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GAP has obtained the reports of the Independent Consultant (IC) stationed at AIG as a result of a deferred prosecution agreement (DPA) between the corporation, the SEC, the Department of Justice, and the NY State Department of Insurance in 2006. James Cole, the IC (from Bryan Cave, LLP), and current would-be nominee for Deputy Attorney General, reviewed the adequacy of AIG’s internal controls over financial reporting and recommended best practices for strengthening legal compliance. For his trouble, he and Bryan Cave were paid upwards of $20 million by AIG. In exchange for this arrangement and a $1.6 billion settlement, the charges against AIG for fraud, bid-rigging and ‘improper’ accounting practices were resolved.
In keeping with the DPA, Cole developed his “Best Practice” recommendations, presumably to ensure that AIG ran with some facsimile of compliance with its regulatory environments. In August and September 2007, Cole issued 215 total pages of mind-numbing detail on Blackout Trading Restrictions, Fair Disclosure requirements, Anti-Money Laundering and Combating Finance for Terrorism regulations, and on and on.
For reasons thus far unexplained, on p. 87 of the September 30 list of recommendations for AIG, however, Cole wrote:
The Derivatives Committee [of AIG] 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”).
The exemption is further elaborated:
For derivative transactions or programs entered into by AIG-FP, the appropriate independent review of the proposed derivative transactions or programs should be conducted by AIG-FP.
But then, if AIG-FP reviews AIG-FP’s transactions, that wouldn’t be independent, would it?
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Yesterday the Department of Justice announced it was joining a whistleblower lawsuit filed against KBR - the Army's largest contractor in Iraq, and a former subsidiary of Halliburton. The suit alleges some KBR employees received kickbacks, including food, drinks, and tickets to sports events from two air cargo companies. An Assistant Attorney General said:
“Defense contractors cannot take advantage of the ongoing war effort by accepting unlawful kickbacks. We are committed to maintaining the integrity of the Department of Defense's procurement process."
On the very same day, the Army announced that it was awarding KBR a $586 million no-bid contract for support services to the military in Iraq, despite the fact that following pressure from Congress in 2008 on no-bid contracts, the Army has bid out all of its logistics orders. The Army argues that it chose KBR because transitioning a new contractor would be disruptive and expensive.
However, the Army's reluctance to change contractors may be costing American taxpayers money: On April 1, the DoJ sued KBR alleging it violated its contract by using private security guards and improperly charging the Army for their services.
The lawsuit was the first action by the United States against KBR despite continuing criticism from lawmakers and overseers about KBR inflating its costs in Iraq and Afghanistan, and a steady stream of whistleblowers coming forward about fraud and abuse practiced by the company.
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We’re still trying to sort out what happened at AIG in the prelude to, and the aftermath of the federal bailout in 2008. Sources report to us that in the run up to the meltdown, Kathleen Chagnon, then-AIG Deputy General Counsel and Chief Compliance Officer, was in charge. Chagnon was reportedly a close friend of General Counsel Anastasia Kelly before arriving, and she was on good terms with the Independent Monitor, James Cole, after she settled in. Cole, of course, was in place at AIG to report to the SEC as part of a settlement of a lawsuit against the former AIG CEO for fraud. A major part of his job was to keep Kelly, Chagnon and later Folsom, honest.
Before turning up at AIG, Chagnon had enjoyed a jumpy career. At 49, she’s a veteran of Hogan & Hartson, The Saint Paul Companies, Constellation Energy, Saul Ewing, LLP., DLA Piper, AIG, and now Remedi Senior Care. She resigned under a cloud from AIG after a series of complaints in July 2008, just as the Financial Products debacle began to unravel.
In the wake of the Chagnon regime, Suzanne Folsom, on the lam from the World Bank, took over and terminated about half of the AIG Compliance Office staff in October 2008 for reasons we do not fully understand. With Kelly’s blessing, and unimpeded by Independent Monitor Cole, Folsom blithely dismissed AIG’s anti-money laundering officer, risk management officer, foreign-corrupt practices officer, global compliance trainer and shared services officer. In their place, consultants who were well-connected to Kelly and Folsom arrived. One salient example is Sarah Brown Meeham, who took up residence in an AIG office on a regular basis. Meeham was a consultant working for Levick Communications, where Kelly has served on the Advisory Board. She didn’t actually deal with compliance; she’s a PR specialist, according to Levick.
