More on the Incompetence and Venality of the SEC

In case you needed more proof of the utter incompetence of the SEC, two new items emerged late last week.

First was more detail on the mindset of the jurors who found Citigroup CDO salesman Brian Stoker innocent in the SEC’s case against him on misrepresenting the bank’s role and interests in selling a CDO squared it had set up to fail and making $160 million by betting against it. Per the juror’s foreman, as recounted by the New York Times:

“I wanted to know why the bank’s C.E.O. wasn’t on trial,” said Mr. Brendler, who served as the jury’s foreman. “Citigroup’s behavior was appalling.”

Guess what? That is proof that the SEC muffed the case. The jury got the hard part, the complicated fact set, that the bank had arranged big time to profit from a dodgy deal and hid its role, and the fact that it had hired a supposedly independent but actually complicit investment manager, from investors.

But the SEC failed to attack the Stoker defense, when it was easy to anticipate (and on top of that, Stoker’s counsel telegraphed its argument in the media), that Stoker was just a poor dumb orders-following foot soldier. Sorry, the fact that the car driver at a bank robbery wasn’t the mastermind does not make him any less an accessory to the crime. First, Stoker knew the deal was being misrepresented, and that investors would reject it if they were given accurate information. Second, he had held securities industry licenses, so he knew what the regulatory standards were. Third, investment banks staffers at his level enjoy considerable autonomy, but that would clearly have been news to this jury. The defense counsel clearly got them to identify with Stoker and compare his situation with their own at work, when an investment banker making over $2 million a year has a job that bears no resemblance to that of the folks on the jury, who probably made $30,000 to $90,000 a year (NYC professionals are generally good at getting themselves excluded from trials). One of my buddies also suspects that Stoker’s counsel made good use of jury consultants and went to greater lengths than the SEC to get sympathetic jurors.

The second example comes from Pam Martens, and a search of my RSS reader shows this verdict against the SEC has not gotten the attention it deserves. You need to read her post in full, but the short form is that the SEC and DoJ picked completely inappropriate subjects for one of their rare criminal cases, which was of course against comparative small fry. Let me turn it over to Martens:

The charges were first brought in 2005 and made no sense from day one to Wall Street veterans who had worked for retail stock brokerage firms. The case was dubbed in the press as the “Squawk Box” case. Prosecutors from the U.S. Attorney’s office in Brooklyn alleged that three brokers from Merrill Lynch, Smith Barney and Lehman Brothers misappropriated confidential information from their firms by placing phones next to the internal public address system known as the “Squawk Box” and letting day traders at A.B. Watley listen in.

The core element of the prosecutors’ case was that this information was confidential. The core problem with the prosecutors’ case are the words “public address system.”

I worked in a retail brokerage office for 21 years and here is what happens while that squawk box is turned on: cleaning people are mulling about; retail clients are coming and going; the guy from the deli is delivering food; brokers from other firms are dropping by to go out for lunch; carpet installers are laying new carpet; telephone repairmen are working on the lines. All in earshot of that information.

When Merrill Lynch or Smith Barney make a corporate decision to stream internal communications into retail brokerage offices, it’s corporate management’s job, not the brokers, to make sure nothing confidential comes over that Squawk Box. To suggest that a retail brokerage office, open five days a week to the general public, has any capacity to police what’s coming over the Squawk Box is bogus and specious.

So this is yet another insider trading case, the one thing the SEC feels comfortable doing. But here is the heinous part. One of basic rules in prosecution is that the government must give the defense any information it has obtained that might help the defendants. Yet the SEC had thirty depositions in which witnesses said the squawk box information was not confidential. That meant their own depositions showed they had no case. They mentioned it only a few weeks before trial to the DoJ (at which point the prosecutors no doubt had their manhood on the line) and flagged it as being possible Brady material (meaning it might need to be presented to the defendants). The DoJ staff clearly had to know this material needed to be shared (this is Prosecution 101) and yet failed to do so. They continued to withhold this information when the case was appealed.

The appeals court hectored the SEC and DoJ not only for misconduct, but also for the impact on the defendants in making their trials far more onerous and costly than they should have been.

And as Martens reminds us, the government seems only able to win cases by cheating, as it did (initially) in this one, and refuses to pursue cases that might show how deep the rot in our system goes. As a result, folks like Jon Corzine and Jamie Dimon have nothing to worry about.

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  1. psychohistorian

    Thanks for the posting Yves.

    So we pay these folks to work against our best interests; isn’t that special.

    How much longer will this go on? Unfortunately, it looks like it will continue until our corrupt system dies of its own efforts and not by those opposing it.

    Ugly, sick and a sad commentary on human civilization, or the lack of what we thought was civilized life.

