20-01-2009, 07:17 PM
http://slabbed.wordpress.com/2008/10/07/...o-slabbed/
Morgan Stanley CEO John Mack: Quintessential Crook in a Gucci Suit.
Posted on October 7, 2008 by sop81_1
Alright folks you want to know the type of people that are benefiting from the rescue package? I’m going to profile one in current Morgan Stanley CEO John Mack. I don’t have much time to compose this post so I’ll be featuring the work of others on this subject. I hope some of the general public anger can be channeled to the worst of the offenders like Mr Mack. We start our tale couresty of the UK Independent:
John Mack, the chief executive of Morgan Stanley, is at the centre of an insider-dealing storm, after allegations from a former investigator at the Securities and Exchange Commission that he passed trading tips to the head of one of Wall Street’s oldest hedge funds.
Morgan Stanley said yesterday the allegations, reported in The New York Times, were simply not true. The hedge fund involved, Pequot Capital, said it had been investigated by the SEC but had never done anything wrong.
The SEC investigator, Gary Aguirre, claims he was ousted from the organisation after insisting it subpoena Mr Mack, a powerful ally and fundraiser for President George Bush.
Mr Aguirre said in a letter to senior members of Congress his inquiry into Pequot had led him to the conclusion that a senior Wall Street executivehadbeen passing information to the hedge fund at the beginning of the decade. Mr Mack was the president of Morgan Stanley until 2001 and then co-chief executive of CSFBfrom 2002 to 2004. The letter does not refer to Mr Mack by name but it has since emerged he is the figure to whom Mr Aguirre was referring.
His superiors did not agree Mr Mack should be subpoenaed and, after rowing over the issue, Mr Aguirre was sacked in September. A spokesman for Morgan Stanley said: “We have no reason to believe the SEC has any interest in Mr Mack in connection with this matter and he has never been contacted on this matter by the SEC.”
It is no secret in finance circles that the US Securities and Exchange Commission is largely a toothless watchdog. The law blog of Sirota and Sirota LLP added additional color and made some predictions:
Morgan Stanley CEO John Mack is under scrutiny regarding an alleged insider-trading scheme by hedge fund Pequot, which Mack ran after Purcell forced him out of Morgan and Mack joined the $7 billion Pequot hedge fund. Mack is back at Morgan after Purcell’s ouster. Pequot allegedly made an illegal $18 million profit through an inside-information scheme in a particular stock. The SEC investigator who worked up the case against Pequot was fired in what the ex-SEC investigator claims was retaliation for his insistence that the SEC take Mack’s testimony, a claim that, needless to say, is vigorously denied by SEC Chairman Cox. The alleged attempted cover-up is itself being investigated, and the SEC is now arranging to interview Morgan Stanley’s CEO to take a peek behind the scenes at Pequot during Mack’s watch.
I wouldn’t expect more than a slap on the wrist from the SEC in a worst case, and I wouldn’t expect the Bush administration to come out on the side of the ex-investigator. The SEC will side with Morgan Stanley just as the SEC has in the IPO Antitrust Case in the federal courts, siding with the securities industry, particularly the Big Kahunas like Morgan Stanley, against the interests of the investing public whom the SEC is supposed to be protecting. That’s why the SEC tried to block New York State Attorney General Elliot Spitzer’s jurisdiction, fortunately unsuccessfully, so that Spitzer would not have been able to “interfere” with the status quo, in which the more money you have, the more the feds turn a blind eye to your transgressions. Morgan Stanley and the SEC have actually lied to the United States Supreme Court that the IPO Antitrust Case challenges underwriting syndicates per se, and if the Second Circuit decision is upheld, it will destroy the American capital-formation system, when it is beyond any doubt that the IPO Antitrust Case does not challenge the syndicate system, it does challenge specific unlawful practices by certain underwriting syndicates in certain IPOs. Morgan Stanley’s IPO manipulations in the 1999-2000 period were always unlawful since 1934, and if you’re Robert E. Brennan of defunct First Jersey Securities, or Blinder “Blind ‘Em & Rob’em” Robinson’s Meyer Blinder, or Stratton Oakmont shtuppingthen NY Senator Alphonse D’Amato with pre-arranged IPO first-day profits at manipulated aftermarket prices, the US government has long since put you out of business for the very same illegal acts as the sacred cow “Big Firms” like Morgan Stanley.
