Post-Madoff Watch Notches UP

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Post-Madoff Watch Notches UP

Postby DrakeS » Fri Jan 15, 2010 3:12 am

Post-Madoff, S.E.C. Rethinks Enforcement
January 14, 2010, 3:39 pm


The Securities and Exchange Commission is seeking to recover from its failure to detect Bernard L. Madoff’s enormous Ponzi scheme by reorganizing its enforcement division and announcing a new cooperation initiative that it hopes will make it easier to pursue cases by rewarding those who help its investigation. The S.E.C. hopes to regain its luster as Wall Street’s top cop by remaking its enforcement arm in the image of a prosecutor’s office.

Robert Khuzami, the director of the enforcement division, spent time in the United States attorney’s office in Manhattan, and his initiatives show that he is taking a page from the Justice Department’s playbook in his reorganization of the division by creating specialized groups and the focus on cooperation.

For the first time, the S.E.C. will use formal cooperation agreements to further encourage those with information to provide it to the staff in its investigation. Going a step further, the commission will also enter into deferred and nonprosecution agreements with those who substantially assist investigations, thus avoiding or mitigating any penalty from a violation.

These types of agreements have been a staple of criminal cases for years, and became the norm for corporate cases after the demise of the accounting firm Arthur Andersen, which was convicted of obstruction of justice in 2002. In the past, resolving a criminal case usually meant agreeing to an S.E.C. injunction and penalty, but companies and individuals may now be able to secure an agreement to forgo any punishment on the civil side, a move that can encourage increased cooperation.

The S.E.C. amended its rules to allow the director of its enforcement division to seek authorization for an order of immunity from the Justice Department without having to get approval from the five commissioners in advance. Cutting out a bureaucratic step in seeking immunity for a witness can help speed up the investigative process.

Another change is the S.E.C.’s reorganization of the enforcement division by creating specialized units that will focus on particular areas. In the past, most people on the enforcement staff were generalists, taking on cases as varied as accounting fraud, insider trading and penny stock abuses. The specialized units will focus on particular types of transactions and investments, like asset management, market abuses, structured and new products, the Foreign Corrupt Practices Act, and municipal securities and public pensions.

Once again, this is much like how a United States attorney’s office is structured, with units to handle drugs, public corruption, child abuse and terrorism. By developing expertise in a particular area, S.E.C. enforcement officials should find it is easier to spot trends in the markets and possible connections among cases. A failure to make connections was the very problem that caused the S.E.C. to miss Mr. Madoff’s Ponzi scheme.

While Mr. Khuzami said that these initiatives were “a potential game-changer for the division of enforcement,” we all know that a reorganization is just the start. Specialized units are only as good as the expertise developed in them and the ability to pass along the accumulated knowledge. One problem that has plagued the S.E.C. for years is staff turnover, which slows pending investigations and takes away from the storehouse of information that can be useful in future cases. Until that issue is addressed, no amount of reorganization will improve enforcement.

On the cooperation front, while the policy on the various cooperation agreements will be welcome by those who are the focus of an S.E.C. investigation, it remains to be seen whether it generates much additional information. The S.E.C. does not have the big stick that the Justice Department has: criminal punishment. White-collar defense lawyers know that the most important issue in a case is potential criminal exposure of the client, and dealing with civil enforcement comes in second. Structuring the S.E.C.’s enforcement division like a United States attorney’s office does not mean the S.E.C. will be accorded the same respect, or instill the same fear, as prosecutors.

The reorganization of the enforcement division is certainly necessary if the S.E.C. wants to overcome the black eye that Mr. Madoff gave it. Whether this is just rearranging deck chairs on the Titanic remains to be seen. Much like an N.F.L. draft, the effect of these changes will not seen for three to five years, when the financial crisis has faded from view and Congress quite possibly becomes less amenable to tough regulation of the markets. Mr. Khuzami is right that this still just a potential game-changer.

– Peter J. Henning


Peter J. Henning, a professor at Wayne State Law School, specializes in issues related to white-collar crime and follows them for DealBook’s White Collar Watch.

http://dealbook.blogs.nytimes.com/categ ... lar-watch/




Justice Department eyes possible fraud on Wall Street
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Justice Department eyes possible fraud on Wall Street
Justice Department eyes possible fraud on Wall Street

WASHINGTON — Turning its scrutiny to bigger fish in the subprime mortgage scandal, the Justice Department is investigating whether lenders or Wall Street firms defrauded investors in the sale of risky mortgage securities, its Criminal Division chief disclosed Thursday.

