There was an article in The New York Times yesterday about the SEC’s disgraceful ruling that it will take no disciplinary action against the SEC cronies at the center of the Gary Aguirre scandal. Read through the Times’ false veneer of objectivity, and it seems that reporter Walt Bogdanich is trying to say that it’s pretty damn strange that a corrupt SEC has been allowed to adjudicate its own corruption.
Stranger still, no other journalist has expressed outrage over this. Meanwhile, the nation’s mainstream media (The New York Times included) has yet to deliver a story describing the Aguirre scandal’s most important component – the bit that makes it the greatest scandal in the history of the SEC and which helps explain why the commission failed to stop a crime that later contributed to the near total collapse of the American financial system.
Readers of the mainstream media know only that Aguirre is the former SEC attorney who claimed that he was fired for political reasons after pursuing an “insider trading” case against Morgan Stanley CEO John Mack and a hedge fund called Pequot Capital. The real story – the one you don’t read in the papers – is that Aguirre has, all along, made it perfectly clear that his investigation – the one he says that Mack “stopped in its tracks” – was about much more than the relatively minor crime of “insider trading.”
Aguirre blew this scandal wide open in 2006, when he wrote an 18-page letter to the U.S. Congress. The letter reads: “I believe our capital markets face a growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money — then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash….There is growing evidence that today’s pools—hedge funds—have advanced and refined the practice of manipulating and cheating other market participants.”
Aguirre then described the investigation that he had led at the SEC. “The investigation was two-pronged,” he wrote. One prong concerned “insider trading.” However, the second, and far more important prong, concerned “market manipulation.” Specifically, Aguirre and his colleagues were investigating “two suspected violations: wash sales and naked shorts.”
“My colleagues,” Aguirre wrote, “believed [the naked short selling] held a greater potential to severely injure the financial markets.”
That is, Aguirre and his colleagues believed that naked short selling (hedge funds selling stock that they have not yet purchased or borrowed in order to drive down prices and destroy public companies) ranked high among the tactics that “were instrumental in delivering the 1929 Crash” – a repeat of which now seemed entirely possible since the tactic had been “refined” by hedge funds intent on “manipulating and cheating other market participants.” But the SEC rank-and-file’s attempt to investigate this crime was “stopped in its tracks” by SEC leaders who had been corrupted by Wall Street fat cats.
At the time when Aguirre released his letter, a small clique of influential journalists with close ties to certain Wall Street fat cats were going to great lengths to whitewash the crime of naked short selling (see “The Story of Deep Capture” for details). Unsurprisingly, some of these journalists quickly sought to discredit the SEC whistleblower. They reported that Aguirre’s investigation concerned only the minor infraction of insider trading, and that he had failed to present evidence that this minor infraction had occurred. The journalists also declared that Aguirre was untrustworthy – an eccentric who had been fired for poor performance.
After a year long investigation into the matter, however, the Senate Judiciary Committee completely vindicated Aguirre. It noted that Aguirre had been fired just two weeks after his supervisors had raved about his “unmatched dedication” in glowing written evaluations of his performance. It presented clear evidence that Mack’s lawyers were given special access to meetings in which Aguirre’s investigation was discussed. While the SEC was busy quashing the investigation and firing Aguirre for complaining about it, Paul Berger, then the SEC associate director of enforcement, was interviewing for a job at Mack’s law firm.
The Senate investigators concluded that they were “deeply troubled” by the SEC’s failure to look into Aguirre’s claims. “At worst,” the Senate report said, “the picture is colored with overtones of a possible cover-up.”
As part of this cover-up, the SEC eventually claimed that although Aguirre had been fired, the commission had nonetheless pressed forward with its “insider trading” investigation, finding no evidence that Pequot or Mack and committed any violations. However, the SEC has yet to reveal whether its rank-and-file were allowed to complete their investigation into the naked short selling that had the greater potential to “seriously injure the financial markets.”
SEC leaders remained uninterested in the crime until this past summer. Data for June showed that “failures to deliver” (phantom stock sold by naked short sellers) had peaked at more than 2 billion shares – an all time record. More important, the SEC’s cronies on Wall Street were now victims of the very crime that they had perpetrated and covered up. An avalanche of naked short selling, timed to coincide with a false news report on CNBC, had sparked the run on the bank that took down Bear Stearns. Now, other Wall Street institutions (including, yes, Morgan Stanley) were getting similarly clobbered. In mid-July, the SEC pronounced that naked short selling had the potential to “seriously damage” the financial system. It issued an “emergency order” protecting 19 big financial institutions (including Morgan Stanley) from the crime.
That kept the big banks safe for a time. But ultimately, short-sellers proved to be more skilled at cronyism than their former accomplices at the big banks. In August, under pressure from the short seller lobby, the SEC lifted its “emergency order.” In the next three weeks, a half-dozen major financial institutions were eliminated or nationalized. Morgan Stanley CEO John Mack (no doubt regretting that he had quashed the Aguirre investigation) hollered that he was next — that law-breaking short sellers were taking down his bank. The SEC responded by banning short selling outright in 900-plus companies. Meanwhile, everyone from Hillary Clinton to John McCain implicated naked short selling in the biggest financial cataclysm since 1929.
A few weeks later the SEC inspector general issued a 191-page report vindicating Gary Aguirre. The otherwise detailed report conspicuously failed to mention the naked short selling component of Aguirre’s investigation, but it contained many of the same findings that the Senate had described. The report, compiled over many months, concluded that Mack’s interference with Aguirre’s investigation raised “serious questions about the impartiality and fairness” of the SEC. The inspector general recommended that disciplinary action be taken against Aguirre’s supervisors, including SEC Director of Enforcement Linda Thomsen.
But last Friday, having spent no more than a few days reviewing the evidence, an SEC administrative judge declared that the SEC did not mishandle the Aguirre case, and that no disciplinary action would be taken. As Bogdanich’s story in The New York Times makes clear (though in not so many words), the ruling stinks to high hell.
For one, it remains unclear why in the world an SEC judge, as opposed to an independent court, is ruling on this matter. For another, it seems that the judge, Brenda Murray, was not even acting in the capacity of a judge. Rather, she issued her not-guilty verdict in the capacity of “an individual” who was asked by the SEC executive director to evaluate the inspector general’s findings.
In other words, there is good evidence that the leaders of our nation’s market regulator are as corrupt as Banana Republic cops on the brothel beat – that they have engaged in a cover-up that might have helped rock the very foundations of the American financial system – but this evidence will be evaluated in no court. There will be no legal proceeding whatsoever. Instead, an “individual” at the SEC, as a favor to the SEC executive director, says the SEC did no wrong…and that’s it – end of story.
Really, end of story. Because, aside from Walt Bogdanich at The New York Times (a paper that won’t call an “outrage” by its proper name, and which seems incapable of printing the words “naked short selling”), no mainstream journalist seems to give a flying hoot.
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Contact Mark Mitchell at [email protected]