So don’t expect John Mack to get much of a grilling from the federal agency charged with enforcing the federal securities laws, and don’t expect more than a slap on the wrist for Pequot even if they did trade on inside information. Don’t expect the ex-SEC investigator to be vindicated and reinstated. Most of all, don’t expect anything much to happen to John Mack of Morgan Stanley. Nobody said Life was fair, and it’s not.
The writer of that blawg entry must be related to Carnac the Magnificent or knew something from the inside. In a New York Times story published in October 2006 we get the gory details:
By the evening of June 20, 2005, the government’s investigation of possible insider trading by Pequot Capital Management, a prominent hedge fund, had reached a critical stage.
Throughout the day, Robert Hanson, a branch chief in the Washington office of the Securities and Exchange Commission, had been questioning his lead investigator in the caseabouttaking the testimony of John J. Mack, an influential Wall Street executive.
The investigator, Gary J. Aguirre, was trying to find out if Mr. Mack had obtained inside information about a merger and passed it to his friend, Pequot’s founder, Arthur J. Samberg.
Finally at 8:25 p.m., Mr. Hanson sent Mr. Aguirre a message from his BlackBerry expressing enthusiasm about the inquiry. “Okay Gary you’ve given me the bug,” he wrote, according to confidential S.E.C. documents. “I’m starting to think about the case during my non work hours.”
But three days later, the investigation abruptly changed course. Mr. Aguirre later told a Senate committee that after news broke that Mr. Mack was being considered to run Morgan Stanley, his supervisor said he could not interview the executive becauseofhis political power. Mr. Aguirre protested and was eventually fired in September 2005, just days after receiving a two-step merit pay increase.
Mr. Mack and Mr. Samberg have both repeatedly denied any improper conduct. Earlier this month, the S.E.C. informed them that it would not bring any charges.
Now, it is the S.E.C. that is under scrutiny. Two Senate committees — Finance and Judiciary — are investigating how diligently the S.E.C. pursued its Pequot inquiry, whether Mr. Aguirre’s firing was an attempt to silence him, and whether senior S.E.C. officials gave special treatment to Mr. Mack by not taking his testimony when Mr. Aguirre wanted to. Mr. Mack, a major fund-raiser for President Bush’s 2004 campaign, was eventually interviewed last August, after Congress began asking questions.
This type of thing getting swept under the carpet is nothing new. Under the general theory that the squeaky wheels always gets the grease the lack of public outrage insured that Mr Mack would skate. In fact in a “Good Job Brownie” moment Morgan Stanley’s Board of Directors gave Mr Mack a $40 MILLION dollar bonus in December 2006, just a year and a few months after the Morgan Stanley insider trading scandal broke. The law blog of Shepherd, Smith, Edwards and Kantas exhibits some outrage:
This year, Morgan Stanley Chief ExecutiveOfficer John Mack was given the largest bonus ever for a Wall Street firm head. His company gave him $40 million after garnering its best profits yet in their 71-year history. As of December 12, the bonus was presented to Mack in options worth $4 million and $36.2 million in shares. His 2006 bonus was 44% larger than his bonus last year and nearly $2 million more than the total compensation received by Goldman Sachs Group Inc. CEO Henry Paulson in 2005.
Mack’s bonus comes 18 months after he rejoined the firm following the firing of former Morgan Stanley CEO Philip Purcell because of the company’s unimpressive performance. Upon being appointed CEO, Mack promised investors that he would improve the Morgan Stanley’s lowered stock price and increase the company’s profits. Morgan Stanley also gave over $57 million in company bonuses to several other Morgan Stanley executives.
This year, shares of Morgan Stanley have gained 43%, outpacing the 24% advantage of the Amex Securities Broker/Dealer Index. It is the second-biggest securities firm in the United States by market value. Morgan Stanley is also one of 12 financial firms that has been accused of allowing its interests to affect its stock reports. In one case, the investment banking firm agreed to pay a $125 million fine to the SEC—although the firm did not admit any wrongdoing—following accusations by luxury firm LVMH that Morgan Stanley treated Gucci—a Morgan Stanley client—preferentially by giving them favorable coverage.
It is interesting that Morgan Stanley only recently paid a tiny sum, in relation to its revenues, in fines for issuing fraudulent research. Although this research caused many of its clients to lose their savings or retirement assets, Morgan Stanley and other brokerage firms are already making record profits and their stock prices have reached record highs. Now we learn their top executives are being rewarded with huge bonuses. Yet, this does not surprise me because: On Wall Street, crime pays!
