SEC Conference Features Former Official Calling for Fraudsters to be Protected from Career Harm

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The SEC showed its true colors yet again at a panel at Stanford Law School at the end of March, although not as dramatically as last year. In last spring’s SEC panel at Stanford, the then head of examinations, Andrew Bowden, made such fawning remarks about private equity, including repeatedly saying he’d really like his son to work in the industry, that he resigned three weeks after we publicized the segment. Nevertheless, this conference was another demonstration of depth of regulatory capture at the agency.

As before, the real action came in when the audience members asked questions. They were all fielded by Andrew Ceresney, a former Debevoise & Plympton partner, now head of enforcement. We’re going to look at two questions in succession.

This one, the second in the Q&A section, has an individual investor reiterating objections that Elizabeth Warren, as well as SEC commissioners Kara Stein and Luis Aguilar, made about the SEC’s practice of being far too willing to waive an automatic sanction, that of the loss of “well known security issuer” status for serious violators. Kara Stein’s stinging 2015 dissent to a Deutsche Bank waiver gives a flavor for how the SEC is all too willing to go easy in the face of criminality:

With these WKSI advantages comes a modicum of responsibility. WKSIs must meet the very low hurdle of not being ineligible. This means that, among other things, they have not been convicted of certain felonies or misdemeanors within the past three years. In granting this waiver, the Commission continues to erode even this lowest of hurdles for large companies, while small and mid-sized businesses appear to face different treatment.

Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating, and stealing. This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR. The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.

Prior Commissions sensibly did not grant WKSI waivers for criminal misconduct. At least, that was the practice until September 19, 2013, when Commission staff granted a waiver to a large institution that pleaded guilty to criminal fraud. This Commission granted another waiver on April 25, 2014, to another large institution that had also been criminally convicted of manipulating LIBOR.

To put none too fine a point on it, this decline in the SEC’s already low standards took place on White’s and Ceresney’s watch.

Now consider this section from the Stanford Law panel. I’m dispensing with the transcript because it’s important to hear the tone and pacing during this short interaction (or watch here starting at 1:40:10):

You can see that soon the questioner starts speaking, some in the crowd, which was heavy on securities lawyers, start fidgeting about. Members of the audience told me there was also sniggering as soon as he mentioned Elizabeth Warren.

Ceresney didn’t let the older man finish his question. He cut him off and proceeded to give a lengthy, technical answer that amounted to a brushoff. And the retiree had also indicated he had two issues he had wanted to raise. It’s not even clear whether the granting of waivers was one of his two beefs, or whether he was citing that as part of a bigger concern.

Ceresney made two points. The first amounted to: “I have nothing to do with this matter. It’s handled elsewhere in the agency.” The second was that the SEC has a well-established process for granting these waivers, so there is nothing to see here.

As attentive readers will recognize, the SEC’s bureaucratic box ticking is besides the point. What Warren, Stein, and Aguilar have contested to is not the process but the results. The SEC looks like it is putting its finger on the scales to favor big, powerful firms. Might that have something to do with revolving door incentives, since they are among the universe of potential employers for departing senior SEC professionals?

Marc Fagel, the former regional director of the SEC’s San Francisco office, asked the next question. A member of the audience who was sitting right behind him reported on what happened off camera:

The gentleman from the public started talking about Senator Warren’s report criticizing the SEC. I saw Fagel almost immediately start to gaffaw in a prolonged and exaggerated way, as if he was trying to make sure that the SEC people in the room would see that he was on their side in believing that the unwashed public doesn’t know what it’s talking about and shouldn’t even attempt to criticize the SEC. As soon as the guy finished his back and forth with Ceresney from the SEC, Fagel jumped up and asked his fawning question.

Here is that “fawning question” (this is a different clip than the one above despite having the same image when idle; or watch here starting at 1:43:45):

Marc Fagel, Partner, Gibson, Dunn & Crutcher: Thank you. Um, and this goes partly to Andrew but partly to the others, I’d like to hear from you. You did reference the deterrent effect. And there’s no question when an enforcement action is brought the industry changes. By the same token, when examiners make findings and those are reported back by leadership like Mark Wyatt, and a lot of great examiners in the room, the industry makes changes. When you speak at a panel or Mary Jo speaks, the industry makes changes. Doesn’t seem like enforcement is always necessary. And couldn’t there be greater use of just relying on the exam findings or on public pronouncements which don’t have the same devastating effects to people who are at the receiving end of an enforcement action. I’d like to hear from other panelists as well if you think if you would change your conduct just sitting on a panel like this or reading about these things in the paper.

