NakedShorts

How Linda enforces securities laws

The position of Linda Chatman Thomsen, director of the enforcement division of the US Securities and Exchange Commission, is fast moving from tenuous to untenable. Already facing disciplinary action — hopefully involving the phrases “Clear your desk” and “grand jury subpoena” — following the inspector general’s report into the handling of L’Affaire Aguirre, she’s now alleged to have tipped a wink or two in the general direction of her old boss, Stephen Cutler, during the JPMorgan-Bear Stearns stitch-up. 

According to Sen. Chuck Grassley (R. Iowa):

Specifically, I have received anonymous but specific information that:

[T]he enforcement director gave information to the [General Counsel] of JP Morgan Chase (himself a former SEC enforcement director) about the state of various investigations into Bear. The GC had called the director to get assurances and inside knowledge from the SEC to help Morgan’s negotiating position (i.e. how much to bid). This inside information, gotten through a personal relationship, would be critical in helping Morgan put together a low-ball bid to Bear and the US government: Morgan could cite litigation (as Ill [sic - Ed] as valuation) uncertainties, while having the assurance (that at least from the SEC) the risk of litigation was not really that great. This could have materially affected the amount of guarantees that Morgan was able to negotiate from the Federal Reserve.

Moreover, the Enforcement Director also allegedly “made representations about the investigation without talking ...to the staff doing the investigation.” The similarity of these allegations to the conduct criticized in our report and the Inspector General’s report is striking.

All of which puts rather a large hole in yesterday’s blatherings on the SEC’s announcement of its Fiscal 2008 enforcement results (the vast majority of which consisted of actions against long-defunct companies for long-defunct filings, with a lot of the rest settled under the Cox discount). 

“The SEC’s role in policing the markets and protecting investors has never been more critical,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “The dedicated enforcement staff has been working around the clock to investigate and punish wrongdoing. The staff’s commitment is unwavering year-in and year-out. We look forward to continuing our vital mission of investor protection in the coming year.” 

Always excepting the assorted ne’er-to-be-investigated-let-alone-prosecuted thuggees and criminules represented by attorneys huddled under the Friends of Linda umbrella. 

Dear Chairman Cox

(Letter from Sen. Chuck Grassley)

Oct. 21 2008

SEC announces Fiscal 2008 Enforcement Results

SEC press release Oct. 22 2008

Tug o’ the forelock, Portfolio. 

Earlier on NakedShorts

L’Affaire Aguirre

Unless your lawyer’s a pal o’ mine

US Securities and Exchange Commission enforcement chief Linda Cheat’em Thomson was on her high horse again yesterday, with a stamped hoof and a whinny in the general direction of some knuckleheads who cleaned up $900,000 on Restoration Hardware’s privatization last year:

“Combating trading ahead of mergers and acquisitions is among the Commission’s highest priorities,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement.  “Insider trading distorts our nation’s markets, and we will aggressively pursue those who seek to take advantage of secret information obtained from company insiders.”

All well and good, but for The New York Times’ report that the agency’s inspector general H. David Kotz has turned in a 191-page not-yet public report that exonerates former SEC investigator Gary Aguirre for trying to crash the alleged (but strongly denied) whisper party attended by those two old pals, John Mack, now chief executive of Morgone Stanley, and Art Samberg, founder of hedge fund Pequot Capital Management.

The inspector general primarily sided with Mr. Aguirre’s version of events, accusing enforcement officials of failing “in numerous respects” to properly manage him and for allowing “inappropriate reasons to factor into its decision to terminate him.” As a result, Mr. Kotz recommended possible disciplinary action against the director of enforcement, Linda Thomsen; Mr. Aguirre’s direct supervisor, Robert Hanson; and the assistant director of enforcement, Mark Kreitman...

...John J. Nester, an SEC spokesman, said that the agency’s review process would now determine “appropriate personnel actions.”

“Appropriate personnel actions” should include the long overdue ceremonial clearing of Ms Thomsen’s desk, and her removal to the taxi stand outside Union Station. From where, of course, she can be driven to the upper echelons of a major corporation, hedge fund or law firm. Be sure only that the circle will be unbroken.

