As the 111th Congress draws to a close, the heat is on to confirm James Cole as Deputy Attorney General. Despite the last-minute push, Cole still has serious problems that haunt and disqualify him from taking a senior position at the Justice Department.

From 2005 through December 2009, James Cole served as an independent monitor in the Compliance Office of the American International Group (AIG), placed there by the Securities and Exchange Commission (SEC) as part of a deal that allowed AIG to escape prosecution for fraud.

While Americans and their elected representatives are notorious for their short attention spans, it’s worth remembering, in this case, that AIG was the corporation that nearly drove the US economy off a cliff in September 2008. AIG’s Financial Products Division (AIG-FP), based in London, wrote credit default swaps involving staggering amounts of money that had to be covered with a US government bailout in the range of $180 billion.

Some say money can’t buy everything. But for BP, money sure seems to be able to buy enough litigation and lobbying power to stay in business, even with its persistent, egregious safety violations that have led to more than one deadly disaster.

While BP’s older crimes may have been overshadowed lately by the more current and devastating Gulf oil spew, it should not be forgotten that the company is still litigating charges related to a 2005 blast at a Texas refinery that killed 15 workers. With the Gulf oil spill and the 40-day release of toxic chemicals from its Texas refinery, BP has its hands full with not one, but three environmental catastrophes. All three remain unresolved.

Regarding the refinery case, the Justice Department recently decided not to revoke the three-year probation it had imposed on BP due to the numerous safety violations (both criminal and civil) found during the federal investigation into the 2005 accident. Although the probation period allowed BP time to respond to violations, it has to date failed to properly respond to all safety issues or fully pay its fines. Although the government warned that it might revoke or renew the probation, it then backed off of its threat – presumably to avoid subjecting the company to further criminal prosecution. Of course, family members of those killed in the accident have been advocating for more, not less, prosecution.

Furthermore, a probe into safety issues at the refinery found that the initial violations noted by federal regulators only scratched the surface of a trove of (shock!) even more violations. This mirrors what we’ve seen in the Gulf – both in the spill itself as well as in the cleanup – where the information that has come forward continues to prompt yet more questions.

 

We now know that dangerous dispersants were being used in the cleanup and that BP was barring media access to oil-soaked sites. But why has the cleanup effort been shrouded in a veil of secrecy in the first place? What about the devastating ailments plaguing Gulf Coast residents, the reports of massive kill zones and dead marine life, and the widely disparate scientific studies on what’s happened to all that oil and dispersant? In light of a 1978 oil spill cleanup in Brooklyn, in which oil dating back to 1948 was found, somehow assurances that “75 percent of the oil is gone” don’t quite make sense. Let’s not forget that the initial (BP-backed) flow rate estimates of 1,000 barrels per day skyrocketed to over 60,000.

It seems that the more we continue to investigate BP, the more dark secrets we shall find. This is not a surprise. Yet, the question remains -- how far will it go before meaningful changes are enacted to protect those who have suffered from the carelessness of BP, and those courageous few insiders who have blown the whistle?

Lindsay Bigda is Communications Fellow for the Government Accountability Project, the nation's leading whistleblower advocacy organization.

In news regarding automaker Toyota’s continuing problems with “unintended acceleration” – a sudden increase in speed that may be linked to several accidents and deaths since 2001 – preliminary findings from federal officials seem to support the company’s claims that problems lie not in faulty electronics, but rather in other issues such as sticking pedals, floor mat entrapment, and driver error.

Government regulators are investigating this issue using data collected from Toyota’s ‘black box’ recorders – devices installed in vehicles that record data such as velocity and acceleration. Of course, keep in mind that federal regulators are reviewing the accuracy of Toyota’s electronic system with an electronic device made by… Toyota? On this note, a handful of safety consultants are asking similar questions, such as: Is the black box device a scientifically validated instrument?