Andrew Ceresney, Director of Enforcement Division at U.S. Securities and Exchange Commission: Well, I’ll just briefly answer. I think that’s right, I don’t think the only thing that causes change in conduct is enforcement actions. But I do think that when you have a violation, um, it’s appropriate to have an enforcement action um, for that violation. Um, there are obviously deficiency letters still issued in connection with exams where there are issues found, and those um, are typically, are typically remedied. But the one thing I’ll just say with regard to a deficiency letters and OC and our relationship with OC, over the years, in the last five years, about ten percent of exams have resulted in referrals to enforcement. It’s been pretty constant.

And so, this idea that we’re not using deficiency letters or otherwise using our other powers to remedy conduct, I don’t think that’s borne out by the evidence. But from my perspective, obviously, um, enforcement actions serve serve two primary purposes: one to punish misconduct, and two, to deter misconduct. And, and so, we bring the actions when we think, we think it’s appropriate, when somebody has violated the law, we think a sanction’s appropriate.

Neither side of this exchange is pretty. Fagel asserts that when the SEC gives speeches, that conduct changes. What evidence is there of that? The agency is widely recognized as being resource constrained and reluctant to litigate cases. In fact, in private equity, firms at thumbing their noses at recent SEC enforcement actions. As we’ll discuss at greater length in our post tomorrow on this conference, private equity firms are actually admitting in their latest annual form ADV disclosures that they are engaging in conduct that the SEC has sanctioned, basically defying the agency to come after them (remember that from a securities law perspective, the time for disclosure was before investors committed funds, not after they are stuck in illiquid investment vehicles).

But the shocking part of Fagel’s remarks is his contention that the SEC should protect the careers of people who’ve engaged in misconduct. We have a former enforcement official stating that members of the financial services industry should be treated as a special class, exempt from damage to their reputation and paychecks from enabling fraud. It’s hard to come up with a better formula for encouraging people to go out and steal.

In fact, the agency should be delighted if Fagel’s claim were actually true, that individuals were getting demoted or sidelined because the SEC caught them out. There’s perilous little evidence of that happening, save for lower level fall guys like Goldman’s “Fabulous Fab” Tourre. Whistleblowers almost without exception incur vastly more in career costs than just about any players in the units they single out.

Similarly, legislators, economists, pundits, and members of the public have demanded for prosecutions of bankers who’ve broken the law. No more free passes for white collar criminals. The SEC can only refer cases for prosecution, but its other remedies include suspending or revoking firms’ and individuals’ securities licenses, steps it very rarely takes, as well as fining responsible employees. We need far more personal accountability, yet Fagel wants finance to become a business that it pure upside to its members, even when they’ve engaged in or failed to stop fraud.

As former securities regulator Ed Walker said via e-mail,

There is nothing as disgusting as watching the revolving door in action. This guy is saying he shouldn’t have enforced the law because now he understands just how wonderful the people he unfairly persecuted are. He has no self-respect.

The worst is that the SEC has arguably reinforced Fagel’s upside-down world view. Gary Weiss, in “Goodbye Marc Fagel and Good Riddance, called Fagel “a quintessential example of the “‘captured regulator.'” Let me not spare you the details:

Fagel was the driving force behind one of the darkest chapters of the SEC’s recent history: Its 2006 probe of research firm Gradient Analytics and its client Rocker Partners, and the subpoena of reporters who told the truth about the company that inspired the probe,, and its crazy CEO, Patrick Byrne.

Gradient’s “crime” was that it questioned Byrne’s management and Overstock’s accounting and  earnings capacity, which was richly borne out by future events.

The probe was based on trumped-up allegations of collusion between Gradient and Rocker, as became clear when it emerged that the former Gradient employees who were the SEC’s star witnesses — as well as Byrne’s, in a civil suit he had filed — had been fired for cause. After all the publicity died down, Gradient and Rocker were quietlyexonerated.

It was bad enough that Fagel, who spearheaded this wrong-headed witch hunt, let himself be led around by the nose by a CEO who was so unhinged that he directed lewd and obscene remarks to a reporter for Fortune, Bethany McLean, and fantasized that a fictional character from the Star Wars movies had ruined his business.

