Why I (Belatedly) Blew the Whistle on the SEC’s Failure to Properly Investigate Goldman Sachs

Yves here. Two things struck me about Jim Kidney’s article below. One is that he still wants to think well of his former SEC colleagues. I know other whistleblowers and internal dissenters who wound up losing their jobs who initially blame themselves, than come to accept that the system in which they operated was fundamentally corrupt, that even if some people locally really were trying to do the right thing, it was bound to either 1. go nowhere, 2. be allowed to proceed to a more meaningful level if it was cosmetic or served some larger political purpose or 3. got elevated because the organization was suddenly in trouble and they needed to burnish their cred in a big way (a variant of 2, except with 3, you might have a something serious take place by happenstance of timing). Kidney does criticize corrosive practices, particularly the SEC stopping developing its own lawyers and becoming dependent on the revolving door, but his criticisms seem muted relative to the severity of the problems.

Number two, and related, are the class assumptions at work. The SEC does not want to see securities professionals at anything other than bucket shops as bad people. At SEC conferences, agency officials are virtually apologetic and regularly say, “We know you are honest people who want to do the right thing.” Please tell me where else in law enforcement is that the underlying belief.

By James A. Kidney, former SEC attorney. Originally published at Watch the Circus

The New Yorker and Pro Publica websites today posted an article by Pro Publica’s Jesse Eisinger about the de minimis investigation by the Securities and Exchange Commission into the conduct of Goldman Sachs in the sale of derivatives based on mortgage-backed securities during the run-up to the Great Recession of 2008.  The details of the SEC’s failure to aggressively pursue Goldman in the particular investigation, Abacus, and its refusal to investigate fully misconduct by Goldman and other “Too Big to Fail” banks, stands not only as a historic misstep by the SEC and its Division of Enforcement, but undermines the claim that the Obama Administration has been “tough on Wall Street.”  The Pro Publica version contains links to a few of the documents I provided.

No one in authority who was involved in the Goldman investigation ever gave me an explanation for why the effort was so slight.  Mr. Eisinger’s article doesn’t offer any explanation from the one investigation participant brave enough to comment.  The details of the investigation into Abacus at my level as trial counsel, which I provided to Pro Publica earlier this year, compels the conclusion that the SEC, its chairman at the time, Mary Schapiro, and the leadership of the Division of Enforcement were more interested in a quick public relations hit than in pursuing a thorough investigation of Goldman, Bank of America, Citibank, JP Morgan and other large Wall Street firms.

Although the emails and documents I produced to Pro Publica stemming from my role as the designated (later replaced) trial attorney for the Division of Enforcement are excruciatingly boring to all but the most dedicated securities lawyer, even a lay person can observe that the Division of Enforcement was more anxious to publicize a quick lawsuit than to follow the trail of clues as far up the chain-of-command at Goldman as the evidence warranted.  Serious consideration also never was given to fraud theories in any of the Big Bank cases stemming from the Great Recession that would better tell the story of how investors were defrauded and who was responsible, due either to dereliction or design.

Instead, the SEC restricted its investigation to the narrowest theory of liability, had to be pressed (by me) to go even one short rung above the lowest level Goldman supervisor in its investigation (which took months to push through, though investigative subpoenas are frequently issued on far less in far smaller cases) and finally dropped other investigations of Goldman in return for a $550 million settlement announced July 15, 2010.  To my knowledge (I retired in March 2014), the SEC never again pursued Goldman for its mortgage securities fraud or other major fraud.  There is no evidence on the SEC website that it did so.

Nearly six years later, long after the statute of limitations for securities fraud expired and individuals, pension funds and corporate entities are no longer able to bring private actions against the Big Banks, the Department of Justice announced another settlement with Goldman for its deceptive conduct in the sale of mortgage-backed securities.  In this one, Goldman agreed to pay more than $5 billion “in connection with its sale of residential mortgage-backed securities.”

At a minimum, it can be said that the SEC left 90 percent of the money on the table at a time when a more aggressive investigation of the company, as well as others, could have counted for something by disclosing, in a detailed court complaint, Wall Street wrongs that might have helped policy makers better address the subject and allow damaged individuals and entities to bring their own lawsuits.

It is very important to emphasize emphatically several points.  First, I have zero evidence, and would be very surprised, if any of the individuals at the Division of Enforcement, including senior supervisors or the SEC chairman or associate commissioners, acted unlawfully or were motivated principally to protect Goldman and other big banks.  All of these people appeared well-intentioned from their point of view, even they never really explained, to me, or to many others at the Commission, their motives in limiting investigations.  The most senior level supervisors left more lucrative jobs in the private sector to head the Division of Enforcement, taking plum jobs but at significant personal sacrifice. (They then returned to even more lucrative employment or even more high-profile public positions.)  All of them were gentlemen.  These factors make it all the more surprising that I never got a clear answer as to why the investigation was so constipated, as it obviously was.  Its range was clearly limited from the outset:  we will sue the bank and not look hard for evidence of individual participation beyond the lowest levels.

By the same token, it is unfair to assume as a fact that any of the individuals at Goldman not sued, or anyone at Paulson & Co., violated the securities laws, civilly or criminally.  Like any citizen, they are entitled to a day in court.  Absent such opportunity, they are innocent of any wrongdoing.  Arguments in my internal correspondence that evidence was sufficient to sue should be viewed only as that — arguments.

So my point in releasing these documents to Pro Publica is not to chastise or hold up to public criticism those involved at the SEC, Paulson & Co. or Goldman, though criticism of the process and of the underlying financial conduct certainly is inevitable.  All of these institutions have substantial influence in the investment industry.  Rather, it is to bring to light the actual conduct of one of several SEC investigations into Big Bank fraud leading up to the 2008 financial crisis.

