In what may be the largest settlement of its kind, the Securities and Exchange Commission (SEC) has agreed to pay $755,000 to settle the wrongful termination claim of Gary J. Aguirre, the attorney who headed the SEC’s insider trading investigation of Pequot Capital Management until his firing in September 2005.
A judge with the Merit Systems Protection Board (MSPB), the federal agency with jurisdiction over Aguirre’s termination claim, issued an order today finalizing the settlement. The settlement sum equals Aguirre’s pay for four years and ten months (the elapsed period since his September 2005 discharge), plus his attorneys’ fees. Aguirre agreed to dismiss two related cases against the SEC.
Government Accountability Project Legal Director Tom Devine stated “Unfortunately, this large settlement is the exception that proves the rule. Until Congress provides real protections for financial regulatory employees such as Aguirre, existing law will remain the best excuse for government regulators to turn a blind eye.”
The SEC’s settlement with Aguirre comes one month after the SEC filed insider trading charges against Pequot, its founder, Arthur Samberg, and David Zilkha, a former Pequot employee, based on facts uncovered by Aguirre. Pequot and Samberg paid the SEC $28 million to settle the charges against them. The case against Zilkha continues.
In August 2007, two Senate committees published a scathing 108-page report criticizing the SEC’s decision to fire Aguirre and close the Pequot investigation, which included Pequot’s suspected insider trading in securities of 20 publics companies.
The Senate report chronicles Aguirre’s promising career at the SEC, including management’s decision to give him a two-step pay raise at the end of his first year for “consistently [going] the extra mile, and then some.”
But the praise vanished when Aguirre tried to subpoena an elite Wall Street banker, John Mack. His supervisors blocked the subpoena, telling Aguirre that Mack had “juice” and “political clout.”
Aguirre’s July 27, 2005, email to his supervisors explained why the Mack subpoena was essential and expressed concern that “treating Mack differently is [not] consistent with the Commission’s mission.” The Senate Report tells what happened next: “Just days after Aguirre sent an e-mail to Associate Director Paul Berger detailing his allegations, his supervisors prepared a negative re-evaluation outside the SEC’s ordinary performance appraisal process.”
One month later, the SEC fired him without warning. The Senate report concluded that Aguirre’s “termination appears to be merely the culmination of the process of reprisal that began with the August 1 re-evaluation.”
Approximately one year after the Senate report, SEC Inspector General H. David Kotz delivered his own report on Aguirre’s firing to then-SEC Chairman Christopher Cox. Kotz recommended that Aguirre’s supervisors be disciplined. To date, neither the current SEC Chairman, Mary Schapiro, nor Cox, has done so.
The Pequot investigation appeared to have run its course when the SEC released its “Case Closing Report” in December 2006, explaining its decision to close the entire investigation, including Pequot’s trading in Microsoft options, without filing charges.
But Aguirre did not stop his Pequot investigation. He continued to collect and piece together the evidence that Samberg had used illegal tips to trade options on Microsoft stock. In April 2008, Aguirre obtained a court order forcing the SEC, over its objection, to turn over to him key records of its Pequot investigation.
In late 2008, Aguirre uncovered the last pieces of evidence necessary to prove an insider trading charge against Pequot, Samberg, and Zilkha. On January 2, 2009, Aguirre sent a letter to SEC Chairman Cox enclosing the new evidence.
Aguirre’s 16-page letter explained how this new evidence, when combined with the evidence uncovered by him in 2005, proved that Samberg had used illegal tips in directing trades in Microsoft options, generating $14.2 million in profits to Pequot hedge funds under his management. But still the SEC would not file a case.
On May 26, 2010, Aguirre filed papers in his FOIA case seeking an order directing the SEC to release additional Pequot records to him. He argued the SEC had to turn over the records under FOIA, because it had filed no case against Pequot or anyone else. Early the next morning, the SEC filed charges against Pequot, Samberg, and Zilkha. The allegations closely track the facts stated in Aguirre’s January 2, 2009 letter.
Asked how he feels about the settlement, Aguirre replied, “I think it’s fair to the public that the SEC pays for my work over the past four years and ten months, since it generated $28 million to the U.S. Treasury. But it’s a shame the team I worked with at the SEC did not get to complete the Pequot investigation. The filing of the case in 2005 or 2006, before the financial crisis, would have been exactly what Wall Street elite needed to hear at the perfect moment: the SEC goes after big fish too.”