All this was known to Fagel, and he should have been canned for poor judgment. But on top of that idiotic Keystone Cops routine, there was the little matter of the subpoenas.

They were issued to three leading financial reporters, Herb Greenberg of Marketwatch, Jim Cramer of,  and Carol Remond of Dow Jones News Service, who had been  critical of the company’s management and accounting..

The subpoenas, which were whipped up by Fagel and other SEC lawyers who swallowed Byrne’s conspiracy theories, were such a major embarrassment that they made the front page of the New York Timeswhen they were withdrawn by SEC chairman Chris Cox.

The shamefaced Cox actually scolded his own enforcement division for doing such a harebrained thing.

But it was even worse than it appeared to be at the time. At the same time that Fagel & Co. were chasing their tails at the behest of a nutty CEO, Bernie Madoff was ripping off his customers and the major Wall Street bankers, including many with large operations in San Francisco, were stealing from everyone in sight.

So what happened to the official who dreamed up this absurd waste of government resources? He was promoted in May 2008, just in time to not cover himself in glory during the financial crisis that was in the process of unfolding.

So get this: Fagel while at the SEC didn’t just ignore a whistleblower, in the case of Madoff. He aggressively persecuted whistleblowers, even in the face of obvious signs that the CEO who was targeted was unhinged and therefore might not be credible. But after this colossal, embarrassing, and highly public cock-up, the SEC protected and even rewarded him! So why shouldn’t he expect the same generous treatment for his clients who defend and engage in abuses?

So if you ever need a poster child for why the revolving door is terrible for enforcement, you can point in general to the SEC’s industry-friendly position that its intermittent wrist slaps change behavior, and in particular, to the sorry conduct of Marc Fagel.

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  1. EndOfTheWorld

    A Bernie Sanders administration would, IMHO, make sure the SEC would actually do its job and penalize the crooks to the max. Between Trump and HRC, I think there is more of a chance that Trump will be tough with the banksters.

  2. Nick

    Warren as head of the SEC under Sanders would be both healthy and fun to see.

    I can just imagine polished private equity employees handcuffing themselves together outside the SEC building like greenpeace activists outside Exxon, holding up placards with pictures of emaciated Lamborghini salesmen and sobbing art dealers.

  3. craazyman

    They’re the Leaders of the Fee World!

    clowns to the left of me
    jokkers to the right
    here I am . . .

  4. timbers

    “Waivers are not related to enforcement…” (near the end of first video)…..Good to know! Next time I get a speeding ticket will the cop tell me it’s not related to speed enforcement? Someone is talking out of three sides of his mouth.

  5. Larry

    The lack of enforcement for lucrative crimes guarantees there will be more crimes. One wonders what would actually result in an SEC prosecutionn? As Yves points out, lucrative future careers in the private sector are incentivising regulators to first do no harm.

  6. diptherio

    Are the videos working for others? I’m getting nothing, just the blank video player embed…Using FF on Ubuntu….never had this happen before

    1. JEHR

      diptherio, I am getting blank screens also but I thought it is because I do not reside in the US.

      1. diptherio

        The solution is to not use FF. Chrome works just peachy. Mozilla must not like TubeChop for some reason….

        1. Yves Smith Post author

          Works for me in Safari and FF. But I’ve updated the post to provide the link to the original video and the start time. Sorry!

    2. TheCatSaid

      not working for me either.
      (and previous tube chop videos didn’t work either)

  7. allan

    “The shamefaced Cox actually scolded his own enforcement division …”

    How sad* that even a BushCo placeholder like Cox would be a welcome change of pace
    from the current “look forward, not backward” crew.

    * Where “sad” means “enraging”.

  8. diptherio

    How a person’s job description reads and what their job actually entails are often two very different things. The unspoken expectations are usually the most important ones.

    Fagel while at the SEC didn’t just ignore a whistleblower, in the case of Madoff. He aggressively persecuted whistleblowers, even in the face of obvious signs that the CEO who was targeted was unhinged and therefore might not be credible. But after this colossal, embarrassing, and highly public cock-up, the SEC protected and even rewarded him!