As I told Mr. Eisinger when I met him, I hoped he would go to the individuals in charge of the SEC investigation at the time and find out why the investigation was so limited. I have spent six years wondering what is the true answer to that question.  Perhaps there were sound reasons, other than the urge to get out a quick press release, which led experienced criminal prosecutors with histories in Wall Street to smother a major investigation by limiting it to the lowest level employee possible, to express total resistance to even investigating further up the chain of command, and ignoring without serious explanation and analysis what I and others, including my own immediate supervisors, viewed as the more appropriate theory for civil prosecution.  I hope there are such reasons.  As a  trial attorney at the SEC for over 20 years, I bled SEC blue.  I believed that the agency usually tried to do the best it could, using analog era procedures and processes to combat fraud in a digital age.  I am saddened to release this information.  But the notion that “the Administration was tough on Wall Street” must be addressed by facts, not press releases and self-serving interviews, else the system’s problems cannot be adequately addressed and repaired to deal with the next financial crisis.

Not only is the issue of how the financial sector enforcement agencies handled the wrongs of the Great Recession an important political issue, but it is important to history.  It is important that the facts not be shielded from the public so that we can all learn for the future.  And it is a melancholy thought that, presented with the opportunity for a rigorous investigation and airing of facts in civil or criminal proceedings gone, history will be denied a fairer story of both the financial crisis itself and how the government responded.

As many news organizations have noted, the taxpayer and Goldman shareholders will pay the combination of penalties and repayments in the DOJ settlement.  No individual was named as liable in the civil settlement with Goldman nor in any of the other similar, and even larger, financial settlements entered into with the Department of Justice, all of which are vastly greater than what the SEC obtained in its “quick hit, one and done” enforcement actions.  DOJ must be credited with what appears to have been a far more thorough investigation of wrongdoing than the SEC performed, but the public is properly mystified that no individuals were charged, criminally or civilly, although the DOJ press releases contains the usual caveat that “the investigation continues.”

The settlements with Goldman and other Big Banks were resolved under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which allows the Feds to ignore the normal five-year statute of limitations for fraud, but does not permit suit by private party victims.  As has been the practice with DOJ when dealing with Wall Street, no criminal charge was brought.  In fact, no complaint was filed in any of these cases.  Instead, DOJ entered into contractual arrangements with the banks.  Failing to fulfill their obligations under the contract would subject them to civil enforcement as a breach of contract matter, not a contempt charge in federal District Court.

Contrary to claims by politicians, it is clear that the Obama Administration has not been hard-hitting on Wall Street fraudsters.  The large fines obtained by the Department of Justice, while a short-term pinch, are simply a cost of doing business.  Relying on fines to penalize rich Wall Street banks, which, after all, specialize in making money and do it well, if not always honestly, is like fining Campbell Soup in chicken broth.  It costs something, but doesn’t change anything in the way of operations or personnel.

Despite billions in fines representing many more billions in fraud, the enforcement agencies of the United States have been unable to find anyone responsible criminally or civilly for this huge business misconduct other than a janitor or two at the lowest rung of the companies.  Nor have they sought to impose systemic changes to these banks to prevent similar frauds from happening again.

Yessir, according to the Obama administration, Goldman Sachs, JP Morgan, Bank of America, Citibank and other institutions made their contributions to tearing down the economy, but no one was responsible.  They are ghost companies.  And nothing needs to be done to prevent such intent or dereliction in the future.

Law enforcement by contract?  Clearly, the banks made it a condition of settlement that no complaint, civil or criminal, be filed.  That might gum up the works by requiring state regulators to take action under their own rules, or cause other collateral consequences.

Ah, say the defenders of the status quo, don’t forget about Dodd-Frank, the unwieldy legislation passed by feckless Democrats influenced by big money contributors and their own fear of appearing too aggressive (a particular Democratic Party contagion).  Dodd-Frank was and is a virtual chum pool for Wall Street lawyers and lobbyists, leaving most of the substance to regulatory agencies such as the SEC and the Federal Reserve, who for years have been significantly captured by those they are supposed to regulate.  The private sector lawyers and lobbyists have open doors to these places to “help” write the rules and add complexity, which they later complain about in court, challenging those same rules as too complex.

Dear citizen, just remember this:  complexity favors fraud, and certainly favors Wall Street and corporate America.  You can’t understand the rules and neither can Congress or all but the most dedicated experts.  That’s a lot of room to disguise misdeeds.  To take a current example, which came to my attention just before completing this post, Congress is trying to use sentencing reform, generally thought of as intending to remove inequities from the criminal justice system, to also make it even tougher to prosecute and punish white-collar crime.  Is this why the Koch Brothers suddenly show such public attention to the poor and needy by favoring such legislation?  See this discussion of adding the “mens rea” requirement to such legislation.  Burying an important but legalistic issue in otherwise liberal leaning legislation is a current example of disguising lax enforcement of white-collar crime in a complicated package.  As one Democratic congressman suggested, how can a liberal vote against sentencing reform?  The explanation of the badger buried in the woodpile is too complicated for the average voter.

Not coincidentally, adding a requirement to the law that it is a defense to either the crime itself or to sentencing that “I didn’t know my acts were against the law” is a get out of jail free card as the complexity of laws addressed to ever more sophisticated business misconduct grows.  Wall Street clearly has shown no shame in using the defense that “no one knew”.  Can’t blame them.  It has worked so far.  Maybe they don’t even need new legislation.