This raises the bigger question of the government’s willingness to trust automakers’ claims. It also brings up the familiar catch of free markets versus government regulation. On the one hand, self-regulation has always been problematic (remember when BP assured us that most companies had voluntarily adopted safeguards to protect against oil spills?). On the other, government regulation is sometimes equally faulty. Toyota’s ongoing acceleration issue highlights both sides of the debate.

The Senate Judiciary Committee is scheduled to vote on James Cole’s nomination for Deputy Attorney General tomorrow – Tuesday, July 20th. Serious doubts remain, however, about Cole’s role at AIG before, during and after the company’s financial collapse in September 2008. I posed him some questions prior to Cole’s hearing last month on GAP’s YouTube channel.

Over the past two weeks, a number of Senators have posed written questions to Cole about his role at AIG. His answers are troubling – particularly those he provided to Senator Charles Grassley.

On July 2nd, Senator Charles Grassley (R-Iowa) posed written questions to James Cole, the Obama administration’s nominee for the post of Deputy Attorney General. Many of these questions focused on Cole’s role as the Independent Consultant placed at AIG from 2005 through 2009 as part of two deferred prosecution agreements (DPAs). The first of these DPAs resulted from charges of aiding and abetting securities fraud in the AIG Financial Products subsidiary based in London, the AIG appendage that crashed the world economy in 2008 and required a $182 billion bailout courtesy of the US taxpayer. Some of Cole’s responses to Grassley’s questions were both puzzling and contradictory, and others we know to be misleading.

Under the terms of the 2006 DPA, Cole was asked to examine “the adequacy of whistleblower procedures designed to allow employees or others to report confidentially matters that may have a bearing on AIG’s financial reporting obligations.” In written questions Grassley asked Cole to provide a “discussion of the scope of your work under the 2006 DPA.” In response, Cole simply quotes from the DPA, which is, of course, available to Senator Grassley and the rest of the world on the DOJ website. A meaningful written discussion of whistleblower procedures at AIG would have to include an account of the layoff of ten compliance attorneys and officials in the aftermath of the corporation’s financial collapse in September 2008. Several of the ten were whistleblowers who had written to senior management at AIG about deficient compliance procedures. None of them was interviewed confidentially by Cole, who acceded to the demand of Suzanne Folsom, then Chief Compliance Officer, that Cole interview her staff only when she or her designee were present. As a result, the whistleblowers were summarily terminated under guise of a staff reduction.

Details Questionable Roles of Liz Cheney, Shaha Riza, and Others in Multi-Million Dollar Program

(Washington, D.C.) – A report released by the Government Accountability Project (GAP), based on documents obtained through nearly three years’ of U.S. Freedom of Information Act (FOIA) requests, exposes the highly irregular manner in which the Foundation for the Future (FFF) – an obscure project funded by the U.S. Department of State – was established and operated by Bush administration officials and appointees.

Specifically, the report details how high-level State Department officials misled Congress as they sought millions in public money for the Foundation, which was a haven for people with political connections. The report also shows that FFF was a pet project of Elizabeth Cheney, former Principal Deputy Assistant Secretary of State for Near Eastern Affairs. Cheney worked to set up the Foundation with Shaha Riza, Paul Wolfowitz’s companion whose seconding to the State Department (and then to the FFF) was directly responsible for the 2007 World Bank scandal that resulted in Wolfowitz’s departure from the Bank.

“Liz Cheney had the preposterous idea that the Foundation for the Future would bring peace and democracy to the Middle East,” said GAP International Program Officer Shelley Walden, author of the report. “This overlong project wasted millions of taxpayer dollars.”

The report, which is based on 267 documents released by the Department of State over a period of 33 months, can be found here: (Full Report) (Executive Summary) (Key FOIA documents) (Appendix I)

Background

The Foundation for the Future first became an issue of public interest inquiry in 2007, when GAP published the payroll records of Riza, girlfriend of then-World Bank President Paul Wolfowitz. The records showed that Riza, a British national who worked as a World Bank communications officer, was seconded to the U.S. State Department after Wolfowitz was appointed, where she was responsible for establishing the Foundation for the Future (FFF). The FFF was a nonprofit organization tasked with promoting democracy and reform in the Broader Middle East and North Africa (BMENA) region.