"We absolutely are looking at the conduct of the securitizers themselves, and what did they say to those who purchased the (securities)," Assistant Attorney General Lanny Breuer told a commission created by Congress to investigate causes of the nation's economic collapse.

"Candidly, (we) have been looking at that for awhile and are looking at that right now in a very key matter."

Goldman admits 'improper' actions in sales of securities
Goldman admits 'improper' actions in sales of securities

WASHINGTON — Goldman Sachs' chief acknowledged Wednesday that the investment bank engaged in "improper" behavior in 2006 and 2007 when it made huge bets on a housing downturn while peddling as safe more than $40 billion in securities backed by risky U.S. home loans.

Lloyd Blankfein, Goldman's chairman and chief executive, made the surprising concession at the opening hearing of the Financial Crisis Inquiry Commission, a 10-member panel that Congress created to investigate and lay out for the public the causes of the worst financial crisis since the Great Depression.

Blankfein and senior officers of three other of the nation's most prominent banks told the panel that serious flaws in their risk models and business practices contributed to Wall Street's meltdown and the massive taxpayer bailouts that followed. The commission also heard testimony that the banks and quasi-government mortgage giant Fannie Mae recklessly took on as much as 95 times more risk than they could cover, and that Wall Street excels

Panel to hear about effort against financial crime
Panel to hear about effort against financial crime

Attorney General Eric Holder on Thursday will tell a panel investigating the financial crisis that the Justice Department is using "every tool at its disposal" to fight the financial crimes that contributed to the meltdown and could cause another.

According to prepared remarks, Holder will say the fight against economic crime is part of a broader strategy to "foster confidence in our financial system, integrity in our markets and prosperity for the American people."

Holder will highlight the work of a new, interagency Financial Fraud Enforcement Task Force created by President Barack Obama to coordinate efforts between the Justice Department and other agencies.

Goldman admits improper' actions in sales of securities
Goldman admits improper' actions in sales of securities

Goldman Sachs' chief acknowledged Wednesday that the investment bank engaged in "improper" behavior in 2006 and 2007 when it made huge bets on a housing downturn while peddling as safe more than $40 billion in securities backed by risky U.S. home loans.

Lloyd Blankfein, Goldman's chairman and chief executive, made the surprising concession at the opening hearing of the Financial Crisis Inquiry Commission, a 10-member panel that Congress created to investigate and lay out for the public the causes of the worst financial crisis since the Great Depression.

Blankfein and senior officers of three other of the nation's most prominent banks told the panel that serious flaws in their risk models and business practices contributed to Wall Street's meltdown and the massive taxpayer bailouts that followed. The commission also heard testimony that the banks and quasi-government mortgage giant Fannie Mae recklessly took on as much as 95 times more risk than they could cover, and that Wall Street excels "at pulling

Goldman Sachs bet on housing meltdown -- and won
Goldman Sachs bet on housing meltdown -- and won

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
By GREG GORDON
McClatchy Newspapers

WASHINGTON -- Turning its scrutiny to bigger fish in the subprime mortgage scandal, the Justice Department is investigating whether lenders or Wall Street firms defrauded investors in the sale of risky mortgage securities, its Criminal Division chief disclosed Thursday.

"We absolutely are looking at the conduct of the securitizers themselves, and what did they say to those who purchased the (securities)," Assistant Attorney General Lanny Breuer told a commission created by Congress to investigate causes of the nation's economic collapse.

"Candidly, (we) have been looking at that for awhile and are looking at that right now in a very key matter."

Breuer didn't identify any company under scrutiny, but Wall Street's biggest investment banks bought many of the $2 trillion in home mortgages issued to shaky borrowers, converted them to high-yield bonds and sold the bonds to investors including pension funds, insurers and foreign banks. Many of the securities have since defaulted, and investors have lost billions of dollars.

Attorney General Eric Holder, who also appeared before the commission, said the economic crisis has brought concern about financial fraud "to the forefront." Holder, who recently announced the creation of a financial fraud task force, said the Justice Department "is using every tool at our disposal, including new resources, advanced technologies and communications capabilities" to catch perpetrators.

According to Breuer, the FBI received upwards of 70,000 "suspicious activity reports" relating to possible mortgage fraud in 2009 and has 2,800 investigations under way nationwide.

The Justice Department disclosures came on the second day of Financial Crisis Inquiry Commission hearings, as federal and state enforcement officials laid bare the regulatory holes, blunders and lack of foresight that enabled the subprime mortgage industry to churn out millions of ill-fated loans that sank the economy.

