The Hell That's Coming Will Be Unprecedented

Discussion in 'Wall St. News' started by flytiger, Oct 17, 2008.

  1. And it's none to soon. The SEC is a disgrace to the Government, the Administration, and the Country. And it's cost all of us Trillions. All so its Enforcement Attorneys could ascend into lawyer heaven. As one ex SEC type who fights for us said, ' make a half mill a year tossing playing cards into a hat. Outraged yet?

    * OCTOBER 18, 2008

    SEC Audit Assails Ties of Official and Lawyer
    An Aborted Inquiry Illustrates Concern of 'Revolving Door'

    A rare inside look at an enforcement case against Bear Stearns Cos. that was ultimately dropped highlights the sensitivity of the "revolving door" between government and industry.

    In one of several scathing reports released in recent weeks, the Securities and Exchange Commission's inspector general said that a senior SEC official closed a long-running case against Bear Stearns amid an "ongoing personal relationship" with the lawyer representing Bear in the matter, who was a former colleague at the SEC.

    David Nelson, director of the SEC's Miami regional office, shut the 3½-year-old investigation into whether Bear Stearns improperly valued complex debt securities -- even after the firm agreed to settle the case, the report says. In a phone call with Michael Trager, a senior partner at the law firm Arnold & Porter LLP, which represented Bear Stearns, Mr. Nelson said: "You're going to be happy with the surprise," according to testimony by Mr. Trager. "Christmas is coming early" and "Bear Stearns can keep their money."

    While the inspector general "did not find evidence of a direct connection" between the relationship and the decision to close the investigation, "even the appearance of a conflict is disturbing and could potentially damage the reputation of the Commission." The report recommends disciplinary action against Mr. Nelson.

    Messrs. Nelson and Trager didn't respond to requests for comment. In a statement, the SEC said "the report does not cite a single instance of improper communication or undue influence." The recommendation for disciplinary action against Mr. Nelson "has been referred to the agency's administrative review process." The SEC won't comment "on any specific individuals or personnel actions until that process has been completed."
    From the Archives

    * Bear Stearns Is Faulted on Its Valuations in 2007

    The inspector general action was triggered by a Wall Street Journal article that reported that the SEC had closed the case last year against Bear Stearns, which involved collateralized debt obligations, or CDOs, which are thinly traded investments that package pools of loans. In the December 2007 article, Mr. Nelson declined to comment, saying: "You've got me in a situation where my hands essentially are tied." Sen. Charles Grassley, an Iowa Republican and ranking member of the Senate Finance Committee, requested information from the SEC into the circumstances surrounding the dropped case.

    Bear Stearns imploded in March after clients pulled money from the embattled securities firm. The firm was acquired for a fire-sale price by J.P. Morgan Chase & Co. The report was one of four released in recent weeks by SEC Inspector General David Kotz that criticizes the agency's oversight of Wall Street during the two years before the start of the financial crisis.

    The case may also have been a missed opportunity for regulators to get ahead of the debt-securities pricing issues that have gripped Wall Street. Mispriced debt securities helped cause Bear's demise and a tough regulatory response could have made investors more confident they could trust the value of securities held by investment firms.

    The allegations illustrate the delicate dealings in industries where lawyers and others cycle between roles in government regulation and private practice. Many enforcement lawyers have left the agency for jobs representing clients in SEC cases.

    The report says Messrs. Nelson and Trager, along with another lawyer who represented a former Bear Stearns broker in the case, "had a friendship going back over 20 years." When Messrs. Nelson and Trager worked together at the SEC, they "would get together when they were 'footloose and fancy free,' " according to the report. The ties "created the appearance, to some, that they may have obtained favorable treatment." Mr. Trager said he considers Mr. Nelson a "friend," though since leaving the SEC he recalled seeing Mr. Nelson only at business events, according to his testimony cited in the report.

    The SEC's Miami regional office opened an inquiry into the matter in February 2004. The probe, upgraded to a formal investigation, examined whether Bear Stearns improperly priced about $63 million of CDOs it sold to W Holding Co.'s Westernbank Puerto Rico bank unit.

    SEC staffers met to review the evidence. An SEC lawyer told the investigative team he believed they had "a strong case," but that "probably Bear Stearns was going to fight like hell because they had the resources and they probably wouldn't want this type of publicity," according to testimony in the report.

    On June 15, 2005, the SEC informed Bear Stearns and a broker that it planned to recommend that they be charged with fraud for mispricing the CDOs. Bear Stearns lawyers met with the SEC in Miami in September 2005. Mr. Trager argued that the fraud charge was excessive "and if it stayed like that, Bear Stearns would litigate," according to the report.

    The case then languished for 14 months before the SEC informed Mr. Trager that it was prepared to proceed with a fraud case. In January 2007 the SEC proposed that Bear Stearns pay a $5 million penalty; Mr. Trager countered with an offer to pay $250,000, which the SEC considered "insulting" and declined, according to the report.

    Mr. Trager raised Bear Stearns's settlement offer to $500,000 and persuaded the SEC staff to drop the fraud charge against the firm in place of a lesser "failure to supervise," the report says. The two sides reached an agreement in principle to settle the case.

    That's when Mr. Nelson "abruptly" decided to close the case, and called Mr. Trager, according to the report. "Just saying you're going to be happy with this," Mr. Trager testified Mr. Nelson told him. "You probably wouldn't have expected this result."

    In his testimony to the inspector general's office, Mr. Nelson said the decision was "a little bit unusual," but explained that after putting "some extra thought" to it, concluded that "this looks like an old case that isn't going to get a lot for us." Mr. Nelson also said there was pressure from the SEC not to bring old cases, according to the report.

    Joan McKown, the SEC's enforcement chief counsel, testified that she considered the matter to be a "light case" and added: "Even if a case is settled, you still have to have everyone's support that it's an appropriate case to bring."

    Still, some SEC executives in Miami were "stunned" at the decision, the report says. Jon Jordan, a Miami branch chief, testified that he "wanted to scream and yell and...go and argue and say, why the heck did you guys do this?" Mr. Jordan, who didn't respond to a request for comment, said he didn't complain because that "would do nothing" for him but make his "life miserable" and "definitely would not help" his career at the SEC.

    Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
  2. fhl


    The sec attorneys couldn't even decide among themselves whether this was a strong or weak case.

    Just because they had a settlement offer, is that good reason for the gov't to take money from a corporation. I mean, wouldn't we rather have a gov't enforcement agency that actually thinks they are doing the right thing, and not just taking money from private industry because "it's there to take".

    What kind of law could we have that would keep people from working in private industry after they have been in gov't, anyway? Not possible.

    If the appearance of conflict is wrong, then both Barney Frank and his gay lover at fnma and Chris Dodd and his friend of Mozzilo loan should be the first to go.

    This case is so much weaker than those that it's not even worth mentioning, and if Frank and Dodd stay, and someone gets nailed in this case, that would be the real outrage.
  3. BadCo


    You got people in the SEC, FDA etc. who do their time in government and find themselves in their 40s with kids about to go to college. So, they don't want to rock the boat too hard for fear of jeopardizing a lucrative second career in the private sector.