Dylan Blaylock is Communications Director for the Government Accountability Project, the nation's leading whistleblower advocacy organization.
For the past two months, GAP has criticized the nomination of James Cole to be Deputy Attorney General at the Justice Department (DOJ). We have argued that because Cole, who served as Independent Consultant at AIG during the critical time period from 2005 through 2009, missed clear signals of malfeasance, he is unsuited to serve as the second-in-command at the DOJ.
Last week, after four senators requested Cole’s reports to DOJ about AIG, prior to deciding on his nomination, a DOJ spokeswoman defended Cole’s role at AIG, telling Main Justice that
Critics who suggest that Mr. Cole was somehow too close to AIG misunderstand his relationship with the company,” …. “His presence was imposed on the company by a federal court. In fact, as the [Congressional Research Service] report notes, AIG executives tried to have him removed.
“[Cole] was never a general overseer or monitor of AIG’s entire operation nor was he assigned to examine many of the issues involving AIG’s near collapse, such as credit-default swaps or retention bonuses…”
This statement did more to obscure Cole’s role at AIG than to clarify it. First, although it’s true that in late 2008, Chief Compliance Officer Suzanne Folsom mounted an effort to remove Cole, it was not because he was insisting on a tough compliance regime. Folsom wanted him out because he was pocketing too much AIG money. His costs, as Independent Consultant, included not just the $20 million paid to his law firm, but tens of millions more for the consultants, who, we understand, were both expensive and incompetent.
A substantial part of the consulting fees apparently went to DLA Piper, the law firm where Anastasia Kelly, AIG General Counsel, parked herself in 2010, after fleeing AIG in order to avoid pay caps imposed by the TARP regulations.
Second, although it’s also true that Cole was not a general overseer of AIG, he failed to object when Folsom dismissed half the team that was working on compliance and oversight just after AIG had to be rescued by taxpayers in 2008. Many of these people had written to the board and to the CEO to expose AIG’s weak compliance program before the meltdown. When Cole did finally interview them, he acceded to Folsom’s demand that she or her designee be present to observe the conversations. This collaboration is simply inconsistent with the responsibility of an independent monitor.
Fourth, Cole was assigned under the 2004 deferred prosecution agreement to review five years of transactions effected by the problem division, AIG-FP. This assignment would specifically have included credit default swaps as well as other fraudulent maneuvers designed to conceal liabilities.
Finally, no one has suggested that the retention bonuses paid in 2009 were involved in AIG’s near collapse. The bonuses were paid after the collapse, and critics questioned the propriety of paying bonuses to those responsible for the crisis. More cynical critics have instead suggested that the putative ‘retention bonuses’ were, in fact, hush money, since a number of people who received them have left the firm. Critics are also wondering if the second round of retention bonuses was paid in 2010.
The Senate Judiciary Committee held James Cole’s confirmation hearing yesterday morning for the post of Deputy Attorney General. It was not exactly an aggressive interrogation. Democratic members of the committee sought Cole’s commitment to continuing the reforms at the heretofore highly politicized Justice Department (DOJ), and Republican committee members wanted assurances that Cole, as the new Deputy Attorney General, would not guarantee Miranda rights to suspected terrorists. There were three or four allusions to Cole's role as an independent monitor at AIG in the years leading up to the financial crisis that brought the company down and wrecked the US economy, but no specific questions were forthcoming. Not from anyone.
In fact, the entire proceeding had the feel of a pro forma procedure along the way to confirming James Cole to be the second-in-command at DOJ. There were various ironic moments, however. For one thing, a number of senators sought assurances from Cole that he would hold BP accountable for the damage now being sustained by states along the Gulf coast as a result of the ongoing oil spill. For his part, Cole guaranteed that, if confirmed, he would make every effort to extract compensation from BP for those whose livelihoods were endangered by the thickening and widening slick of scum.
Asking Cole about corporate accountability in the BP case is like asking “Brownie” how he would handle another hurricane in New Orleans. It’s beside the point. Cole has a five-year record of responsibility for corporate oversight and compliance at AIG, where he failed to hold either individual managers or the corporation itself accountable for the catastrophe they visited upon US credit markets. In throw-away comments at yesterday’s hearing, Cole assured the committee that as Deputy Attorney General he would dedicate himself to combating mortgage fraud and financial fraud. When he made this statement, neither he nor his questioner (Senator Ted Kauffman, D-De.) made any reference to his recent past at AIG, where the Financial Products Corporation encumbered the corporate balance sheet with tens of billions of dollars in worthless real estate bonds as Cole looked the other way.
