Nothing but bad judgement

Sarbanes-Oxley and other things


Senior executives to certify financial information
As a result of the Enron Scandal, in 2002 the Sarbanes-Oxley Act (Sarbox) was enacted. It was meant to make it easier to prosecute fraudulent behavior. Without Sarbox, the administration managed to put away at least some of the top men behind the Enron scam. Several senior executives were sentenced, with up to 24 years in prison. link
Sarbox sets standards for public company boards, management and public accounting firms, with several options for criminal prosecution. Penalties for fraudulent financial activity are much more severe. Supervising of auditors is enhanced. Whistleblowers are protected. The oversight role of the board of directors is increased; senior executives have to individually certify both to the accuracy of financial information and to the implementation of internal supervising controls. With Sarbox, not one of the top men behind the subprime crises has been sentenced. link

SEC actively opposed by the government
The Securities and Exchange Commission (SEC) is responsible for implementing the Sarbox rules. According to Wikipedia (checked on May 20, 2014), one (1) fraud conviction can be directly attributed to SEC and Sarbox. And that was a fraud discovered in 2004, resulting in some civilian fines and no criminal charges.
Even when it comes to cases that look like clear Sarbox violations, SEC is very reluctant to do anything. link link
Maybe it is unfair to blame the SEC. When they try to act, they have powerful opponents. Not only the banks but also the Department of Justice (DoJ) and the Congress. For criminal cases SEC has to cooperate with the DoJ and the DoJ is not very cooperative. link Should the SEC try to act, the Congress threatens with budget cuts. link

Lehman a clear Sarbox case
Since Sarbox, top executives are requested to certify that they have an adequate internal control system. 'Knowingly' and 'willfully' making false certifications might render 10 or 20 years prison sentences. They have to certify that they have designed, evaluated and presented controls.
A clear Sarbox case should be Lehman Brothers. First of all, an internal letter shows that the top brass was warned about numerous accounting shortcomings, still they did not do anything (besides firing the warner and whistleblower). Besides, their accounting was an utter disaster with numbers not adding up and understatement of risks. link link

IRS, Lawyers, Accountants and more

IRS for tax avoiders
A common tax evading device is setting up companies in low tax jurisdictions, often abroad; another is hiding taxable assets. In 2006, the congress estimated that tax evasion cost the IRS more than $450 billion a year. To counteract this, a whistleblower office was established, to pay whistleblowers 15-30% of recovered amounts.
It did not work. One thing is that many at Wall Street are unwilling to bite the hand that feeds them; there are few whistleblowers. Another thing is that those supposed to enforce the federal securities laws are not much more enthusiastic; maybe because they are unwilling to bite the hand they hope will soon feed them. When Citigroup loan underwriter team leader Richard Bowen reported to senior management that 40-60% of loans purchased for resale did not meet their loan standards, senior management acted. They increased the rate to 80% and they destroyed Bowden's banking carrier. In July 2008, Bowen gave the SEC more than 1000 pages of documents and the agency told him "Mr. Bowen, we are going to pursue this". He never heard back. Still, Attorney General Eric Holder has the effrontery to claim "The Obama administration is scouring Wall Street for whistleblowers...". A reporter requesting Bowen's SEC file was denied access because it contained Citigroup "trade secrets". link
One company set up completely sham foreign companies, with no operations whatsoever in any of these tax jurisdictions; yet it claimed all of its profits were due to these phony companies. Another company had foreign brokerage accounts for US individuals, without reporting as mandated by law. They clearly knew what they were doing as they had 'fessed up for an amnesty program for past abuses; still they continued. The IRS permitted them to submit a selection of accounts to be investigated. The submitted accounts were found to be acceptable and the IRS closed the case. The IRS even goes so far it engages in retaliatory audits against IRS attorneys who publicize how the IRS waving through tax scams.
With IRS getting massive personnel injections from big accounting and law firms, you might guess what happened. IRS Chief Counsel Donald Korb found it morally wrong to disclose billion dollar tax scams; as he says, "it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS... The IRS didn't ask for these rules; they were forced on it by the Congress." With top IRS executives setting friendship with bankers before law enforcement, there is no wonder the IRS is not very efficient. link

Lawyers and Accountants get a free pass
The Supreme Court is not ashamed to take the side of big business. In 1994 it reversed decades of precedents: private suits against advisors for "aiding and abetting" frauds are no longer permitted. In other crimes you can be prosecuted for complicity (like driving the getaway car at a bank robbery). Not so any longer for lawyers and accountants.
In 2008, the Supreme Court upheld this ruling. One motivation was that shareholder lawsuits "may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets". In other words, you don't have to care about law if it threatens your profit. link link
It even works the other way. If you commit a crime and tell your accountant, you get away free. Joseph Cassano, head of AIG's Financial Products unit, was acquitted because he told his accountants what he was up to. It's like, I did not know it was against the law, I told my lawyer I was gonna rob a bank and he didn't say anything. As a rule, not knowing about the law is no excuse for breaking it; in finance it does work. link
Lawyers and accountants can be prosecuted, but not by their victims. DoJ can sue, so if SEC finds anything inappropriate they can ask DoJ to sue; DoJ however, is, if possible, even more reluctant than SEC to do anything. The Government is actually on the other side; if a bank can show that the Government knew about their misconduct and did not do anything, they can claim they thought it was permitted and they can get away with it. As long as you can claim that you are not the main architect, it's OK to profit knowingly from fraud. link

One small fish
But at last they did it. SEC managed to get a conviction. Banks often give their CDOs fancy names. Goldman made 25 CDOs named Abacus; they were designed to fail and they did fail. One of them was sold by Fabrice Tourre, in spite of the title of vice president a relatively low tier executive and the only Abacus seller indicted. Goldman also had to pay, $550 million for Tourre's CDO. This is a low price for getting away with 24 out of 25.
This does not mean that SEC does not try. It means that those who try are obstructed. James Kidney, for many years a SEC attorney, wanted to go after Tourre's boss Jonathan Egol; he also wanted to go after those who picked the securities for Abacus and then betted against them. Egol was questioned and three of four lawyers on the case wanted to proceed against him; still enforcement director Robert Khuzami decided to abstain. Kidney left the case after being demoted. link

Bad judgment by high-ranking SEC official
It is unfair to say that the DoJ does not do anything. While working as a high-ranking SEC official, Spencer C. Barasch also worked as a private attorney for Allen Stanford, a man who masterminded a $7 billion Ponzi scheme (second only to Bernie Madoff). For years, Barasch overruled colleagues who wanted to investigate Stanford. One day after Barasch left the SEC for the law firm Andrews Kurth, the SEC examiners could persuade their superiors to investigate Stanford. At last, the DoJ did do something and Stanford got 110 years. Barasch had to pay $50,000 in a civil case for allegedly violating conflict-of-interest laws, working for both Stanford and SEC.
Barasch could have faced other potential conflict-of-interest cases. As a private attorney he represented electronics company Microtune although he had earlier investigated it as a SEC official. The SEC was considering a civil fraud lawsuit against Barasch's future employer Andrews Kurth for its involvement in the Enron case; according to confidential internal emails, AK apparently considered using Barasch to get inside information.
Barasch settled a bribery case where he as a SEC official negotiated with AK. A short time later, AK hired him so they probably were satisfied with the settlement; Barasch even became a partner. There is no evidence that Barasch's actions were more than bad judgment. link

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