Deutsche books hid $12bn losses, say staff

Πηγή: FT
By Tom Braithwaite, Kara Scannell and Michael Mackenzie
Dec 5 2012

Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bail-out, three former bank employees have alleged in complaints to US regulators.

The three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades, according to people familiar with the complaints.

All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive.

Instead, they allege, the bank’s traders – with the knowledge of senior executives – avoided recording “mark-to-market”, or paper, losses during the unprecedented turmoil in credit markets in 2007-2009.

Two of the former employees allege that Deutsche mismarked the value of insurance provided in 2009 by Warren Buffett’s Berkshire Hathaway on some of the positions. The existence of these arrangements has not been previously disclosed.

Deutsche said in a statement that the allegations were more than two and a half years old and were publicly reported in June 2011. It added that they had been the subject of “a careful and thorough investigation”, and were “wholly unfounded”.

The bank said the investigation revealed that the allegations “stem from people without personal knowledge of, or responsibility for, key facts and information”. Deutsche promised “to continue to co-operate fully with the SEC’s investigation of this matter”.

The complaints were made at different times in 2010 and 2011 independently of each other. All of the men spent hours with SEC enforcement attorneys and provided internal bank documents during multiple meetings, people familiar with the matter say.

Robert Khuzami, head of enforcement at the SEC, has recused himself from all Deutsche Bank investigations because he was Deutsche’s general counsel for the Americas from 2004 to 2009. Dick Walker, Deutsche’s general counsel, is a former head of enforcement at the SEC. The SEC declined to comment on the investigation.

Two of the former Deutsche employees have alleged they were pushed out of the bank as a result of reporting their concerns internally.

One of them, Eric Ben-Artzi, a risk manager at Deutsche, was fired three days after submitting a complaint to the SEC. In a separate complaint to the Department of Labor, he claims his dismissal was retaliation for his allegations.

Matthew Simpson, a senior trader at Deutsche, also left the company after submitting his own complaint to the SEC. Mr Simpson declined to comment. Deutsche Bank paid Mr Simpson $900,000 to settle his anti-retaliation lawsuit. Reuters reported in June 2011 that Mr Simpson had raised concerns about improper valuation of the derivatives portfolio.

The third complainant, who worked in risk management and has requested anonymity, raised his concerns to the SEC and voluntarily left the bank.

William Johnson, a former assistant US attorney, with the law firm Fried Frank, was hired by Deutsche to conduct an investigation which has now been closed.

The complainants allege that the bank misvalued the positions by failing to account for losses it faced when the market worsened. Had the proper valuations been made on the positions during the tumultuous period, they allege, the losses for the whole portfolio would have exceeded $4bn and could have risen to as much as $12bn.

“Self preservation can be a powerful motivator,” said Jordan Thomas, head of the whistleblower practice at the law firm Labaton Sucharow, who is representing Mr Ben-Artzi.

“During the financial crisis, many financial institutions faced an existential threat and the evidence suggests that Deutsche Bank crossed the line by substantially inflating the value of its credit derivatives portfolio – the largest risk area in its trading book.”

Editor's note: You might like also Bombshell: Deutsche Bank Hid $12 Billion In Losses To Avoid A Government Bail-Out

Why Does the SEC Protect Banks’ Dirty Secrets?

Illustration by Pete Gamlen

Πηγή: Bloomberg
By William D. Cohan
Oct 28 2012

Remember Richard Bowen?

He is the former senior executive at Citigroup Inc. (C) who in November 2007 issued a clarion call to his colleagues and Citi’s board that a major credit-quality problem loomed for the bank.

About William D Cohan

William D. Cohan is the author of the recently released "Money and Power: How Goldman Sachs Came to Rule the World" and the New York Times bestsellers "House of Cards" and "The Last Tycoons."More about William D Cohan

Bowen was the chief underwriter in the business unit that bought some $50 billion annually in home mortgages from third parties that were then bundled up and sold as securities to investors the world over. On Nov. 3 he sent an “urgent” e-mail to executives including Robert Rubin, the former U.S. Treasury secretary who was then chairman of the bank’s executive committee, and Gary Crittenden, the chief financial officer, raising concerns about “breakdowns in internal controls and resulting significant but possibly unrecognized financial losses existing within our organization.”

Bowen wrote that he had been “agonizing for some time” about the problem, especially since his direct superiors at the bank, whom he had warned repeatedly since he first discovered the problem in mid-2006, had done little or nothing to remedy it. What he had discovered was that 60 percent of the home mortgages that Citigroup had bought from third parties, or $30 billion, were “defective,” meaning that they didn’t meet Citigroup’s underwriting criteria. Nevertheless, they were still packaged up -- defects and all -- and sold as securities.

Almost Nothing

You know where this is going. The Citigroup executives did next to nothing. Rubin, who left the company in January 2009, told the federal Financial Crisis Inquiry Commission on April 8, 2010, that “either I or somebody else sent it to the appropriate people, and I do know factually that that was acted on promptly and actions taken in response to it.” Commission Chairman Phil Angelides asked Rubin to follow up with his commission and explain precisely what actions Citigroup took in response to Bowen’s e-mail. A few months later, Rubin’s attorneys sent a letterstating that the “e-mail was subsequently passed on to the appropriate personnel at Citigroup” and that “Citigroup should be able to provide a description of its response to Mr. Bowen’s concerns.” A Nixonian response if ever there was one.

