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.