The Death of a Salesman

It was only a matter of time before the hideously disfigured face of U.S. financial services would gaze into the mirror and see the reflection of legal counsel from a parallel universe. The thoroughly discredited one-stop-shopping-mega-bank-securities-casino has spawned a new era law firm: one that lends its legal imprimatur to complex financial derivatives that blaze a scorched earth from Jefferson County, Alabama to the Arctic Circle, then offers up white color criminal defense to investment bankers snared in the fraud aftermath.

The news last Friday that Fabrice Tourre, a 31-year old Vice President at Goldman Sachs had been charged with civil fraud by the Securities and Exchange Commission (SEC), together with the firm, for failing to advise investors that he was knowingly peddling a custom-tailored package of mortgages handpicked for failure by John Paulson, a hedge fund manager that planned to short them, was half the story. The eyebrow raiser in the story went unnoticed; the lawyer and law firm that would be representing Mr. Tourre (who referred to himself as the Fabulous Fab[rice] in an internal email), was Pamela Chepiga of London’s derivatives powerhouse Allen & Overy: the law firm that signed off on the Structured Investment Vehicles (SIVs) that blew up Citigroup and made it a ward of the taxpayer.

Back on November 6, 2007, I wrote the following here at CounterPunch in an article titled “Wall Street Metes Out Street Justice to Citigroup”:

“Now, once again, one of the most troubling aspects of the current Citigroup debacle that has gone unreported is the extent to which these opaque and convoluted debt instruments managed by Citigroup, called CDOs (collateralized debt obligations), got dumped into Cayman Islands SIVs, transmuted into AAA-rated commercial paper, landed in the so-called safe money market funds in the U.S., including an astonishing amount at Citigroup’s competitor, Merrill Lynch.

“According to Standard & Poor’s Structured Finance research reports, Citigroup is managing the following Structured Investment Vehicles (SIVs), incorporated in the Cayman Islands and not consolidated on Citigroup’s balance sheet: Centauri Corp., Beta Finance Corp., Sedna Finance Corp., Five Finance Corp., and Dorada Corp. In addition, according to press reports, Citigroup created two more SIVs as recently as November 2006: Zela Finance Corp. and Vetra Finance Corp. These SIVs contain approximately $80 Billion in what is increasingly being viewed as toxic debt.

“Knowing the history of Citigroup and knowing the safety and liquidity requirements for money market funds, how did one of the oldest and most sophisticated firms on the street, Merrill Lynch, end up with a boatload of this SIV paper in its various money markets? The most troubling of its money market exposure as of its July 31, 2007 filing with the SEC is its Citigroup managed SIV commercial paper positions in what one would think would be the safest of all its money market funds, the Merrill Lynch Retirement Reserves Money Fund. Merrill’s SEC filing shows $52.9 Million in Beta Finance, $53 Million in Five Finance, $10 Million in Sedna Finance, and $10.7 Million in Zela Finance.”

On April 7 and April 8, the Financial Crisis Inquiry Commission conducted two days of hearings attempting to get to the bottom of how these SIVs ended up back on Citigroup’s balance sheet, what these super senior tranches were created for in the first place, and how senior management could have possibly not known about the so-called “liquidity puts” that obligated Citigroup to bring toxic waste back unto its balance sheet without adequate capital to buffer the losses. The two days ended with little enlightenment.

Surprisingly, or perhaps not since this Commission has not seen fit to issue one subpoena, the name of the law firm, Allen & Overy did not come up once; the fact that this toxic waste was sitting in money market funds did not come up once; and the fact that 58 per cent of this off-balance sheet debt was financial institution debt, not mortgage debt, also did not come up.

Allen & Overy also had their hand in the ill-fated effort to bail Citigroup out of its SIV nightmare by attempting to create the ill-fated Master Liquidity Enhancement Conduit (MLEC) that envisioned Wall Street competitors chipping in billions to bail out Citi. This is how Elizabeth Collett describes on Allen & Overy’s website that 2007 summer and fall of financial hell:

“The summer of 2007 was a fascinating time for those of us involved in the structured credit markets. Since I joined A&O’s derivatives and structured finance group as an associate in 2004 the capital markets had been growing very fast. With the onset of the credit crunch, however, our work changed from advising investment banks setting up complex finance structures to focusing on how existing structures would be affected by reduced liquidity and falling asset values.

“Structured Investment Vehicles (SIVs) were particularly hit hard given that they rely on constant funding and high credit ratings (which were, in part, reliant on the value of their assets). At its peak, the SIV market was worth around $400 billion (held by 30 vehicles), so it was not long before concern arose that these vehicles might start selling billions of dollars of assets into an already volatile market. In the early Autumn of 2007 the US Treasury called in a number of the biggest US investment banks and asked them to come up with a solution to the problem. Citibank, the largest of them, and the market leader in terms of managing SIVs, took on the challenge. Given A&O’s wealth of experience in advising on SIVs and, in particular, as Citibank’s English counsel on all the SIVs managed by them, we were the natural choice to advise and were therefore the first to be instructed.

“Although by the time the transaction ended there were six law firms (A&O being the only English law advisers), three structuring banks and an investment manager involved, I was fortunate enough to see the deal progress from the beginning. What came out of Citibank’s proposals, developed with our advice, was the Master Liquidity Enhancement Conduit (MLEC or, as the press dubbed it, the ‘Super-SIV’), I was the lead associate in the A&O team, working with five partners and a number of other associates. I was involved at every stage including co-ordinating the A&O team, drafting parts of the term sheet, participating in conference calls to brainstorm the structure, reviewing and commenting on transaction documents and preparing draft agreements. Over the following two months the media coverage of the transaction gathered momentum (unsurprisingly since it was intended as a $100 billion solution to the SIV crisis) until there were almost daily reports on its progress in the Financial Times and the Wall Street Journal. It was fascinating to be working on such a high profile and politically sensitive transaction, and the media attention highlighted the fact that Allen & Overy is at the very forefront of the legal world in capital markets.”

Why would Fabrice Tourre want a law firm that is so closely aligned with the dubious derivatives that he is charged with fraudulently misrepresenting to investors to be his defense lawyers. It is possible that criminal charges could also be brought. And, his interests and those of his employer, Goldman Sachs, may diverge. (Allen & Overy also lists Goldman as a significant client.)

It may well be the background of Ms. Chepiga that Mr. Tourre finds comforting and has landed her as a white collar defense lawyer in a firm specializing in derivatives and debt markets with clients like Citigroup and Goldman Sachs: Ms. Chepiga worked in the 70s and 80s in the U.S. Attorney’s Office of the Southern District of New York. From 1982 to 1984, she was the Chief of the Securities and Commodities Frauds Unit in that office where she coordinated criminal prosecutions with the SEC.

PAM MARTENS worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at




Pam Martens has been a contributing writer at CounterPunch since 2006. Martens writes regularly on finance at