SEC v. Cuomo

"In a swipe at New York Attorney General Andrew Cuomo, the [SEC] said in a court filing that the December 2008 firing of Bank of America [BofA] Corp.'s general counsel had nothing to do with his opinion about ballooning losses at Merril Lynch & Co. just before the securities firm's takeover by the giant bank. The SEC's court filing sets up a showdown between two securities regulators whose relationship has been fraught with tension for years. ... Mr. Cuomo alleged in a separate complaint filed last month that Timothy Mayopolous, [BofA's] former general counsel, was ignored by another executive when he tried to discuss Merrill's mounting losses and then terminated the next day. ... Meanwhile the swift action by Messrs. Spitzer and Cuomo to take on Wall Street occasionally has left the SEC looking flat-footed. The divergent stances in the [BofA] case could portend trouble for cooperation on other cases", Kara Scannell & Dan Fitzpatrick at the WSJ, 18 February 2010, link:

http://online.wsj.com/article/SB10001424052748703444804575071372283031624.html.

That the SEC and Cuomo are at each's throat means the truth may come out.

Ken Lewis-Scapegoat-2

"The bank bailouts of the last two years have been 'about as popular as a root canal,' as President Obama noted in his State of the Union address. ... So it was probably inevitable that New York Attorney General Andrew Cuomo would file civil fraud charges against Bank of America, its former CEO Ken Lewis, and its former CFO Joe Price, as he did this week. Everyone assumes Mr. Cuomo is running for governor this year, and BofA is conveniently based in Charlotte, not Wall Street. .... The Martin Act is a prosecutorial bludgeon that forces most defendants to settle out of court rather than risk being convicted merely for having been wrong on some facts. ... When Mr. Lewis told Treasury Secretary Hank Paulson and [Fed] Chairman Ben Bernanke that he was considering invoking this clause and scotching the deal, they insisted he buy the faltering trading house and later announced an additional taxpayer investment in BofA to allow the bank to digest Merrill. Mr. Lewis swallowed hard and went ahead with the merger. Mr. Cuomo says this was all a bluff by Mr. Lewis in order to trick the regulators into providing more TARP money. Never mind that Mr. Lewis had a contractual right to pull out of the deal if he felt material facts had changed. ... Mr. Cuomo's logic boils down to this: Mr. Lewis is guilty for not telling his shareholders about rising losses at Merrill, but he's also guilty for trying to protect his shareholders from the rising losses at Merrill. ... On the public evidence so far, Mr. Cuomo should be thanking Mr. Lewis, not suing him", my emphasis, WSJ Editorial, 6 February 2010, link:

http://online.wsj.com/article/SB10001424052748704533204575047421387157564.html.

I'm with the WSJ. Cuomo's case against the BofA and Lewis was announced the same day as the SEC's new BofA settlement. Are Cuomo and the SEC engaging Lewis in a tag-team wrestling match? Cuomo apparently wants to run for NY Governor over Lewis corpse. I hope Lewis and the BofA take this one to the mat. That BofA is not headquartered in NY may be the reason Cuomo is pursuing this case to the Vampire Squid's applause.

Which Mob?-3

"The latest indictment to hit the New York City Buildings Department taps into the usual themes of bribery, corruption and compromised inspections. But it also introduces a new criminal element into the agency: the mob. Manhattan prosecutors on Thursday accused the Luchese crime family of infiltrating the Buildings Department, saying that three of the family's associates found jobs as building inspectors and that others in the family, including top bosses, committed a wide range of crimes. ... Robert M. Morgenthau, the Manhattan district attorney, said 27 of 29 people named in the indictment had been arrested; the other two remain at large. Those indicted include bosses and associates of the Luchese family, officials of four corporations, real estate officials and the six building inspectors. ... 'These former inspectors are accused ot betraying the public and this department for their own selfish gain, and they should be prosecuted to the full extent of the law,' [said Robert LiMandri, buildings commisioner]. Morgenthau said the largest known bribe was $44,000, paid by a real estate company to Carmine Francomano Jr. for 'favorable dispositions' of building inspections. Altogether, Mr. Francomano accepted $82,500 in bribes, Mr. Morgenthau said. ... In an unrelated gambling indictment announced almost simultaneously on Thursday, a dozen other people connected to the Luchese family were among 19 people charged. The announcement was made by Preet Bharara, the [US] attorney in Manhattan, and Andrew M. Cuomo, the state attonery general", Christine Hauser, at the NYT, 2 October 2009, link: http://www.nytimes.com/2009/10/02/nyregion/02building.html.

Bharara, you learned well at Mary Jo White's knee. Forget the Lucheses. Find something to indict Vikram Pandit for. If you lack the brains, I'll explain the "Old Lane Scam". Pro Bono. But I have no law degree, lest an Ivy League one. So? You tell criminals "ignorance of the law is no excuse", don't you? Find something to indict Lloyd Blankfein (LB) or John Mack for. Invoke Laverntiy Beria's, 1899-1953, spirit, "Show me the man, and I'll find you the crime". Are the SEC and DOJ "mob infiltrated" organizations. Ben Stein, my 21 December 2007 post, was so right: http://skepticaltexascpa.blogspot.com/2007/12/mortgage-fraud-whose.html. $44,000? Is that LB's monthly cigar bill? Why is "Lady Justice" depicted wearing a blindfold? Because she's blind to only certain types of crimes?

Ken Lewis Whistleblower?-3

"When [BofA] bought Merrill Lynch last winter, the political class applauded and called CEO Ken Lewis a solid citizen. Now, from the safety of noncrisis hindsight, our politicians claim that the bank's shareholders may have been mistreated. Few of those shareholders are complaining, given the profits Merrill has been generating for the bank in recent months, but the pols apparently want a scapegoat for bailouts and bonuses. Mr. Lewis fits the bill. ... Of course, proxies rarely make anything clear, because, like all SEC-mandated disclosures, they are created to ensure regulatory compliance rather than inform invstors. Was this one worse than average? ... Anyone who cared enough to read the proxy probably consumer enough financial news to understand that BofA was willing to pay to maintain Merrill's principal asset--its employees. ... But count us as skeptical that BofA managers would risk violating securities laws in order to make sure that other people could collect large bonuses, or to hide another firm's losses so they could have the privilege of overpaying to acquire it. ... If Mr. Cuomo wants to do a public service, he could focus on the government's own role in this episode. ... Here's a theory of the case that won't help Mr. Cuomo become governor, and won't help Mr. [Edolphus] Towns make headlines, but might even be true and fair: Amid the autumn and winter financial panic, everyone involved was operating under tremendous pressure with incomplete information. Federal officials all but ordered Mr. Lewis to buy Merrill and they certainly knew all about the bonuses", original italics, my emphasis, Editorial at the WSJ, 21 September 2009, link: http://online.wsj.com/article/SB10001424052970204518504574419050445773522.html.

"After fighting to keep his grip on the bank he helped build from a scrappy Southern outsider to the nation's largest in assets, [BofA] Chief Executive Kenneth D. Lewis said he will resign by year end. ... Even as the board backed Mr. Lewis publicly, there were signs that his interests and the bank's were diverging. Mr. Lewis has hired his own lawyers, former US Attorney Mary Jo White and James Wyatt III, a criminal-defense expert in Charlotte, while the board and the bank have separate representation on the various lawsuits and investigations relating to the bank's purchase of Merrill Lynch", Dan Fitzpatrick and Joann Lublin at the WSJ, 1 October 2009, link: http://online.wsj.com/article/SB125434715693053835.html.

It is inconceivable that Zimbabwe Ben and Hank Paulson didn't know.

Uh oh. Ken, watch your new lawyers like a hawk. You hired Mary Jo "Ping Pong Ball Fed" White. You don't know who your lawyers represent. My advice: get a Roy Cohn, if you can find one. One who would be unafraid to let the Fed, Treasury and DOJ know: If you come down, you will crash their whole corrupt system.

The SEC-BofA Circus

"Beware of regulators bearing the gift of quick settlements, especially amid a populist stampede. That seems to be the healthy attitude of Judge Jed Rakoff to the recent SEC fine against [BofA] for handing out unpopular bonuses. ... This tale begins in the panicked days of last year's financial crisis. ... Enter new SEC chief Mary Schapiro, who has used the episode to signal a new era of supposedly get-tough enforcement. The SEC brought a civil lawsuit, alleging that BofA had misled inveastors by failing to disclose the bonuses in the proxy documents it sent to shareholders. ... In pursuing BofA, Ms. Schapiro broke with the SEC's policy of pursuing individuals, rather than companies, in cases of alleged fraud against investors. ... Next enter Judge Rakoff, a Clinton appointee, who the SEC expected would rubber stamp the deal. But the judge has proven to be skeptical of the SEC's case. The judge first asked why behavior that the SEC considered so egregious merited a fine of merely $33 million. ... The SEC's defense is that it would be too difficult to go after BofA management, since individuals will claim their decisions were advised by corporate lawyers and are protected by attorney-client privilege. ... Then again, perhaps the real reason the SEC is reluctant to go after individuals is because, regarding the BofA, all roads lead back to the federal government. ... Buried within a brief filed recently to Judge Rakoff, the SEC included the bombshell detail that BofA had in fact supplied the Fed and Treasury with a financial document that included information about the bonuses. ... If the Fed and Treasury were fine with these payouts, and didn't demand their discliosure, pehaps Messers. Paulson and Bernanke should be the parties in the SEC dock", my emphasis, Editorial at the WSJ, 5 September 2009, link: http://online.wsj.com/article/SB10001424052970204731804574387044194076168.html.