I was told repeatedly when I entered the Goldman investigation that synthetic CDOs were just too complex for me to understand.  Of course, it appeared to be plain vanilla fraud selling a product designed to fail but nicely packaged for chumps to buy.  Claims of complexity hide many easily understood sins.

At least for the major sins, we don’t need even more complex regulations.  Instead, put leadership in place who will aggressively enforce the laws we have already.  That would raise plenty of eyebrows and put some bums in prison, or at least make them pay civil and criminal penalties personally.  As many have noted, prison or, at least, personal financial liability, beats corporate concessions every time and pays back in future reluctance to break the law.  The country should try it sometime.

So back to little me, a small and ineffective cog in the larger system.  Why is this release of documents so long after the investigation?

My friends know that I have been upset since 2010 about the way the SEC handled the Goldman case and, in my view (confirmed by other trial lawyers), that it became a template for other SEC civil suits against the Big Banks.  In 2011 I wrote an anonymous letter to The New York Times complaining about the lack of investigative effort by the Division of Enforcement and the impact of the “revolving door” bringing Wall Street defense lawyers into the highest reaches of the SEC.  This is a practice that Obama has continued at most departments and agencies having to do with the financial system, following in Bill Clinton’s footsteps.  The New York Times letter was based entirely on publicly available information.

I was dismayed to not find any follow-up to my letter in The New York Times.  I gave up trying to bring attention to the investigative lassitude of the agency.  Interest appeared to be over.

A year after I retired, I sent a copy of the letter to The Times, under a cover letter identifying myself.  One of the addressees on the original letter called and told me  the original letter never was received.  The caller suggested that was because I misaddressed it to the old location of The New York Times.  I felt foolish, of course, but I guess that in 2014, when the letter was finally received, The Times didn’t see fit to follow-up the information even knowing its source.  This was another indication to me that the time for debate over the law enforcement treatment of wrong doers on Wall Street had passed.

Once, years earlier and only for a brief time, the SEC was an agency that was at least sometimes fearless of Wall Street institutions.   In those days, the directors of the Division of Enforcement were home-grown, not imported from Wall Street law firms.  After 1996, that ended.  Every director since has been nurtured as a Wall Street defense lawyer.  The decline in performance has followed an expected arc.  No one has seemed bothered by this.   It seems the phrase “lawyers represent client interests” is sufficient explanation to insulate this practice from critics.  In this view (pushed by lawyers), lawyers are the only people in America who are not influenced by their work experience, including friendships and defense of client practices.  They are SO exceptional!  So give it up, Jim, I finally told myself.  It’s the nature of Washington to put foxes in hen houses and claim they are protecting the fowl.

But in April 2015, Sen. Bernie Sanders announced his presidential candidacy, based principally on anger over how Wall Street has escaped being held seriously responsible for its misdeeds. If you credit Sanders with nothing else, praise him for not letting go of the notion of justice for those who suffered and those who caused pain and anger for millions.  Yes, the banks are not solely responsible for the Great Recession, but they contributed more than their fair share and leveraged immensely the damage initially caused by others.

Sanders was not treated seriously.  The publications I read made it clear that Sanders was, like Donald Trump, a flash in the pan.  Jeb Bush and Hillary Clinton would be nominated.  Anger against Wall Street and inequality were issues, but not worthy vehicles for a political campaign.  Nothing here.  Move on.

It turns out that the ravages caused by Wall Street are the gift that keeps on giving.  As Sanders campaigned with far more success than predicted, and Secretary of State Clinton defended President Obama as “tough on Wall Street,” it was evident that my small contribution to correcting the record might be timely.

So here it is.

Do I think Obama is responsible for the ineffective and embarrassing lay downs at the SEC and DOJ?  Yes, I do.  I have no idea if the President communicated to his law enforcement appointees that they should “go easy on Wall Street.”  Rarely is such overt instruction necessary in Washington.  But it is not hard to believe that in some fashion he did send such signals, since he came into office with a mantra of letting bygones be bygones, including in the far more important arena of the false narratives for invading Iraq.

In any event, the chairman of the SEC and the attorney general are appointed by the President.  At a minimum, we can say with certainty that Obama was satisfied with their performance. It is difficult to conceive that, as a Harvard educated lawyer who also taught law at the University of Chicago, it never crossed his mind how massive civil or criminal misconduct could go on without the supervision or knowledge of at least mid-level executives. Certainly, the public criticism was brought to his attention.  His response was to create a joint task force on the subject of fraud in general.  Its main visible public function is to collect all the press releases on fraud prosecutions, including small-time fraud, on one website.  It also offers advice to “elders” on how to avoid fraudulent scams.  The pro forma mention of the task force in DOJ’s announcement of the Goldman settlement signals that the Task Force doesn’t do much.  Again, law enforcement by press release.

The alternative possibility, never mentioned because it is preposterous, is that big Wall Street firms so lack supervision of their lower level employees that fraud on a huge scale can be conducted without the knowledge of even mid-level executives.  At the SEC, at least, such a conclusion should call for application of its “regulatory” function to impose supervisory conditions on the banks.  No such action was ever undertaken.  Instead, it was “pay up some money and nevermind.”

Dodd-Frank at best imposes generalized rules about bank size and other generic issues, rather than addressing the kinds of fraudulent actions that actually occurred.  It is appropriate for the SEC or Federal Reserve to impose narrower changes in corporate practice to address specific kinds of fraud.  They are called “undertakings” and are often imposed by civil settlements with the SEC or in litigated relief. It did not happen with the Big Bank frauds.