This post also appears on GAP Homeland Security Director Jesselyn Radack's Daily Kos blog.
UPDATED 12:23 PM: Earlier today I argued that, in light of the Obama administration going after reporters and sources, Wikileaks is the only avenue left. In the comments I stated that Wikileaks is not ideal because it lacks the fact-checking and at-least-the-pretense-of-balance of journalism. I stand corrected. In Mr. Assange's own words, BREAKING:
This idea is spin by those connected to the abuses we have revealed, however, it is simply not true.
There has never been a documented case of WikiLeaks misattributing a document. We have a perfect record over three years of publishing. Compare this record with any other publisher of political materials.
In the U.S. a lot of the anti-Wikileaks propaganda comes from military apologists attempting to undermine the strength of http://collateralmurder.com/ by attacking its messenger. However, read that website carefully and all statements made in the video itself. You will see that even after other details have come to light, none require corrections. Why? Because we fact-checked--to the degree of sending people to the most dangerous part of Baghdad during election time to do it. Who else has such demanding standards?
We push the ideal of "scientific journalism"--all primary sources for every article made available. It's our invention because we love fact-checking and want others to check our facts to prove our good work.
On the balance issue. You're right. We don't believe in "balance"--we believe in accuracy and fairness. That is an important difference and higher standard. The truth is not revealed by balancing the lies of competing powergroups--that is a job for politicians. We, as servants of the historical record, have a higher standard.
I can't argue with that, Julian Assange. THANK YOU for what you are doing and for your bravery in contacting me.
In many cases, like that of Bradley Manning, we end up slamming "leakers" for going to Wikileaks instead of questioning why American soldiers used an Apache helicopter to shoot unarmed Iraqi civilians, journalists, and children, while egging each other on like they were playing Call of Duty.
If the Obama administration so despises disclosures to the media or Wikileaks, giving protections and options to national security whistleblowers should be priority one. In the meantime, I submit that it is the government officials who engaged in torture, warrantless wiretapping, and "collateral murder" who have endangered our national security, and not those who exposed the wrongdoing.
Jon Stewart's monologue on The Daily Show should be required watching for any doubters about Obama and civil liberties (he discusses Thomas Drake and whistleblowing at 7:00):
On Obama's watch, national security whistleblowers find themselves exempt from the Whistleblower Protection Act, crippled by the inaptly-named "Intelligence Community Whistleblower Protection Act" (which provides zero real protections for employees) and now, thanks to Obama's recent crackdown on "leakers", whistleblowers--fearing criminal prosecution should they turn to the media (often the only real check on government abuse of power)--can only go to Wikileaks.
Wikileaks may be the only option left for employees who see waste, fraud, abuse or illegality in the national security realm. This is certainly not ideal, as Wikileaks lacks the fact-checking and at-least-pretense-of-balance of journalism.
I appeared on two recent shows on NPR and Pacifica Radio that detail the debate over Wikileaks and Obama's stance on so-called "leakers." (Remember, we called them whistleblowers during the Bush administration). The radio shows are available here and here.
I've chronicled the Obama administration's recent dedication to criminalizing whistleblowing to a greater extent than any other president in history:
Thomas Drake (former senior National Security Agency official)- Stemming from a Bush leak investigation into the warrantless wiretapping program, recently indicted for allegedly retaining classified information that led to a series of newspaper articles about NSA's billion-dollar mismanagement of a program to conduct secret surveillance with maximum privacy intrusion.
James Risen (New York Times reporter)- Justice Department reissued Bush-era grand jury subpoena for his sources for a chapter of his 2006 book, State of War, which focuses on a CIA-led ruse to disrupt Iranian nuclear weapons research.
Shamai Leibowitz (FBI linguist)- sentenced to 20 months in prison for giving classified information to a blogger.