"The letter on Tuesday from David A. Markowitz, the chief of Mr. Cuomo's Investor Protection Bureau, said that 'attorney-client privilege is hindering this office's ability to make fair and fully informed decisions as to what charges, if any, to bring and whether individual [BofA] officers should be charged.' in its response, [BofA] disputed that assertion on several fronts, writing that 'because [BofA] did not violate the law, it has not offered reliance on legal advice as a defense'," Zachery Kouwe at the NYT, 10 September 2009, link: http://www.nytimes.com/2009/09/10/business/10bank.html.

"A federal judge threw out the [SEC's] proposed settlement with [BofA] over its disclosure of controversial bonuses paid to Merrill Lynch [ML] employees, in an unusual ruling that casts doubt about how the agency handles probes of major US companies. ... The Rakoff ruling undermines one of the most high-profile cases against alleged corporate wrongdoing conducted under SEC chief Mary Schapiro, who took the job in January. It puts new pressure on the agency to show it is fighting for investors in the wake of the controversy over its policing of the financial industry during the Wall Street boom and its failure to catch Bernard Madoff's massive fraud despite several red flags. ... In a rare scuttling of an SEC settlement, Judge Rakoff said the $33 million fine levied on [BofA] 'does not comport with the most elementary notions of justice and morality' because the company's shareholders--the victims of the alleged misconduct--are the same people being asked to pay the fine. He set a trial date for Feb. 1. ... Securities lawyers said they couldn't recall such a high-profile case being forced into a trial after the government and a company agreed to a settlement. In his ruling, Judge Rakoff often wrote that if bank executives in fact relied on legal counsel in crafting the proxy language, 'why are the penalties not then sought from the lawyers?' ... SEC spokesman John Nester said Monday the settlement, ... 'properly balanced all of the relevant considerations.' ... Wachtell, Lipton, Rosen & Katz, which represented [BofA], declined to comment. A lawyer for Shearman & Sterling, which represented [ML], declined to comment", my emphasis, Kara Scannell, Liz Rappaport & Jess Bravin at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB125294493976909051.html.

"'If the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders' money as a penalty for lying to them?' On this point, we think the judge is soft-pedaling the coercive nature of regulatory prosecution. ... Given all the dirty laundry already aired about this deal, including claims that [Fed] Chairman Ben Benrnake and former Treasury Secretary Hank Paulson forced a reluctant BofA to conclude its Merrill purhase, it's not surprising if the BofA was willing to pay for it to go away", Editorial at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB10001424052970203917304574413242609077958.html.

"With one rebuke from a federal judge, the [SEC's] tool for regulating financial markets and protecting investors faces daunting questions. Legal experts said Monday's rejection by US District Judge Jed. S. Rakoff of the agency's proposed $33 million settlement with [BofA] Corp. could bring tougher scrutiny of other settlements over alleged wrongdoing. For decades, the SEC has resolved more than 90% of its investigations through settlements, lawyers estimate. Defendants neither admit nor deny wrongdoing, and judges sign off on the deal with little scrutiny. In the process, government officials get to send a message of deterrence without blowing their enforcement budget, which could happen if too many cases went to trial. ... Other legal scholars noted that the judge undercut the derterrence message the SEC intended to deliver, suggesting that the proposed penalty was too light", my emphasis, Kara Scannell at the WSJ, 16 September 2009, link: http://online.wsj.com/article/SB125305845632913893.html.

"New York's attorney general, Andrew Cuomo, ramping up his investigation of Merrill Lynch's purchase by [BofA], issued subpoenas to the five directors on the bank's audit committee at the time fo the deal, according to people familiar with the situation. ... In a comment Wednesday, Mr. Cuomo said he wonders broadly where the boards were in this financial crisis, and whether BofA directors 'protected the rights of shareholders, were they misled, or were they little more than rubber stamps for management's decision-making?' ... 'Subpoenas by an attorney general of outside directors [are] quite unusual' for any reason, said Charles Elsdon, head of the Weinberg Center for Corporate Governance at the University of Delaware's business school", Liz Rappaport, Dan Fitzpatrick and Joann Lublin at the WSJ, 17 September 2009, link: http://online.wsj.com/article/SB125312111880316599.html.

Get tough enforcement? Against whom? The Feds encouraged the BofA to violate securities law? Never. The SEC's case stinks.

Did the SEC violate New York Law?

I'm sure Nester is right. What were the "considerations"? A managing directorship at say GSG, four New York BigLaw partnerships, and what else Nester? Who says the SEC can't be bought? We remember Nester. He appears in my 23 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/who-is-stephen-cutler-2.html.

Would the BofA pay $33 million to stay in Zimbabwe Ben's good graces? It's peanuts. Through interest rate suppression, the BofA gets much more than $33 million a year from the Fed.

The SEC's "biggest tool" is as threatening as Monty Python's "comfy chair" wielded by the Spanish Inquisition. Consent decrees are an SEC tool. To protect miscreants, not investors. For decades I have advocated the SEC be deprived of this tool. The message the SEC sends with these settlements is: it can be bought off. Cheaply with big jobs to SEC enforcement personnel.

Will Cuomo's inveastigation lead to ZB and Henry Paulson? If not, what's he doing? IS the FBI looking to "Spitzer" Cuomo? Stay tuned.

Schwab Mixes It Up

"Charles Schwab has long touted his anti-Wall Street credentials as proof he cares about small investors. Now he has gone against Wall Street in a different way, fighting back against New York Attorney General Andrew Cuomo, who is pushing to get the major brokerage firms to cover losses for clients who invested in auction-rate securities. ... Nearly every major firm on Wall Street has bowed to pressure from Mr. Cuomo and agreed to pay a total of more than $60 billion to buy back the securities from investors, marking the biggest settlement for individual investors in history. ... For Mr. Schwab, the feud goes beyond these securities. He says Mr. Cuomo is going too far, arguing that his firm just sold the securities and didn't underwrite them. ... Mr. Cuomo's office sued Schwab last week, alleging that the company committed civil fraud in selling auction-rate securities to its customers. ... The company says the allegations lack merit and disputes the idea that distributors should have the same responsibility as underwriters of auction-rate securities. ... On its Web site, Schawb has published statements aligning itself with other victims of misinformation about the auction-rate securities market and state that Mr. Cuomo 'hastily settled' with large Wall Street firms that have been let 'off the hook' by not being forced to buy securities from clients of so-called downstream firms like Schwab", my emphasis, Liz Rappaport at the WSJ, 25 August 2009, link: http://online.wsj.com/article/SB125115650819655199.html.

I'm with Schwab on this. His firm should not bear underwriters' liability.

Appraisal Problems

"Appraisals are becoming one of the biggest obstacles for Americans trying to sell their homes, refinance their mortgages or tap into home-equity credit lines. ... Now, some people in the mortgage business--and some borrowers--say the pendulum has swung too far the other way. ... Lenders burned by huge losses from defaults are now pressing appraisers to be more conservative. And appraising itself is more difficult with home prices fluctuating rapidly and transactions few and far between in some markets; sale prices from a few months back may no longer reliably indicate the value of nearby homes. ... In some cases, lenders are requiring that appraisals be based on sales closed within the past three months rather than the prior six-month norm, appraisers said. Some lenders are also asking for comparisons with at least one sale in the past 30 days. ... Fannie and Freddie agreed to the code last year after New York Attorney General Andrew Cuomo accused them of failing to ensure that appraisers were shielded from pressure to inflate their estimates", James Hagerty and Ruth Simon at the WSJ, 9 June 2009, link: http://online.wsj.com/article/SB124450388959795613.html.

I think the Home Valuation Code of Conduct will change little in the appraisal world. CPAs have had ethical standards for decades. So?

Yves Smith (YS) has a related 24 June 2009 post at her Naked Capitalism, link: http://www.nakedcapitalism.com/2009/06/low-appraisals-blamed-for-keeping.html. YS attacks the Bloomberg story for "industry-cheerleading". The WSJ also does this.

Whose Watching?