And pay it does because Congress is also a toothless watchdog. The problem with Congress of course is enforcing laws and providing direct regulatory oversight is the province of the executive branch of our government. Congress provides oversight of the regulators but when things go wrong the only stick congress has beyond the power of the purse is a wet noodle. And yes, the GAO found that the allegations against Mack and the SEC had basis in fact and then delivered a stern whipping to the SEC with that wet noodle. The New York Times tells the story:
The Securities and Exchange Commission bungled a promising investigation two years ago into suspicious trading at Pequot Capital Management, a giant hedge fund, according to the final report released yesterday by Congressional investigators looking into the matter.
Among the commission’s failings, the report said, were delays in the Pequot investigation, disclosure of sensitive case information by high-level S.E.C. officials to lawyers for those under scrutiny, a detrimental narrowing of its scope after a meeting with a Pequot lawyer, and the appearance of “undue deference” to a prominent Wall Street executive that resulted in the postponement of his interview until after the case’s statute of limitations had expired.
The 108-page report by the Senate Finance and Judiciary committees under the leadership of Charles E. Grassley, Republican of Iowa, and Arlen Specter, Republican of Pennsylvania, caps a yearlong investigation into the S.E.C.’s firing of Gary J. Aguirre, a former staff lawyer, in September 2005.
Mr. Aguirre, who led the commission’s investigation into suspect trading by Pequot and its founder, Arthur J. Samberg, was fired after he complained that superiors had thwarted his efforts by barring his interview of John J. Mack, currently the chief executiveof Morgan Stanley and a close friend of Mr. Samberg.
Mr. Mack was asked to testify before the S.E.C. last summer after Mr. Aguirre’s allegations had become public and Congress had begun investigating the commission’s handling of the matter. The S.E.C. closed the Pequot inquiry last fall without taking action against the fund or its management. A Pequot spokesman declined to comment on the report…….
“The investigation of Pequot Capital Management could have been an ideal opportunity for the S.E.C. to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement,” the report said. Instead, the S.E.C.’s inquiry was undermined by a series of missteps, according to Senate staff workers who took the testimony of 30 people and reviewed 10,000 pages of documents.
Mr. Aguirre responded to the report yesterday, saying that Christopher Cox, the S.E.C. chairman, “can bless” the conduct of those senior S.E.C. officials criticized in the report “or he can protect the capital markets by cleaning house.”
Mr. Cox issued a statement last night saying he looks forward to reading the full report, adding, “The agency’s commitment to prosecuting insider trading has never been stronger, and initiatives such as our hedge fund insider trading task force in the enforcement division will ensure that remains true in the future.”
Pequot Capital came under regulatory scrutiny in 2004 after stock exchange officials had identified 17 to 25 sets of suspicious trades by the hedge fund. Such transactions are routinely turned over to the commission, whose officials then decide whether to investigate them.
One series of trades, which made Pequot $18 million, came just ahead of the announcement in 2001 by the General Electric Capital Corporation that it would buy Heller Financial. Advisers on the deal were Credit Suisse, a firm that was wooing Mr. Mack to be its chief executive at the time, and Morgan Stanley.
But after Mr. Aguirre’s investigation was under way, the report said, lawyers for both Mr. Samberg and Morgan Stanley’s board, which was then considering hiring Mr. Mack as chief executive, received access to high-level S.E.C. enforcement officials — outside the presence of Mr. Aguirre, who was leading the Pequot inquiry. After these contacts, the scope of the Pequot investigation narrowed and Mr. Aguirre was barred from interviewing Mr. Mack.
When Mr. Aguirre complained, the S.E.C. retaliated by firing him, Senate investigators concluded.
The report paints a picture of an agency that does not always treat prospective witnesses equally.
“By allowing the perception that ‘going over the head’ of S.E.C. staff attorneys yields results,” the report said, “the S.E.C. undermines public confidence in the integrity of its investigations and exacerbates the problems associated with ‘regulatory capture.’ ”
For example, on June 26, 2005, Linda Thomsen, the director of enforcement, spoke by telephone about the Pequot case to Mary Jo White, a lawyer at Debevoise & Plimpton, who was representing the Morgan Stanley board and was concerned about Mr. Mack’s possible involvement, the report said.
Ms. Thomsen said she had told Ms. White nothing about the case during the call. But according to Ms. White’s account of that conversation, Ms. Thomsen disclosed that subpoenaed e-mail messages showed that there was “smoke there” though “surely not fire.”
