Shut Down the SEC

The Securities and Exchange Commission (SEC) is so riddled with Wall Street conflicts that it ought to be shut down and replaced with a new agency.

That’s the take of Gary Aguirre, former SEC enforcement attorney, and currently the lawyer representing SEC enforcement attorney and whistleblower Darcy Flynn – who alleges that the SEC is unlawfully destroying records of preliminary investigations once they have been closed.

“The culture is too embedded at the SEC – it’s in the SEC’s DNA,” Aguirre said in an interview last week.

Aguirre would replace the SEC with a new regulatory agency that would prohibit attorneys from flying through the revolving door from the SEC to Wall Street – or from Wall Street to the SEC – for a number of years.

“SEC people are offered jobs on Wall Street that have compensation levels vastly over what their qualifications warrant,” Aguirre said. “The differential is the Rolodex they bring with them.”

The SEC fired Aguirre in 2005 – just one year after he joined the agency.

Aguirre was in the middle of an investigation of Pequot Capital Management and one of its investors – John Mack, the CEO of Morgan Stanley.

“There was push back when I tried to pursue that investigation and take the testimony of that banker,” Aguirre said. “I was told at that time that it was because of his political connections.”

“When I pressed, I was fired.”

Aguirre has spent the last five years seeking to clear his name – and he has.

Five investigative agencies – including two Senate committees and the SEC Inspector General – have sided with Aguirre and against the SEC.

Aguirre also took his case before the Merit Systems Protection Board where it was settled for what he says is “the largest settlement for a federal whistleblower.”

Aguirre says the problem at the SEC is the revolving door and a culture that bows down to Wall Street.

He’s says that the work of Robert Khuzami and Mary Schapiro are symptomatic of the problem.

“The rotation of Richard Walker out of the SEC in 2001, the hiring of Khuzami in 2004, and the placement of Khuzami in 2009 as the guy at the controls, just after the financial crisis suggests that we have a Wall Street player on sabbatical at the SEC,” Aguirre said.

“You are a Wall Street bank, and you just brought the nation to its knees through mortgage-based securities that were based on grossly overvalued real estate. And that fraud runs through not only the bonds that were issued, but the net worth of the banks. So, there was prolific fraud. And then there was the extraordinary leveraging. And then the crisis.”

“Who would you want at the SEC?”

“You would want a Wall Street lawyer.”

“How did the Goldman Sachs situation work out? No charges against any of the executives other than a low level trader.”

“Everybody walked on Goldman. Khuzami is the architect on the Goldman settlement. It involves no executives. Who pays on this one? The shareholders.”

“If there is a criminal investigation, the Department of Justice is going to look at what the SEC has done and see if there is any potential. But no individuals were named.”

“Khuzami bails out in the case against Deutsche Bank because he has a conflict. But he has already set the standard in Goldman because no executives were charged.”

“The SEC is supposed to keep an eye on Wall Street. Why are we rotating Wall Street in and out of the executive levels of the SEC to make those decisions?”

“It’s crazy. And nothing is going to change until we change that system. Mary Schapiro is the same. She started at FINRA. And she’ll rotate back in.”

“They update their Rolodexes, which updates their value to the industry, and then they go back into the industry.”

“Deutsche Bank has had somewhat of a dynasty over the last decade. Walker to Deutsche Bank. And then Khuzami from Deutsche Bank back to the SEC.”

“Andrew Vollmer was the general counsel at the SEC. He’s replaced by Mark Cahn. And Vollmer goes to WilmerHale.”

“Cahn goes from deputy general counsel to general counsel. And then they rotate somebody from WilmerHale into the deputy spot.”

“And then look at the cases that they bring. We had Vollmer and Cahn representing the SEC against investors in a case against one of the Wall Street banks. Where does the SEC come out? They intervened in the case on behalf of the bank against the shareholders.”

“To me it is so clear, so obvious, and yet it is so tolerated.”

“If you are at the SEC making $150,000, or tops $200,000, and as soon as you walk out that door, you may walk into $1.5 million or $2 million on Wall Street. That’s where the focus is.”

“You leave there with a Rolodex with everyone you work with. And the people who fill your position are a phone call away. So, it’s fairly simple to call back to the SEC and say to your former subordinate – you ought to take another look at this case.”

“And sometimes, I don’t even know if it needs to go that far. In the case of Mary Joe White, she was the dean of the securities lawyers. And she can call the head of enforcement and begin to raise questions. And if you are about to head out into Wall Street, we are talking about somebody who can be very helpful to you.”

The result of the culture of Wall Street infusing the halls of the SEC? A weak agency that brings cases against the small fry, while letting the big fish go.

“If you want to send a message to Wall Street, you go after the top people, not just the small fry,” Aguirre said. “That is a message that everybody will hear. But in Pequot, the SEC made a fundamental choice. When the Pequot case came in from the NYSE, another case came in with it.”

“Pequot involved an $18 million profit involving this hedge fund over a period of 30 days of trading.”

“It passed under the SEC’s radar. Nobody picked up on that case until I started with the SEC a few years later.”

“Simultaneously with the Pequot trading in Heller and GE, another case came in involving a low level employee of GE who was suspected of making $150,000 profit on trading options, along with his partner a Taiwanese Kung Fu instructor.”

“So, these guys made $150,000. Pequot made $18 million. Guess which case they went after? And if you guess the low level GE employee, you guessed right.”

“When I got to the SEC, I found the Pequot case collecting cobwebs. I opened it. And then began to pursue it. But the explanation at that time was that hedge funds trade in large amounts all the time, and we really can’t make a case against them.”

“That theory insulates every hedge fund over a few hundred million dollars in assets.”

“If you are a billion dollar hedge fund, you are home free.”

Darcy Flynn got caught in the same trap that Aguirre was caught in.

“Darcy Flynn is one of the career SEC people,” Aguirre said.

“He is happy with his job at the SEC. But he’s deeply troubled by what he sees in terms of the revolving door and how that has compromised the ability of the SEC to carry out its mission.”

“He has made two types of disclosures.”

“One involved the rotation of Richard Walker in 2001 from the SEC to the general counsel’s office at Deutsche Bank.”

“And that happened almost simultaneously with the decision at that time to derail the filing of a fraud case against Deutsche Bank.”

“The second disclosure involved destruction of records.”

“Mr. Flynn had gone to the SEC Inspector General and to the Congress last summer about the destruction of records relating to informal investigations.”

“The SEC has conceded that it has destroyed records that were supposed to be preserved. The National Archives and Records Administration (NARA) has issued a statement saying that the SEC had no authority to destroy those records.”

A couple of hours after we finished interviewing Aguirre, word came down that the SEC’s general counsel had ordered a freeze to the destruction policy.

Russell Mokhiber edits the Corporate Crime Reporter.


Russell Mokhiber is the editor of the Corporate Crime Reporter..