Transcript GARY J. AGUIRRE May 30, 2006 The Honorable Chuck Hagel

SEC: Difficult to Prove
Institutional Insider Trading
“But to get the evidence to prove a violation of the
statute under which we allege insider trading is
difficult.”
Joe Cella, Head of SEC’s Office of Market
Surveillance.
Gretchen Morgenson, Whispers of Mergers Set Off
Bouts of Suspicious Trading, N.Y. Times, 26 Aug. 2006
SEC: Difficult to Prove Ponzi Schemes
“The staff told [the SEC Inspector General] that
senior SEC management did not favor the pursuit
of Ponzi schemes and other frauds that were
difficult to investigate and time-consuming to
prosecute.”
The SEC’s Impeccable Timing, The Wall Street Journal Apr. 20, 2010
SEC: Difficult to Prove Market Manipulation
“Since the almost overnight collapse of Bear
Stearns earlier this year, top-level Wall Street
executives have been pleading with regulators to
investigate what they see as efforts by short
sellers to plant false information and profit from
it…The issue is a notoriously challenging one
for the S.E.C.”
Stephanie Clifford and Jenny Anderson, S.E.C. Warns Wall Street: Stop
Spreading the False Rumors, N.Y. Times, July 14, 2008
Highly Leveraged Banks
“[A]s of 2007, the five major investment banks—
Bear Stearns, Goldman Sachs, Lehman Brothers,
Merrill Lynch, and Morgan Stanley—were operating
with … leverage ratios … as high as 40 to 1. … Less
than a 3% drop in asset values could wipe out a firm.”
The Financial Crisis Inquiry Report January 2011 xix
Hidden Leverage
“And the leverage was often hidden—in
derivatives positions, in off-balance-sheet
entities, and through “window dressing” of
financial reports available to the investing
public.”
The Financial crisis Inquiry Report January 2011 xx
Lack of Transparency
“Panic fanned by a lack of transparency of the
balance sheets of major financial institutions,
coupled with a tangle of interconnections
among institutions perceived to be ‘too big to
fail,’ caused the credit markets to seize up.”
The Financial crisis Inquiry Report, xvi, January 2011
Bear Stearns Collapse
1) Leverage, 40-1
2) Off balance sheet exposure and more leverage
through arcane derivatives not disclosed.
3) Market abuse by banks and hedge funds.
The SEC’s Clarion Call: We need this:
Why can’t the SEC make these big cases?
“There are no smoking guns …. Evidence is
almost entirely circumstantial.”
Thomas C. Newkirk, Associate Director, Division of
Enforcement, Sep. 19, 1998
So Congress Created the First Ever …
Dodd Frank’s Smoking Gun Magnet 21F (b)(1)
•
•
•
•
•
Original information of securities violation.
Voluntarily provided to SEC
Leads to a successful enforcement
More than $1 million recovery;
Whistleblower award not less than 10% or
more than 30%
• Some whistleblowers disqualified, e.g., SEC
and DOJ staff
• Appellate review of denial of the claim, but
not amount.
Criteria increasing a whistleblower’s award percentage
• significance of the information provided by the
whistleblower
• assistance provided by the whistleblower
• law enforcement interest in making a
whistleblower award
• participation by the whistleblower in internal
compliance systems.
Criteria decreasing a whistleblower’s award
percentage
• culpability of the whistleblower;
• unreasonable reporting delay by the
whistleblower;
• interference with internal compliance and
reporting systems by the whistleblower.
SEC Final Rule p. 123
What if SEC already has a case against the
company?
“Thus, a whistleblower will be eligible for an
award in a matter already under
investigation if his or her information
‘significantly contributes’ to our success.”
SEC Final Rule p. 100
Criteria for deciding if whistleblower award
in an ongoing investigation
In applying this standard, among other things,
we will look at factors such as whether the
information allowed us to bring: (1) our
successful action in significantly less time or
with significantly fewer resources; (2)
additional successful claims; or (3) successful
claims against additional individuals or
entities.
What is a smoking gun?