While seconded from the Bank to the State Department in 2005 and 2006, Riza received salary raises in excess of what Bank rules allowed, earning far more than Secretary of State Condoleezza Rice. In October 2006, Riza’s secondment was transferred to the FFF itself, where she remained until returning to the Bank in early 2008, after Wolfowitz was forced to resign.

Liz Cheney’s Failed Pet Project

The documents released by the Department of State (DOS) show that Liz Cheney, as Principal Deputy Assistant Secretary of State for Near Eastern Affairs, envisioned Riza’s highly irregular secondment to the FFF in May 2005, well before it was established, and before Paul Wolfowitz became President of the Bank. In this unsupervised position, Riza promoted an overtly political U.S. agenda in the Middle East. Riza’s activities in this role were in apparent violation of conflict of interest regulations at the World Bank, as well as the national security, tax and visa regulations of the U.S. government. The report also shows that Cheney was instrumental in the Foundation’s launch and failure to obtain broad international support.

“The project was doomed from the start – State Department officials in the region warned that restrictive laws in the Persian Gulf states would make the Foundation ineffective; BMENA governments did not support a Foundation that would give their opposition a platform from which to oppose them; and potential donors had misgivings about the project’s lack of indigenous imprint,” stated Walden. “Despite these warning signs, Cheney and the Bush administration moved full steam ahead and established the Foundation anyway.”

In 2005, Cheney, Shaha Riza and Condoleezza Rice embarked on an international crusade to obtain financial and diplomatic support for FFF. But their efforts at diplomacy were a failure; they raised less than 25% of the goal (set by Cheney) of $25 million (USD) in contributions from other nations. The great majority of funding came from the United States, although the legislation creating the institution included a requirement for matching funding.

“The Foundation for the Future was to promote democracy, transparency and popular political participation on a multilateral basis in the Middle East,” said GAP International Program Director Bea Edwards. “So when Liz Cheney – who, in the view of many Middle Eastern leaders, occupied her position largely because she was the Vice President’s daughter – asked other nations for contributions, they balked. Add to this the fact that the Foundation’s board member selection process was directed by the former Deputy Secretary of Defense’s girlfriend and that the Foundation was managed by a personal friend of Wolfowitz’s with little expertise in the region, and it’s no wonder that many potential donors refused to fund it.”

Astroturfing

GAP’s report shows that the FFF was almost entirely financed and monitored by the U.S. government, even though the Bush administration repeatedly portrayed it to Congress as a multilateral, non-governmental organization created in response to democratic demands from grassroots organizations. Documents also show that the Bush administration intended to use the Foundation as a vehicle through which to demonstrate its purported commitment to democratic processes and human rights abroad, at a time when President Bush was subjected to increasing criticism for human rights violations in Iraq, Afghanistan, “black sites” around the world and Guantánamo Bay.

Dubious Lobbying and Funding Efforts

From 2005-2007, officials at the State Department executed a number of questionable legislative maneuvers in the US Congress that were favorable to the FFF. In the end, the Bush-Cheney administration successfully obtained the passage of three laws related to the Foundation and a disbursement of $21.3 million in public funds. They also secured $921,064 for the Eurasia Foundation – a non-profit organization set up by the State Department in the 1990s to promote democracy in the former Soviet Union – to help establish the FFF.

It appears that in order to obtain the disbursement to the FFF, State Department officials deliberately misled the US Congress about the funding pledged to the Foundation by other governments. Evidence strongly suggests that section 534(k) of US Public Law 109-102, which at that time stipulated that funds could only be made available to the Foundation to the extent that they had been matched by contributions from other governments, was violated; the Foundation’s own reports show that less than $6.4 million of the $22.26 million in “matching funds” listed by the State Department in its communications with Congress as pledged ever materialized.