"The Big Four accounting firms are used to embarrassing headlines about their purported misdeeds. After all, the past decade has seen one business catastrophe after another at companies audited by the major firms. Witness the scandals at Tyco, WorldCom and Xerox. ... In investor lawsuits filed in recent months, BDO Seidman [BDOS] and McGladrey & Pullen stand accused of shoddy audits and signing off on the books of fraud-ridden businesses and investment funds. The cases, together with a string of earlier ones involving the two firms, raise unsettling questions about the level of confidence investors can put in financial audits. ... The gray area centers on what is reasonable, an issue that often plays out in the courts because accounting firms can be one of the only solvent players left when a company goes down. ... [BDOS] had audited [ES Bankest LLC] and concluded its books were free from material error. ... 'Auditors are supposed to have professional skepticism, and that is just inconsistent with the client relationships that they try to preserve to keep the money flowing,' [Steven] Thomas says. ... [BDOS] ... also is contesting a civil lawsuit from the collapse of Le-Nature's Inc., a Pennsylvania iced-tea producer shuttered in 2006 after allegedly faking $240 million in revenue, according to forensic accounting undertaken by a bankruptcy court. [BDOS] auditors had certified that Le-Nature's financial statements were free from material error. ... For McGladrey & Pullen, some tough questions have come from Frederick J. Grede, a Chicago bankruptcy trustee who claims the firm's auditors actively participated in the 'looting' of Sentinel Management Group, a $1.4 billion investment fund that failed in August 2007. ... According to New York Attorney General Andrew Cuomo, [J. Ezra] Merkin repeatedly lied to his customers about what he was doing with the $2.4 billion they had given him. ... The Merkin funds were audited by [BDOS], which attested that the books were free of material error. ... In a lawsuit [New York Law School] blames [BDOS] for not telling investors about Merkin's alleged sleights of hand. Exhibit A: the 2007 audit of Ascot, which lists the fund's assets on a week-to-week basis, but doesn't mention that just one broker, Madoff, held nearly all those assets. ... But New Jersey lawyer, Alan Wasserman, who is preparing another case against [BDOS] on behalf of Merkin investors, says Merkin's heavy reliance of Madoff is a 'red flag any accounting firm should have seen' and noted. ... In the view of Richard L. Kaplan, a law priofessor at the University of Ilinois, a diligent auditor should go to source documents to verify the financial statements it is scrutinizing. If a fund claims it has cash in a bank account, auditors should get records directly from the bank, he said. Kaplan has advocated tougher oversight of accounting firms. Still, he acknowedged there are limits. 'A very determined crook.' he added, 'will deceive virtually any auditor'," my emphasis, AC Thompson and Jake Bernstein at Barron's, 11 May 2009.

Yes, Thomas, one problem with CPA audits is the fee arangement. Another is the SEC. I disagree with Kaplan, CPAs have too much regulation now. It doesn't work. The SEC should eliminate the "large accelerated filer" and "accelerated filer" concepts. It should give registrants 120 days to file: 10-Ks and 60 10-Qs. But the "analyst community" will scream. So? CPAs have enough excuses for shoddy work, short SEC filing deadlines should not be another. Go "to source documents", how novel. What did PWC do at Satyam? If you haven't recently, read a 10-K. The SEC has registrants include much repetitious material. Why?

Ken Lewis, Whistleblower?

"[Fed] Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co.--a deal that later triggered a government bailout of BofA--according to testimony by Kenneth Lewis, the bank's chief executive. Mr. Lewis, testifying under oath before New York's attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening difficulties at Merrill, the struggling brokerage giant. ... Under normal circumstances, banks must alert shareholders of any materially signifcant financial hits. ... Disclosing losses at Merrill--which eventually totaled $15.84 billion for the fourth quarter--could have given the BofA's shareholders an opportunity to stop the deal and let Merrill collapse instead. ... 'It wasn't up to me.' Mr. Lewis said. The BofA chief said he was told by Messrs Bernanke and Paulson that the deal needed to be completed, otherwise it would 'impose a big risk to the financial system' of the US as a whole. ... A person in government familiar with Mr. Bernanke's conversations with Mr. Lewis said Wednesday that the Fed chairman didn't offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel. Mr. Paulson repeatedly told Mr. Lewis that 'the US government was committted to ensuring that no systematically important financial institution would fail.' ... In the transcript reviewed by the Journal, Mr. Lewis didn't say he was explicitly instructed to keep silent about the losses at Merrill. But his testimony indicates that he believed the govenment wanted him to remain silent. ... By keeping mum, the CEO of one of the biggest US banks appeared to set aside a basic tenet of American-style finance--that, above all, companies must disclose marterial informantion to shareholders and potential investors. 'Regulators are supposed to tell you to obey the law, not to disobey the law,' said Jonathan R. Macey, deputy dean of Yale Law School, 'If you're the CEO, your first obligation is not to your regulator, it's to your institution and shareholders", my emphasis, Liz Rappaport at the WSJ, 23 April 2009.

"The cavalier use of brute government force has become routine, but the emerging story of how Hank Paulson, and Ben Bernanke forced CEO Ken Lewis to blow up Bank of America is still shocking. It's a case study in the ways that panicky regulators have so often botched the bailout and made the financial crisis worse. ... In order to keep Mr. Lewis quiet, they all but ordered him to deceive his own shareholders. And in the name of restoring financial confidence, they have so mistreated [BofA] that bank executives everywhere have concluded that neither the Treasury nor the [Fed] can be trusted. ... But Washington decided that America's financial system couldn't withstand a Merrill failure, and that BofA hasd to risk its own solvency to save it. So then-Treasury Secretary Paulson, who says he was acting at the dcirection of [Fed] Chairman Bernanke, told Mr. Lewis that the feds would fire him and his board if they didn't complete the deal. ... But since the government didn't want to reveal this new federal investment [TARP] until after the merger closed, Messrs. Paulson and Bernanke rejected Mr. Lewis request to get their commitmnent in writing. 'We do not want a disclosable event,' Mr. Lewis says Mr. Paulson told him. 'We do not want a public disclosure.' Imagine what would happen to a CEO who said that. ... The merger closed on January 1. But investors and taxpayers had to wait weeks to learn that the government had invested another $20 billion plus loan insurance in BofA, and that Merrill had lost a staggering $15 billion in the last three months of 2008. ... But it is the Merrill deal that raises the most troubling questions. Evaluating the policy of Messrs. Bernanke and Paulson on their own terms, this transaction fundamentally increased systemic risk. In order to save a Wall Street brokerage, the feds spread the risk to one of the country's largest deposit-taking banks. ... Instead they transplanted the Merrill risk to BofA shareholders, the bank's depositors and the taxpayers who ensure those deposits. And then they had to bail out BofA too. ... Mr. Paulson told Mr. Cuomo's investigators that he also kept former SEC Chairman Christopher Cox out of the loop while forcing BofA to rescue Merrill. ... At the next meeting on January 8, a week after the merger had closed, the minutes again make no mention of either regulator telling their colleauges that they had committed tens of billions of dollars. Yet the minutes helpfully note that among the topics discussed were 'coordination, transparency and oversight'," my emphasis, Editorial at the WSJ, 27 April 2009.

Repeatedly? Hmm. Not "explicitly", so? How did Macey get the idea "regulators are supposed to tell you to obey the law"? "Hahahaha" the Mogambu Guru would say. Have America's courts ever seen anything like this before? Yes!

"Defendants, Sentry Insurance (Sentry), Frank Singer (Singer) and Caroline Fribance (Fribance) appealed from a judgment entered on a jury verdict of $1.34 million in favor of plaintiff, Vincent A. Gantt (hereafter plaintiff or Gantt) in his action for tortious discharge in violation of the covenant of good faith and fair dealing and in contravention of public policy, ... defamation, and intentional infliction of emotional distress", Gantt v. Sentry Insurance, 4 CR 2d 874, 875 (1992). "For the reasons set forth below, we conclude that a termination in retaliation for testifying truthfully concerning a coworker's sexual harassment claim in the context of an administrative investigation is actionable under Tameny", 875-6. "Joyce ... Bruno, meanwhile, filed a complaint with the Department of Fair Employment and Housing (DFEH). She alleged harassment by Dresser and failure by Sengtry's higher management to act on her complaints. Caroline Fribance, Sentry's house counsel in charge of labor-related matters, undertook to investigate the matter. Gantt informed Frinbance that he had reported Bruno's complaints to personnel in Scottsdale. However, Ganttt gained the impression that he was being pressured by Fribance to retract his claim that he informed Scottsdale of the complaints", 876. "Gantt met with Fribance the day before his formal DFEH interview. She repeatedly reminded him that he was the only management employee supporting Ms. Bruno's claim that she had notified management about the harassment. Plaintiff felt that Fribance was unhappy with his testimony and that her unstated intent was to induce him to change his story", my emphasis, 877. Imagine: a jury was permitted to infer Fribance wanted Gantt to change his testimony. Fribance repeating a fact was held against her. Hmmm. Fribance is a director of Planned Parenthood of Wisconsin, having retired as a Sentry vice-president. Why wasn't she disbarred for this stunt?