Impartiality of SEC is Questioned

by Walt Bogdanich

The New York Times Oct. 6 2008

SEC Charges Former VP, Three Friends in Insider Trading Scheme

SEC press release Oct. 7 2008

Sal Sodano is not a crook

Technically. Former chairman slips SEC charges

Sal Sodano, former chairman and chief executive officer of The World’s Most Unnecessary Securities Exchange™, will not face civil sanctions relating to his ethics-free tenure. Because, it seems, the US Securities and Exchange Commission didn’t get around to filing charges against him until after he loaded his grand-luxe $22 million “change in control” package, and his Wells Notices, into one of those black cars they used to keep parked around the back, and rode out of Trinity Place.

An SEC administrative law judge bounced the action yesterday because:

1. Section 19(h)(4) of the Exchange Act does not confer authority to institute public administrative proceedings against an individual who is no longer an “officer or director” of a self-regulatory organization; and
2. Section 19(h)(4) requires proof of scienter and the Division has not alleged that Sodano acted with the requisite state of mind or any facts that could support such a finding...

...Because Sodano prevails on his first argument that Section 19(h)(4) does not provide for sanctioning a former officer or director, his second argument is rendered moot.

Sodano was accused of failing to maintain an adequate regulatory program at the exchange, failing to...pay adequate attention to regulation, to put in place an oversight structure, to ensure the regulatory staff was properly trained, and to dedicate sufficient resources to ensure that the Exchange was meeting its regulatory obligations.

Sodano’s inattention to and apparent lack of interest in regulation filtered down the management chain creating an environment in which regulation was not a priority and, therefore, compliance with the securities laws and the Amex’s rules was not enforced.

Notwithstanding this responsibility and numerous red flags throughout the period 1999 to 2004, Sodano failed to fulfill his responsibilities as an officer of the Amex to enforce compliance with federal securities laws and the Amex’s rules.

Leaving now the question, in light of the disclosures in the recent Senate committees’ report on L’Affaire Aguirre, as to whether the failure to formalize its complaint against Sodano in time was mere normal course SEC bungling, or more evidence of petty careerist corruption and the staff’s wink-and-a-nod submission to the powerful. Consider:

Deafened by the billing

Asymmetric incentives No. 4853

...one law firm representing Pequot said it had 59 attorneys and paralegals working on the case and reviewing documents 6 days and 60 hours per week...
NakedShorts, Aug. 7 2007

From Someone Hugh Knows, using a British spellchecker:

I wanted to make a quick point re your comments today re Pequot. The point that dumbfounds me is that, as a result of indemnification clauses in investment management agreements, the costs of all legal representation to defend a manager in the event of a regulatory investigation are charged to the fund i.e. the legal bills are paid by the investors, not the manager! Only in the event of a final finding of gross negligence, willful default or fraud would the manager be required to repay the fund for amounts previously advanced.  As such, the manager (or at least a large firm like Pequot with substantial AUM) sits in the stunningly luxurious position of having a blank cheque to fund an unlimited legal defence.

Of course. It’s at least one of the reasons why Amaranth is kicking so vigorously—at last count, Amaranth Advisors LLC and principal Nick Maounis had retained attorneys David Boies, former CFTC enforcement chief Geoffrey Aronow and Winston & Strawn LLP, and recently added lobbyists Quinn Gillespie—over the recently announced Commodities Futures Trading Commission and Federal Energy Regulatory Commission actions.

Stand by your Cox

The consistent theme of Senate report on the The Gary Aguirre Affair is an old story: Buddies taking care of buddies. And it starts right at the very beginning, with the minority—Republican—staff authors pouring unwarranted praise on one of their own: US Securities and Exchange Commission Christopher Cox, a 16-year representative from California’s 48th congressional district, former chairman of the House Homeland Security Committee, chairman of the Republican conference and a leader of the party’s geldmachinen.

We commend SEC Chairman Christopher Cox for his full and complete cooperation. Although the SEC initially “circled the wagons,” its eventual cooperation allowed us to conduct a thorough, independent review of allegations by the fired SEC attorney...

...However, under Chairman Cox’s leadership, when Senate investigators raised questions, the SEC eventually opened its investigative files. By making documents and witnesses available, Chairman Cox demonstrated a commitment to accountability and transparency.

Several things:

One down: Stachnik out as SEC IG

When US Securities and Exchange Commission chairman Christopher Cox shows up for work this morning he will, with luck, be greeted with a stack of resignation letters from several senior members of the division of enforcement, and the agency’s inspector general.
NakedShorts
Aug. 6. 2007

Near enough. Walter Stachnik, since 1989 the inspector general of the US Securities and Exchange Commission, retired Friday, Aug. 3, after 30 years of public service, according to an SEC spokesman yesterday.