Earlier in the case, in February 2005, Audrey Strauss, a lawyer at Fried, Frank, Harris, Shriver & Jacobson representing Pequot, met with Stephen M. Cutler, then director of enforcement at the commission. Two weeks after the meeting, the report said, the investigation into Pequot was narrowed. “The staff was ordered to investigate only a few of the suspicious transactions” flagged by the New York Stock Exchange, the report said.
A spokeswoman for Mr. Cutler said he could not be reached for comment last night.
This narrowing of the case made an already difficult job of demonstrating a pattern of illicit trading more difficult, the report said.
The report also concluded that Paul R. Berger, then an associate director of enforcement and one of Mr. Aguirre’s supervisors, did not recuse himself from the Pequot case “in a timely manner” once he had expressed interest in working for Debevoise, the law firm hired by Morgan Stanley’s board to vet Mr. Mack before naming him chief executive.
Mr. Berger, who eventually took a job at Debevoise, initially told Senate investigators that he had stopped working on any matters involving Debevoise in early 2006, around the time he first considered seeking employment at the firm. But Senate investigators said they had found that the previous September, just days after Mr. Aguirre’s firing, Mr. Berger authorized an S.E.C. colleague to tell Debevoise that he might be interested in working there.
“Mary Jo just called,” the colleague wrote to Mr. Berger, referring to Ms. White in an e-mail message dated Sept. 8, 2005. “I mentioned your interest.”
Asked why he had failed to tell Senate investigators about this earlier exchange, Mr. Berger said that “I was very concerned about having any discussions without first talking with the S.E.C. and getting authorization.”
The Senate report accused Mr. Berger of giving investigators “incomplete” answers, but says it found no evidence of an explicit link between Mr. Berger’s role in the Mack dispute and his subsequent job at Debevoise.
Mr. Berger said yesterday that any suggestion that he had not properly recused himself is “unfair and inaccurate.” He added: “I did what I was supposed to do. I contacted the chief ethics officer in the general counsel’s office of the S.E.C. and they told me I did not have to recuse myself.”
The Senate report suggested that the S.E.C. had failed to pursue the Pequot investigation vigorously after Mr. Aguirre’s firing. For instance, when the commission took Mr. Mack’s testimony on Aug. 1, 2006, the report said, it did not “seriously test” a theory put forward by Mr. Aguirre that Mr. Samberg had rewarded Mr. Mack for information on the Heller deal by letting him invest alongside Pequot in a private company that was sold for three times his investment in little over a year.
Mr. Mack was the only individual investor allowed to participate in the deal, the report noted. The next trading day after Pequot officials allowed Mr. Mack in the deal, Mr. Samberg began his aggressive buying of Heller Financial stock.
A spokeswoman for Morgan Stanley, where Mr. Mack is chief executive, declined to comment on the report.
The report also stated that Liban A. Jama, a staff lawyer, had complained that he was given less than two days to prepare for “critical” testimony from two witnesses. Without more time, Mr. Jama wrote in an e-mail message to Mark Kreitman, his supervisor and assistant director in the enforcement division, “I would not feel comfortable taking the testimony.” Mr. Jamasaid he was surprised by Mr. Kreitman’s response. “He said, ‘You don’t need to prepare that much for it,’ which I found strange.”
The report also noted that Mr. Aguirre was not the only S.E.C. official to suffer after complaining about practices at the agency. A second unidentified staff investigator had protested what he believed might have been an inappropriate contact between an outside lawyer and Ms. Thomsen, the enforcement director. This investigator also received a negative re-evaluation of his job performance shortly after he complained in July 2005, the report said.
Our readers can find the full Senate finance committee report here.
I think the bottom line here is we can help our politicians in being proactive in curbing such abuse. The general public is in an angry mood for certain but the anger accomplishes nothing if it is not channeled constructively. To bring needed change our collective anger needs to look less like a 3 year old throwing a temper tantrumand more of letting Congress know we are sick of crooks like John Mack making fortunes insider trading and otherwise while simultaneously endangering our economic system peddling toxic securities and derivatives. Does Congress listen to the public? Based on the hits we get here at Slabbed from the US House and Senate the answer is absolutely yes. But they need us mushrooms to give them a basis to force needed change to our regulatory systems.
sop
“We are up against a powerful force” - Speaker Nancy Pelosi in Bay St Louis, Mississippi. August 2007
Morgan Stanley CEO John Mack: Quintessential Crook in a Gucci Suit.