Not reducing the agreement to writing is a "badge of fraud" in bankruptcy paralance. Where is the SEC and DOJ on this? I have news for Paulson and Bernanke, the 1934 Securities Exchange Act is not optional. This is so much fun. I see Paulson's failure to inform Cox as res gestae showing "consciousness of guilt". He was obviously afraid, as useless as Cox was at the SEC, even Cox could have seen the 1934 Act violation. Well Eric Holder, how about it? Not only do I conclude Zimbabwe Ben and Hank "Goldman Sachs Boy" Paulson are criminals, I also conclude neither understands finance. Their spreading Merrill's risk to the BofA should have been obvious to this dynamic duo. Consider the implications of GSG's former chairman's actions for GSG's current financial statements.

"The lease and contract in this case--which involve, inter alia, the letting of a Naval Petroleum Rserve for exploitation by means of a private corporation and a scheme for obtaining fuel oil and elaborate storage facilities for the Navy by means of the royalties of crude oil provided for the [US] in the lease--were without authority of law, and the [US] is entitled on that ground to have them cancelled", Mammoth Oil v. US, 275 US 13, 13 (1927). "This suit was brought by the [US] against the petitioners in the District Court of Wyoming to secure the cancellation of an oil and gas lease made by the [US] to Mammoth Oil Company [MOC] April 7, 1922, and to set aside a supplemental agreement made by the same parties February 9, 1923", 30. "The lease and agreement were signed for by the [US] by Fall as Secretary of the Interior and Denby as Secretary of the Navy", 31. "The complaint states that the lease and agreement were made as the result of a conspiracy by Fall and H.F. Sinclair to defraud the [US]; that Fall acted for the [US] and Sinclair acted for the [MOC]; that the negotiations were secret, and the lease was made without competition; that responsible persons and corporations desiring to obtain leases were by Fall, in collusion with Sinclair, denied opportunity to become competitors of the [MOC] ... in general terms, the complaint charges that Fall and Sinclair conspired to defraud the government by making the lease without authority and in violation of the law, and to favor and prefer the [MOC] over others", 35-36. "But [Fall] refused to submit the question to the Attorney General, and, as a reason for not taking such legal advice, said that 'the chances were at least even, or at least there was some chance' that an adverse opinion would be given, 'and if the Attorney General signed such an opinion ... he [Fall] would be estopped from going anything'," 46. "Under the circumstance, his failure to submit the lease to the Attorney General or to any lawyer in his own Department indicates that he knew the transaction was liable to be condemned as illegal, and that without regard to the law, he intended to put it through", my emphasis, 47. Interesting; Paulson never told Cox of the BofA-Merrill issue. Hmm. Albert Fall ultimately went to prison for his part in the Teapot Dome scandal, Fall v. US, 49 F2d 506 (DC Cir., 1931). Well Eric Holder, where are you?

We Are All Experts Now

"As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers. ... An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says. ... Unsecured creditors have asserted in court filings that they are owed about $200 billion. ... 'While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down-plan should have been pursued. It was an unconscionable waste of value,' said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman's chief restructuring officer. Mr. Marsal estimates that the total value destruction at Lehman will reach betweeen $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined. Much of the destruction of value comes from the bankruptcy filing of the parent guarantor, Lehman Holdings. ... The problem for creditors is that this also terminated contracts in which Lehman was owed money. Mr. Marsal said a few extra weeks would have allowed Lehman to transfer or unwind most of its 1.1 million derivatives trades, preserving more cash for creditors. ... 'This filing, which was pretty much dictated to the board of directors at Lehman that weekend, occurred with no planning,' said Mr. Marsal, whose New York firm was hired by Lehman's board around 10:30 PM Sept. 14. That was just hours before Lehman [LEH] filed for the largest bankruptcy in U.S. history, after the U.S. government declined to offer its backing. ... 'Had fundamental rules of crisis management been followed, much of the value that was lost by the unsecured creditors would have been prevented. This loss in value was a big hit to the public holders and could have been mitigated,' Mr. Marsal said. ... About 150 Alvarez and Marsal [A&M] employees are on site at Lehman offices in New York, London and Hong Kong, combing through creditor claims and managing operations. They are piecing together what happened at the moment of Lehman's collapse", my emphasis, Jeffrey McCracken at the WSJ, 29 December 2008.

How interesting. A&M was hired before LEH's bankruptcy. What if anything did A&M tell LEH before filing? Is A&M's report designed to protect A&M from a malpractice suit for failure to warn LEH's board of this at least, reasonably possible result? If A&M did not anticipate this $50+ billion disaster, why listen to A&M now? What does "value was destroyed" mean? Did an "Act of God" cause it? Aren't derivatives a "zero-sum" game? If so, counterparties gained at LEH's expense! Should LEH's bankruptcy estate sue them? Or is A&M protecting these counterparties by saying value "destruction", not transfer? Has LEH preference payments or fraudulent transfers to pursue? Does A&M recognize LEH's counterparties may give it future referrals with nothing more to gain from LEH, a "repeat player advantage"? A better title for the WSJ article, "Lehman's Chaotic Bankruptcy filing Destroyed Billions in Value", would have been "Lehman's Consultant Claims ... ". The WSJ accepted A&M's claims at face value. "Preserved value" or cost counterparties more? "This also terminated contracts". Did the "Three Musketeers", Henry Paulson (HP), Zimbabwe Ben (ZB) and Chris Cox (CC) know this on the night of 14 September?

Why believe "experts"? Look at KPMG's recent BCE "solvency" opinion. Citigroup was to be a BCE buyout lender. Citigroup gained by the buyout falling through. As Citigroup is also a KPMG client, KPMG should have refused this assignment, my 18 December 2008 post. What does Marsal mean by, "pretty much dictated to the board of directors at Lehman"? Who? Marsal name names. Did Goldman Sachs (GSG), orchestrate this through HP? Or was this CC's or ZB's doing? No matter, LEH's board should not have filed on 15 September if it was not in the interest of LEH's shareholders and creditors. PERIOD! Did Marsal discuss these "fundamental rules" with LEH's board on the night of 14 September? If not, why not? Where was Harvey Miller (HM), LEH's bankruptcy counsel on the night of 14 September? Should LEH sue HM for malpractice? The WSJ headline is revealing. Creating chaos may conceal bankruptcy fraud so intentional acts appear to result from oversight or mistake. Did that happen here? Is the SDNY US Attorney's Office looking into this? The WSJ might have used this title, "Lehman Counterparties Screw Unsecured Creditors Out Of $50 Billion".

One commenter on Yves Smith's 29 December 2008 piece, link: http://www.nakedcapitalism.com/2008/12/75-billion-needlessly-lost-in-hasty.html, cited this 14 December 2008 NYT article, link: http://www.nytimes.com/2008/12/14/business/14miller.html. I hadn't read it before, thinking it a HM profile. Here goes, "From his perspective as Lehman's undertaker, Mr. Miller believes that the fallout from the firm's messy bankruptcy could have been avoided. Regulators could have stepped in, he says, not necessarily to save Lehman, perhaps, but to head off the meltdown that followed. 'They totally missed it,' he says. 'Look what happened.' ... In the days after Lehman filed for bankruptcy, he notes, demand for corporate debt utterly evaporated. The failure of a Wall Street firm poses its own special risks, because other companies that rely on it--such as counterparties to complex financial contracts known as derivatives--are all financially exposed to its collapse. That's why Mr. Miller says it was crucial for the government to head off the wholesale termination by counterparties of all their transactions with Lehman Brothers before the firm was forced into bankruptcy. "If the Fed or the Treasury said, "Let's say to Lehman, there's no bailout, we're not going to save the company," they could have supported an orderly unwinding of all the transactions over a period of months," he says. 'It probably would have cost the economy a lot less money'," my emphasis, Johnathan Glater (JG) at the NYT, 14 December 2008, link: http://www.nytimes.com/2008/12/14/business/14miller.html.

.

