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Email Illuminates “Deep Capture” of the SEC


By some quirk of human psychology, it remains difficult for a certain segment of the population to accept the “deep capture” thesis – the notion that our nation’s regulatory bodies and parts of our media have been “captured” (at times, outright “corrupted”) by a powerful, moneyed elite. “No way,” we are told. “Maybe in Nigeria. Europe, sure. But to think it happens in America? That’s a conspiracy theory.”

Yeah? Well, read this:

That is an email to Paul Berger, then the associate director of enforcement at the Securities and Exchange Commission. The author, a Washington lawyer, is referring to Ralph Ferrara, a former SEC lawyer who apparently managed to parlay his government service into mansions, maids and millions – by way of a plum position at a law firm called Debevoise & Plimpton.

As you can see, the email was sent in January 2005, soon after the SEC had launched an investigation into alleged naked short selling, insider trading and other misconduct at Pequot Capital, a powerful hedge fund. That same month, the SEC’s lead investigator in the case, Gary Aguirre, was shut out of meetings in which the Commission’s top officials gave Pequot’s lawyers privileged information about the investigation.

By the summer of 2005, some of the SEC’s top officials, including Paul Berger, were maneuvering to have the Pequot investigation whitewashed. When Aguirre tried to interview John Mack, formerly chairman of Pequot and then CEO of Morgan Stanley, he was told to lay off because Mack’s lawyers had “juice” with Berger and SEC Director of Enforcement Linda Thomsen.

Aguirre complained about this in a formal letter to Berger. In response, Berger arranged for Aguirre to be fired – never mind that the SEC had just commended Aguirre for his “unmatched dedication.” At precisely the same time, Berger told Mack’s law firm that he was quite ready to leave public service, and that what he’d really like is to have a job at Mack’s law firm. The name of Mack’s law firm (the law firm with “juice”) was Debevoise & Plimpton – i.e., the same law firm whose multi-million dollar paychecks to former SEC officials had inspired that salivating email.

Perhaps the lawyer who sent that email was merely updating Berger on his colleague’s career trajectory. I have no evidence that the lawyer was trying to influence Berger or the SEC. But the email is a good example of the kinds of conversations that occur with disturbing regularity at our nation’s market regulator. No doubt, those maids and millions were top of mind as the SEC’s associate director of enforcement considered whether he ought to bury an investigation into some serious crimes, fire the whistleblower, and simultaneously apply for a job at the alleged criminal’s law firm.

In the summer of 2006, Aguirre wrote an 18-page letter to the U.S. Congress, blowing this scandal wide open. In this letter, Aguirre noted that his rank-and-file colleagues at the SEC believed that the naked short selling they were investigating had the “potential to seriously injure the financial markets.” So it was all the more appalling when–in November, 2006–the SEC leadership officially closed the investigation into Pequot. In doing so, the SEC said it had found no evidence of insider trading, but it said nothing about the far more serious charges of naked short selling and market manipulation.

Two U.S. Senate Committees spent more than a year looking into this matter. In multiple reports (one more than 700 pages long), Senate investigators did not refer directly to “naked short selling,” but from their descriptions of “market manipulation” and “wash sales” (which are often used to hide naked shorts) it is clear that they believed that Pequot engaged in naked short selling, and that this crime did, indeed, have the potential to “seriously injure the financial markets.”

The Senate concluded that everything about the case – the special treatment received by Pequot and Mack’s lawyers, Aguirre’s dismissal, Berger’s solicitation of Debevoise & Plimpton – was as seedy as can be.

“At worse,” the U.S. Senate stated in one report, “the picture is colored with tones of a possible cover-up.”

Last month – after naked short selling and other hedge fund tricks contributed to the biggest financial cataclysm since 1929 – the SEC inspector general issued a 191-page report confirming just about everything in the U.S. Senate reports. It is impossible to read these reports without concluding that this is the biggest scandal in the history of the SEC–a scandal that entailed a cover-up of precisely those same crimes that “severely injured” (or rather, nearly vaporized) our financial markets.

The SEC leadership responded to the inspector general last week by assigning an SEC employee, who happened to be an administrative judge, but who had no jurisdiction and was not acting in her capacity as a judge, to issue a short document stating that the SEC was innocent – that nobody had acted inappropriately in the case of Aguirre and Pequot Capital. With this document in hand, the SEC announced that it had been “cleared” by “a judge” – making it sound as if there had been some sort of official, independent ruling.

In other words, the corrupt SEC leadership tried to convince us that the corrupt SEC leadership would have the final say on whether the SEC’s leadership was corrupt. The cover-up continued. There was a time when the nation’s journalists would swarm on an abomination such as this. But, alas, there was hardly a peep from our media. Indeed, The Wall Street Journal and other publications helpfully reported that a “judge” had “cleared” the SEC leadership of wrong-doing.

But this scandal is not under the rug yet. And it might grow in magnitude. In a civil case brought by Aguirre, a federal district court ruled earlier this year that the SEC is far from “cleared,” and that it must hand over thousands of internal documents pertaining to the Pequot investigation. The SEC has largely ignored the ruling, turning over documents with much of the relevant stuff blacked out, but it is doubtful that the commission will get away with this. Tomorrow, the court will hold a hearing at which the SEC will likely be ordered to hand over more documents – including those containing evidence of the “market manipulation” (read: “naked short selling”) that helped “seriously injure the financial markets.”

Meanwhile, Paul Berger, the former associate director of enforcement who tried to bury this case, has been made partner at the law firm of Debevoise & Plimpton. I’d tell you how much he’s getting paid for his “juice,” but I hesitate to incite a citizen insurrection.

* * * * * * * *

Mark Mitchell previously worked as a writer for the Wall Street Journal editorial page, chief business correspondent for Time Magazine in Asia, and as the editor responsible for the Columbia Journalism Review’s online critique of business journalism. Send tips to mitch0033@gmail.com

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