Citigroup’s attorneys, in turn, wrote to the commission in November 2010 that the bank had responded to Bowen’s e-mail by firing “the head of the group” responsible for evaluating the credit quality of the purchased mortgages -- actually, Bowen had done that already -- and by putting in place a bunch of new “processes.” Yet according to a July 2012 article in Bloomberg Markets magazine by Bob Ivry about Sherry Hunt, who worked for Bowen, “There were no noticeable changes in the mortgage machinery as a result of Bowen’s warning.”

By the time of Rubin’s FCIC testimony, of course, Citigroup had been bailed out with $45 billion in cash from the American people, along with another $306 billion in guarantees from the federal government for a pot of the very same toxic home mortgages that Bowen had warned about. Rubin pocketed $126 million in his 10 or so years at the company. Bowen, who was stripped of his responsibilities at Citigroup soon after writing the infamous e-mail, left the company two weeks after Rubin. He now teaches accounting at the University of Texas at Dallas.

Warning Ignored

As horrific as it was for Rubin, Crittenden and others to ignore Bowen’s explicit warning, that’s not the end of the story. As part of blowing the whistle on Citigroup’s bad behavior, Bowen also alerted the Securities and Exchange Commission, the bank’s main regulator, hoping it would thoroughly investigate the “breakdowns of internal controls” and take legal action against those responsible. Before the bailout of Citigroup, he gave the SEC two long depositions and 1,000 or so pages of documents, some of which were taken from the Internet, detailing the extent of Citigroup’s problems and Bowen’s attempts to rectify them. Importantly, he said he also gave his permission for the SEC to release to the public his depositions and the revealing documents.

Naturally, the SEC did nothing to pursue Bowen’s claims before billions of taxpayer dollars were used to rescue Citigroup. But it must abide by the Freedom of Information Act, which allows the public to gain access to documents such as those Bowen provided. It has a horrendous track record of fulfilling FOIA requests in anything like a timely manner. My experience has been that the agency begrudgingly gives out the bare minimum long after I really needed it.

Earlier this year, Bloomberg’s Ivry filed a FOIA request with the SEC to get copies of Bowen’s two depositions and the 1,000 pages of documents. Ivry wanted to know just what Bowen had discovered about Citigroup’s bad behavior in the years leading up to its bailout. Initially, the SEC stonewalled, claiming that the Bowen cache amounted to Citigroup “trade secrets.”

When Ivry finally got his FOIA documents back from the SEC, he was underwhelmed. “It was a discussion about nothing and it was heavily redacted, including Bowen’s name,” Ivry told me via e-mail. Needless to say, he was unable to get any additional insight into what Bowen had uncovered and was unable to inform the rest of us.
Unreleased Documents

When I told Bowen, earlier this week, that the SEC had failed to release his documents and his testimony about Citigroup to Ivry, he was flabbergasted. For legal reasons, Bowen said, he can’t share the information directly, but he fully expected the SEC to make it available to journalists and the public. He also expected the SEC to investigate the wrongdoing.

“I’m outraged, quite frankly,” Bowen told me. “I had been told that once the investigations were concluded that my material would be available to the public via FOIA. And to hear now that the SEC has made the decision that no, it cannot be available, I know nothing about the legal side of this, but quite frankly, I’m totally outraged.”

Last week, I filed my own FOIA request for Bowen’s documents and testimony. On Oct. 22, I received an acknowledgement letter from the agency. My tracking number is 13-00937-FOIA. Trust me, I’ll let you know if the SEC gives me anything more than it gave Ivry. But I won’t be counting on it.

Too Big To Jail: Wall Street Executives Unlikely To Face Criminal Charges, Source Says

New York Attorney General Eric Schneiderman, accompanied by Attorney General Eric Holder, speaks at the Justice Department in Washington, Friday, Jan. 27, 2012, after Holder announced the formation of the Residential Mortgage-Backed Securities Working Group.

Πηγή: Huffington Post
By Ben Hallman
Sept 9 2012

A last-ditch effort by federal and state law enforcement authorities to hold Wall Street accountable for nearly bringing down the U.S. economy is unlikely to lead to any criminal charges against big bank executives, according to a source close to the investigation.

Barring a "hail mary pass," said the source, who spoke on the condition of anonymity because the investigation is still ongoing, the members of a task force President Barack Obama formed in January to investigate fraud in the residential mortgage bond industry will instead most likely bring civil lawsuits against some of the banks involved, though it isn't clear when these cases might come.

That means any penalties for those accused of fraud or other misconduct would be measured in dollars, not jail terms.

A spokesman for New York Attorney General Eric Schneiderman, a co-head of the task force and the driving force behind its formation, declined to comment.

Adora Andy, a Department of Justice spokeswoman, said in a statement that "all appropriate remedies, civil and criminal, are on the table."

"As always, if working group members uncover evidence of fraud or other illegal conduct, we will pursue such conduct aggressively," Andy said.