I believe that the American public is entitled to accurate information about how their government works, including the important regulatory agencies.  One way to do this is to fully disclose how the sausage is made, especially when the process is defective.  Self-promoting press releases swallowed by a fawning business press is not sufficient.  I knew I would not disclose any non-public information about the Goldman investigation while the lawsuit against Fabrice Tourre was pending.  He was the one guy at Goldman the SEC sued personally.  In fact, I think he was the only guy employed by any of the big banks sued personally.  (Another fellow who worked with the banks — not for the banks — was sued in another case.  He was found not liable, with the jury asking how come higher-ups were not in the dock and urging the investigation to continue. It wasn’t.) The Tourre case concluded a few years ago with a verdict against the defendant.  All appeals are exhausted.  The statute of limitations has expired for private actions. Disclosure of the information I had can do no harm to the public or to pending litigation.

The only reason to keep the information secret is to prevent embarrassment to the SEC or to those people who made decisions for the agency.  Most of them left the SEC years ago.  For public consumption, I have tried to redact all names of the non-supervisory personnel in the Division of Enforcement who worked on Goldman.  I also must add that, as the emails show, for a period of time those dedicated investigators were excited about the notion of bringing at least a slightly broader action than their supervisors wanted.  As is the case with much of the Division of Enforcement, the worker bees try hard and usually are fearless.  It is their bosses who frequently suppress their enthusiasm for policy, political, or personal reasons.

As final egotistical end note, I must say that, despite all of my personal reservations about his dedication to effective law enforcement in the financial sector, I voted for the President twice.  I will vote for whoever is the Democratic nominee.  But I ask myself:  Is this the best that two political parties given de facto monopoly over selection of presidential candidates can do?

Whoever is nominated and elected, Republican or Democrat, I hope that he or she will recognize the need to end the practice of hiring Wall Street personnel to run our financial enforcement agencies.  They should begin by looking to home-trained personnel to lead the major departments and agencies, such as Treasury, the SEC and the Department of Justice, including the chief of the Antitrust Division.  These are the people who are responsible for these institutions on a daily basis and also understand the nature and importance of their mission.  They have a career stake in doing an effective job.  Outsiders are, in general, more interested in resume polishing for the next private job.  Additionally, much great talent leaves these agencies for their own more lucrative private careers when they see their own chances for advancement blocked by outsiders or their energies trying to fairly but aggressively enforce the law sapped by timid leadership.

One party has chastised our government on every occasion for nearly 40 years  and shows no intention of reining in Big Business or Wall Street.  Directly or by implication, these attacks tarnish government employees in general, making a public service career less attractive to our most talented citizens.  The other party has been indifferent or ineffective in its defense of civil service and has addressed financial sector wrongs by adding to the complexity of the system rather than cutting through it.  As a result, some of our businesses are above the law.

Something has got to change.  It will.  The question is, will it be for the better?

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  1. Gaylord

    The author is trying very hard to be nice to the point of being delusional. This is criminality and corruption through and through, and it didn’t end in ’08. Don’t be sad… get mad.

    1. James Levy

      When it’s your career, you get sad.

      A little history: I was hired, first as an adjunct, then a tenure-track professor, by the interdisciplinary Freshman teaching unit at my old university. Two years before I would have come up for tenure (and gotten it) they axed the program and switched me, against its will, to the History Department. And they reset my tenure clock to zero. Long story short, they were never going to tenure me. So I slogged on and earned my pay and got my two kids through high school. By then, my wife wanted out of the suburbs and said she was leaving, preferably with me, but leaving. So we moved to the country. This cut me off from the academic life (and nice $72,000 a year paycheck) that I had struggled for years to enter and excel in.

      So what? So, It’s gone. I’m cut off. My intended life’s work is ruined. At 51 I’m an unemployed naval historian with two books and seven refereed journal articles and I can’t get an interview for a full-time job at a community college. How painful is this? It’s murder. Hurts all the time. No more exciting lectures to give. No more university library at my beck and call. No more access to journals. No more conferences. It’s an occasional one-off course and driving a delivery van.

      This man has risked a lot to do what he did. He’s lost more than many of you will realize. If he can’t just crap on the old life and the old profession, please, cut the man a little slack. You don’t want to be him.

      1. H. Alexander Ivey

        Mr Levy, I am very sympathetic to your situation – long story short, I was in the forefront of the late 70s to the present, layoffs in various industries where I found myself game-fully employed. I too, no longer believe I will ever be employed full time at any job. But I argue that it is not that the gods do not favour us; it is that we are the outcome of bad gov’t policies and unregulated (regulated for the consumer) businesses practices. Hence, my lack of sympathy or willingness to tolerate breast beating (see my April 24, 2016 at 6:44 am posting) by those who put us here.

      2. ahimsa

        @James Leavy

        Not sure I follow you?

        James A. Kidney, former trial attorney with the Securities and Exchange Commission, retired from the SEC in 2014 at the age of 66 after 24 years working there.

        Looks like he had a full career, although had to put up with a lot of bullshit, and possibly soured some relationships on his way out.

        From Bloomberg: SEC Goldman Lawyer Says Agency Too Timid on Wall Street Misdeeds

      3. inode_buddha

        Very similar situation here. Going on 50, unemployed in my chosen field, etc. And yes, its hard to just walk away sometimes… I have to keep my mind focused ahead instead of looking back.

        Are there any yacht clubs nearby you? There is like 4 of them within 10 minutes of me (I’m on the Great Lakes) You could teach sailing and rigging no doubt. Bonus: Union crane operators are required to know their rigging – they may need teachers too.