    Thank you for continuing to de-legitimize the current financial sector of our current social organization.

  2. YankeeFrank

    What I find interesting is that these SEC attorneys and their DOJ counterparts emasculate themselves in order to protect Wall Street and make for themselves a soft, lucrative landing once they leave “public service”. I remember an era when you made a name for yourself being a badass prosecutor and then went to work for the defense side, and they hired you because you had proven what a kickass attorney you are by securing convictions. Things have gotten so soft and bloodless with corruption it now appears the banks don’t even care that they are hiring losers with shite skills to defend them as they know there are no real threats against them anymore.

    But damn, how do these SEC attorneys look themselves in the face every morning without seeing what frauds and incompetents they are. Pathetic.

    1. nonclassical

      ..they get up in mornings to trophy wives, jet to work in porsche, where they protect one another’s (Mel Brooks) “..phoney baloney jobs”..

    2. Up the Ante

      “One of basic rules in prosecution is that the government must give the defense any information it has obtained that might help the defendants. ”

      Prosecution has a duty to present all material evidence to the jury.

      Therefore, they opt not to prosecute ANY of them because they have evidence on, ahem, ALL of them.

      Clear enough ?

      Only problem is .. they sold themselves, too.

      Now, perhaps, perhaps, you can begin to see the importance of ‘finding them out’.


  3. MichaelC

    I think the only way we’re going to determine if the SEC is serious is if the SEC brings a case against the Deutsche Bank Stoker equivalent (START)and pursue it based on lessons learned in the Stoker case. (better juries)

    START Refresher:( The infamous “Crap” deal)

    The fact that Khuzami, current head of SEC enforcement, was General Counsel at DB and supervised the ‘crap deal’ should incentivize the SEC (and their D supporter’s)to be a little less lax in their enforcement actions, if only to avoid a Rommney victory.

    Throwing Khuzami under the bus is a win win for the D’s. They may not deserve it but…

  4. hermanas

    We want “best practises” spelled out.

    “I wanted to know why the bank’s C.E.O. wasn’t on trial,”

  5. William

    In my 25 years as an (mostly) technical consultant for many companies, I’ve learned that competency is RARELY what the workplace wants most. Learning the game and then playing it is what keeps you in a job. And staying in a job is what half of the workforce wants. The other half is comprised of those who focus on doing a good job, along with a few highly competent persons who do the work of a raft of the first type of worker without breaking a sweat (but get paid the same).

    I’m no Ayn Rand fan, but this is the truth that spurred much of her writing–people who not just contribute little, but who, in their focus on gamesmanship, actually hamper the efforts of others. Rand wanted a way to allow the highly competent to work, produce, and be rewarded commensurately for their efforts.

    Although the U.S is considered non-communist, much of the mindset of people here is to not reward competency, instead pay everyone in the same job pretty much equally.

    1. Salamander

      Amen, brother. Don’t rock the boat. Don’t get the boss in trouble. Don’t outshine the boss. Don’t surprise anybody. Keep the chair warm. Be pleasant and boring. Plod along in your little lane, and don’t get any bright ideas about changing anything.

      Follow that safe strategy, and you’ll be promoted a year or two behind the superstars, a healthy percentage of whom will 1) quit in frustration or 2) get sacked because their work ethic, situational awareness, and moral compass gets them in conflict with their superiors.

      But one has to wonder… wasn’t it ever thus?

    2. nonclassical

      …you’re lobbying for “benevolent dictator”, without restrictions on powers…
      Chinese version included variety of balancing of powers…

  6. Tom Crowl

    As the King of the Lilliputions said to Dr. Gulliver when confronted with the cruelyy and irrationality of his policies:

    “I LOVE law… I HATE justice.”

    We haven’t really made much progress since Swift wrote that… or rather… there was some good progress for a while… but then came all the ‘neos’… the neo-conservatives and the neo-liberals.

    The proper term is neo-oligarchs… I suggest the term for the whole crowd.

    But they’re really very old school.

    1. nonclassical

      ..”the Whinnie said to me, BUT, is not the PURPOSE of communication to tell that which IS; if you tell that which is NOT, you leave receptor of communication in worse condition than if you told nothing at all..”

  7. Eric Patton

    Until there are broadly-held anti-capitalist beliefs, and a movement with an institutional progam to back up those beliefs (meaning a movement to replace capitalism with new and well-defined alternative economic institutions), nothing’s changing. It’s the lesson of history, and prevent events continue to justify the theory.

    And it starts with honest class analysis of the kind the left can do right now, at this very instant, if only it would choose to. There are three classes, not two. Until the left acknowledges that, then no, Jamie Dimon has nothing to worry about.

