In October 2006, Gretchen Morgenson and Walter Bodganich of The New York Times began to report on the serious implications of this story.
On December 5, 2007, however, New York Times reporter Floyd Norris wrote a story that was dismissive of Mr. Aguirre's allegations and derisive of his motives ("Get a Job, then Sue Because You Were Not Hired Earlier"). Reporter Norris included no quote from Mr. Aguirre and precisely one sentence ("He contends that the S.E.C. was unwilling to go after John Mack, now the chief executive of Morgan Stanley, because of his political clout") that reflected Aguirre's position. Norris made no mention of Aguirre's deeper claims about the systematic capture of the SEC, nor about hedge funds cheating other market participants, nor about the systemic risk thereby engendered (we will see that such omissions display a remarkable regularity and near-total consistency in our mainstream financial press). However, Norris did find space to cover the SEC's position liberally, including a statement of the SEC's denial of Aguirre's claims, their reasons for that denial, the position of SEC Enforcement Director Linda Thomsen reaffirming that position, the same from an EEOC judge, two rhetorical questions aimed at deriding Mr. Aguirre's actions, and a quote from an SEC lawyer attacking Aguirre. Mr. Norris closed by saying of that attack by the SEC's own lawyer, "It certainly sounds as if that opinion was correct." Such was the fair and impartial approach taken by "our newspaper of record."
Mr. Norris and The New York Times displayed perfect timing, for that very day Gary Aguirre was to appear to testify at a Senate hearing. Notwithstanding the mocking and derisive tone taken by "our newspaper of record," the U.S. Senate Judiciary Committee went ahead with Mr. Aguirre's testimony (see parts 1 and 2). Several SEC officials appeared to refute Mr. Aguirres claims (click here). Giving testimony that drew sharp replies from the U.S. Senate Judiciary Committee members these SEC officials contradicted each other and their own email records. The Inspector General of the SEC refused to answer questions on the advice, he said, of the U.S. Department of Justice (read that again: the Internal Affairs of the SEC essentially invoked the 5th Amendments protection against self-incrimination).
When the Wall Street Journal played its normal and customary role of downplaying these events on the behalf of Wall Street, it drew a public letter from Senator Grassley rebuking them for their misdirection.
In January 2007, the Senate released a preliminary report. An AP News story by Marcy Gordon summarized:
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an official review raises serious questions about the Securities and Exchange Commission's handling of an insider-trading investigation and the possibility of a cover-up amid allegations of political interference.After taking testimony and reviewing thousands of documents, many of them provided by the SEC, the judiciary panel's preliminary findings show extraordinarily lax enforcement by the SEC and ... may even indicate a cover-up by the SEC, Senator Arlen Specter said. The SEC's handling of the matter, including a review of the attorney's allegations by the agency's inspector general, has all of the earmarks of the obstruction of justice, he said.
In March 2007, Mr. Aguirres allegations were covered sympathetically in a PBS news story.
In August 2007, the final report was released under the imprimatur of the Committee on Finance of the U. S. Senate. A good summary of the report can be found in this Reuters story.
The Senates report stated the following conclusions (emphases in the original):
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Staff Attorney Gary Aguirre said that his supervisor warned him that it would be difficult to obtain approval for a subpoena of John Mack due to his very powerful political connections. Aguirres claim is corroborated by internal SEC emails, including one from his supervisor, Robert Hanson. Hanson also told Aguirre that Macks counsel would have juice, meaning they could directly contact the Director or an Associate Director of Enforcement.
SEC management delayed Macks testimony for over a year, until days after the statute of limitations expired. After Aguirre complained about his supervisors reference to Macks political clout, SEC management offered conflicting and shifting explanations.
The SEC fired Gary Aguirre after he reported his supervisors comments about Macks political connections, despite positive performance reviews and a merit pay raise.
After being contacted by a friend in early September 2005, Associate Director Paul Berger authorized the friend to mention his interest in a job with Debevoise Plimpton. Although that was the same firm that contacted the SEC for information about John Macks exposure in the Pequot investigation, Berger did not immediately recuse himself from the Pequot probe. Berger ultimately left the SEC to join Debevoise Plimpton. When initially questioned, Bergers answers concerning his employment search were less than forthcoming.
The SECs Office of Inspector General failed to conduct a serious, credible investigation of Aguirres claims.
