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On May 21st, the White House nominated James Cole of Bryan Cave, LLP for the position of Deputy Attorney General at the Department of Justice (DOJ). Cole was the Independent Consultant at AIG in the years leading up to the September ’08 bailout there.
On the same afternoon, the Department of Justice closed its two-year investigation of Joseph Cassano, Andrew Forster, and Thomas Athan of the London-based Financial Products Unit of AIG and informed them that they would not face criminal charges.
Cassano was the CEO at AIG-FP, Forster was the head trader and executive vice president and Athan was a managing director. None of them will be the subject of criminal prosecution, according to the Washington Post.
So, just about two years after AIG nearly runs the international economic system over a cliff, the Justice Department decides there was no criminal wrongdoing and the former AIG monitor is selected to run the day-to-day operations of the Justice Department. Although Cole, as the Independent Consultant (IC), was not monitoring the risk-taking that contaminated AIG-FP, the decision to leave the unit to operate without oversight was at least partially his.
According to one source at AIG, the prevailing storyline – that AIG-FP was a rogue unit operating largely beyond the regulatory reach of its corporate parent – is a myth. If the senior management and the board of the corporation office did not know about the magnitude of the financial risk assumed by AIG-FP, this was willful ignorance.
A few more major stories are out concerning the BP oil spill in the Gulf Coast:
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First, ProPublica rounds up several instances in which BP has attempted to slow the flow of information about the spill. Reports are out, nonetheless, about BP refusing to publicize results of “tests on the extent of workers’ exposure to evaporating oil or from the burning crude over the Gulf.” The tests could be an important tool in determining whether or not it is currently safe for workers in the Gulf.
Similarly, CBS News reporters were banned from filming a beach covered with oil in Louisiana by a motley crew of BP contractors and members of the Coast Guard. The reporters were threatened with arrest if they continued to attempt filming the beach. One of the men said to the reporters: “This is BP’s rule. It’s not ours.” Just who is supposed to be in charge then? This incident raises serious questions about the involvement of the government with BP. CBS reports: "We spoke with Coast Guard officials today; they say they're looking into it."
Prominent scientists are also raising concerns about the government's response to the oil spill, according to a New York Times report. The scientists argue that by now, the Obama administration should have certainly released test results on water from the deep ocean near the spill, and should be pushing BP to release more information as well. The deep ocean tests are specifically important because the oil spill is nearly a mile below the surface.
The Huffington Post reports that Representative Edward Markey (D-Mass.), head of the House Select Committee on Energy Independence and Global Warming, demanded and will soon receive live streaming video of the oil spill in Gulf, following heavy criticism of BP for not releasing video sooner. As we blogged about previously, many scientists have come forward to say that even the short, grainy video clips released by BP earlier prove that the scope of the disaster is much larger than BP estimated.
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The Government Accountability Project has obtained the May 2009 report issued by the Congressional Research Service (CRS) about the performance of James Cole, the Independent Consultant placed at AIG in 2006 by the Securities and Exchange Commission (SEC) as part of a Deferred Prosecution Agreement (DPA). The DPA represented the resolution of federal and state allegations of improper accounting and bid rigging at AIG, among other infractions.
It should be emphasized that the findings of the SEC related to the accounting practices at AIG – which led to the DPA – were devastating. For one thing, the SEC found that in 2000 and later years, AIG “materially misrepresented the company’s earnings” and deceived investors about the value of the corporation’s stock. Based on the manipulation of on-paper transactions, AIG constructed a picture of profitability during these years that the SEC described as a “fiction.”
These and other transactions identified in the SEC complaint suggested a complete breakdown in internal controls over accounting at AIG. Management was able to manipulate earnings by creating sham transactions, concealed by false records, apparently without detection for a period of years. The SEC complaint charges that AIG “knowingly circumvented or knowingly failed to implement a system of internal accounting controls” (SEC Complaint, p. 28).
The nature and scope of Cole’s early reports on internal controls at AIG cover virtually all of the company’s compliance and reporting obligations. According to the CRS report:
“It is almost as though the Independent Consultant assumed that AIG had no internal compliance or accounting systems whatsoever.”
It is important to recall that Cole, for the purposes of this DPA, began his reporting in 2006, after management at AIG (in particular at the AIG-FP group responsible for credit default swaps) was trying to limit the company’s exposure to losses as a result of the increasing vulnerability of the US housing market. AIG’s failure to implement a system of internal controls prevailed during the period that AIG-FP exposed the entire firm to the catastrophic losses that would not become publicly visible until 2008. Although Cole was on site in board meetings and in the Compliance Office as the company began reckoning with the financial damage done by the AIG-FP group, these actions completely escaped his notice and are mentioned in his reports only after they have been covered in the press in September 2008.
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This post also appears on GAP Homeland Security Director Jesselyn Radack's Daily Kos blog.