"This matter came on for trial, on September 30, 1992, upon plaintiff/trustee's second amended complaint for avoidance of transfers, preferential, fraudulent and post-petition, of funds and assets by Debtor to defendant Society Bank in an amount approaching $3,000,000. Upon consideration of the evidence adduced at trial and the record herein, the court finds that certain transfers made to defendant should be avoided, and that the trustee should be granted judgment against defendant in the amount of $2,148,499.43. On August 20, 1990, an involuntary petition under chapter 7 of title 11 was filed against Debtor Parker Steel Company. ... Plaintiff, in the instant complaint, seeks to avoid certain payments, as preferential. Plaintiff claims that defendant received paymennts from Debtor, while insolvent, within one year of Debtor's petition, benefitting certain guarantors", In Re Parker Steel, 149 BR 834, 838 (Bkrtcy, ND Ohio, 1992). Parker Steel was decided before 1994's change to section 404 of the bankruptcy code, or under Deprizio. "Therese A. Zmuda, employed as a CPA with Holt, Kisoff & Moseley, Inc., testified that she had been retained by plaintiff to review Debtor's records", 841. "Zmuda's opinion, using the 1989 audited statement and 1990 reviewed statement, applying these adjustments to Debtor's valuation of assets and liabilities, was that Debtor was insolvent in August, 1989, continuing until March, 1990. ... Zmuda opined that, based upon the relationship between the draws on the line of credit and the amount of accounts payable, Debtor was attempting to pay down the line of credit", 842. The time of insolvency is critical as are payment practices. I call this a secured-unsecured creditor debt swap. "Michael Clodfelter, a partner of Ernst & Young, defendant's witness, testified that he is a consultant for creditors and Debtors in bankruptcy situations, valuing privately held businesses. ... It was Mr. Clodfelter's opinion that Debtor was solvent through March, 1990; Debtor's solvency is more doubtful beginning in April, 1990", 843. "The issue contested by defendant is the solvency of the Debtor from August, 1989 until July, 1990. ... Initially, the court notes that insolvency is to be determined at the time of the transfer, not at the time the petition was filed. ... Additionally, the court must consult the bankruptcy code definitions is assessing the imapct of the Sharon liability", 844. "This balance sheet test refers, then, to insolvency when a Debtor's liabilities exceed its assets, at a fair value. ... In valuing Debtor's liability to Sharon, although GAAP are relevant, they are not controlling", 845. LEH's CDS counterparties must prevent an insolvency determination, lest they be found to be beneficiaries of billions in preference payments. I note the court found the Ernst & Young experts testimony to be less credible than Zmuda's.

"Appellant Helig-Meyers Company and five of its wholly-owned subsidiaries appeal the decision by the [US] Bankruptcy Court [BC] for the Eastern District of Virginia that debtors were solvent on the date of the alleged preferential transfers to Wachovia Bank, N.A., and others (collectively 'the lenders'), as part of a financial restructuring on May 25, 2000. ... The debtors argue that the [BC] improperly applied the balance sheet test and relied upon an analysis of the creditor's expert on the mistaken belief that sich expert executed a balance sheet test of the debtor's solvency", In Re Helig-Meyers, 328 BR 471, 474 (ED Va., 2005). "The burden is on the trustee to prove the avoidability of a transfer under subsection (b); however, 'the debtor is presumed to have been insolvent on and during the 90 days immediately preceeding the date of the filing", 475. "The definition of insolvency nicely frames the issue. An insolvent debtor's financial condition is such that 'the sum of such entity's debts os greater than all of such entity's property at a fair valuation.' ... The qualification of 'a fair valuation' in the definition often requires that the judge sort through the differing presentations by the parties' valuation experts and to make factual findings. Not surprisingly in this case, the two valuation experts reached vastly different conclusions regarding the value of the debtors' assets. ... As a threshold matter, Judge Tice considered whether, on the date of the transfers, the debtors collectively operated as a going concern or were on their deathbed", my emphasis, 477. "A debtor lies on its deathbed where the debtor is 'in a precarious financial condition' so that 'liquidation was imminent when the petition was filed", 477. "As a going concern, the court applies the balance sheet test to measure the debtors' solvency. The balance sheet method 'contemplates a conversion of assets into cash during a reasonable period of time'," 477.

If HM is right, "the fallout ... could have been avoided", why does HM think the regulators "totally missed it"? Did they? Was the result intended? In reading this I conclude A&M and HM "cleared" reports before release. They both want to protect LEH's board and the counterparties. "Look what happened"! Yes, look! "Forced into bankruptcy", what nonsense. Either ZB, CC and HP did not anticipate what looks like the counterparities $50 billion gain, or they did. Is A&M preparing a smiliar AIG report at this minute? "Orderly unwinding"? Should HM come back, in his next life, he could make a fine offensive lineman, protect that quarterback! What does "cost the economy" mean? Which participants in the economy? "Counterparties ... are all financially exposed". Yes they were. Should they be dragged into federal district court? Well HM, how big are your cojones? Will you make enemies of every other Wall Street house to benefit LEH's unsecured creditors? If not, you should be replaced. I refer again to Switzer, my 18 December post: http://skepticaltexascpa.blogspot.com/2008/12/deprizio-doctrine-and-aig.html.

Look at some expert "advocacy". In about 1971, McKinsey, the big consulting firm, disgraced itself, in my opinion, by writing Pan American's plea for government subsidies. In about 1999, KPMG wrote a report economically "justifying" subsidies for a Hartford, Connecticut sports stadium. Forensic experts produce junk to attempt to mislead juries into convicting defendants with forensic evidence, my 8 June 2008 post: http://skepticaltexascpa.blogspot.com/2008/06/expert-monopolies.html. No matter how much expertise A&M supposedly has, we don't know why it wrote what it did. No document reveals the circumstances of its preparation, my 7 February 2008 post, link: http://skepticaltexascpa.blogspot.com/2008/02/why-dont-we-learn-from-history.html.

A significant similarity between LEH and AIG is: the derivatives counterparties were protected. HP, ZB and CC seem to have their answer to "Carthago delenda est", i.e., "The counterparties will be protected".

What Judge Tice did at Helig cannot be done for AIG lest someone conclude AIG was insolvent months ago and that liquidation, not going concern valuation was appropriate.

Mary Jo Rides Again

"On Sept. 25, as the world financial crisis escalated, two of New York's most powerful lawyers met for lunch in a restaurant near Wall Street with a name that recalled happier times: Bull Run. They were Michael J. Garcia, the [US] attorney in Manhattan, and Andrew J. Cuomo, the state attorney general. Both men's offices have histories of moving aggressively against financial fraud, and of vigorously defending their turf when other prosecutors try to compete for their cases. ... First came the bust; now comes the inevitable flood of investigations and possible prosecutions. State and federal prosecutors are looking at a range of companies, from Fannie Mae and Freddie Mac, the mortgage finance companies that were effectively nationalized in September, to Lehman Brothers, the Wall Street bank that collapsed last month in the largest bankruptcy in [US] history. But the crisis is so widespread that there has been another phenomenon--cooperation among prosecutors, especially in New York, where in the past they have not been shy about bumping elbows and sometimes had to resolve conflicts at the highest levels of the Justice Department. ... Two people familiar with the Lehman investigations said the case had been divided among the three offices [Manhattan, Brooklyn and New Jersey] because there were too many avenues of inquiry for any one office to handle. ... The decision to cooperate can be advantageous to prosecutors. Under the arrangement in the swaps investigation between Mr. Garcia and Mr. Cuomo, for example, some of Mr. Cuomo's lawyers would be designated as 'special' federal prosecutors to enable them to participate in secret grand jury proceedings. ... Mr. Garcia's office has said it is looking into whether federal laws were violated, while Mr. Cuomo, with a broader mandate as the state's attorney general, can seek industry reforms, legislation, civil settlements and other remedies. ... Mary Jo White [MJW], who served as [US] attorney for the [SDNY] from 1993-2002 and is now in private practice, said there were risks of intense public pressure 'to put scalps on the wall--"how could something as bad as this happen if nobody did something wrong?"' 'You have to distinguish between arguably bad risk-taking,' she said, 'and someone who has actually violated the law.' ... But for now, the public cooperation between prosecutors, notably Mr. Garcia and Mr. Cuomo, has caught the attention of the legal community, largely because of the history of turf battles involving the [US] attorney for the [SDNY]. ... In 1997, for example, Ms. White, then the [US] attorney, allowed one of [Paul] Shechtman's clients, who had been charged in a securities case by Robert M. Morgenthau, the Manhattan district attorney, to plead guilty to federal charges. That effectively stopped Mr. Morgenthau from pursuing his case. Mr. Morgenthau's office complained, but Ms. White responded that to prosecute the crimes 'under only state law diminshes their seriousness'," my emphasis, Benjamin Weiser and Ben White at http://www.nytimes.com/, 31 October 2008.

"The [SEC] said it won't take disciplinary action against its enforcement chief and others who were criticized in a report by the agency's inspector general [IG]. The clearance of SEC enforcement chief Linda Thomsen and David Nelson, head of the agency's Miami office, came amid a congressional review of the agency's performance in recent years. Recent SEC [IG] reports have highlighted potential issues raised by a revolving door between the government and industry. One report by the [IG] found Ms. Thomsen had improperly released information about an insider-trading investigation involving hedge fund Pequot Capital Management and John Mack, a well-known Wall Street executive. The [IG] concluded Ms. Thomsen improperly relayed information when she told lawyer [MJW], who was working for Morgan Stanley's board and vetting Mr. Mack as a potential chief executive, that there was smoke but not fire in the investigation. ... The SEC's chief administrative-law judge ... said Ms. Thomsen did disclose to Ms. White information about the status of the SEC investigation, but '[t]here are no indications that Thomsen's disclosure was committed maliciously or for gain, or was frequently repeated.' ... SEC [IG] David Kotz said he was 'surprised and disappointed" by the decision", my emphasis, Kara Scannell at the WSJ, 8 November 2008.