    Fagel didn’t cock-up anything, he performed his job to perfection. It only seems odd because you’re assuming that the explicit job description is the one that matters when that is clearly not the case. Fagel was promoted because he did his job exceptionally well, according to the much more relevant unspoken job requirements of working at the SEC. Attacking whistleblowers and discrediting the agency was just part of his application for advancement. He was showing the people who matter (those who hire the lobbyists and donate to campaigns and pay six-figure speaking fees to favored politicians) whose side he was on — namely theirs.

    Just like we got railroad regulations in order to provide PR cover for railroad company malfeasance, the SEC is mainly about providing spin-control and plausible deniability to the financial “services” industry. Getting somebody to invest in your sketchy financial instrument or opaque fund is a lot more difficult if you don’t get that government seal-of-approval — people just see through the con too easily. If we except that, then Fagel was obviously the exact right man for the job.

    I know, I know…you’re going to say it wasn’t always like this, that the SEC really did used to serve investors and the public good, and that may well be true…but it hasn’t been the case for my entire lifetime, nearly two generations now, so I don’t think it’s particularly relevant. I think we’d be better to (metaphorically) burn the SEC to the ground, remove it entirely, than to try to fix it. Law of the Second-Best applies here…a properly functioning SEC would be the ideal, but that’s not an option, and a non-properly-functioning SEC may be even worse than none at all.

    At least if we got rid of financial regulations and ineffective regulators all together, people would be forced to actually think for themselves about whether this slick banker is offering them a legit opportunity or a selling them a bill of goods. If people started doing that, hedge funds and PE would disappear overnight…..maybe.

    That’s my story and I’m sticking to it (until I hear a convincing argument against it). I’m going full on Libertarian here — let’s get rid of the SEC!

    1. Chauncey Gardiner

      Going ‘scorched earth’ on corrupted agencies that are no longer serving the public interest?… Intriguing proposal, dip, and not just the SEC. Might have a hidden benefit of reducing the necessity for and incomes of a few thousand lobbyists, senior partners and others of the “professional class” at white shoe law, accounting and PR firms that presently house legacy water carriers. After all, lots of infra h/b built up around these agencies and their “private sector” networks over the years.

      Seems to me the determinant is simply whether an agency has become so compromised in service to their prospective future employers and clients that on balance they are damaging the very people they are pledged to protect? News like this doesn’t raise public confidence:

    2. polecat

      Yes, I agree… let’s go farther, and get ride of all the 3 letter agencies…and ..just..start… fresh…!!

      Look… ALL the dept.heads of these agencies…..and their toady underlings, need to be fired,replaced with capable, unbiased people, who will do right by the public… not for themselves…….and the scum who were replaced put on trial for treason against the public domain!!!!

  9. ke

    The folks who have climbed to the top know that there is little difference between the practices of communism, capitalism, Catholicism, etc, so they have far more in common with each other than the groups fighting over mythology.

    No matter where you go, most people will be jockeying to see who is going to be forced to cut down a tree so everyone else can have firewood, until there are no more trees, in layer upon layer of people farming people. You aren’t going to learn anything but bad habits in that environment, which will preclude you from participating in a productive environment.

    Without surplus, you cannot help anyone in deficit, without joining the black hole yourself. Regardless of politician, nothing changes net, so why would you care, unless you are jockeying to climb the debt pyramid.

    When you get on a job with people capable of consideration, there will be no question because it’s like walking out of a dark closet into the sunlight. The 5k allows you to travel through the slave event horizons, and the 100s make you pause before breaking one, showing consideration. You don’t have to open the want ads or go on linked in, because you will be recognized by your judgment.

    We have reached the end of another empire cycle, New same as the old, with another layer of artificial complexity for misdirection. The game of artificial demographic variability didn’t just begin yesterday, but the losers in this round, the majority, the only possible outcome in an actuarial ponzi, are waking up..

    Questioning the system is productive; expecting it to change is a waste of time. Work and exchange your money on par with the time others work, discounting the debt money according to layer in the ponzi.

    I’m going to charge Trump $300/hr to fix his elevator in the big city, some small time tyrant in a gateway city $150, and I’ll fix all kinds of crap, because it’s all really the same crap, for free to people trying to make a living and feed their kids.

    Consideration is the key that opens doors for you, not pleading to a politician spending debt to get more debt to enslave more children to the past. The peer pressure groups compete with each other for more access to debt and discount within the .group by hierarchy. America is all about gang activity, some legal and some not.

