the settlement will be locked and this will all too conveniently be swept away.
April 27th, 2010 at 9:28 am
Settlement = tax on profits . The wind up is crime pays.
April 27th, 2010 at 9:33 am
I would offer GS a deal right now if I were the SEC. Settle the national debt, and then conduct business however you see fit. We can’t stop them from doing it anyway, besides well after the fact.
Settle the debt, proceed as you were.
April 27th, 2010 at 9:34 am
http://www.interfluidity.com/v2/817.html
Steve Randy Waldman “Goldman and “hope”
One of the best writers out there on the Goldman situation.
April 27th, 2010 at 9:34 am
So now we need to know how the junior staffers at the SEC decide upon which cases to bring before the Commission for their approval. Someone has to initiate these things. And why initiate anything if you know it would never fly with the politics of the appointees on the Commission?
So we are back where we started. Prosecutorial discretion turns on the political viability of the case.
It’s not unlike the manner with which CDO’s were reverse-engineered to meet the ratings agencies requirements for AAA status. You start with the environment, political, legal, etc., in which you operate, and construct a case that you believe will succeed in that environment.
April 27th, 2010 at 10:00 am
No opinion; just a serious question.
Assuming that this happened more than once (I think we can,) and that it happened with a non-synthetic garbage-rated-triple-A CDO part of which was sold to a teachers’ pension fund in Fond du Lak, WI, with nothing in the prospectus mentioning that Magnetar had sponsored said CDO, influenced the fund manager’s selection of underlying securities, and purchased CDSs that would pay off on the downgrading of the AA, A, BBB, BB tranches, can the Fond du Lak district attorney start legal proceedings against the seller of the CDO?
April 27th, 2010 at 10:03 am
We need an investigation onto what cases are not being pursued and why. Those commissioners need to be grilled over the fire of a congressional investigation so they stop blocking action against their friends at Wall Street and start serving Main Street.
April 27th, 2010 at 10:03 am
As an attorney during the Reagan administration at another federal agency much hated by Republicans, I can attest that everything in C’s e-mail is spot on. In our case, David Stockman of OMB did everything he could behind the scenes to sabotage our efforts to enforce the law, and to signal to the senior people that resistance would not be good for their careers.
April 27th, 2010 at 10:12 am
No doubt there is a tale to be told about cases that got nixed during the Bush era. Junior people don’t decide and they certainly don’t sent agency regulatory enforcement priorities (and non-priorities).
There’s a greasy slick on the surface of every agency; those are the political appointees whose tenure tracks that of the incumbent president/party. Beneath that is the bureaucracy, entrenched by level of seniority. The political appointees can make life difficult or impossible for career senior staff. The executive (i.e., incumbent political party) controls funding/staffing levels. They can and do starve out/embarrass/overburden/demoralize/intimidate career staff. Sometimes senior careerists fight back by leaking info to journalists/congressional staff for the other party.
I don’t doubt the truth of C’s viewpoint, but I think it’s pretty clear that the SEC was on a tight leash at the macro political level and I agree with Curmudgeon that anybody with a lick of agency political sense and experience learns how to read the tone being set at the top.
April 27th, 2010 at 10:17 am
“Barry, can you offer any explanation why Goldman is playing this silly PR game in the press instead of just quietly saying “Mea culpa, here’s a settlement offer, without admission of wrongdoing…”?”
Ignorant speculation mode: On
Perhaps, extrapolating from C’s description of how things work at the Commission level, they have some very cozy off the record relationships with some of the upper level muckity mucks in the SEC hierarchy. They seem to everywhere else, why not in the place it matters most. They might have some reason to think that they already know what their settlement amount is going to be upfront, and they are just going about their business of after the fact PR.
Continuing with ignorant speculation: It is also possible that this really is the tip of the iceberg.
April 27th, 2010 at 10:22 am
crankitto11 makes a good point. We didn’t just start ignoring the law and goosing the markets after 9/11 with the hopes to show the world Bin Laden can’t destroy USA capitalism……
April 27th, 2010 at 10:31 am
The Commissioners power is wielded not to instigate investigations but to kill them by not approving them — this was rampant during the Bush administration.
It seems the commission needs to be paid by commission. That should get more cases through
April 27th, 2010 at 11:49 am
And what role is played by Chairperson Mary Schapiro?
April 27th, 2010 at 1:28 pm
Anyone see Chazz Palmintieri’s “A Bronx Tale”?..looks like Cologero aka “C” grew up and joined the good guys! Thanks “C”. I put my money next to yours.
April 27th, 2010 at 2:54 pm
“PS: I should also add that I first found your blog while at the SEC. It was on an SEC list of recommended websites to read.”
That IS awesome Barry. For years I wondered if there was anybody in Washington reading your blog……
and yes they are. Congrats Barry! I would bet there are some working in the legislative branch (staff and/or legislators) who are reading it also. And IMHO, legislators should be consulting with you….in private of course.
April 27th, 2010 at 3:29 pm
Thank you, “C”.
I know I’m just dreaming but it would be nice to read that if the SEC had a smoking gun, they’d be kicking some GS balls down the street.
April 27th, 2010 at 4:32 pm
from calculated risk
Making the rounds, a little Goldman humor (ht Brian):
“You want the truth? You can’t handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap. “We use words like credit default swaps, collateralized debt obligation, and securitization? We use these words as the backbone of a life spent investing in something. You use ‘em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to!”