The subprime mortgage bubble popped more than five years ago, triggering a full-fledged economic meltdown. Since then, the question confronting regulators and government prosecutors has been whether the banks that drove the market's expansion simply made terrible business decisions, or committed fraud in order to reap short-term profits.

The Securities and Exchange Commission, in a number of civil lawsuits, has alleged the latter (as a regulatory agency, the SEC cannot bring criminal suits). But with the exception of one failed case against Bear Stearns in 2009, the Department of Justice, which historically would lead any criminal effort, has declined to criminally prosecute those who created the financial instruments built out of toxic mortgage loans.

By pooling investigative resources, it was hoped that the Justice Department, the SEC and a handful of state attorneys general, led by Schneiderman, could accomplish what the agencies had mostly failed to deliver on their own: a sense of justice, however fuzzily defined.

But from the start, the task force -- officially, the Residential Mortgage-Backed Securities Working Group -- has been dogged by critics questioning the seriousness of the effort, and by concerns that the legal timeframe in which investigators must bring cases is coming to a close.

Civil cases, if and when they are filed, could lead to large financial penalties and possibly aid for struggling homeowners. Yet it seems unlikely that such a result will satisfy those whose anger sparked the Occupy Wall Street movement, or even many middle-class Americans who may wonder how, in contrast to other financial crises, this one could end with none of the people who seemingly helped orchestrate it behind bars.

"Without accountability, the unending parade of megabank scandals will inevitably continue," Neil Barofsky, the former watchdog over the $700 billion bank bailout fund and a frequent critic of the Obama administration's response to the financial crisis, recently told The Huffington Post.

How and why the government chose this path will be the subject of debate for years to come. Some say prosecutors lacked resources. Others assert that the complexity of the financial transactions makes it virtually impossible to prove criminal intent in court, where prosecutors must convince a jury of guilt "beyond a reasonable doubt." In a civil action, by contrast, the bar is lower: jurors need only conclude that "a preponderance of evidence" indicates guilt.

One former prosecutor said a simpler human dimension may also be preventing government lawyers from filing criminal charges: the basic fear of losing a big case.

"Losing has a chilling effect, because no one wants to take a spin like that and come out on the short end," said Cliff Stricklin, a former prosecutor who worked on the Enron task force and also successfully prosecuted Qwest Communications chief executive Joseph Nacchio for accounting fraud. (Nacchio is currently serving a seven-year sentence in a federal prison.)

"[Losing a case] makes you wonder if there was indeed a crime, and if so, how you go about proving it," Stricklin said. "It is a signal to the public that either the government is jumping to conclusions or isn't competent."

CATASTROPHE OR CRIME?

Mary Jo White, a former U.S. attorney for the Southern District of New York, adheres mostly to the view that the financial crisis was a catastrophe, but not a crime. Now a prominent defense attorney at the law firm Debevoise & Plimpton, White said she thinks calls from some quarters for more criminal prosecutions are unwarranted.

"The financial crisis was so expensive and so many people were injured that one's instinct is to think that there must have been massive wrongdoing from the top on down," she said.

But criminal cases must be built on compelling evidence, not suppositions, and evidence of broad-based misconduct that would rise to that level doesn't exist, White said.

"I don't think the criticism is fair," White said.

William Black, a law professor at the University of Missouri-Kansas City and a prominent former bank regulator, is in the camp that thinks prosecutors have missed a massive opportunity.

"They don't get the whole concept of looting," he said.

Black, who worked with prosecutors to develop some of the 1,100 criminal cases that emerged from the Savings & Loan crisis of the late 1980s and early 1990s, said that Wall Street accounting fraud flows from a simple recipe: grow by buying high-interest loans, leverage the business by borrowing lots of money and keep next to nothing in reserve against losses.

"You are mathematically guaranteed to report record profits," he said.

But those profits are based on a fiction, he said, one that costs investors when the bank collapses -- and in some cases, can cost taxpayers too.

Financial firms like Goldman Sachs profited tremendously by purchasing loans described widely in the industry as "liar's loans," Black said. These loans were made without the borrower having to prove income, or even that he or she had a job.

"It makes no sense that an honest lender would ever make liar's loans," he said. Nor does it make sense that a sophisticated bank like Goldman, which runs an entire business based on the ability to calculate risk, would purchase such dangerous loans without knowing that they were toxic, he said.

Indeed, the Financial Crisis Inquiry Commission produced evidence last year which suggests that Goldman Sachs traders knew these investments were more dangerous than they were letting on to their customers. Internally, they characterized offerings as "junk" and "monstrosities" even as they offloaded the mortgage bonds onto investors, according to the report.

The SEC came to the same conclusion when investigating whether the bank had misled investors about a product known as Abacus. That probe led to a $550 million settlement in 2010.

The SEC has won $2.2 billion in penalties stemming from financial crisis-related cases, though it has been dogged by complaints -- most notably from federal judge Jed Rakoff -- that its fines are too small and that it doesn't target individuals often enough. An SEC spokesman declined comment.

Still, the agency's efforts to pursue financial crisis fraud far outstrip those of the Justice Department.

The government's lone criminal case related to the creation of complex mortgage investments came in 2009, when a federal jury declined to convict two former Bear Stearns hedge fund managers accused of lying to investors about the soundness of the securities they were selling.