      4. Norb

        More than ever, I am convinced the capitalist system needs to be rejected as the means determining how goods and services are delivered. The injustice and inequality generated are too great. Finding a positive expressive outlet for this dissatisfaction will require leadership- and a new vision for the future.

        The amount of social damage being inflicted by the elite is almost beyond comprehension. Since they have successfully insulated themselves form the consequences of their actions, they remain aloof and uncaring for the plight of ordinary people, not to mention the health of the planet. This system will continue to cut more and more people off from the benefits of collective social action and effort. The work of the many, supporting the desires of the few cannot stand.

        We all have to decide the level of inequality we are willing to live with. How people answer this question will naturally sort them into common communities. Leave the isolated gated communities to the elite. Careerism, like capitalism, is a dead end if your position cannot be guaranteed. The amount of talent and passion for work wasted under the current system is another undercounted fact. Sustainability and democracy are not compatible with capitalism.

        Getting mad is only the beginning. The anger must be directed in some productive fashion. Any resistance to the current order must have broad social support and that support only has strength if self-reliant. Building these self-reliant structures is what the future will hold. If the plutocrats can build a world for themselves, why can’t the common man. It only takes work,discipline, and control over the means of production.

        Workers without power, influence, and the means to obtain life necessities are slaves. Is the best the human mind can conceive a life of benevolent serfdom?

        By the way, I believe I would enjoy sitting in on one of your lectures. I’m sure I would learn much- and be a better man for it.

      5. local to oakland

        @James Levy … sorry to hear. I know a few who have been chewed up by the academic meat grinder. I hope you can find a productive outlet for your scholarship. Exile is hard.

        I have been helped by the stoics, and Dante.

  2. H. Alexander Ivey

    “The explanation of the badger buried in the woodpile is too complicated for the average voter.”

    That’s it! Stop right there! I will not let you (speaking to the author) BS your guilty conscience over my internet link. The average voter clearly knows they are getting screwed, that Wall Street and the voter’s own bank is ripping the voter off, and most clearly, that the justice department, from state and local to federal, is enabling this injustice.

    You sir, are swimming with sharks. Your morality is “is it legal?”, your justification is “for the shareholder”. Therefore, you refuse to see the mendacity and instead excuse it for ignorance.


    I know other whistleblowers and internal dissenters who wound up losing their jobs who initially blame themselves, than come to accept that the system in which they operated was fundamentally corrupt, that even if some people locally really were trying to do the right thing, it was bound to either 1. go nowhere, 2. be allowed to proceed to a more meaningful level if it was cosmetic or served some larger political purpose or 3. got elevated because the organization was suddenly in trouble and they needed to burnish their cred in a big way (a variant of 2, except with 3, you might have a something serious take place by happenstance of timing).

    Wow, that’s a mouthful – and it’s only one sentence. Whilst I love your pieces, I’ve noticed that many of the articles – at least the run up summation to the articles – tend to be written in a stream-of-consciousness style that, frankly, is hard to digest. This seems to be the case more now than in the past. I don’t know if you’re harried or on an impossible schedule, but could you please make your syntax easier to read? Thanks from a long-time reader and donator.

    1. readerOfTeaLeaves

      Because it’s a Sunday and I have time to goof off, one potential revision — b/c I believe what Mr Kidney has to say is important enough for me to spend a few minutes on one potential suggestion. I’ve amended and added what I hope are accurate meanings:

      Focusing on these as the key subject/verb pairs:
      I know (other whistleblowers)
      (other whistleblowers) [lost their jobs]
      (other whistleblowers) [blamed themselves – initially]

      (other whistleblowers) [finally… accept]
      the system in which they operated… [was corrupt]
      … even if…(some employees) tried to [be competent]

      (It — there’s a problem with ‘it’ as the subject, because we are unclear what ‘it’ refers back to — I’ll interpret ‘it’ as investigating fraud’ ) was bound to…

      I know other whistleblowers and internal dissenters. They wound up losing their jobs.
      Initially, they blamed themselves, until they finally came to accept that the system in which they operated was so fundamentally corrupt that they could not retain a sense of their own integrity while working within the organization.

      Despite the fact that some people really were trying to do the right thing, for reasons that I will explain, investigating fraud was bound to go in one of only three directions:
      1. fraud would not be investigated at all,
      2. fraud investigation would serve the agency’s need for better public relations — in other words, the appearance of fraud investigation would be allowed to proceed, but only if it was merely cosmetic (or served some larger political purpose), or else
      3. fraud investigation became temporarily elevated, but only because the organization* was suddenly in trouble – and consequently, needed to burnish its credibility by actually investigating fraud.

      (Although 3 is a variant of 2, in the third option, credible fraud investigation could occur if, and only if, political necessity enabled competent SEC employees to actually investigate fraud in order to maintain the reputation of the SEC).

      [NOTE: *It’s not entirely clear here whether ‘the organization’ is the target business, or whether it is the SEC (which would need to burnish it’s cred in the face of bad publicity)]

      Not sure how close I came to the author’s intended meanings, but I thought that I’d give it a shot.

    2. Yves Smith Post author

      The sentence parses correctly even though it is long. Stream of consciousness often does not parse correctly, plus another characteristic is the jumbling of ideas or observations. The point is to try to recreate the internal state of the character.

      For instance, from David Lodge’s novel “The British Museum Is Falling Down”:

      It partook, he thought, shifting his weight in the saddle, of metempsychosis, the way his humble life fell into moulds prepared by literature. Or was it, he wondered, picking his nose, the result of closely studying the sentence structure of the English novelists? One had resigned oneself to having no private language any more, but one had clung wistfully to the illusion of a personal property of events. A find and fruitless illusion, it seemed, for here, inevitably came the limousine, with its Very Important Personage, or Personages, dimly visible in the interior. The policeman saluted, and the crowd pressed forward, murmuring ‘Philip’, ‘Tony’, ‘Margaret’, ‘Prince Andrew’.