Bradley Manning (Army Intelligence Analyst)- arrested for allegedly disclosing to Wikileaks classified video footage [titled "Collateral Murder"] of an apache helicopter attack that killed unarmed Iraqi civilians, including two Reuters reporters, and injured two children.The crackdown has received support from giddy conservatives like Gabriel Schoenfeld, author of Necessary Secrets, and supporter of prosecuting under the Espionage Act not only leakers, but - much to the chagrin of the First Amendment - also the journalists and newspapers who help get the truth out. . .and by logical extension, anyone who reads the articles and further disseminates them by discussing or e-mailing them on.
As much as Schoenfeld would like us to believe in some mythical state of whistleblower protections for national security employees where employees can easily blow the whistle and merrily go about their careers, the reality for national security whistleblowers is tragically different.
Inside Sources Prompt Questions about James Cole’s Record at AIG as Independent Monitor
The Government Accountability Project (GAP), which has been critical of the nomination of James Cole since he was rumored to be on the short-list for Deputy Attorney General, has posted mock questions for members of the Senate Judiciary Committee to pose to Cole at his confirmation hearing later today.
Cole was nominated by the Obama administration last month to be second-in command at the Department of Justice. For years, Cole has served as the Independent Consultant (IC) stationed at insurance behemoth AIG as a result of two deferred prosecution agreements (DPAs) between the corporation, the SEC, and the Department of Justice in 2004 and 2006. The DPAs were put in place as part of a settlement when AIG previously faced massive fraud charges.
“The administration is trying to deflect attention from Cole’s poor record of oversight at AIG in the years leading up to the financial crisis by claiming he was not asked to monitor the troubled subsidiary,” said Bea Edwards, GAP’s International Program Director. But in fact, it was Cole’s own decision that exempted that subsidiary from his scrutiny.”
When rumors of Cole’s potential nomination began to emerge in April, GAP began receiving frequent and disturbing calls from AIG alumni and current staff about serious problems with Cole’s actions during his tenure. Since then, Edwards has been steadily posting blog entries about Cole based on the disclosures we have received.
In advance of this hearing, Edwards has produced a primer on Cole’s role at AIG, followed by five questions GAP believes should be asked at the hearing.
This post also appears on GAP Homeland Security Director Jesselyn Radack's Daily Kos blog.
Courtesy Flickr User Georgiap
Open-government groups, like my own (the Government Accountability Project), are aghast by Obama's recent crack down on whistleblowers--coming from a President who pledged maximum transparency. In the past 6 weeks, people being subpoenaed, arrested, indicted or convicted include:
Thomas Drake (former National Security Agency official) - Indicted for allegedly retaining classified information that led to a series of newspaper articles on NSA's billion-dollar mismanagement of a program to conduct secret surveillance with maximum privacy intrusion.
James Risen (New York Times repoter) - Justice Department reissued Bush-era grand jury subpoena for his sources for a chapter of his 2006 book, State of War, which focuses on a CIA-led ruse to disrupt Iranian nuclear weapons research.
Shamai Leibowitz (FBI linguist) - sentenced to 20 months in prison for giving classified information to a blogger.
Bradley Manning (Army Intelligence Analyst) - arrested for allegedly disclosing to Wikileaks classified video footage of a controversial helicopter attack that killed unarmed Iraqi civilians, including two Reuters reporters, and injured two children.
President Obama is fast on his way to sending a record number of whistleblowers to prison.
Reilly quoted Cole's defenders’ claim that “his work did not specifically include the major issue that nearly led to the company’s demise – namely credit default swaps.”
This explanation for Cole’s myopia and his astonishing ability to miss the unmanageable risk that brought on the meltdown at AIG is superficial and disingenuous. The key word is “specifically.” According to our sources, the problem was not simply credit default swaps (CDSs), but rather the way in which AIG-Financial Products (AIG-FP), the division that primarily generated and traded them, was exempted from compliance obligations and oversight. On May 26, 2010, Elizabeth Warren, Chairwoman of the Congressional Oversight Panel on TARP, said in her opening statement chairing the hearing:
“The company [AIG] was a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight."
In contrast to Warren’s opinion, Cole did not seem to perceive structural problems with regulatory oversight and legal compliance at AIG. On the contrary, when writing about AIG compliance in August 2008, he reported to DOJ and the SEC,
“Each compliance plan will be submitted to the OC (Office of Compliance) for review and approval to ensure that the plan has adequately provided controls for addressing all identified compliance risks.”
This, according to Cole, was a reasonable and achievable goal. Next to this text in his table of goals, Cole placed a green dot, meaning progress toward the goal was advancing without problems.