Posted on October 7, 2008 by sop81_1
Alright folks you want to know the type of people that are benefiting from the rescue package? I’m going to profile one in current Morgan Stanley CEO John Mack. I don’t have much time to compose this post so I’ll be featuring the work of others on this subject. I hope some of the general public anger can be channeled to the worst of the offenders like Mr Mack. We start our tale couresty of the UK Independent:
John Mack, the chief executive of Morgan Stanley, is at the centre of an insider-dealing storm, after allegations from a former investigator at the Securities and Exchange Commission that he passed trading tips to the head of one of Wall Street’s oldest hedge funds.
Morgan Stanley said yesterday the allegations, reported in The New York Times, were simply not true. The hedge fund involved, Pequot Capital, said it had been investigated by the SEC but had never done anything wrong.
The SEC investigator, Gary Aguirre, claims he was ousted from the organisation after insisting it subpoena Mr Mack, a powerful ally and fundraiser for President George Bush.
Mr Aguirre said in a letter to senior members of Congress his inquiry into Pequot had led him to the conclusion that a senior Wall Street executivehadbeen passing information to the hedge fund at the beginning of the decade. Mr Mack was the president of Morgan Stanley until 2001 and then co-chief executive of CSFBfrom 2002 to 2004. The letter does not refer to Mr Mack by name but it has since emerged he is the figure to whom Mr Aguirre was referring.
His superiors did not agree Mr Mack should be subpoenaed and, after rowing over the issue, Mr Aguirre was sacked in September. A spokesman for Morgan Stanley said: “We have no reason to believe the SEC has any interest in Mr Mack in connection with this matter and he has never been contacted on this matter by the SEC.”
It is no secret in finance circles that the US Securities and Exchange Commission is largely a toothless watchdog. The law blog of Sirota and Sirota LLP added additional color and made some predictions:
Morgan Stanley CEO John Mack is under scrutiny regarding an alleged insider-trading scheme by hedge fund Pequot, which Mack ran after Purcell forced him out of Morgan and Mack joined the $7 billion Pequot hedge fund. Mack is back at Morgan after Purcell’s ouster. Pequot allegedly made an illegal $18 million profit through an inside-information scheme in a particular stock. The SEC investigator who worked up the case against Pequot was fired in what the ex-SEC investigator claims was retaliation for his insistence that the SEC take Mack’s testimony, a claim that, needless to say, is vigorously denied by SEC Chairman Cox. The alleged attempted cover-up is itself being investigated, and the SEC is now arranging to interview Morgan Stanley’s CEO to take a peek behind the scenes at Pequot during Mack’s watch.
I wouldn’t expect more than a slap on the wrist from the SEC in a worst case, and I wouldn’t expect the Bush administration to come out on the side of the ex-investigator. The SEC will side with Morgan Stanley just as the SEC has in the IPO Antitrust Case in the federal courts, siding with the securities industry, particularly the Big Kahunas like Morgan Stanley, against the interests of the investing public whom the SEC is supposed to be protecting. That’s why the SEC tried to block New York State Attorney General Elliot Spitzer’s jurisdiction, fortunately unsuccessfully, so that Spitzer would not have been able to “interfere” with the status quo, in which the more money you have, the more the feds turn a blind eye to your transgressions. Morgan Stanley and the SEC have actually lied to the United States Supreme Court that the IPO Antitrust Case challenges underwriting syndicates per se, and if the Second Circuit decision is upheld, it will destroy the American capital-formation system, when it is beyond any doubt that the IPO Antitrust Case does not challenge the syndicate system, it does challenge specific unlawful practices by certain underwriting syndicates in certain IPOs. Morgan Stanley’s IPO manipulations in the 1999-2000 period were always unlawful since 1934, and if you’re Robert E. Brennan of defunct First Jersey Securities, or Blinder “Blind ‘Em & Rob’em” Robinson’s Meyer Blinder, or Stratton Oakmont shtuppingthen NY Senator Alphonse D’Amato with pre-arranged IPO first-day profits at manipulated aftermarket prices, the US government has long since put you out of business for the very same illegal acts as the sacred cow “Big Firms” like Morgan Stanley.
So don’t expect John Mack to get much of a grilling from the federal agency charged with enforcing the federal securities laws, and don’t expect more than a slap on the wrist for Pequot even if they did trade on inside information. Don’t expect the ex-SEC investigator to be vindicated and reinstated. Most of all, don’t expect anything much to happen to John Mack of Morgan Stanley. Nobody said Life was fair, and it’s not.