Especially suspicious was the State Department’s representation of a murky $10 million pledge from Qatar, the largest “pledge” of any country other than the United States. Documents indicate that the State Department knew that this pledge would never materialize when it asked Congress to disburse matching funds.

GAP’s report also suggests that FFF management – including former FFF Chairman (and close friend of Paul Wolfowitz) Anwar Ibrahim, who is currently a Malaysian parliamentarian – misled the US Internal Revenue Service. The FFF’s financial statements for 2006 and 2007 state that the Foundation did not attempt to influence national legislation, an assertion contradicted by the cables and reports released by the Department of State. These documents suggest that several Foundation representatives actively lobbied the US Congress in 2006-07 for legislative changes favorable to the FFF.

Shaha Riza

State Department documents show generous travel allowances and salaries for the office of Shaha Riza, whose nebulous duties did not seem to require such lavish financial support. Riza was paid a net salary of $180,000 to perform such tasks as reviewing a translated draft of the FFF bylaws, a PowerPoint presentation of a business plan and a translated policies and procedures manual.

The Foundation for the Future continues to operate, although the departure of both Cheneys from public office appears to have weakened its financial support from Congress. Because the vast majority of its funding comes from the U.S. government, budgetary figures indicate that the FFF will be unsustainable after 2014.

Dylan Blaylock is Communications Director for the Government Accountability Project, the nation's leading whistleblower advocacy organization.

The public finally got a look at the trio who ran AIG aground before the bailout in 2008 when they appeared before the Financial Crisis Inquiry Commission yesterday. Joseph Cassano, Martin Sullivan and Robert Lewis seemed defiant and pained, still stunned and humiliated, respectively. The New York Times articles (here and here) and the questioning yesterday explain the sheepishness and shame on display with the AIG executives who testified. At AIG-FP (Financial Products), Cassano had encumbered the AIG holding company with enormous uncapitalized and unhedged long-term risk based on a single market trend: the upswing in US housing prices. This is like betting your house that one horse will win the Derby because it’s been winning up until now. In this case, we now know that the horse was feeling queasy by 2005, so why Cassano did this remains unclear. Based on yesterday’s testimony, neither Sullivan nor Lewis ever asked him.

What is clear is that AIG-FP under Cassano had inexplicable corporate autonomy, even after senior management knew that he was sinking the ship. By 2006, AIG-FP had stopped insuring CDSs (credit default swaps) based on mortgage-backed securities because even the “experts” working for Cassano knew the deals were rotten. These guys were careful to keep this to themselves, however, and James Cole, the Independent Consultant installed at AIG by the SEC and the Justice Department to review AIG-FP transactions from 2000 – 2005, failed to spot it. Part of the reason for the blind spot that affected Cole is explained by the recommendations for compliance (p87) that he himself set out in 2007. When Cole recommended the establishment of a Committee to oversee the transacting of derivatives, which would have encompassed oversight of the CDSs insured by AIG-FP, he wrote:

The Derivatives Committee should be responsible for providing an independent review of proposed derivative transactions or programs entered into by all AIG entities other than AIG Financial Products Corp. (“AIG-FP”).

These recommendations, made in September 2007, show Cole’s explicit intention to keep his eye off the ball, even though, a 2004 deferred prosecution agreement between AIG, the Department of Justice (DOJ), the SEC and the New York State Insurance Commission– placed him at AIG to review potentially fraudulent AIG-FP transactions.

Cole, of course, has now been nominated to serve as the Deputy Attorney General at DOJ, where he would help to decide who should and should not be prosecuted. Cole does not appear to be the ideal candidate for this slot, based on his performance at AIG.

Bea Edwards is the International Reform Director for the Government Accountability Project, the nation's leading whistleblower advocacy organization.