The government used to fire, blacklist and bankrupt whistleblowers. But now the government has upped its ante: it is prosecuting them.
Three weeks ago, former NSA whistleblower Thomas Drake was indicted for "leaking."
In today's Washington Post, there's a great article on financial whistleblower Bradley Birkenfeld. He complied with a whistleblower incentive law and ended up in jail.
This is a toxic trend that must stop.
Bradley Birkenfeld is a former banker with UBS, Switzerland's largest bank, who shattered 75 years of Swiss bank secrecy by blowing the whistle on American tax dodgers who hid money in Swiss bank accounts.
Birkenfeld's story is more than a cautionary tale. It is a glaring stop sign for any potential financial whistleblower. The new IRS Whistleblower Reward Program enticed him to come forward with a law that turned into virtual entrapment.
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In case you've had as hard of a time as we've had keeping up with all the bad news coming out about the Gulf Coast oil spill, GAP's brought together some of the more appalling tidbits from the last few days:
First, despite the fact that BP has said many times that it is impossible to accurately judge the extent of the Gulf spill by looking at video of oil gushing out of the broken pipe, experts analyzing the video at the request of NPR argue that it is possible and that the spill is far worse than BP has estimated. While BP claims the oil is likely spilling at a rate of 5,000 barrels a day, the experts predict it is somewhere between 56,000 barrels to 84,000 barrels a day and that the oil spill has already surpassed the iconic Exxon Valdez spill in scope.
Similarly, the New York Times reports that environmental groups are raising concerns over why BP continues to claim it is impossible to measure the scope of the oil spill, and why they have produced and are sticking to the number of 5,000 barrels a day. The groups argue that there are accepted scientific methods that could be easily used to more accurately measure the leak, and that "the figure of 5,000 barrels a day was hastily produced by government scientists in Seattle. It appears to have been calculated using a method that is specifically not recommended for major oil spills."
Greenwire reports that, as we blogged about last week, BP is continuing to use risky chemicals called dispersants to break up the oil spill, but that the oil giant has bypassed the use of less toxic chemicals in favor of ones manufactured by a company with which they have close ties. The company, Nalco Co, was once part of Exxon Mobil Corp. and currently has leadership that includes executives from both BP and Exxon. Even worse, EPA data shows the Nalco dispersant to be less effective than less toxic alternatives in dealing with southern Louisiana crude oil.
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As we try to develop a comprehensive picture of what exactly happened at AIG’s compliance group over the last couple of years (the very group tasked with ensuring that the company complied with laws and regulations), sources have provided additional pieces of the puzzle.
Christina Mallus, the legal HR manager during the crisis at AIG, whom we understand has since been promoted, was deeply involved in assisting senior compliance management (Anastasia Kelly, Suzanne Folsom, Kathleen Chagnon and Karen Nelson) in their successful efforts to make senior compliance officers disappear if they raised issues of mismanagement. Several compliance officers complained to management and wrote letters to the AIG board of directors before September 2008. These complaints and letters, which contained allegations of incompetence, lack of resources, discrimination, racism, cronyism and nepotism, were seen by Kelly, Folsom and the others as cause for retaliation and dismissal. Kelly, in fact, controlled all avenues of whistleblowing at AIG; even the Ethics Hotline reported back to her.
In his March 2009 report to the SEC , then-Independent Consultant James Cole noted the ‘layoff’ of compliance officers executed by Folsom the previous fall:
“In the fall of 2008, AIG terminated the employment of ten additional compliance professionals in the OC [Office of Compliance], including the DCCO [Deputy Chief Compliance Officer], Risks, and the DCCO, Life and Retirement Services. These individuals had responsibilities in the following areas: anti-money laundering (“AML”), Foreign Corrupt Practices Act (“FCPA”), code of conduct, investigations, insurance, privacy, training and risk assessments.” (pp. 8-9).
Curiously, though, Cole made no inquiries about the layoff, despite the fact that subsequent to it, Folsom and Kelly petitioned to have his monitoring suspended for six months because, in part, the AIG compliance staff was overworked, according to them (p. 10). Clearly, the layoff was not precipitated by lack of demand for the compliance officers’ services, but neither Cole nor Mallus, as HR Manager, asked any questions.
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Suzanne Folsom, former World Bank Golden Parachuter who has now departed AIG with a second parachute worth $1 million in severance, has been replaced by Karen Nelson. Nelson was Folsom's hatchet-man at AIG from 2008-2009 and is now the interim acting Chief Compliance Officer reporting to the CEO. Under Folsom, Karen Nelson was the deputy who helped bury the bodies when a majority of senior compliance personnel were terminated in October 2008 at the AIG corporate compliance oversight group.
New sources tell GAP that the massacre befell the compliance people barely one month after the September 2008 financial services collapse, in retaliation for their complaints to superiors about lax regulation in the reckless run-up to the AIG meltdown.