      More generally:

      The Stream of Consciousness style of writing is marked by the sudden rise of thoughts and lack of punctuations.

      The sentence may be longer than you like but this is not stream of consciousness. A clear logical structure (“first, second, third”) is the antithesis of stream of consciousness.

  4. fiscalliberal

    I fail to see why fraud is not prosecuted. We can get cute with fancy words but fraud is clear and simple. Also – Enron results in SARBOX which seems to be clearly ignored. Yves – do we know of any SARBOX prosecutions? Clinton started deregulation, Bush implemented deregulation and Obama maintains it. No wonder the kids are mad. The financial industry makes the Koch brothers look like pikers.

    1. Yves Smith Post author

      There is actually a high legal bar to prosecuting fraud.

      I have written at length re Sarbox and the answer is no. And under Sarbox, you don’t need to prosecute, you can start with a civil case and flip it to criminal if you get strong enough evidence in discovery. There was only one case (IIRC, with Angelo Mozilo) where the SEC filed Sarbox claims, one in which it also filed securities law claims. The judge threw out the Sarbox claims with no explanation. I assume it was because the judge regarded that as doubling up: you can do Sarbox or securities law (the claims to have some similarity) but not both. But the SEC as it so often does seems to have lost its nerve after that one.

  5. afisher

    Interestingly, the SEC has been warned about more of the same type of fraud: https://www.sec.gov/comments/s7-16-15/s71615-60.pdf

    I don’t know if an election would have consequences and if a new administration headed by Sanders would make it the SEC more responsible to the taxpayers and not the investors / banks.

    It only took a decade for Markopolos to have his ponzi scheme information read by SEC.

  6. diptherio

    I want to like this guy, I really do. But then he goes and says stuff like this:

    The most senior level supervisors left more lucrative jobs in the private sector to head the Division of Enforcement, taking plum jobs but at significant personal sacrifice. (They then returned to even more lucrative employment or even more high-profile public positions.) All of them were gentlemen. These factors make it all the more surprising that I never got a clear answer as to why the investigation was so constipated, as it obviously was.

    So he doesn’t understand how the revolving door works…or he does but he’s being purposefully obtuse about it. Sacrifice my ass! Gentleman my heiny! And claiming that there’s no proof of criminality when, as is pointed out above, Sarbanes-Oxley was obviously violated isn’t helping things either.

    Listen dude, pick a side. It’s either the American people or Wall Street crooks and their abettors in government. You don’t get to have it both ways. This kind of minimization and wishy-washyness is only helping the crooks. More disappointing than I exepected.

    1. diptherio

      I mean, at least he lays blame at Obama’s feet, and calls the fraud what it is: fraud. Good on him!

      …But then he pulls out the “vote for Dems no matter what they do!” line and I just shake my head….

      1. polecat

        diptherio……. excuse me for a momen—-BARFFFF!!!!!!—- Whew ……… that felt better !! ……….

        yes …I agree….these kinds of articles are nothing more than defensive measures against a growing public rage !!!

        bu…bu…but Just Us !!

        1. diptherio

          these kinds of articles are nothing more than defensive measures against a growing public rage !!!

          I don’t actually agree. I think the guy feels a little guilty for not doing more, now he’s trying to salve his conscience. Still, he can’t quite bring himself to admit that the people he was working for may well have been criminals. They were just so nice!

          Self-reflection is not comfortable, and most people don’t have much tolerance for it. I think this guy’s legitimately trying to do the right thing (not cover up for criminality) it’s just that it’s really psychologically difficult to admit certain aspects of reality. It’s not like he’s the only one.

          1. polecat

            I find it telling that suddenly now (within the last year or so) that all these people ( people in high finance, their underlings, traders, hedge funders, and other assorted enablers of massive fraud upon the general public, are suddenly having a ‘come to hayzeus’ epiphany! I’m not buying whatever faux sincerity they’re trying to project…….

            They’ve screwed millions of trusting people with their fraudulent grifting!

            1. reslez

              > I find it telling that suddenly now (within the last year or so) that all these people […], are suddenly having a ‘come to hayzeus’ epiphany!

              Especially when it comes after a fat retirement and a lengthy career of going along. I have much more respect for people who really did put their daily bread on the line, and there are plenty of those people, a lot of whom Obama sent to jail. So, yeah, great, you finally told the truth… but where were you when the country needed you to speak out?

    2. perpetualWAR

      How about where the guy said “until proven guilty, they are innocent.” Hahahahahahaha

      Crooks, the lot of them.

      1. diptherio

        Couldn’t we use civil forfeiture to go after them regardless of whether we can prove any actual crime? What’s good for the average citizen is surely good for the elite banker…

    3. reslez

      It’s a good thing they’re gentlemen. I don’t know if I could handle all the looting and self-dealing if it came from common ruffians. Truly we are fortunate to be in such hands, my fellow countrymen!

    4. ChrisPacific

      Yes, I had trouble getting past that line as well. Either he is being ironic or he has a massive blind spot on that point.

  7. Lars Jorgensen

    According to Bill Black in a ted talk 2014. After the Savings and loans debacle, where the regulators went after the worst of the worst criminals, they made 30.000 criminal referrals and 1000 procecutions with a 90% succes rate.