Last month, the Justice Department announced that it had dropped a probe of Goldman Sachs, launched after the Senate’s Permanent Subcommittee on Investigations found that the bank sold investments "in ways that created conflicts of interest with the firm’s clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients.”

There was "not a viable basis" to bring criminal charges against the bank or its employees, the Justice Department said in a statement explaining its decision.

LAST CHANCE FOR PROSECUTORS

Obama's multi-agency mortgage task force was supposed to succeed where previous investigations had failed.

"This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans," Obama said in his State of the Union address in January.

The goal of the new unit was to drill down into the sophisticated financial instruments the banks created to package and sell mortgages in a search for fraud. But the group was met with skepticism from many legal experts, who wondered how this effort would be any different from previous investigations.

The group got off to a rocky start. Three months after its formation, it had failed even to secure office space. In May, Schneiderman told the Wall Street Journal that he wanted more resources and wished that investigators at his partner agencies would pick up the pace.

According to the Justice Department, the investigation is now in full swing.

More than 200 investigators are on the job, "devoting significant resources to investigate and prosecute misconduct by financial institutions in the origination and securitization of mortgages," the agency said in a statement.

The DOJ has issued 30 civil subpoenas in the past four months, it said, and the SEC has issued more than 300 -- though that number includes pre-existing investigations.

The New York attorney general's office, HuffPost previously reported, is now investigating several major institutions.

But if none of these cases yield a criminal indictment, who, if anyone, is to blame?

Schneiderman, though he never promised criminal cases, is likely to attract some criticism for the lack of prosecutions due to his aggressive advocacy for the task force. Last year, Schneiderman led an insurgency against a robo-signing settlement shaping up between state attorneys general and five large banks. His goal, he said, was to preserve his ability to continue an investigation he had opened in the spring into possible fraud that led to the housing bubble and crash.

The states leading the negotiations dispute that Schneiderman's ability to continue his investigation was ever in doubt. Nevertheless, his initial opposition to what became a $25 billion deal led directly to the creation of the task force

Schneiderman co-leads the task force, along with Robert Khuzami, the enforcement director of the SEC; Lanny Breuer, the head of the criminal division at the Justice Department; Stuart Delery, the head of Justice's civil division; and John Walsh, the U.S. Attorney for the District of Colorado.

Though each of these entities are sharing documents and resources, it is up to the individual agencies to file charges.

The biggest challenge for Schneiderman, who took office in January 2011, was the ticking clock. Most mortgage bonds were packaged and sold in 2006 or earlier, and the statute of of limitations on most types of fraud cases is five years from the commission of the alleged wrongdoing.

It is possible to extract "tolling" agreements from a business or individual under investigation that effectively extends the allotted time in which to bring a case, in exchange for more lenient treatment. But Schneiderman would have had to enact tolling agreements in very short order after taking office. It isn't clear whether a bank or an individual would accept such an agreement in a criminal case if they knew the statute of limitations was about to run out.

It is also true that while the New York attorney general's office has the authority to bring criminal fraud cases, it historically almost never does. Like the SEC, the office instead typically files lawsuits with the expectation of wringing a settlement -- and political bragging points -- out of a Wall Street firm. It's part of the recipe that both Andrew Cuomo and Eliot Spitzer used to pave their way to a governorship.

Instead, the attorney general's office typically defers to the Department of Justice, which has a large team of experts parked in the U.S. attorney's office just a few blocks away in lower Manhattan. But instead of taking on Wall Street's top executives, that office has focused on alternate cases -- such as the recent prosecution of hedge fund king Raj Rajaratnam, who was convicted of insider trading.

Stricklin, now in private practice at the Bryan Cave law firm in Denver, said that he doesn't know whether there was criminal conduct in the run-up to the financial crisis.

"The truth is more complicated than can be explained in sound bites," he said.

But he has seen, he said, a decline in the talent level of those working white-collar cases at agencies like the Federal Bureau of Investigation and the Justice Department, which over the past decade have diverted some of the most talented people over to counterterrorism.

"The government needs to decide if it is really going to tackle white-collar crime or not, and if so it needs to allocate resources," he said.

Otherwise, the result will be fewer cases, and more losses, Stricklin said.

"It always matters to bring solid criminal cases where you are holding people accountable," he said. "But the worst signal is not to do nothing, but to do something partway."

Wells Fargo & Co. to pay $6.5 million to settle SEC charges

Wells Fargo becomes the latest bank to be held accountable by the SEC for not disclosing risks of certain investments to its customers.

Πηγή: Proactive Investors

By Carrie White
August 15 2012

Wells Fargo & Co. (NYSE:WFC) Tuesday conceded to pay over $6.5 million to settle charges by the Securities and Exchange Commission (SEC) that the bank's brokers didn't properly inform customers about the risk of mortgage-backed investments.

According to its filing, the SEC alleged that from January to August 2007, Wells Fargo sold customers asset-backed commercial paper that was structured with risky mortgage-related securities including collateralized debt obligations, that later resulted in "substantial losses" for investors after the mortgage-backed complex products defaulted.

Wells Fargo & Co will now pay to settle civil charges alleging it sold these investments to municipalities and non-profits during the financial crisis without fully disclosing the risks.