Whenever my "favorite" Fed, MJW comes up, I assume I have a "target rich" environment. Hey MJW, get the joke, "target", like "target notice" sent to persons under federal investigation? Just checking. Wouldn't want to overtax your intellect. I remember your using your office in 1997, improperly in my opinion, to derail Manhattan DA Morgenthau's prosecutions, a man I disagreed with from time-to-time, but who I believe to be incorruptible. Unlike the SDNY's AUSAs and US Attorney. MJW, why worry about "scalps" now? What did you do as US attorney for nine years? Had you taken more "scalps" of "persons of consequence" to use Frank Kafka's term, we might not be in this mess today. But had you, you might not be back at Debevoise and Plimpton (D&P). Can one's future employment prospects at "Justice" influence his exercise of "prosecutorial discretion" today? Yes, MJW, we want scalps. How about starting with John Mack (JM)? I'm sure if Mike Garcia's (MG) successor spends even the $9 million spent to prosecute Martha Stewart for nothing, he can find something to incarcerate JM for. No, MJW, we need not distinguish anything. Save your comment for jury closing argument. I say, paraphrasing Franklin Delano Roosevelt, "Investigate and investigate, indict and indict and convict and convict". No deals, no quarter; public jury trials. MJW "allowed" someone to cop a plea instead of letting Morgenthau try the case. Why? Did you protect someone Mary? Come on, don't be shy. Tell us all about it. If so, who? "Diminishes their seriousness?" What does that mean?

What's going on here, given the SDNY US Attorney's office history of questionable, in my opinion, prosecutorial decisions? I surmise MG realized with Bush's approval rating at about 20%, his office had little credibility and he "rented" some from Andrew Cuomo (AC). AC, watch your back when in bed with the "White-Garcia Mob". If you have designs on New York's governorship, following Thomas Dewey, your involvement with this "operation" could end your political career. Why did MG pursue Eliot Spitzer? Why did MG expend federal prosecutorial effort on that? AC, watch yourself and assume nothing in dealing with these characters.

The federal "revolving door" revolves once more. According to her biography at D&P's website, MJW graduated from Columbia Law School in 1974. She was Judge Marvin Frankel's law clerk, then worked for D&P from 1976 to 1978. She was a SDNY AUSA from 1978 to 1981. From 1983 to 1990 MJW was a D&P litigation partner. From 1990 to 1993 she was with the Brooklyn US Attorney's office, 1993-2002, SDNY US Attorney, then back to D&P. "White's practice concentrates on internal investigations and defense of companies and individuals accused of involvement in white collar corporate crime, of [SEC] and civil securities law violations, and of other major business litigation disputes and crises. For her criminal work, she leads a Debevoise team that includes ten former Assistant U.S. Attorneys with extensive experience in major commercial investigations and prosecutions. Ms. White's recent representations of public record include: ... A Special Committee of the Board of Tommy Hilfiger which conducted an internal investigation in connection with a federal criminal investigation resulting in a decision by the US Attorney for the [SDNY] not to criminally prosecute the company. ... Under Ms. White's leadership, the [US] Attorney's Office for the [SDNY], sucessfully investigated and prosecuted numerous cases of national and international significance", my emphasis. Doesn't this give you warm and fuzzy feelings and increase your confidence in the SDNY US Attorney's Office? We don't know who MJW declined to prosecute or why? Do we? I would have liked the SDNY US Attorney's Office to have indicted Tommy Hilfiger, but MJW's biography is apparently a D&P sales tool aimed at prospective clients, "See, Tommy Hilfiger wasn't indicted, you won't be either. Trust us, we have CLOUT where it counts". Is this what D&P is saying? MJW's D&P biography reminds me of Monty Python's Flying Circus, "Snap snap, grin grin, wink wink, nudge nudge, say no more". MJW's D&P team "includes ten former Assistant U.S. Attorneys" I thought, "Hmm, could an enterprising, fearless go-for-broke, politically inclined AUSA with brass cojones use this as an "admission against interest' or a a co-conspirator statement after a James determination? More from MJW's D&P biography, "When [MJW] left her post as US Attorney for the [SDNY] in January, 2002, she was acclaimed for her nearly nine years as the leader of what it widely recognized as the premier US Attorney's office in the nation". By whom? MJW never prosecuted anyone at Kidder Peabody or GE for 1994's Joe Jett debacle did she? Under the most charitable interpretation I can credit, MJW never figured out what happened at Kidder. Under less charitable interpretations, duh.

The SEC is hopeless, top to bottom. An administrative-law judge fined Joe Jett $8.4 million for nothing, my 12 September 2007 post, and Thomsen walks! A travesty. Thomsen knowingly and wilfully released information. That she did not gain, nor did it frequently (how often is "frequently"?) nor maliciously is irrelevant. Isn't it? Suppose one commits a murder. Will he be prosecuted for "only one time"? Is motive an element of crime? I thought mens rea refers to intent to commit the act, not whether or not one intended to break the law by virtue of the act. "Whoever corruptly, or by threats of force, or by any threatening letter or communication influences, obstructs, or impedes or endeavors to influence, obstruct or impede the due and proper administration of the law under which any pending proceeding is being had before any department or agency of the [US], ... Shall be fined under this title, imprisoned not more than 5 years or, ... or both", 18 USC 1505. Could an aggressive AUSA shoehorn MJW's actions into an indictment under this statute? Maybe. I think it's worth a shot. Besides, the peasants would love seeing a former US Attorney and SEC enforcement chief indicted. The SDNY US Attorney's office could turn the trial into a big moneymaker on pay per view. Why not, people pay millions to see pay per view fights? UFC is on pay per view. Why not US v. White and Thomsen? The Las Vegas bookmakers could take bets on which counts would yield convictions. Then on the sentence length. Hundreds of millions could be made.

Why We Need Federalism-9

"Cuomo has become 'a second SEC', or Securities and Exchange Commssion, says Columbia Law professor John Coffee, 'in cases in which the SEC has been strangely slow'," Barron's, 1 September 2008.

"A former Credit Suisse Group broker pleaded not guilty to charges he and another broker misled investors about purchases of auction-rate securities. Julian Tzolov, through his attorney, entered his plea Friday before a U.S. Magistrate in Brooklyn, N.Y. ... Prosecutors allege the two engaged in a plan to get higher commissions by approaching clients about buying auction-rate securities backed by student loans, but used clients' funds to buy more risky debt securities. The [SEC], in a separate civil lawsuit, alleged Messrs. [Eric] Butler and Tzlov made more than $1 billion in unauthorized purchases of auction-rate securities for the accounts of their corporate clients", Chad Bray at the WSJ, 8 September 2008.

"In July, Anotolio Pellizzetti, a 70-year old retired physician in Tavernier, Fla., filed an aribitration claim accussing UBS AG's wealth-mangement unit of fraud in selling him $2.5 million of auction-rate securities. ... [O]ne feature of this litigation stands out: Mr. Pellizzetti was referred to an attorney by his son--a former UBS broker who first sold his father the securities. ... Now, in the latest twist of the roiled credit markets, some brokers are siding with customers who allege that the securities weren't as billed. ... In the wake of all this, a behind-the-scenes debate is unfolding about the role played by brokers. Even as the auction market burgeoned to $330 billion in recent years, many brokers knew little about its inner workings, according to regulatory documents, lawsuits and interviews with brokers and their clients. ... Brian McNiff, a spokesman for Massachusetts Secretary of State William Galvin, notes that the state opted to file civil-fraud suits against units of UBS and Merrill Lynch & Co., not their financial advisers. ...UBS and Merrill Lynch have both settled their complaints with Massachusetts and other regulators without admitting or denying wrongdoing. ... Brokers are caught in the middle because the auction market was both obscure and complex--but filled a need for their clients at a time when money-market funds offered often-paltry returns. In short, an auction-rate security is a form of debt that pays a short-term interest rate that is reset periodically. ... According to a complaint filed by New York's attorney general [Andrew Cuomo] against two UBS units, which the company settled in August without admitting or denying wrongdoing, the firm's financial advisers, 'readily admit that they represented auction-rate securities to be cash equivalents, as that was their understanding.' Many UBS brokers, the complaint says, 'did not even have the most basic understanding of how auction-rate securities worked until; after UBS determined not to participate in auctions of Feb. 13, 2008.' ... [T]he Massachusetts complaint ... [said UBS] 'was providing its sales force, and consequently its customers, with half-truths about the mature of' the auction market during the fall of 2007 and early this year", Daisy Maxey at the WSJ, 8 September 2008.

It sould be nice if Chris Cox would ask himself why a "second SEC" is necessary. What's wrong with the SEC he heads?