AS
DZ
Asks for
earnings
“tidbits”
DZ
AS
To get back
“on MSFT
ASAP”
DZ
AS
Presumed MNI
communication
35,000 option
Contracts
$18 million
MSFT Beats
Estimates
_________________________
4/6/01
4/7/01
4/9/01
4/9 - 4/11
4/20
From:
Sent:
To:
Subject
Mark Spain
Sunday, April 8, 2001, 11:08 AM
David Zilkha
RE: Any visibility on the recent quarter?
March was the best march of record. Made up the shortfall in us sub.
w2k pro major contributor. on track for revised forecast (MYR)
----Original Message-------From: David Zilkha
Sent: Saturday, April 07, 2001 11:37 PM
To:
Mark Spain
Subject: Any visibility on the recent quarter?
Hey there,
Have you heard whether we will miss estimates? Any other info?
David
“After a scathing 2007 report by the Senate criticized
the SEC’s handling of Aguirre’s Pequot investigation,
and after Aguirre dredged up the smoking gun emails and passed them along to the Senate, the FBI
and the SEC in late 2008, the SEC reopened the case
in January 2009.”
Liz Moyer, Scales of Justice Look Skewed for Rajaratnam, Samberg, May 27, 2010,
Forbes
Delivery of the Smoking Gun
(Full letter available on Government Accountability Project website)
Gregory Zuckerman and Kara Scannell,
Pequot Capital,
a Top Fund, to Close as Firm Faces Probe,
The Wall Street Journal May 29, 2009
Gretchen Morgenson, Pequot Capital and
Its Chief
Agree To Settle S.E.C. Suit for $28 Million,
N.Y. Times May 28, 2010
“Mr. Samberg and Pequot will return $18 million
in profits and interest and pay $10 million in
penalties.”
What happened to the whistleblower?
Reuters, Whistle-Blowers Awarded $1 Million In
Pequot Case, N.Y. Times, July 24, 2010
“A couple has been awarded $1 million for
information that led to an insider trading settlement
against Pequot Capital Management ... The $1 million
award is a record for a whistle-blower who
provided information in connection with an insider
trading case, the agency added.”
What happened to the fired SEC attorney?
Gretchen Morgenson, S.E.C. Pays Settlement to
Staff Lawyer It Fired, N.Y. Times June 30,
2010
“The settlement appears to be the largest
disclosed by the Merit Systems Protection
Board, the federal agency that oversees such
cases.”
Whistleblower protections
No employer may discharge, demote, suspend, threaten,
harass, directly or indirectly, or in any other manner
discriminate against, a whistleblower in the terms and
conditions of employment because of any lawful act done by
the whistleblower—
a) providing information to the SEC pursuant to WB statute;
b) participating in the process; or
c) making disclosures that under the Sarbanes-Oxley Act and
any other law, rule, or regulation subject to the jurisdiction of
the SEC.
Remedies where reprisal
Whistleblower may bring an action in the US
District Court for”
(i) reinstatement with the same seniority status
(ii) 2 times the amount of back pay with
interest; and
(iii) litigation costs, expert witness fees, and
reasonable attorneys' fees.
Confidentiality Agreements
“We caution employers that, as adopted, Rule
21F-17(a) provides that no person may take
any action to impede a whistleblower from
communicating directly with the Commission
about a possible securities law violation,
including by enforcing or threatening to
enforce a confidentiality agreement.”
SEC Final Whistleblower Rules, p. 33
12
“GOD-GIVEN MARKETS”
Manipulation of the markets was not merely the source
of immediate stock-market profit, but the indispensable
means to innumerable tortuous schemes and devices.
Ferdinand Pecora, Wall Street Under Oath: The Story Of Our Modern
Money Changers, at 258.
It all looks alike on the ticker
“The Public was always in the dark. It could not
tell whether sales were due merely to the ‘free
play of supply and demand,’ or whether they
were the product of manipulated activities…It
all looks alike on the ticker (emphasis
added).”
Ferdinand Pecora, Wall Street Under Oath: The Story Of Our Modern
Money Changers, at 267.
In Goldman, Sachs We Trust
“The virtue of the investment trust was that it
brought about an almost complete divorce of
the volume of corporate securities outstanding
from the volume of corporate assets in
existence. The former could be twice, thrice, or
any multiple of the latter.”
John Kenneth Galbraith, The Great Crash 1929, at p. 47.