The SEC has said that broker-dealers "must do their homework" before recommending complex investments to their customers.

According to a report form the Wall Street Journal, Shawn McMurtry, a former salesman who was a VP at Wells Fargo, was suspended from the securities industry for six months and had to pay a $25,000 penalty, the SEC said.

In June, McMurtry left Wells Fargo voluntarily, a spokeswoman for the bank said.

The Wells Fargo's brokerage unit, based in Minneapolis, has agreed to settle the case without admitting or denying the charges. It will pay a $6.5 million penalty, plus $65,000 in disgorgement and more than $16,000 in prejudgment interest.

The SEC said the money will be placed into a fund for the benefit of harmed investors.

The case is one of the latest to come about as the SEC tries to hold banks accountable for their actions during the crisis. It was brought by the agency's enforcement unit that specializes in municipal securities and public pensions.

Last September, Royal Bank of Canada (TSE:RY) agreed to pay $30.4 million to settle SEC charges that it inappropriately sold unsuitable investments to five Wisconsin school districts.

In 2010, Goldman Sachs (NYSE:GS) paid $550 million to settle SEC allegations that it misled investors in sub-prime mortgage derivatives by failing to disclose certain information about the role of hedge fund Paulson & Co. Inc.

Last year, J.P. Morgan Chase & Co. (NYSE:JPM) paid $153.6 million to settle SEC charges that it misled investors in a complex mortgage securities transaction.

Goldman Sachs: the bank that thought it ruled the world

Finance sector stocks tumbled after Goldman Sachs was accused of fraud

Πηγή: The Telegraph
By Harry Wilson
July 19 2012

'Long-term greedy” was the phrase that Sidney Weinberg, Goldman Sachs’s legendary managing partner from the 1930s to the 1960s, used to describe the American investment bank’s overarching strategy. Such a pious mission statement from a corporate titan would make a modern audience balk. However the phrase neatly encapsulates the way that Goldman Sachs has operated over the past 80 years, a period in which it has risen from being a little-known, slightly scrubby broker to the world’s most profitable, powerful and controversial financial institution.

When Lloyd Blankfein, Goldman Sachs’s current chairman and chief executive, was caught saying last year that the bank was doing “God’s work”, the contrast between Goldman Sachs’s own view of its business and what the rest of the world thought of it was vividly demonstrated.

His comments came just weeks after the firm was memorably described in an article in Rolling Stone magazine as a “vampire squid wrapped around the face of humanity relentlessly jamming its blood funnel into anything that smells like money”. Doing God’s work is the last thing most think Goldman Sachs is up to.

As Philip Pullman writes in his latest book, The Good Man Jesus and the Scoundrel Christ, “As soon as men who believe they’re doing God’s will get hold of power, whether it’s a household or a village or in Jerusalem or in Rome itself, the devil enters into them.”

Last Friday, those who believed that the devil was running the show at Goldman Sachs finally received the news they had been waiting for. America’s Securities and Exchange Commission (SEC) said that it was investigating the bank for misleading investors in so-called collateralised debt obligations, a complex financial product sold by the bank during the boom years of the Noughties.

Goldman Sachs immediately hit back, saying that it would “vigorously” contest the case. However some will have found it hard to hide a feeling of Schadenfreude that at last a bank that at its peak was worth more than $100 billion (£65 billion) was finally being brought to heel.

The story of the bank over the past decade has been one of inexorable rise. In the 1980s Salomon Brothers, now part of the American banking behemoth Citigroup, was the bank to beat on the global stage. In the 1990s a cluster of largely American firms vied for supremacy after the demise of Salomon’s, brought down in part by being found guilty of rigging bond market auctions. The 2000s, however, undoubtedly belonged to Goldman Sachs.

In whichever market observers cared to look at, whether it be share trading, bond trading, corporate advisory or securities underwriting, Goldman Sachs was either at the top or running a close second. Its success was born of a combination of brutally hard work, an undoubted ability to attract the best young minds and that undefinable X-factor that comes from being acknowledged as the best game in town.

“No one ever got fired for hiring Goldman Sachs” is still one of the markets’ mantras. Indeed it has been said that the bank was often hired by companies to advise them only because they were afraid that it might end up working for a rival.

For all its reputation, there has always been at least a hint that some of Goldman Sachs’s success had less to do with its market nous and more to do with its connections. After Lehman Brothers was allowed to file for bankruptcy in September 2008, Goldman Sachs, along with Morgan Stanley, was allowed to convert itself into a bank holding company just weeks later. This gave it access to tens of billions of dollars of government lending. One did not need to be a conspiracy theorist to point out that US Treasury Secretary Henry “Hank” Paulson – the man in charge of the bail-out – was the bank’s former chief executive.

This impression was not helped when Mr Paulson selected Neel Kashkari, a youthful former Goldman Sachs executive, to run the American government’s Troubled Asset Relief Programme, the equivalent of Britain’s Asset Protection Scheme. The move put him in charge of hundreds of billions of dollars of American taxpayers’ money. Again, Goldman Sachs was a beneficiary.