    Now after the 2008 crisis, which was 70 times bigger causing 10 million job losses and costing 11 trillion dolllars, the Obama administration has not made one single criminal referral. https://www.youtube.com/watch?v=-JBYPcgtnGE

    Today I fell over some information about the IMF, that the organization is exempt from legal prosecutions and taxes. Can this be true?

    From the article: “The employees who bare the IMF badge are pretty much exempt from all forms of government intervention. And, according to LisaHavenNews, the IMF “law book,“ the Articles of Agreement lists the reasons and requirements for exclusion from government mandate.”


    1. Steve in Dallas

      Thank you, I was hoping someone would mention Bill Black.

      I’m a software/hardware product/business development engineer. In 2008, after 20 years of reading the WSJ and stunned by the sellout to Murdoch, I went to the internet independent media (IM) to follow the ‘economic crisis’. Within a few months it was clear to me 1) I had learned nothing of substance reading the WSJ, 2) the U.S. MSM, education system, and government are thoroughly captured/corrupt.

      Being a ‘reader’ (note: I don’t know anyone who reads non-fiction) for me this ‘worldview transition’ was quite natural, nothing really surprised me, and it was a big relief to discover such good information/analysis so easily available on the internet. However, eight years later, I have yet to meet a single person who has rejected the MSM or tuned in to what’s happening, via the IM or otherwise. In fact, after leaving the university in 1990, I have yet to meet a single person with any basic understanding of (or the slightest interest in, or concern about) the extreme institutional criminality of the the Savings & Loan Crisis, Asian Economic Crisis, Technology Bubble, the 2008 crisis, or the many economic/military wars-of-aggression methodically destroying one government/economy/country after another.

      To me, nothing made the global/economic/organized/mafia criminality more clear than the 2008/2009 articles by Bill Black. Back then I again foolishly assumed people would rally behind Dr. Black to reestablish basic law enforcement against yet another obvious largest-ever “epidemic” of organized crime. Looking back, the highly organized (and very successful) criminality of the Paulson/Obama/Geithner/Bernanke/etc. cabal was truly an amazing operation to behold. Perhaps the most shocking news came in 2010 when numerous studies confirmed that the top 7% of Americans had already “profited” from the economic crisis, that the criminally organized upper class had not only increased their net wealth but, more importantly, had increased their rate of wealth accumulation relative to the bottom 93%. Still, to me, infinitely more amazing, the bottom 93% didn’t, and still don’t, seem to care, or if they do, they’ve done absolutely nothing to even start to fight back.

      Today, when reading these articles, I’m astounded how completely meek and ‘unorganized’ the bottom 93% are compared to the extremely vicious and organized top 7%. Year after year the wealthy elite, who’s core organizing philosophy is “take or be taken, kill or be killed”, increasingly wallow in dangerously high and unprecedented levels of wealth accumulated by blatant/purposeful/methodical/criminal/vicious looting while their victims, the bottom 93% ‘working class’, do absolutely nothing (what are they doing?…. other than playing with their phone-toys, facebook, video games, movies?). At this point, the main (only?) reason I continue to ‘read’ is to perhaps someday ‘behold’ the working class 93% attempting to educate themselves and consequently ‘organize’ to defend themselves.

  8. lyman alpha blob

    I sympathize with Mr. Kidney and applaud him for doing what he can to try to rectify this abhorrent situation. I also applaud him for placing the blame squarely on Obama and his reasons for doing so are solid.

    What I find much harder to understand is why he would vote for Obama even in 2012 after it became apparent that Obama was ultimately responsible for stonewalling his investigation, and his complete willingness to vote for the corrupt Democrat party no matter what going forward.

    As long as enough people continue to have that attitude things will never change until the whole system comes crashing down. I’d much rather see an FDR-type overhaul of the system rather than a complete collapse as I’m rather fond of civilization. But I’ve come to expect the latter rather than the former so I’ll be reading my weekly Archdruid report for the foreseeable future.

  9. Carolinian

    The most senior level supervisors left more lucrative jobs in the private sector to head the Division of Enforcement, taking plum jobs but at significant personal sacrifice. (They then returned to even more lucrative employment or even more high-profile public positions.) All of them were gentlemen. These factors make it all the more surprising that I never got a clear answer as to why the investigation was so constipated, as it obviously was.

    Yes poor babies for that “significant personal sacrifice” that resulted in “even more lucrative” private employment. The author explains the problem then scratches his head over what it might be.

    In a rational world there would be a strict separation between the regulated and the regulators. The government would hire professional experts at decent salaries and they never ever would be allowed to then move on to jobs with the regulated. Clearly the assumption underlying our current–irrational–system is that these high status technocrats are “gentlemen” with a code of honor. Welcome to the 19th century. Those long ago plutocrats in their stately English mansions were all gentlemen and therefore entitled to their privileges by their superior breeding. They were the better sort.

    Meanwhile for lesser mortals it seems totally unsurprising when laws are ignored because you hire your police from the ranks of the criminal gangs. No head scratching needed.

  10. Alex morfesis

    Reid Muoio (boss of kidney @ $EC) has a brother at a major tall bldg law firm whose job is to help fortune 500 companies deal with D & O insurance issues…so when in the article Muoio says “He” did not go thru the revolving door…it was fraud by omission…his brother sits on the opposite side of these private settlement agreements…

    so is Kidney unaware…leaving us to maybe accept he was never much of an investigator…or just forgot to point it out for us…

    The world is full of govt types who tell us TINA…

    The wealthy Elliott Spitzer told us he would have loved to help “the little people” but the OCC and then scotus with waters v wachovia…except scotus ruled only direct subsidiaries get protection and the OCC specifically said the trustee operations of OCC regulated entities are also not covered/protected…

    A really big shoe
    as Ed used to remind us….