    You are far better off with a broken arm than the bad habits of ghetto psychology, no matter how big the house or how fast the car. From the perspective of labor, the SEC doesn’t exist, because it’s function is to rig the rules favor of debt kept off balance sheet, which every layer in the ponzi depends upon.

    Public education is a waste of time, except to develop a mechanism to offset each layer in the ponzi with as little energy as possible, because all the rules are arbitrary and if they fail to confirm the status quo, they will be changed. That’s what passes for learning, from Early Childhood Education, fitness for debt slavery.

    1. TheCatSaid

      What’s the 5K that allows you to travel through the slave event horizons?
      What are 100s that make you pause before breaking–what–an event horizon?

      1. ke

        I’ve been preparing the youngsters for travel throughout the system as it is being locked down with the removal of cash. Essentially, there are cash islands. Each event horizon is a debt psychology locking the participants in. Cash systems discount debt, over time to equilibrium where you are essentially cash free as well. With the right skills, employers have to pay you to begin work, in a tangible medium, rather than the debt system, where you have to provide the up front and are paid in debt, which only has worth, short term, relative to others being paid in debt, all going bankrupt over time, to do nothing productive and feed the debt issuers.

        1. ke

          The Bay Area essentially gets free labor from people trying to strike it rich in the debt ponzi, chasing free RE inflation money from China, another part of the debt pyramid, which is already imploding. The infrastructure problems are just a symptom, and replacing crappy old with crappy new only lasts so long, leaving the majority stranded.

  10. griffen

    Good post. Thanks for keeping up the heat & let’s keep banging the drums.

    Posts like these are healthy reminders of what has not changed.

  11. tim

    Black SEC
    Warren AG

    Budget = comparable to “black ops” budget skillz

    Who else should be who ?

  12. Robert Coutinho

    In defense of Patrick Byrne, he was calling for the elimination of the revolving door long before many. His site,, has some of the “conspiracy theories” of which he has been accused of promoting. Except, he and his allies have backed up many of their claims with hard evidence (including an expose of Jim Cramer–who made a living in the 1990’s by insider trading–and then published the fact in his own book)!

  13. Ishmael

    You will never clean up the SEC. People who work at the SEC are unionized and like most government employees near impossible to fire! Catch them watching porn during work on govt computers are they fired — nope. Such action in private industry would have you out the door in a couple of minutes.

    If you can not fire people you can not fix things. This is true about most of our government.

    It is rather amazing that some police did not come pouring into the conference and arrest whoever was asking those questions for making those government employees feel stressed and thus they must be terrorists.

    A famous quote — In government scum rises to the top.

    1. Vatch

      It may be difficult to fire SEC employees, but the primary reason it is almost impossible is that the people at the top don’t want to do it. People like current chairman Mary Jo White, or former enforcement director Robert Khuzami are (were) not unionized SEC employees. Instead, they are integral parts of the revolving door, and there’s no way they’ll risk rocking the lucrative jobs for favors boat by firing people. The financial industry (which controls the SEC) does not want people in the SEC to do their jobs, which means that if an SEC employee wastes his time on the job, he’s doing what the financial industry wants.

      1. Robert Coutinho

        To be more specific about how the system works:
        1) Get SEC job
        2) Those with more seniority at SEC explain how “the system” works to you
        3) You work there for about five years. You “let slide” all sorts of shenanigans because this and that financial firm are represented by Flybynite LLC lawfirm.
        4) After five years, you get a seven-figure salary for life from Flybynite LLC. This is your reward for looking the other way when various financial firms represented by Flybynite had been referred for “possible infractions.”

        Wash, rinse, repeat.

  14. ishmael

    Political appointees are not union but practically everyone else is. They are government union workers and unless you are caught robbing a bank they will not fire you. You now have at least 15 years of corruption coming into their ranks and that would not change unless you went through and fired almost all the people there.

    At these jobs you have a choice. Sit back do little and collect an okay salary for DC and then either collect your pension or collect your pension and go to work for a law firm defending people against the SEC. On the other hand you could do your job and do some work and maybe piss some people off because you have to take a confrontational position and no job with a law firm lies in your future.

    Of course if you are some small player without a big PE firm behind you they might make a show of you for instance Martha Stewart.

    1. EndOfTheWorld

      The attorney general choice would be important. Eric Holder was a corporate lackey. A tough AG could and would bring charges against criminal banksters, the SEC be damned.

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