The American authorities’ case against Goldman Sachs prominently features another young Goldman Sachs banker, a French-born 31-year-old called Fabrice Tourre. Mr Tourre, who referred to himself in emails published by the SEC as “the fabulous Fab”, is alleged to have sold a debt product that he knew would fail to a group of investors, mainly large banks, including ABN Amro, now part of Royal Bank of Scotland.

Mr Tourre is alleged to have allowed another Goldman Sachs client, American hedge fund Paulson & Co, to select the complex bonds that were put inside the product. The SEC alleges that Goldman Sachs did this so that Paulson & Co could make money by betting that the bonds would fall in value (Paulson & Co has not been accused of any wrongdoing).

Goldman Sachs’s strong links with hedge funds have always aroused suspicion; however, the bank has argued that it has highly effective internal “Chinese walls”, barriers that stop employees from sharing information that might allow them or a client to trade on insider information.

The significance of the latest allegations is twofold. First, they suggest that Goldman Sachs was favouring one client over another. This is particularly resonant as Paulson & Co was one of the most high-profile success stories of the financial crisis and recently the subject of a best-selling book, The Greatest Trade Ever. The book detailed how Paulson & Co founder John Paulson made billions of dollars shorting the American sub-prime market.

Second, the allegations imply that Goldman Sachs made money from the travails of its own customers. It is often pointed out that the bank makes far more money from trading with its own money than it does from advising its clients. This so-called proprietary trading involves the firm putting billions of dollars of its own capital at risk by buying stakes in assets as diverse as golf courses – the firm was once the largest owner of golf courses in Japan – to oil and ships.

In the case of the sub-prime market, it is now well-known that Goldman Sachs, unlike almost all of its Wall Street rivals, took an early decision around 2006 to begin betting against the American housing market.

The SEC’s allegations suggest that these trades might have involved not just canny positioning by the bank, but actively putting its clients into trades that it knew would lose them money.

What this means for the future of Goldman Sachs is still too early to say. At best, the bank will be one of many financial institutions that become embroiled in a series of investigations relating to this issue – Britain’s own Financial Services Authority is already reported to be starting its own investigation into the matter. Finding safety in numbers would allow Goldman Sachs to argue that it was just doing what everyone else was.

It would be more serious, however, if the SEC’s investigation remained an isolated incident. If this was the case it could mark the beginning of the end for Goldman Sachs, going the same way as other investment banks that sailed too close to the wind and sank. Who now, aside from those with a long memory and an interest in markets, remembers Salomon Brothers or Drexel Burnham Lambert?

As one Goldman Sachs partner, quoted in Charles Ellis’s history of the bank The Partnership, said: “Only looking back could we see the real risk – the risk of arrogance. We didn’t see it then, but it was there and it was growing.

“The firm was at the top. We had always been the best – always the top students and the best athletes and the class leaders. And now we were the best firm – in our self-appraisal. But that was the first step towards arrogance.”

NY judge rejects $285 million Citigroup settlement with SEC over mortgage investment

U.S. District Judge Jed Rakoff said the public has a right to know what happens in cases that touch on “the transparency of financial markets".

Πηγή: Washington Post
By AP
Nov 28 2011

NEW YORK — A judge on Monday used unusually harsh language to strike down a $285 million settlement between Citigroup and the Securities and Exchange Commission over toxic mortgage securities, saying he couldn’t tell whether the deal was fair and criticizing regulators for shielding the public from details of the firm’s wrongdoing.

U.S. District Judge Jed Rakoff said the public has a right to know what happens in cases that touch on “the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives.” In such cases, the SEC has a responsibility to ensure that the truth emerges, he wrote.

Rakoff said he had spent hours trying to assess the settlement but concluded that he had not been given “any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”

He called the settlement “neither fair, nor reasonable, nor adequate, nor in the public interest.”

The SEC shot back in a statement issued by Enforcement Director Robert Khuzami, saying the deal was all four of those things and “reasonably reflects the scope of relief that would be obtained after a successful trial.”

SEC Chairman Mary Schapiro, meanwhile, sent a letter to a key senator Monday asking for Congress to expand the agency’s authority to fine companies and individuals. She is seeking to raise the limits on fines under current law and make other changes.

Such changes would “further enhance the effectiveness of the (SEC’s) enforcement program,” Schapiro told Sen. Jack Reed, D-R.I., who heads the Senate Banking subcommittee on securities.

The SEC had accused Citigroup of betting against a complex mortgage investment in 2007 — making $160 million in the process — while investors lost millions. The settlement would have imposed penalties on Citigroup but allowed it to deny allegations that it misled investors.

Citigroup said in a statement that it disagreed with Rakoff because the proposed settlement was “a fair and reasonable resolution to the SEC’s allegation of negligence” and was consistent with long-established legal standards.

“In the event the case is tried, we would present substantial factual and legal defenses to the charges,” it added.

This wasn’t the first time that the judge struck down an SEC settlement with a bank, and Rakoff has made no secret of his disdain for settlements between the government agency and banks for paltry sums and no admission of guilt.

“The SEC’s longstanding policy — hallowed by history, but not by reason — of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact,” he wrote in Monday’s decision.

Adam Pritchard, a professor of securities law at the University of Michigan Law School, said courts could become clogged with cases that would normally be settled if other judges adopt Rakoff’s reasoning and deprive companies of their incentive to avoid trial.