  11. susan the other

    Does anyone else think this was insider demolition – not just the failure to prosecute, but the whole financial implosion in the first place? Who writes up nothing but “shitty deals” – all the while saying to each other: IBGYBG and survives to slink away? They must have had a heads up that the financial system as we had known it in the 20th c. was done. They had a heads up and then they got free passes. My only question is, Wasn’t there a better way to bring down the system, an honest way that protected us all? By the end of the cold war money itself had become an inconvenience because of diminishing returns. And now the stuff is just plain dangerous because everyone who got screwed (99%) wants their fair share still. It is paralyzing our thinking. Obama maintains he personally “prevented another depression”. I honestly think he might be insane. What we need is a recognition that the old system was completely irrational and it isn’t coming back. And most of us are SOL. Somebody is going to figure out how to maintain both the value and usefulness of money very soon, because we’ve got work to do.

    1. cnchal

      The GFC was the first great financial crime of this millenium, and Goldman Sachs was at the epicenter. A heist of gargantuan proportions, they didn’t even need a safecracker after Bernanke spun the dials and opened the door wide.

      Imagine if the FBI and the Mafia exchanged their top leaders every few months. That’s what we have here with the SEC and Wall Street.

      Bernie Sanders: The business of Wall Street is fraud and greed.
      We can add to that. The business of the SEC is to provide cover.

    2. polecat

      It’s all about ‘their protection’….not ours!

      and Obama………..

      He’s a f#cking psychopathic peacock!

  12. KYrocky

    In Yves intro she shares her views, first, that Kidney still wants to think well of his former SEC colleagues and his criticisms seem muted relative to the severity of the problems, and second, that there are class assumptions at work.

    The first is obvious, as the SEC is an utter failure in its responsibility to investigate and prosecute financial criminals. While Mr. Kidney devotes a fair amount of his passages pondering how it can be that no individuals within these financial institutions bear personal responsibility, Mr. Kidney fails to see the SEC through that same lens. To say Kidney’s criticism of his coworkers is muted is an understatement. The individuals at the SEC are corrupt. The individuals at the Justice Department are corrupt. Probably all nice people: husbands, wives, fathers, mothers, friends, etc. Just like those folks at the financial institutions. Mr. Kidney cuts them slack because of his personal relationships with them. Mr. Kidney chooses to give them the benefit of doubt when the totality of their professional performance at the SEC make clear this cannot be true.

    With respect to class assumptions at work, Yves illustrates with the deference shown by SEC officials and investigators toward these financial criminals and their presumption that these individuals are honest. Mr. Kidney does share some of his disappointment in President Obama and Obama’s administration but fails to properly connect the dots. In short, the lack of financial crime prosecutions is the result of a deliberate, planned and orchestrated effort.

    Mr. Kindney’s investigations were prevented in going forward by his superiors. He was never given an explanation for this despite his asking. But Kidney believes his superiors are all good people.

    No, they are not. They are compromised people who have placed their career employment above their sworn duty. The fact that their bosses have done the same, as have those in the Justice Department as well as President Obama, should not diminish this fact. The phrase “class assumptions” is too euphemistic when describing a system where there is no justice for the victims of financial crimes, a system where the Justice Department and Administration coordinate to shield financial criminals based on where they work.

    This is America. In today’s America the fact is certain individuals are above the law because our elected officials at all levels accept that this is okay. Victims of these individuals will be prevented access to their legal recourse, and that these criminals are protected from the highest level of our government down. This goes way, way beyond class assumptions.

    1. readerOfTeaLeaves

      Yves has written extensively about how corporate interests have funded academic sinecures, as well as continuing legal education seminars attended by attorneys and judges. This is part of the fallout; if you want more, check out her section of ECONned where she explains how legal thinking was perverted by business interests.

  13. flora

    Thanks for this post. Glad to see the SEC story is still alive. I’m sure the SEC and Obama would prefer it quietly go away.

  14. dk

    As someone who has fallen on their sword more than once (and again recently), I just want to say that “placed their career employment above their sworn duty” is accurate but also oversimplifies the situation.

    People with families tell themselves that they balance performance of most (some?) of those duties, while shirking the balance in order to protect their families (a “good” (as in, expensive) college for the kids)… this actually comes down to sustaining their social status, in a culture (political as well as corporate) where loyalty is valued equal to and above performance, and honorable action is diminished, trivialized, even ridiculed; and not just within the context of the financial industry.

    This is not at all a defense of the choice, but the choice is made in a very class-stratified social context, and arises in that general context. People take out loans to buy cars and houses, they squirrel earnings away into investments (to avoid taxes) which they are reluctant to draw from… they feel less ready to abandon their addictive income streams for honor, and fudge their responsibilities. It’s not isolated to regulators, or government, or even finance. It occurs so constantly and on so many fronts that addressing specific cases doesn’t make a dent in the compromise of the entire culture. And that compromise is fueled and maintained by a very twisted set of ideas about money, and career, and social status (not to mention compromises in journalism, education, science, you name it).

  15. Synoia

    I read Mr kidney as being very sarcastic. I could not write this with a serious sarcastic (Lawsuit Avoiding) view:

    The most senior level supervisors left more lucrative jobs in the private sector to head the Division of Enforcement, taking plum jobs but at significant personal sacrifice. (They then returned to even more lucrative employment or even more high-profile public positions.)

    taking plum jobs but at significant personal sacrifice

    Oh really? Must have hurt. And from a legal point of view does not appear libelous.

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