That may be what’s ailing AIG with these people running the show. They think that good PR is an adequate substitute for real compliance with regulation. And as it turned out, once Kelly and Folsom collected their ample severance packages, even the best corporate hack/flack in the world couldn’t have made AIG look good.
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Even though we thought it was impossible to top the barrage of troubling news that emerged last week about the oil spill (still going on!) that followed the explosion, fire and sinking of the oil platform Deepwater Horizon, even more disturbing information has come out since our last blog on the topic.
BP has continued to a.) be less than forthcoming about the oil spill details, and b.) downplay the effects to many news outlets. As we conveyed last week, despite claims from scientists at the National Oceanic and Atmospheric Association to the contrary, BP argued on Wednesday that the oil spill was stable and had actually moved farther away from the coastline. BP also took nine days to admit that the amount of oil leaking was 5000 barrels a day, rather than the 1000 barrel figure they initially claimed. In addition, a plan filed by BP with the U.S. Minerals Management Service (MMS) outlined a worst-case oil spill scenario of 162,000 gallons a day for the Deepwater Horizon platform, much less than the 210,000 gallons a day currently estimated.
The company has also refused to disclose how much oil was under the surface in the area in which they were drilling; however, an anonymous company official confirmed that it was tens of millions of barrels.
BP chief executive Tony Hayward claimed today that chemicals used to keep oil from the surface have had a significant impact on the spill. He failed to mention that BP had already bought up a third of the world's supply of the chemicals, called dispersants, and that the supply could easily run out if the flow of oil continues for any serious length of time.
Hayward also neglected to point out that the chemicals themselves pose a threat to the fragile gulf ecosystem – and according to an expert, may be more toxic than oil. While not all of the compounds in the chemicals are known due to trade secrecy, at least one is associated with "headaches, vomiting and reproductive problems at high doses." From ProPublica:
“There is a chemical toxicity to the dispersant compound that in many ways is worse than oil,” said Richard Charter, a foremost expert on marine biology and oil spills who is a senior policy advisor for Marine Programs for Defenders of Wildlife and is chairman of the Gulf of the Farallones National Marine Sanctuary Advisory Council. “It’s a trade off – you’re damned if you do damned if you don’t – of trying to minimize the damage coming to shore, but in so doing you may be more seriously damaging the ecosystem offshore.”
The chemicals can also have a worrisome effect on food safety. Studies have shown toxic compounds from the chemicals can accumulate in shellfish, and affect the development of fish. The chemicals will likely negatively affect the Gulf Coast fish industry.
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Read an update on the situation here
Many troubling details are beginning to come out about the explosion and sinking of the oil platform Deepwater Horizon, which oil giant BP was leasing from Transocean, the world's largest offshore drilling contractor. The platform exploded on April 20 and sank two days later, leaving 11 workers missing and presumed dead, and producing one of the largest oil spills in history in U.S. water.
Soon after the explosion and sinking of the platform, which houses the machinery used to extract oil from the ocean floor through a hole called an oil well, the New York Times reported that federal authorities have recorded more than 500 fires on oil platforms, two deaths and 12 serious injuries due to platform fires in the Gulf of Mexico since 2006. None of the accidents has slowed the rate of drilling in the Gulf, which has increased over the past decade. In the aftermath of the explosion, industry officials said that despite the loss of the Deepwater Horizon, drilling in the Gulf will likely continue as usual.
On Tuesday, the London Guardian (UK) reported that the Minerals Management Service (MMS), the US government agency responsible for overseeing offshore oil activities, was expected to launch an investigation into the sinking of Deepwater Horizon.
MMS is currently investigating a whistleblower's claims that BP had broken the law by not keeping an up-to-date set of records on the oil platform Atlantis, also located in the Gulf of Mexico. In the event of an emergency, such records would be vital to shut down the platform. According to an email from a BP executive, not having the records could lead to "catastrophic operator errors." Atlantis, which is located 190 miles south of New Orleans, is the largest oil platform of any kind in the world.
