In this last week’s World Finance, reporter Gretchen Cashen highlights Eric Ben-Artzi’s bold gesture in refusing a Whistleblower reward and why he did so, his experience at Deutsche, and the parallels with mine at Citigroup.
Most importantly, it takes a hard look at one of the most egregious issues in government: that of the regulators, most specifically, the Securities and Exchange Commission (SEC). My own experience is indicative of their lack of accountability. When I could not persuade Citigroup’s Board of Directors to conduct an internal investigation of the bank’s financial malpractices, I turned to the SEC.
Turns out it was all in vain, as the 1,000 pages of fraudulent activity I had documented was not only buried, it was locked up. The SEC classified my testimony as “confidential and trade secrets” and has repeatedly refused to release it, despite much of it being public information.
Like Ben-Artzi, I believe, there is an “incestuous” revolving door relationship between Wall Street banks and the regulators. Anyone who leaves the SEC has a ready-made position within the banks or those who support them. As Ms. Cashen says in the article, ”In the years since the crisis, the absence of any significant convictions has come to show the worrying extent of corporate impunity on Wall Street…. Individuals at the highest echelons of “Corporate America” have been largely unaffected by their own financial gambling.”
This “incestuous“ revolving door has also resulted in large bank control in limiting mandated rules-making by the SEC and the Financial Accountings Standards Board (FASB) and the Commodities Future Trading Commission (CFTC). Additionally, there is a practice of Wall Street executives cashing out early and thus rewarded when they take government jobs.
Mr. Ben-Artzi’s heroic gesture in turning down the $8.25 million whistleblower reward offered to him by the SEC opens the door to more public scrutiny which is very much needed. He told the Financial Times just a week or so ago that the SEC’s investigation of Deutsche Bank “was disappointing.” He stated that the $55 million fine does nothing to prosecute and hold to account the executives responsible for the crimes and instead allowed for top executives being able to retire with “multimillion dollar bonuses based on the misrepresentation of the bank’s balance sheet.”
In the article, Ben- Artzi argues that the revolving door culture which prevails on Wall Street enables guilty executives to escape punishment over and over again. “This goes beyond the typical revolving door story. In this case top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were on-going.”
Let’s look at the facts. Robert Rice, the chief lawyer at Deutsche in 2011 and to whom Ben-Artzi initially took his concerns, was responsible for leading the internal investigations into improper accounting, and in 2013 was serving as the SEC’s Chief Counsel. In 2009, Robert Khuzami was Deutsche’s senior lawyer in North America before going on to become director of the SEC’s enforcement division. When he left the SEC he cashed in on his four years there for a $5 million plus salary at Kirkland & Ellis, another prominent Wall Street firm.
Both Rice and Khuzami reported to Richard Walker, the bank’s general counsel who was once head of enforcement at the SEC. Mary Jo White, the current SEC Chair, was a lawyer for several Wall Street financial firms, where she established relationships with several banking executives including Robert Rice and Robert Khuzami. Ms. White appointed James Schnurr chief accountant at the SEC. Schnurr was deputy managing partner at Deloitte and while there the firm signed off on the books of Bear Sterns, Washington Mutual, and Fannie Mae; each of which went bust shortly thereafter. By the way, while White was a partner at a major Wall Street law firm, she had Deloitte as a client. White’s husband still has Deloitte as a client, thereafter leaving their investors with $15 billion in losses.
Former SEC attorney, James Kidney, has pressured the SEC to investigate Goldman Sach’s executives for their involvement in the 2007 Abacus 2007-ACI investment scam. Abacus, a sub-prime debt deal, was designed to fail. It allowed hedge fund John Paulson & Company to bet against it, all the while recommending it to their own clients as a good investment. The SEC did not bring charges against John Paulson, who made $1 billion in profits, and Goldman Sachs subsequently settled for $550 million.
When Mr. Kidney retired from the SEC in March of 2014, he commented in his retirement speech, “on the rare occasions when enforcement does go to the Penthouse, good manners are paramount. Tough enforcement, risky enforcement is subject to extensive negotiation and weakening.”
Bank Whistleblowers United colleague, former SEC attorney Gary Aguirre’s experience was similar. During his tenure at the SEC, he had pressured his bosses to serve a subpoena on John Mack, then an official at Morgan Stanley. He suspected Mack’s potential involvement in insider trading. Aguirre had contacted the office of Special Counsel to discuss the SEC’s protection of Mack. Three days later, while on vacation, he received a phone call from his boss – and was fired. Aguirre later testified to Congress that the SEC had thrown a “roadblock” into his investigation because the suspected insider trader had “powerful political connections”.
So it seems the SEC settles with the guilty banks for settlements rather than prison sentences. Since 2008, 20 global financial institutions have paid $235 billion in fines which as Ben Artzi, myself and others have pointed out, comes from shareholders’ pockets, not the guilty bank individuals! And not one prison sentence is meted out.
This last week several Rasmussen polls reflect that 67% of voters are angry at the current policies of the Federal government. Reporters Pam Martens and Russ Martens say, “the smooth functioning of the American economy is based on citizen’s having confidence in the country’s leaders … No Federal agency has to date done more to drown investor consumer confidence than the crony Securities and Exchange Commission (SEC).”
I concur. Mr. Ben–Artzi has gone very public with this issue. My Bank Whistleblowers United colleagues and I have done our best to raise awareness, as have others.
When are we going to demand an end to the cronyism between the SEC and the very financial institutions they regulate? When are we going to demand and get justice?
In 2012, Federal Judge Jed Rakoff wrote regarding the Occupy Wall Street Movement, “What a huge debt this Nation owes to its “troublemakers.” From Thomas Paine to Martin Luther King, Jr.; they have forced us to focus on the problems we would prefer to downplay or ignore. Yet it is with hindsight that we can distinguish those troublemakers who brought us to our senses from those who were simply… troublemakers.”
More of us need to be those “troublemakers“ who bring people to their senses.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