The writer of that blawg entry must be related to Carnac the Magnificent or knew something from the inside. In a New York Times story published in October 2006 we get the gory details:
By the evening of June 20, 2005, the government’s investigation of possible insider trading by Pequot Capital Management, a prominent hedge fund, had reached a critical stage.
Throughout the day, Robert Hanson, a branch chief in the Washington office of the Securities and Exchange Commission, had been questioning his lead investigator in the caseabouttaking the testimony of John J. Mack, an influential Wall Street executive.
The investigator, Gary J. Aguirre, was trying to find out if Mr. Mack had obtained inside information about a merger and passed it to his friend, Pequot’s founder, Arthur J. Samberg.
Finally at 8:25 p.m., Mr. Hanson sent Mr. Aguirre a message from his BlackBerry expressing enthusiasm about the inquiry. “Okay Gary you’ve given me the bug,” he wrote, according to confidential S.E.C. documents. “I’m starting to think about the case during my non work hours.”
But three days later, the investigation abruptly changed course. Mr. Aguirre later told a Senate committee that after news broke that Mr. Mack was being considered to run Morgan Stanley, his supervisor said he could not interview the executive becauseofhis political power. Mr. Aguirre protested and was eventually fired in September 2005, just days after receiving a two-step merit pay increase.
Mr. Mack and Mr. Samberg have both repeatedly denied any improper conduct. Earlier this month, the S.E.C. informed them that it would not bring any charges.
Now, it is the S.E.C. that is under scrutiny. Two Senate committees — Finance and Judiciary — are investigating how diligently the S.E.C. pursued its Pequot inquiry, whether Mr. Aguirre’s firing was an attempt to silence him, and whether senior S.E.C. officials gave special treatment to Mr. Mack by not taking his testimony when Mr. Aguirre wanted to. Mr. Mack, a major fund-raiser for President Bush’s 2004 campaign, was eventually interviewed last August, after Congress began asking questions.
This type of thing getting swept under the carpet is nothing new. Under the general theory that the squeaky wheels always gets the grease the lack of public outrage insured that Mr Mack would skate. In fact in a “Good Job Brownie” moment Morgan Stanley’s Board of Directors gave Mr Mack a $40 MILLION dollar bonus in December 2006, just a year and a few months after the Morgan Stanley insider trading scandal broke. The law blog of Shepherd, Smith, Edwards and Kantas exhibits some outrage:
This year, Morgan Stanley Chief ExecutiveOfficer John Mack was given the largest bonus ever for a Wall Street firm head. His company gave him $40 million after garnering its best profits yet in their 71-year history. As of December 12, the bonus was presented to Mack in options worth $4 million and $36.2 million in shares. His 2006 bonus was 44% larger than his bonus last year and nearly $2 million more than the total compensation received by Goldman Sachs Group Inc. CEO Henry Paulson in 2005.
Mack’s bonus comes 18 months after he rejoined the firm following the firing of former Morgan Stanley CEO Philip Purcell because of the company’s unimpressive performance. Upon being appointed CEO, Mack promised investors that he would improve the Morgan Stanley’s lowered stock price and increase the company’s profits. Morgan Stanley also gave over $57 million in company bonuses to several other Morgan Stanley executives.
This year, shares of Morgan Stanley have gained 43%, outpacing the 24% advantage of the Amex Securities Broker/Dealer Index. It is the second-biggest securities firm in the United States by market value. Morgan Stanley is also one of 12 financial firms that has been accused of allowing its interests to affect its stock reports. In one case, the investment banking firm agreed to pay a $125 million fine to the SEC—although the firm did not admit any wrongdoing—following accusations by luxury firm LVMH that Morgan Stanley treated Gucci—a Morgan Stanley client—preferentially by giving them favorable coverage.
It is interesting that Morgan Stanley only recently paid a tiny sum, in relation to its revenues, in fines for issuing fraudulent research. Although this research caused many of its clients to lose their savings or retirement assets, Morgan Stanley and other brokerage firms are already making record profits and their stock prices have reached record highs. Now we learn their top executives are being rewarded with huge bonuses. Yet, this does not surprise me because: On Wall Street, crime pays!