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Soon after she left her position as General Counsel at AIG in order to avoid the annual pay caps of $500,000 for federally bailed-out banks and companies, Anastasia Kelly sat down with Fortune Magazine and announced,
I wanted to put in a worldwide compliance and regulatory organization, but I kept hearing, ‘Why do we need this?’ I just kept pushing, and eventually we got that organization in place. When things blew up in 2008, it was very important in keeping things under control overseas.
Given the amount of public financing the US government has sunk into AIG over the past two years, it would be reassuring to know that, at the very least, the corporate compliance department is in order there. That way, the feds can “wind down” their/our ownership and liquidate this load. Action appears to be increasingly urgent after the value of AIG common stock fell an alarming 16 percent yesterday, and analysts predict that it will sink to less than 20 percent of its current value.
Sadly, however, it appears that Ms. Kelly’s assessment of her efforts to strengthen the compliance function at AIG is grossly overstated. This is a problem because of the significance of compliance capability at a global corporation. It is the compliance function that establishes and integrates anti-money laundering measures, anti-corruption safeguards, and risk management capability, among other things.
GAP has obtained a draft report of the Independent Monitor (IM) at AIG written in October, 2009 that more than contradicts Kelly’s claims to Fortune. The IM is a product of AIG’s unfortunate government entanglements since 2004, when the former CEO, Hank Greenberg, accepted a deal that, among other things, placed a government monitor in the Corporate Compliance Office and the Board Room. The monitor reported to the Securities Exchange Commission, and in return, Greenberg escaped criminal prosecution for fraud.
Although the monitor reportedly allowed AIG to rewrite his final evaluations, his draft report makes for interesting reading. Right up front it reveals that Kelly’s ‘worldwide compliance and regulatory organization’ is a delusion. The draft report is a chronicle of the IM’s frustration in dealing with Kelly’s appointee Suzanne Folsom, AIG’s Chief Regulatory Officer/Chief Compliance Officer (CRO/CCO). According to the draft report, Folsom variously exaggerated the impact of the compliance work she’d done, juggled numbers, withheld information, and ignored appeals for better data. This record looks very much like a reprise of her performance at the helm of the World Bank’s investigative unit, which she abandoned in January, 2008 after running it aground and subverting another ‘independent’ effort to right the ship
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So it’s news that James Cole, fresh from his role preventing fraud at mega-insurance firm AIG in the years before it tanked, is to be nominated for the position of Deputy Attorney General – the number two job at the Department of Justice. When this rumor hit the newswires, our whistleblower switchboard began lighting up like a Christmas tree with calls from alarmed AIG alumni.
Apparently the AIG connection had occurred to a number of people as a potential speed bump on the road to Cole’s confirmation. Here’s the sharp-eyed Al Kamen in the Washington Post:
One issue likely to come up at any confirmation hearings for Cole is his private-sector work involving American International Group. Under a 2004 government settlement with the giant insurer, the Justice Department demanded that AIG name an independent monitor to report periodically to Justice and the Securities and Exchange Commission about AIG's operations.
Initially, sources have told GAP, Cole came into AIG as the independent monitor like an anti-fraud typhoon, meeting with the relevant people and overseeing about 35 different work streams. But gradually, as he worked with AIG’s dazzling General Counsel, Anastasia “Stasia” Kelly and her “compliance” team, he seemed to weaken and adapt. For one thing, we hear, Cole allowed AIG management to revise his quarterly reports to the SEC, an unexpectedly collaborative practice for an independent monitor.
This was not part of the deal. The settlement was worked out to resolve a civil lawsuit after AIG was charged with multiple forms of fraud. The suit alleged that AIG worked with PNC Financial Services Group to inflate earnings and defraud investors. The settlement obliged AIG to accept an independent monitor and in return, executives avoided criminal prosecution. James Cole was to be the regulators’ eyes and ears at AIG, monitoring corporate compliance practices and reporting to the government. In the process, he would earn at least $20 million from AIG for his law firm, Bryan Cave.
It’s probably worth pointing out that, while independently monitoring AIG on behalf of the SEC, Cole failed to detect an atmosphere of, shall we say, laissez faire compliance at the company. This is not to say that Cole was in a position to unravel the weird goings-on in the Financial Products Division that ultimately brought the company down in September 2008 – but he should have noticed that the company’s attitude toward regulation was ‘soft.’ According to more GAP sources, Cole did virtually nothing to change that. On the contrary, he may have helped to conceal it.