  8. Hugh

    During the Bush years, the DOJ hired a bunch of quack lawyers. These were never cleaned out by Obama and Holder. But even that can’t explain making such fundamental errors or otherwise muffing slam dunk cases. On the one hand, I think professional standards have gone into the toilet. On the other, I think cases like these are thrown in order to convey the impression that such cases are inherently unwinnable.

    It’s important to remember too that these prosecutors aren’t working in isolation. I don’t know if these cases went through main Justice or the Southern District of New York, but either way there are two to three layers of higher ups who failed to exercise appropriate oversight over these cases, that is, of course, if you believe that these were good faith prosecutions. If you do not harbor such a belief, then these same higher levels were in on and likely even directing the con.

    1. Susan the other

      This is the most frightening thing I have read so far. I am so dismayed by this very clever obstruction of justice I really think it could be the turning point, if everyone understood how methodical it was. Clearly, the DoJ should be taking action, and we know Holder will do no such thing. He probably colluded. Throwing a trial by knowing it will be appealed and then at that point you can produce the decision you were after all along is far worse than throwing the NBA championship. It makes a shambles of law and process. And the appeals court is not vulnerable to claims of mistrial. All that is left is the Supremes. God help us.

      1. nonclassical

        Susan…”all that’s left is the Supremes”…and they’re always “right”..(FDR had an answer, and bushbama is no FDR)

  9. John Regan

    Prosecutors who are very good at getting indictments and convictions suddenly become incompetent when the defendants are cops.

    Or Wall Street CEO’s, apparently.

    But if you’r some schmuck selling food stamps to pay your rent, you can be pretty sure of going to prison.

    The system isn’t working too well. That’s putting it mildly.

  10. C. Alexander Brown

    This is not necessarily over. The financial institutions involved could be forced to disgorge the illegal profits they made, Your Attorney General will not do it, and your Mr Milquetoast President will not do it. But there is a recourse available to you American Citizens. Nothing can stop aggrieved private Citizens from seeking redress through your courts in private actions, also the Federal Attorney General and the various various States’ Attorneys in concert or individually to act.
    So are you just talkers, or can you act in a righteous cause like old time Americans?
    Over to you people.


      1. Mrrunangun

        With a vote for candidates who agree to prosecute malefactors. That would mean abandoning the blind partisanship that currently characterizes the avg. US voter.

        1. foppe

          so “private citizens” do so by engaging in collective action, but only to “elect responsible pols/prosecutors”? Right…

  11. briansays

    consider who the head of the SEC during the last half of the Bush
    former congressman and far right ideologue
    who today i believe is a white collar defense lawyer in biglaw

  12. Fraud Guy - Also

    I’d love to know what the instructions of the judge, Raskin, to the jury were in the Stoker case. Ddi he tell them that if they found that Stoker committed such-and-such acts, they MUST convict, regardless of whether the jury believed Stoker committed the acts under orders of superiors? He saw the defense make the argument about Stoker acting under orders–did he tell the jury that it was legally irrelevant?

    Stoker has been famously skeptical of Citi in recent history, so the situation is all the more perplexing. It would be great if someone could find and post the jury instructions.

      1. hermanas

        pg.12,”you should not concern yourself in anyway whether any other person may or may not be liable,..”

        that answers the jury foreman

  13. Markar

    incompetence? I think it’s called regulatory capture. Mary Schapiro’s role is of the bankers, by the bankers, and for the bankers.

    1. Robin Hood

      I believe the Keystone Cop – Kabuki Theater explanation. If I can understand law in 1 minute or less – they are faking incompetence.

    2. Jim


      And Yves herself has written about it.

      Why would we expect an SEC chief to go after a person of consequence when that same SEC chief may try to work for that person of consequence in the near future. Or recommend lieutenants to that person of consequence in the near future.

      The incentive system is not conducive to prosecution of big fish. In retrospect, hats off to the Bush DOJ for successfully prosecuting his pal, Kenny Boy and Enron’s CEO, Skilling.

      1. Capo Regime


        that is a great point. The Bush DOJ did indeed aggresively go after Enron–full of political friends and donors. Hey even a stopped clock is right twice a day! Still wonder why Mckenzie staff at Enron got off without any mention or even brand damage.

        Doubtful if Holder would go after a scam perpetuated by major donor and friends. Hey wait–its not conjectural he has failed to go after scams that make Enron look like a rigged American Legion bingo.

  14. jo6pac

    Ives thanks for the link to Pam, I always enjoy what she has to say when CounterPunch cares her stories of the criminal class of money changers.

  15. JGordon

    The SEC is performing an important role as the government’s premier office responsible for surfing porn on the internet. To even suggest that they are somehow supposed to be rooting out securities fraud is insulting and besmirches the good names of the Wall Street/Washington kleptocrats who run the SEC.

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