And pay it does because Congress is also a toothless watchdog. The problem with Congress of course is enforcing laws and providing direct regulatory oversight is the province of the executive branch of our government. Congress provides oversight of the regulators but when things go wrong the only stick congress has beyond the power of the purse is a wet noodle. And yes, the GAO found that the allegations against Mack and the SEC had basis in fact and then delivered a stern whipping to the SEC with that wet noodle. The New York Times tells the story:
The Securities and Exchange Commission bungled a promising investigation two years ago into suspicious trading at Pequot Capital Management, a giant hedge fund, according to the final report released yesterday by Congressional investigators looking into the matter.
Among the commission’s failings, the report said, were delays in the Pequot investigation, disclosure of sensitive case information by high-level S.E.C. officials to lawyers for those under scrutiny, a detrimental narrowing of its scope after a meeting with a Pequot lawyer, and the appearance of “undue deference” to a prominent Wall Street executive that resulted in the postponement of his interview until after the case’s statute of limitations had expired.
The 108-page report by the Senate Finance and Judiciary committees under the leadership of Charles E. Grassley, Republican of Iowa, and Arlen Specter, Republican of Pennsylvania, caps a yearlong investigation into the S.E.C.’s firing of Gary J. Aguirre, a former staff lawyer, in September 2005.
Mr. Aguirre, who led the commission’s investigation into suspect trading by Pequot and its founder, Arthur J. Samberg, was fired after he complained that superiors had thwarted his efforts by barring his interview of John J. Mack, currently the chief executiveof Morgan Stanley and a close friend of Mr. Samberg.
Mr. Mack was asked to testify before the S.E.C. last summer after Mr. Aguirre’s allegations had become public and Congress had begun investigating the commission’s handling of the matter. The S.E.C. closed the Pequot inquiry last fall without taking action against the fund or its management. A Pequot spokesman declined to comment on the report…….
“The investigation of Pequot Capital Management could have been an ideal opportunity for the S.E.C. to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement,” the report said. Instead, the S.E.C.’s inquiry was undermined by a series of missteps, according to Senate staff workers who took the testimony of 30 people and reviewed 10,000 pages of documents.
Mr. Aguirre responded to the report yesterday, saying that Christopher Cox, the S.E.C. chairman, “can bless” the conduct of those senior S.E.C. officials criticized in the report “or he can protect the capital markets by cleaning house.”
Mr. Cox issued a statement last night saying he looks forward to reading the full report, adding, “The agency’s commitment to prosecuting insider trading has never been stronger, and initiatives such as our hedge fund insider trading task force in the enforcement division will ensure that remains true in the future.”
Pequot Capital came under regulatory scrutiny in 2004 after stock exchange officials had identified 17 to 25 sets of suspicious trades by the hedge fund. Such transactions are routinely turned over to the commission, whose officials then decide whether to investigate them.
One series of trades, which made Pequot $18 million, came just ahead of the announcement in 2001 by the General Electric Capital Corporation that it would buy Heller Financial. Advisers on the deal were Credit Suisse, a firm that was wooing Mr. Mack to be its chief executive at the time, and Morgan Stanley.
But after Mr. Aguirre’s investigation was under way, the report said, lawyers for both Mr. Samberg and Morgan Stanley’s board, which was then considering hiring Mr. Mack as chief executive, received access to high-level S.E.C. enforcement officials — outside the presence of Mr. Aguirre, who was leading the Pequot inquiry. After these contacts, the scope of the Pequot investigation narrowed and Mr. Aguirre was barred from interviewing Mr. Mack.
When Mr. Aguirre complained, the S.E.C. retaliated by firing him, Senate investigators concluded.
The report paints a picture of an agency that does not always treat prospective witnesses equally.
“By allowing the perception that ‘going over the head’ of S.E.C. staff attorneys yields results,” the report said, “the S.E.C. undermines public confidence in the integrity of its investigations and exacerbates the problems associated with ‘regulatory capture.’ ”
For example, on June 26, 2005, Linda Thomsen, the director of enforcement, spoke by telephone about the Pequot case to Mary Jo White, a lawyer at Debevoise & Plimpton, who was representing the Morgan Stanley board and was concerned about Mr. Mack’s possible involvement, the report said.
Ms. Thomsen said she had told Ms. White nothing about the case during the call. But according to Ms. White’s account of that conversation, Ms. Thomsen disclosed that subpoenaed e-mail messages showed that there was “smoke there” though “surely not fire.”
Earlier in the case, in February 2005, Audrey Strauss, a lawyer at Fried, Frank, Harris, Shriver & Jacobson representing Pequot, met with Stephen M. Cutler, then director of enforcement at the commission. Two weeks after the meeting, the report said, the investigation into Pequot was narrowed. “The staff was ordered to investigate only a few of the suspicious transactions” flagged by the New York Stock Exchange, the report said.