I doubt Butler & Tzolov (B&T) did this without their Credit Suisse supervisors knowledge. This sounds like another Joe Jett fiasco and B&T are the designated scapegoats.

Compare the Feds' treatment of brokers with that of the state regulators.

Auction-Rate Update

"J.P. Morgan Chase & Co. and Morgan Stanley agreed to buy back more than $7 billion in auction-rate securities as part of an agreement to end probes by regulators into how they marketed the complex securities. At a news conference, New York Attorney General Andrew Cuomo siad J.P. Morgan would pay $25 million in civil penalties while $35 million in penalties will be paid by Morgan Stanley", WSJ, 15 August 2008.

"Wachovia Corp. is buying back as much as $8.8 billion in auction-rate securites, but the decision should have minimal impact on the Charlotte, N.C., bank as it works its way through the more-serious headaches relating to the U.S. mortgage rout, analysts said Friday. ... Wachovia, which neither admitted nor denied wrongdoing, also will pay $50 million in civil penalties", WSJ, 16 August 2008.

"The New York attorney general's office turned up the heat Wednesday on financial firms that sold auction-rate securities and haven't settled with regulators. Attorney General Andrew Cuomo's office is stepping up its probe of three banks Bank of America Corp., Goldman Sachs Group Inc. and Deutche Bank AG, which underwote and sold the securities, issued by municipalities and others. ... In the widened probe targeting the three firms, Mr. Cuomo's office has been gathering more documents, conducting witness interviews and assigning more lawyers to investigate the companies' auction-rate operations. Settlement discussions with the firms and with other regulators investigating these firms have also ramped up, people in the office say", WSJ, 21 August 2008.

"Andrew Cuomo and a group of regulators representing 48 other states have come to settlement agreements with Goldman Sachs Group Inc., Deutsche Bank AG [DB] and Merrill Lynch & Co. [ML] over the sales and marketing of auction-rate securities. Goldman agreed to buy back $1.5 billion of retail investors' auction-rate securities by Nov. 12. The firm will also pay a $22.5 million penalty to the states. [DB] consented to buy back $1 billion of its retail clients' auction-rate securities within 90 days and pay a $15 million penalty to the regulators. ... The [SEC] has been involved in the negotiations with these firms and said it expects to make an announcement regarding [ML] soon", WSJ, 22 August 2008.

"[ML] and the [SEC] reached a preliminary settlement under which the Wall Street firm would buy back at least $7 billion of auction-rate securities it sold to customers. ... '[ML] did not make adequate disclosures that the liquidity of these securities was based on [ML] supporting the auctions it managed when there was not enough demand. Investors were left holding illiquid securities when [ML] stopped supporting auctions in February 2008,' the SEC said", WSJ, 23 August 2008.

It would be nice if someone at these banks was indicted for something.

"Say it ain't so, Joe", said the 7-year old to "Shoeless Joe Jackson" after the 1919 Blacksox scandal. Even Goldman Sachs. I'm heartbroken.

$22.5 million for GS? Peanuts. It's 33% of Lloyd Blankfein's 2007 bonus!

Will anyone at ML go to prison over this? Why ask?

Smart Money?

"The big Wall Street firms are finally coming clean about the collapse of the auction-rate-securities market--now that New York Attorney General Andrew Cuomo and other regulators have put a gun to their heads. The truth is even uglier than I suspected. ... As regular readers know, I was among the victims. ... I've since heard from hundreds of others. Wall Street's reaction was to offer to lend investors their own money--using our other assets as collateral and charging us market rates. It was insult on top of injury. ... Thanks to a wave of subpoenas, lawsuits or threatened lawsuits, and the prospect of disclosure, three of the biggest sellers of auction-rate securities agreed last week to reimburse clients. ... Those firms said they will buy back a total of nearly $40 billion in the securities, a sum that, while large, can indeed be absorbed by their balance sheets. What's really shocking are the allegations and evidence that some executives may have known that the auction-rate market was about to collapse even as they pressed their brokers to push the product on unsuspecting clients. ... Katrina Byrne, a spokeswoman for UBS, responded: 'We catagorically reject any claim that the firm engaged in any widespread campaign to move auction-rate securities inventory from our own books into private client accounts.' As for the emails, she said, 'We were disappointed the New York attorney general released details on certain transactions when we conducted our own internal investigation with the assistance of external counsel. We found no evidence of unlawful conduct by any employees'," James Stewart (JS) at the WSJ, 14 August 2008.

JS is a Smart Money columnist. Imagine, he bought this junk. Are we impressed with UBS's internal investigation? Yes, unfavorably. Will the NY State Bar investigate the investigators? Will it find UBS's attorneys are "justice obstructors" and make a criminal referral, or at the very least, violated some canon of legal ethics? Ain't gonna happen. Where was the SEC while this went on? Where's Mike Garcia (MG)? Will he indict anyone? Why not start with the attorneys who conducted UBS's internal investigation? Or is MG too busy with the "Bear Stearns Two"? Hey MG, how many SDNY US Attorneys Office "alumni" work for UBS's law firm? Enough to give it prosecutorial immunity? The Feds prosecuted Milberg Weiss. Whaddayasay Mike?

Loren Steffy on Auction-rate Securities

"This year it was Julius Caeser, and watching it, I felt a little like I did last week as I watched the investigation into the auction-rate bond market unfold. It's a familiar story. ... The auction-rate mess is a remake of two recent Wall Street productions: tainted research in 2002 and mutual fund market timing in 2003. ... In each case, the plot is the same: Wall Street used its control of information to lure unsuspecting investors into securities by misrepresenting their performance. ... For this latest drama, the curtain rises on a familar cast. There's a rogues' gallery of reported targets: Citigroup, Merrill Lynch, JPMorgan Chase, Morgan Stanley, UBS, Wachovia, Bank of America. On the other side, we have the prosecutors: Massachusetts Secretary of State William Galvin and the New York attorney general once again lead the charge, though Andrew Cuomo has replaced Eliot Spitzer, who briefly became governor before becoming a public disgrace. ... And the [SEC]? It's upstaged again, dithering over arcane short-selling rules and aiding in the administration's campaign to prop up the stocks of the very firms it should be investigating. The specter of Harvey Pitt looms large", my emphasis, Loren Steffy (LS) at the Houston Chronicle, 13 August 2008.

Harvey Pitt was my "favorite" SEC chairman. LS's article link: http://www.chron.com/disp/story.mpl/business/steffy/5940178.html. That's telling 'em LS.

Why We Need Federalism-8

"A former Treasury Department official is at the center of a civil complaint recently filed by New York Attorney General Andrew Cuomo against UBS AG, in which the firm is accused of fraud in the auction-rate-securities market. ... The complaint, filed last week in New York City, alleges that [David Aufhauser, DA] and six other UBS executives sold $21 million of their personal holdings in auction-rate securities in the months leading up to the market's collapse, based on unique inside knowledge of the problems in the market. ... The Treasury Department awarded [DA] its highest honor, an Alexander Hamilton award. He also represented the Treasury Department on the Justice Department's Corporate Fraud Task Force. He joined UBS in 2004", Liz Rappaport, at the WSJ, 1 August 2008.

"Massachusetts regulators accused Merrill Lynch & Co. of co-opting 'supposedly independent' research anaylsts to help them dump collapsing auction-rate securities on unsuspecting customers. ... 'We've seen a corruption of research', says Massachusetts Secretary of the Commonwealth William Galvin, who oversees the state securities division. 'This is an issue that many of us on the enforcement side have seen years ago, and it's the same pattern.' ... In August 2007, Martin Mauro, a fixed-income research analyst, issued a report noting some of the less-than flattering features of auction rate securities. That alarmed Francis Constable, a managing director in charge of Merrill's auction-rate securities desk. Ms. Constable demanded that Merrill retract the report. ... Constable ... sent the following message: ' Shut this guy down'," John Hechinger at the WSJ, 1 August 2008.

"New York state's attorney general, Andrew Cuomo, threatened Friday to sue Citigroup Inc. for alleged fraud in the marketing and sales of auction-rate securities and for destroying evidence after being subpoenaed by his office. ... Citigroup said it is cooperating with Mr. Cuomo's investigation and 'acted in good faith and in the best interests of our clients both before and since auctions began to fail, and there is simply no basis for claims to the contrary.' ... The firm also disclosed Friday in a regulatory filing that it has received subpoenas or requests for information for the [SEC], among others, in connection with its handling of auction-rate securities. ... The letter, written by David Markowitz, the head of the investor-protection bureau in Mr. Cuomo's office, accused the bank of wrongly telling customers the securities were safe, liquid and cash-equivalent. It added that the bank failed to tell investors that, from last August until earlier this year, the market was kept afloat only because the bank placed bids in auctions for the securities", Amir Efrati at the WSJ, 2 August, 2008.