Those lapses included:

- Failing to rein in what Chairwoman Sheila Bair of the Federal Deposit Insurance Corp. called a "shadow banking system" in which major banks ramped up their risks by making hundreds of billions of dollars in exotic, off-the-books bets.

- Deciding to scale back the FBI's resources for tracking white-collar crime after Sept. 11, and assigning scant personnel at the Securities and Exchange Commission to monitor major investment banks after they were given new freedom in 2004 to take on added risks.

- Adopting rules in 2004 that restricted state regulators from policing predatory lending and other mortgage abuses, prompting some major lenders to seek federal charters to avoid tough scrutiny.

- Relying too much on the credit ratings of Wall Street agencies, which had financial incentives to bestow high ratings on dubious mortgage-backed securities.

- Failing to monitor major banks' compensation arrangements that gave bonuses for completing mortgage securities sales, regardless of the risks of default.

- Ignoring a warning to Congress by the FBI's investigation chief in 2004 that widespread subprime-related mortgage fraud would lead to a financial crisis.

"I mean, everybody missed everything," said the panel's vice chairman, Bill Thomas, a retired Republican congressman from California.

Bair and SEC Chairwoman Mary Schapiro described a series of fixes under way, including some to address the widespread losses incurred by investors around the world in subprime-related mortgage securities.


Schapiro said her agency is conducting a "broad review" of the regulation of these securities backed by bundles of mortgages and consumer loans. The SEC is looking at Wall Street firms' disclosures in offering circulars, their public reporting and "considering several proposed changes designed to enhance investor protection in this market."

Schapiro and Bair described multiple ways in which they propose to narrow the roles of major Wall Street credit ratings agencies: Moody's Investors Service, McGraw Hill-owned Standard & Poor's and Fitch Ratings.

While the ratings agencies have to date been shielded from liability, largely via the First Amendment's protections of free speech, the SEC is weighing the idea of making them subject to experts' legal exposure, just as are lawyers and accountants, Schapiro said.

That approach, she said, "might impose some additional discipline on how they conduct their business and . . . be an effective check on their enthusiasm for highly rating everything."

Bair said she sees "major advantages" to tying the rating agencies' compensation to the longer-term performance of securities that they give triple-A ratings, the highest investment grade, parceling out their fees over time.

Both women urged creation of a systemic risk council in which financial regulatory agencies would share information so they could identify major risks across the financial system.

Also testifying were four state regulators, including attorneys general Lisa Madigan of Illinois and John Suthers of Colorado. Madigan said that, years before the subprime market exploded, state investigators uncovered "a pattern of predatory lending practices that would eventually permeate and destroy much of the mortgage industry and our economy," including higher payments to mortgage brokers for loans with the most punishing terms for borrowers.

Federal regulators, she said, showed little interest and pushed to curtail state authority, while lenders shifted to federal charters. A major lesson, she said, is that federal charters "must not be mistakenly viewed as giving lenders a blanket exemption" from state laws.

Meanwhile, Goldman Sachs issued what it called a clarification of statements by its chairman and chief executive officer, Lloyd Blankfein, at Wednesday's opening hearing.

Asked about Goldman's secret bets against the housing market while it sold $40 billion in risky mortgage securities in 2006 and 2007, Blankfein said he thought "that the behavior is improper, and we regret the result - the consequence that people have lost money in it."

On Thursday, Goldman said that Blankfein had "said no such thing" and that the question was "predicated on the assumption that a firm was selling a product that it thought was going to default" and in that case, "the practice would be improper."

Mr. Blankfein does not believe, nor did he say, that Goldman Sachs had behaved improperly in any way," the firm said.

A commission spokesman said: "The hearing was Webcast, which is available on our Web site, and a transcript will be available shortly."


http://www.isafirm.com/
nice choice of words Kurt. "damn shame" My arent we eloquent. Just wait till someone has a few "choice words " for you, too. Uhhh duhhh...hmmmmh
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Re: Post-Madoff Watch Notches UP

Postby Yeahsure » Sun Feb 07, 2010 3:07 pm

Now will anyone go to jail or not?
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Re: Post-Madoff Watch Notches UP

Postby coldharvest » Tue Feb 09, 2010 8:33 am

Yeahsure wrote:Now will anyone go to jail or not?

American 'justice' can barely get organized crime, what chance to you think it has against old white money.....the meanest gang in the world.
I know the law. And I have spent my entire life in its flagrant disregard.
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