His retirement date coincided with the release of the Senate Finance and Judiciary committees’ report on The Gary Aguirre Affair, which devoted more than 20 pages to heavily criticizing the joke-investigation by Stachnik’s office of Aguirre’s firing . The spokesman did not specifically address a written question asking whether Stachnik’s departure was connected with the report’s release.

“Given that the IG’s office operates independently of the management of the commission, and the importance of that independence, we determined not to issue a press release,” said the SEC spokesman, apparently poker-faced, when asked why the agency did not follow its usual practice of acknowledging the service of a departing senior executive.

Your mileage may vary. Mine did.

(* Forelock tug to Mr F. for the hedzzup.)

Double takes from L’Affaire Aguirre

The 700-plus page report on The Firing of an SEC Attorney and the Investigation of Pequot Management, released last Friday by the minority staff of the Senate Finance and Judiciary committees, is notable not just for its analysis of the scandal’s critical issues. Sprinkled in the narrative, tasty anecdotal morsels about how the world works.

1. Everybody should have a Goldman Sachs

2. How to get hired by the SEC

3. Oh no, it’s Mario Gabelli!

SEC "not taking on Fried Frank"

For Art's sake, a masterclass

Meet Audrey Strauss (left). Her name—and that of her firm, Fried Frank et al—is one to keep at the top of the To Call list should the US Securities and Exchange Commission’s enforcement division show up unannounced, according to the the US Senate report on The Gary Aguirre affair released late Friday.

Strauss represented Pequot Capital Management and its founder Art Samberg in the agency’s insider-trading investigation that—after a belated start, its distinctly restrained prosecution once senior SEC staff realized that they had big game on their line, and a final flurry of look willing when Aguirre’s complaints became public—was abandoned when the statue of limitations expired.

Samberg’s defense, in the famous allusion of US Attorney Patrick Fitzgerald announcing the perjury and obstruction of justice indictment of Scooter Libby, may not have tossed sand in the umpire’s eyes. But it certainly stirred up plenty of dust on the base-paths.

Step I: Limit the investigation

Step II: Spin out document production

Step III: It was never a fair fight anyway

Step IV: Prepare the witness

Step V: And they all lived happily ever after

Empty suits and selective 'enforcement'

Senior SEC staff strangled major investigation

Players in The Gary Aguirre Affair, from left: Stephen Cutler, now general counsel for JPMorgan Chase; Linda Thomsen, the SEC’s director of enforcement (so far); fired for trying to do his job SEC attorney Aguirre; Art Samberg, founder of Pequot Capital Mgt; and his old pal John Mack, now chairman of Morgan Stanley.

When US Securities and Exchange Commission chairman Christopher Cox shows up for work this morning he will, with luck, be greeted with a stack of resignation letters from several senior members of the division of enforcement, and the agency’s inspector general.

Not that it’s going to happen. But any remaining illusions that the staff of the US Securities and Exchange Commission—and especially senior division of enforcement executives—valiantly enforce the nation’s securities laws without fear or favor evaporated Friday night with the release of the joint Senate finance and judiciary committees’ report into the The Gary Aguirre Affair.

The underlying issue—whether or not Arthur Samberg, founder of Pequot Capital Management, traded illegally on inside information, and was tipped in one transaction by his long-time pal, current Morgan Stanley chairman John Mack—has long since been moot. But it’s clear that the alleged guardians of the nation’s securities laws are, in the words of an SEC staffer’s email quoted in the report:

...empty suits. When push comes to shove, no one in the SEC is going to take on [Fried Frank] or any other major player. Not going to happen...

NakedShorts will be culling highlights from the report over the next few days, but for a taste of what’s to come, Page 37 is a great place to start [Emphasis added]:

Evidence we reviewed suggests that the reluctance to question Mack represents a much more subtle and pervasive problem than an individual partisan political favor. SEC officials were overly deferential to Mack—not because of his politics—but because he was an ‘industry captain’ who could hire influential counsel to represent him [and] that he had powerful contacts, that [former US Attorney] Mary Jo White, [former enforcement director] Gary Lynch, and others would be representing him, that Mary Jo White could contact a number of powerful individuals, any of whom could call [enforcement director] Linda [Thomsen] about the examination...

Look Mom, hardly any hedge funds!

Little evidence of iniquitous hedge funds
in SEC insider trading actions

Repeat a lie often enough and it acquires the dignified aura of truth. And that seems to be happening as securities regulators flail away at an apparent insider trading epidemic. Last week, US Securities and Exchange Commission chairman Christopher Cox said, in what has become something of a mantra, “We have made it a priority to investigate insider trading in the hedge fund space because of economic and circumstantial evidence that it is occurring.”