He called it a powerful SEC tool to encourage settlements “and Judge Rakoff is taking that away from them.”

The SEC’s consent judgment settling the case was filed the same day as its lawsuit against Citigroup, the judge noted.

“It is harder to discern from the limited information before the court what the SEC is getting from this settlement other than a quick headline,” the judge wrote.

“In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers,” Rakoff said. “Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”

He set a July 16 trial date for the case.

Khuzami said in the SEC statement that Rakoff made too much out of the fact that Citigroup did not have to admit wrongdoing. He said forcing Citigroup to give up profits, pay fines and face mandatory business reforms outweigh the absence of an admission “when that relief is obtained promptly and without the risks, delay and resources required at trial.”

Khuzami added: “Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.”

Rakoff said the power of the judiciary was “not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated.”

He added: “If its deployment does not rest on facts — cold, hard, solid facts, established either by admissions or by trials — it serves no lawful or moral purpose and is simply an engine of oppression.”

In the civil lawsuit filed last month, the SEC said Citigroup Inc. traders discussed the possibility of buying financial instruments to essentially bet on the failure of the mortgage assets. Rating agencies downgraded most of the investments just as many troubled homeowners stopped paying their mortgages in late 2007. That pushed the investment into default and cost its buyers’ — hedge funds and investment managers — several hundred million dollars in losses.

Earlier this month, Rakoff staged a hearing in which he asked lawyers on both sides to defend the settlement.

At the hearing, Rakoff questioned whether freeing Citigroup of any admission of liability could undermine private claims by investors who stand to recover only $95 million in penalties on total losses of $700 million.

In his decision, he called the penalties “pocket change” to a company the size of Citigroup and said that, if the SEC allegations are true, then Citigroup got a “very good deal.” If they are untrue, the settlement would be “a mild and modest cost of doing business,” he said.

In 2009, Rakoff rejected a $33 million settlement between the SEC and Bank of America Corp. calling it a breach of “justice and morality.” The deal was over civil charges accusing the bank of misleading shareholders when it acquired Merrill Lynch during the height of the financial crisis in 2008 by failing to disclose it was paying up to $5.8 billion in bonuses to employees even as it recorded a $27.6 billion yearly loss.

In February 2010, he approved an amended settlement for over four times the original amount, but was caustic in his comments about the $150 million pact, calling it “half-baked justice at best.” He said the court approved it “while shaking its head.”

Citigroup’s $285 million would represent the largest amount to be paid by a Wall Street firm accused of misleading investors since Goldman Sachs & Co. agreed to pay $550 million to settle similar charges last year. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.

All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.

Rakoff’s ruling Monday was the latest in a series of setbacks for the SEC under Schapiro’s leadership. Rakoff has said he doesn’t believe the agency has been sufficiently tough in its enforcement deals with Wall Street banks over their conduct prior to the financial crisis.

The SEC told Rakoff recently that $285 million was a fair penalty, which will go to investors harmed by Citigroup’s conduct, and that it was close to what the agency would have won in a trial.

Wall Street reform law bogged down

Republicans are blocking the nomination of Richard Cordray

Πηγή: Politico
By JOSH BOAK

Oct 30 2011

President Barack Obama signed the Dodd-Frank financial reform bill into law 15 months ago, saying he was anxious to put new rules of the road in place for Wall Street.

But federal agencies have blown about 77 percent of the rule-making deadlines for the massive overhaul, according to a recent progress report by the law firm Davis Polk — meaning key parts of the bill are far from implementation.

Some Democratic officials see a Republican plot afoot to run out the clock, in hopes that a GOP-controlled Senate and White House can overturn the reforms. But one top Treasury official said the missed deadlines are less of a concern to the administration than the possibility that a rushed process would result in poor regulations.

“We want quality and speed, but we’re not going to sacrifice quality for speed,” Deputy Treasury Secretary Neal Wolin told POLITICO. “We want to make sure that we do these rules in a thorough way.”

In some cases, Wolin said, politics are slowing down the process. Senate Republicans are blocking the nomination of Richard Cordray to head the new Consumer Financial Protection Bureau unless changes in governance are made to the agency. GOP lawmakers also have introduced bills to repeal all or part of the 848-page Dodd-Frank law.

“There are certainly some who’ve sought to delay or roll back provisions of Dodd-Frank or slow things down,” Wolin said. “We don’t think that’s helpful. What’s important now is we go about the business of putting in place a stronger financial system that will better protect our country.”

Republicans push back against the charge, saying that regulators are simply unable to write regulations from the law in a timely or effective way.

Obama has tried to spark more movement on the reforms by taking his case directly to the public in speeches and news conferences.

“What we’ve seen over the last year,” he said at a news conference this month, “is not only did the financial sector — with the Republican Party in Congress — fight us every inch of the way, but now, you’ve got these same folks suggesting that we should roll back all those reforms and go back to the way it was before the crisis.”

But a strategy that largely depends on standing behind a podium and shaming his opponents is unlikely to save the reforms from being killed or delayed, said Arthur Levitt, who was chairman of the Securities and Exchange Commission in the Clinton administration.