A spokeswoman for Mr. Cutler said he could not be reached for comment last night.
This narrowing of the case made an already difficult job of demonstrating a pattern of illicit trading more difficult, the report said.
The report also concluded that Paul R. Berger, then an associate director of enforcement and one of Mr. Aguirre’s supervisors, did not recuse himself from the Pequot case “in a timely manner” once he had expressed interest in working for Debevoise, the law firm hired by Morgan Stanley’s board to vet Mr. Mack before naming him chief executive.
Mr. Berger, who eventually took a job at Debevoise, initially told Senate investigators that he had stopped working on any matters involving Debevoise in early 2006, around the time he first considered seeking employment at the firm. But Senate investigators said they had found that the previous September, just days after Mr. Aguirre’s firing, Mr. Berger authorized an S.E.C. colleague to tell Debevoise that he might be interested in working there.
“Mary Jo just called,” the colleague wrote to Mr. Berger, referring to Ms. White in an e-mail message dated Sept. 8, 2005. “I mentioned your interest.”
Asked why he had failed to tell Senate investigators about this earlier exchange, Mr. Berger said that “I was very concerned about having any discussions without first talking with the S.E.C. and getting authorization.”
The Senate report accused Mr. Berger of giving investigators “incomplete” answers, but says it found no evidence of an explicit link between Mr. Berger’s role in the Mack dispute and his subsequent job at Debevoise.
Mr. Berger said yesterday that any suggestion that he had not properly recused himself is “unfair and inaccurate.” He added: “I did what I was supposed to do. I contacted the chief ethics officer in the general counsel’s office of the S.E.C. and they told me I did not have to recuse myself.”
The Senate report suggested that the S.E.C. had failed to pursue the Pequot investigation vigorously after Mr. Aguirre’s firing. For instance, when the commission took Mr. Mack’s testimony on Aug. 1, 2006, the report said, it did not “seriously test” a theory put forward by Mr. Aguirre that Mr. Samberg had rewarded Mr. Mack for information on the Heller deal by letting him invest alongside Pequot in a private company that was sold for three times his investment in little over a year.
Mr. Mack was the only individual investor allowed to participate in the deal, the report noted. The next trading day after Pequot officials allowed Mr. Mack in the deal, Mr. Samberg began his aggressive buying of Heller Financial stock.
A spokeswoman for Morgan Stanley, where Mr. Mack is chief executive, declined to comment on the report.
The report also stated that Liban A. Jama, a staff lawyer, had complained that he was given less than two days to prepare for “critical” testimony from two witnesses. Without more time, Mr. Jama wrote in an e-mail message to Mark Kreitman, his supervisor and assistant director in the enforcement division, “I would not feel comfortable taking the testimony.” Mr. Jamasaid he was surprised by Mr. Kreitman’s response. “He said, ‘You don’t need to prepare that much for it,’ which I found strange.”
The report also noted that Mr. Aguirre was not the only S.E.C. official to suffer after complaining about practices at the agency. A second unidentified staff investigator had protested what he believed might have been an inappropriate contact between an outside lawyer and Ms. Thomsen, the enforcement director. This investigator also received a negative re-evaluation of his job performance shortly after he complained in July 2005, the report said.
Our readers can find the full Senate finance committee report here.
I think the bottom line here is we can help our politicians in being proactive in curbing such abuse. The general public is in an angry mood for certain but the anger accomplishes nothing if it is not channeled constructively. To bring needed change our collective anger needs to look less like a 3 year old throwing a temper tantrumand more of letting Congress know we are sick of crooks like John Mack making fortunes insider trading and otherwise while simultaneously endangering our economic system peddling toxic securities and derivatives. Does Congress listen to the public? Based on the hits we get here at Slabbed from the US House and Senate the answer is absolutely yes. But they need us mushrooms to give them a basis to force needed change to our regulatory systems.
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“We are up against a powerful force” - Speaker Nancy Pelosi in Bay St Louis, Mississippi. August 2007
The shadow is a moral problem that challenges the whole ego-personality, for no one can become conscious of the shadow without considerable moral effort. To become conscious of it involves recognizing the dark aspects of the personality as present and real. This act is the essential condition for any kind of self-knowledge.
Carl Jung - Aion (1951). CW 9, Part II: P.14