The theme was picked up on Friday, May 11, by Peter Bresnan, deputy director of the SEC’s division of enforcement. In a spectacularly shallow segment, even by CNBC standards, he provided the following sound-bite, introduced by reporter Hampton Pearson saying “At the eye of the insider trading storm, hedge funds.”

Hedge fund managers are under enormous pressure to show profits for their clients. Their clients expect profits of between 20 and 25 percent each year. Not every hedge fund manager can get those kind of returns through legitimate trading.

Evidence? Well, not so much. In fact, based on a simple analysis of the SEC’s own litigation releases in 2007, hardly any. And certainly none that would indicate hedge funds are more likely to cross the blurry line than blabbermouths presumably unaware of their life partner’s secret lust for securities fraud infamy, or, for that matter, securities industry compliance professionals.

Well, they didn’t take the Fifth

Robert B. Hanson, branch chief in the division of enforcement of the US Securities and Exchange Commission, may be, as one of his colleagues said, “among the most dedicated public servants I have had the privilege to know, a person of unimpeachable character, honor and fierce dedication to our agency’s mission to protect investors.”

But he’s got a really selectively bad memory.

Congratulation to the guys and gal of the SEC who appeared before the Senate Judiciary Committee yesterday. You may not be as venal or corrupt or cretinous as those you encounter in your daily work, but that mutual admiration, back-covering, selective amnesia (although well done on remembering the various posies you’ve been awarded along the way) and self-righteous indignation did yourselves no favors.

NakedShorts will stipulate that Gary Aguirre is not the most stable element on the planet. But almost 16 months after SEC attorney Eric Ribelin smelled something rotten when Aguirre was fired, yesterday’s proceedings did nothing to quell the stench.

Pre-fight memo

With the US Securities and Exchange Commission staff heading to The Hill today for a knock-down-drag-out-no-holds-barred-bite-and-scratch showdown with the Senate Judiciary Committee and former investigator Gary Aguirre about the handling of the Samberg/Mack/Pequot insider trading case, NakedShorts would like to submit just one question:

The trading activity at the heart of the investigation appears to have occurred during 2001. So why, pray tell, is it 2005 - by NakedShorts admittedly imprecise figuring, at least three years later - before an investigation gets up to speed?

That folks, at least as much as the headline he-said she-said and why-who-got-hired-by-which-white-shoe-law-firm allegations, is the scandal.

The Aguirre Letters

Tip o' the cap to The Wall Street Journal* for putting up former Securities and Exchange Commission attorney Gary Aguirre's correspondence with Senate Banking Committee nabobs Chuck Hagel and Christopher Dodd, and chairman Christopher Cox.

The Senate Banking Committee letter (18 pp)
The Cox Letter (2 pages)

Aguirre is scheduled to appear at tomorrow's otherwise content-free Senate Judiciary Committee hearing.

* But next time, if there is a next time, please spell my name correctly.

News from the taxidermist

The SEC in its own trophy case?

Bounce over to The New York Times this morning for some serious scoop. These paragraphs sum up the story’s theme of an agency in hot pursuit of The Massive Hedge Fund Trophy it so desperately wants, until it all gets, well, a little inconvenient:

One of the nation's most prominent hedge funds, Pequot Capital Management, is under investigation by the Securities and Exchange Commission for possible insider trading, according to government officials briefed on the case…

…At the same time, the SEC’s handling of the Pequot inquiry has itself come under scrutiny by Congress and the Office of Special Counsel, a federal agency that examines whistle-blower complaints. These officials are examining charges by Gary J. Aguirre, the SEC lawyer who ran the Pequot investigation until [being fired] last summer, that senior SEC officials had backed his inquiry — including the issuance of scores of subpoenas — until he sought the testimony of [John J. Mack, who served briefly as Pequot’s chairman after leaving Credit Suisse and before taking over as chief executive of Morgan Stanley]...

...Senate investigators want to know, among other things, whether political considerations played a role in the SEC’s firing of Mr. Aguirre only 11 days after awarding him a two-step merit pay increase and after his supervisor had praised his work on the Pequot investigation.

And lots more besides.

SEC Is Reported to Be Examining a Big Hedge Fund
By Walt Bogdanich And Gretchen Morgenson
The New York Times [Free regn. reqd] Jun. 23 2006