"Pushing to put one of the biggest debacles on the credit crisis behind them, Citigroup Inc. and Merrill Lynch & Co, agreed to buy back $17 billion in auction-rate securities", WSJ, 8 August 2008.

"A once obscure corner of the bond market is triggering one of the messiest Wall Street scandals in years--and potentially the largest mass bailout of American individual investors ever. On Friday, facing allegations of wrongdoing over its sales of so-called auction-rate securities, UBS AG agreed to buy back nearly $19 billion of the investments as part of a settlement with federal and a group of state regulators. ... Regulators from several states have also shown up on Wachovia's Corp.'s doorstep demanding documents; the bank says it's cooperating. A New York state official has accused Citigroup of destroying documents, a charge Citi has denied. Federal prosecutors are preparing to file criminal charges against two former Credit Suisse Group brokers who allegedly lied to investors about auction-rate securities. ... UBS said it didn't intentionally hide the risks of auction-rate securities, and sold them 'appropriately' to individuals for 20 years. ... Merrill categorized auction-rate securities as 'other cash' on its brokerage statements. ... Also, regulators say brokers were paid unusually rich commission to sell the securities. ... UBS said that, after its own internal probe, it 'found cases of poor judgment' but not illegality by certain individuals, and is 'evaluating appropriate disciplinary measures", Liz Rappaport and Ann Randall Smith (R&S) at the WSJ, 9 August 2008.

"Securities regulators are widening the list of Wall Street firms that are being told to fix the auction-rate securities mess. ... State regulators have subpoenaed roughly 30 financial institutions about their involvement in the auction-rate securities market. ... In an SEC filing, [Wachovia] said its individual retail-brokerage clients held $8.7 billion of auction-rate securities as of Aug. 1. That doesn't count other clients, such as corprate clients and charities", Liz Rappaport at the WSJ, 12 August 2008.

Doesn't DA's participation in a "Corporate Fraud Task Force" (CFTF) make you feel nice and warm inside? Was the CFTF's job to facilitate corporate fraud by getting corporations prosecutorial immunity? Why did UBS hire DA? Did DA do anything at Treasury that served USB's interests? It's Alice in Wonderland at Treasury. I await Chris Cox's SEC joining in Cuomo's case. That'll be a long wait.

Hey Chris Cox, now you have an opportunity, charge Constable with securties fraud and make a referral to Mike Garcia's office. Whaddayasay?

I wish Cuomo good luck with his Citigroup suit. I note the SEC is also investigating "C". I can't help but wonder what the SEC would have done absent Cuomo's investigation.

I wonder how Citigroup will account for the buy back.

Aren't you reasured that UBS found no illegality?

I'm crushed. Wachovia too!

Joshua Rosner Strikes Again

Joshua Rosner (JR) has a fine post at http://www.rgemonitor.com/ on 9 June 2008 concerning the Andrew Cuomo's rating agency (RA) "reforms". I agree with all of JR's post except his taking issue with compensating RAs when "the investment bank ultimately selects [another] to rate a RMBS". JR states, "Other than increasing the revenues for these rating agencies, this part of the Cuomo agreement does nothing to address the underlying truth stated by former Moody's Executive Brian Clarkson, 'you start with a rating and build a deal around a rating'." Paying RAs for preliminary work will not increase their total fees as the RAs will charge less to complete a rating. Suppose a RA has a 50% chance of getting an assignment. Each RA's preliminary work might be "worth" say $100,000. The work to complete the rating might be "worth" $500,000, assuming each bills by the hour like CPAs and attorneys. Assuming a RA is rational, how does it quote a fee? It quotes $700,000 to do the work. Why? You have two RA's split the market. Each does $100,000 of preliminary work, one does $500,000 of completion work, total fair value, $700,000. Whether RA A or B gets the $700,000 doesn't make any difference in the long run. I think this proposed reform would cost the investing public nothing and have some "informational content" as revealing a possible "ratings shop" by the investment banker. Good show, JR.

Another Tobacco "Deal"

"The three major bond-rating firms are set to overhaul the way they collect fees as part of a settlement with New York State's attorney general, Andrew Cuomo. ... Under the Cuomo settlement, which would cover the hardest-hit portions of the mortgage-market, the firms would get paid for their review, even if they didn't end up getting hired to rate the deal. This would mean the firms would get paid even if they were tough. .. The settlement is unlikely to satisfy critics who have urged that bond-rating firms stop being paid altogether by bond issuers or that the firms be permitted to rate any deal they choose, regardless of the whether the issuer cooperates. ... The decision not to seek fines from the three major bond-rating firms ... shows [Cuomo] believes investor confidence can be shored up without an all-out attack on the bond-rating industry", my emphasis, WSJ, 4 June 2008.

"An agreement between New York state Attorney Geneal Andrew Cuomo and the three major bond-rating firms will overhaul the way they collect fees and aims to improve the way mortgage-backed securites are rated. ... Moody's Corp. Chief Executive Raymond McDaniel, at a separate briefing, said the settlement is a 'very constructive development' for bond-rating firms and an 'important step' for 'restoring confidence' in the credit markets. ... Mr. Cuomo's settlement ... does deal with what many critics say has been a chronic problem with bond ratings: They are paid for by the entities being rated. ... Under the accord, the firms would get paid for their review, even if they aren't hired to rate the deal. That is designed to make ratings firms less reliant on getting the ratings assignment from bond issures. Ratings firms will also have to disclose the fees they collect in these securities. ... The settlement also requires that rating firms review due-diligence reports on loans that go into the securities in an effort to better equip them to understand what is in the mortgage securites they are rating. ... Christopher Cox, chairman of the [SEC] said in a statement: 'I am most appreciative of the efforts of the Attorney General Cuomo and his staff to consult with the Commission and coordinate their efforts in a way that is consistent with the Commission's pending rulemaking for credit-rating agencies'," my emphasis, WSJ, 6 June 2008.

This deal stinks. It will not fix the ratings agencies. See my 10 June 2008 post, Bert Ely's got the right idea. The "deal" reminds me of the tobacco industry "settlement", that cost the tobacco industry nothing, but cartelized it. Few people understand the tobacco industry deal was in substance, a group of state attorneys general levying an excise tax on cigarettes. I remember reading a good analysis of the deal by a Stanford University law professor in the WSJ.

There is nothing in Cuomo's settlement for investors. Consider McDaniel's comment, it's a "very constructive development" for Moody's. I agree, McDaniel, that's exactly why it's of no help to investors. Further, the defender of investors' interests, Chris Cox endorsed it. 'Nuff said.

A PCAOB Opportunity

"Fannie Mae and Freddie Mac announced an agreement with New York Attorney General Andrew Cuomo to discourage inflated appraisals by enforcing new standards in the home-mortgage market. ... The code bars lenders and their representatives from pressuring appraisers to supply inflated estimates of property values, which are widely viewed as an important contributor to the mortgage crisis. Appraisers have long complained that they risked losing business if they didn't appraise homes at values that would allow loans to be made. ... Fannie and Freddie also agreed to create an independent organization to monitor the new appraisal standards. Their main regulator, the Office of Federal Housing Enterprise Oversight [OFHEO], approved the new code", WSJ, 4 March 2008.

We are witnessing the "SEC-ization" of the mortgage business with OFHEO as the SEC, Fannie and Freddie as underwriters and appraisers as CPA firms. We need one more organization to made the ensemble complete, the "independent" monitoring organization. I nominate the PCAOB. Why not? It already exists and has shown tremendous competence in regulating the CPA profession. Hey Mark Olson (MO), how about it? This looks like a natural PCAOB "product extension". Hey, MO, get on with it.

Seriously, this appears to be a "pass the buck" operation to blame the mortgage mess on the least well politically connected group responsible for it, appraisers.

Rating Agency Reform?

"Standard & Poor's Ratings Services plans to announce 27 separate actions it will take in the hopes of bolstering confidence in credit markets and the bond rating firm's analytical integrity, including a tougher oversight of analysts to spot potential conflicts of interest. ... Analysts who leave S&P to work at a bond insurer will have some deals they previously rated reviewed to make sure their objectivity wasn't compromised by the prospect of the new job. ... An auditing or governance expert will also be brought in to publicly review S&P's processes", WSJ, 7 February 2008.

"Andrew Cuomo, New York state's attorney general, wants credit-ratings firms to go further in their efforts to overhaul how they rate mortgage-related bonds, criticizing voluntary changes under way at the firms as 'too little, too late.' ... Cuomo called the moves 'window dressing' that fall short of the systemic change needed to restore investors confidence. S&P and Moody's 'are attempting to make piece-meal change that seem more like public relations window dressing than systemic reform,'' he said", WSJ, 8 February 2008.

I agree with Cuomo. Having seen 31 years of CPA reform, I expect no subtantive changes from the ratings agencies. "An auditing or governance expert". Who? A Big Four CPA firm? Mary Jo White? Arthur Levitt? Give it up S&P.