The conclusion of the Senate report (page 104) expands on this last point regarding the Office of the Inspector General, the part of the SECs organization tasked with preventing precisely the regulatory capture implicated in these events:
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The OIG investigation into Aguirres allegations was flawed from the beginning and hindered by missteps during the entire process. Every step seems to have been based on a desire to go through the motions and close the case. How the OIG could assess Aguirres credibility without ever speaking to him remains a mystery. One of the major problems with the OIG seems to be the perception within the SEC regarding the independence of the office and whether or not employees who approach the OIG are treated fairly. We interviewed a number of current and former SEC employees who indicated that the OIG is not well respected and that there is a general reluctance to approach the OIG with concerns. Aguirre was no exception. Based on our review, the OIG at the SEC seems to have failed in its mission. Other SEC employees perceive it as a tool of management, used for retaliatory investigations against disfavored staff.
The New York Times summarized all of this in a story with the tepid headline, S. E. C. Erred on Pequot. Indeed, if derailing investigations into wealthy elites with juice while negotiating high-flying jobs with their white shoe law firms and ensuring an Inspector General conducts a half-hearted investigation before whitewashing the cover-up-firing of an investigator too recalcitrant to go along for the ride all count as erring, then yes, The New York Times is correct, the SEC erred here.
In late July, 2007, SEC Chief Economist Chester Spatt resigned suddenly and effectively immediately. The U.S. Senate report was released on August 3, 2007. That afternoon, Walter Stachnik, Inspector General of the SEC, also resigned (according to this Forbes story he had held that position since its creation in 1989). The following Thursday, August 9, 2007, SEC Commission Roel Campos resigned as well. That same day news leaked of the impending resignation of a second commissioner, Annette Nazareth (who, as we shall see later, is tightly linked to the issues discussed here).
The SEC is overseen by seven people: five commissioners, a chief economist, and the Inspector General. On August 3, 2007 the Senate Judiciary Committee reported on its investigation into the political capture of the SEC. Within a three week period straddling that report's publication date, four of those seven (the Chief Economist, the Inspector General, and two of the five commissioners) were out. I do not know to what degree that constellation of facts is meaningful or coincidental, and I do not wish to disparage any individual's record of public service (well, actually, I do want to disparage Inspector General Stachnik's, but other than him...) In all cases, however, I trust that at this point my claim, The SEC, regulator of our nations capital markets, has been at least partially captured by financial elites, is now not as improbable as it may have initially sounded.
Given Mr. Aguirre's thorough vindication by the United States Senate Judiciary Committee and the GAO, I thought it would be interesting to ask The New York Times' Floyd Norris how he felt in retrospect about the hatchet job he had written on Mr. Aguirre. Surely a thoughtful, fair-minded journalist at "our newspaper of record" would welcome the opportunity to reflect on how his mocking and derisive attack on Aguirre looked in the soft glow of hindsight, especially given that Aguirre had risked fortune, reputation, and conceivably even his freedom, to blow the whistle on his former employer. So I wrote Mr. Norris a short note that included a link to his December 5, 2006 story, and the simple question, "How do you feel about this piece now?" The response I received from Mr. Norris was instructive:
Quote:
"I have read our story on the Senate report, but not the report itself, and that does not change my opinion on Mr. Aguirre. I did not conclude in the blog that he was or was not fired for illegitimate reasons. The Senate thinks he was, judging by the article. The blog item remains accurate, to the best of my knowledge."
In short, concerning a one-sided story that lambasted a tiny corner of Mr. Aguirre's position while ignoring its most crucial elements, and which was devoted to parroting parroting attacks on Aguirre by the SEC, its director of enforcement, its lawyer, and asked derisive rhetorical questions by and ended with a quote from Mr. Norris opining that, "It certainly sounds as if the attack on Aguirre was correct," now, in the face of a Senate report which vindicates Mr. Aguirre and is seemingly causing the disintegration of the highest echelon of the SEC, Mr. Norris can bring himself to express neither remorse nor contrition. Please stick another pin in this as an expression of the standards of journalism thus evinced by our financial media in general and "our newspaper of record" in particular, for it is a topic to which we shall later return.
In any case, if we may assume that these claims regarding the regulatory capture of the SEC are worthy of at least tacit acceptance, then we may in good conscience turn to that alarm raised to the United States Senate by erstwhile SEC Senior Investigator Aguirre:
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our capital markets face 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 todays pools-hedge funds-have advanced and refined the practice of manipulating and cheating other market participants
Last edited by Patrick Byrne on Tue Sep 04, 2007 6:47 pm edited 35 times in total
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