“A president that wants something as complex as this to take place has to devote an incredible amount of his resources and political capital to getting it done,” he said. “Left to the legislators and regulators, it will sink and rot in the miasma of dialogue and debate.”

In putting together the rules, regulators are sorting through thousands of comment letters and answering questions at congressional hearings and meetings with executives and lobbyists from the financial services industry. The sheer volume of activity makes it hard to act quickly or decisively, lending credence to worries that Republicans are obstructing progress.

“They hate it; they’re afraid to take it head on, so they’re trying to slow it down in hopes they take over the White House,” said Rep. Barney Frank (D-Mass.), one of the architects of the 2010 law.

Bart Chilton, who as a member of the Commodity Futures Trading Commission is among the regulators approving the new rules, said getting input from investment firms is critical, but some have less than helpful intentions.

“There are some people who all they want to do is run the clock out,” said Chilton, one of three Democratic commissioners. “Their goal isn’t thoughtful regulation, it’s no regulation.”

Republican staffers said there is no grand strategy for holding up regulations, emphasizing that their goal is to dismantle the law.

“If that is one of the side consequences, that’s not a terrible thing from our perspective,” a GOP Senate aide said. “We would rather most of these not happen in the first place. … Some people might be looking at it with 2012 in mind, but I don’t think that’s the primary thing.”

Much of the blame for the delay, Republicans said, rests squarely with federal agencies that lack the ability to meet the schedule set up by the law.

“The bad thing is that the deadlines are not reasonable or realistic,” said a Republican congressional aide. “The delay is from the regulators. We’re not controlling them.”

One financial industry executive said the law touches on so many parts of the economy that both sides have a fair point. Reasons for the delay can range from the intricacies of a regulation to partisan disputes to the roadblocks put up by investment firms to insufficient funding for regulators.

“There’s a whole mosaic of why the deadlines are being missed,” the executive said.

For example, the proposed Volcker rule introduced by agencies this month contributed to a sense of confusion. It came decked out with a 215-page preamble, 384 footnotes and requests for comment on 394 specific issues, the American Bankers Association said.

Named after former Federal Reserve Chairman Paul Volcker, it limits banks to proprietary trading that isn’t on behalf of their clients. The dense proposal failed to clarify the difference between proprietary trading and legitimate trading by banks to hedge risk or keep markets liquid.

Ken Bentsen, executive vice president for public policy at the Securities Industry and Financial Markets Association, fears that without sharp guidelines, the government could penalize banks for trading they believe was legal.

“What you think was allowed, you find out in the rearview mirror that it was not allowed,” he said.

Public Citizen, a watchdog group calling for greater Wall Street oversight, shared similar concerns about the vagueness of the proposal, but called it an “invitation for evasion” by banks.

According to the administration, the questions in the proposals show that agencies are being inclusive and responsive.

Republican lawmakers claim that regulators have not been exhaustive enough in assessing the potential economic impact of the rules.

After an investigation by inspectors general at the SEC and the CFTC, among other agencies, Sen. Mike Crapo (R-Idaho) expressed concern in June “that there are no uniform cost-benefit requirements for our financial regulators that focus on economic growth, job creation or competitiveness.”

Former SEC Commissioner Paul Atkins said the fundamental problem lies with Dodd-Frank itself, which he said forces regulators to climb “unscalable mountains” and issue rulings that are certain to face challenges in court.

The newly created Financial Stability Oversight Council, he said, faces the nearly impossible task of monitoring and quarantining “too big to fail” institutions. Atkins is skeptical that new entities such as the council can provide the kinds of safeguards being promised by the administration.

“Dodd-Frank,” he said, “is infused with this philosophy that a cabal of people like the oversight council can peer into the future at where a bubble is growing and prick it.”


Republican staffers said there is no grand strategy for holding up regulations, emphasizing that their goal is to dismantle the law.

“If that is one of the side consequences, that’s not a terrible thing from our perspective,” a GOP Senate aide said. “We would rather most of these not happen in the first place. … Some people might be looking at it with 2012 in mind, but I don’t think that’s the primary thing.”

Much of the blame for the delay, Republicans said, rests squarely with federal agencies that lack the ability to meet the schedule set up by the law.

“The bad thing is that the deadlines are not reasonable or realistic,” said a Republican congressional aide. “The delay is from the regulators. We’re not controlling them.”

One financial industry executive said the law touches on so many parts of the economy that both sides have a fair point. Reasons for the delay can range from the intricacies of a regulation to partisan disputes to the roadblocks put up by investment firms to insufficient funding for regulators.

“There’s a whole mosaic of why the deadlines are being missed,” the executive said.

For example, the proposed Volcker rule introduced by agencies this month contributed to a sense of confusion. It came decked out with a 215-page preamble, 384 footnotes and requests for comment on 394 specific issues, the American Bankers Association said.

Named after former Federal Reserve Chairman Paul Volcker, it limits banks to proprietary trading that isn’t on behalf of their clients. The dense proposal failed to clarify the difference between proprietary trading and legitimate trading by banks to hedge risk or keep markets liquid.

Ken Bentsen, executive vice president for public policy at the Securities Industry and Financial Markets Association, fears that without sharp guidelines, the government could penalize banks for trading they believe was legal.

“What you think was allowed, you find out in the rearview mirror that it was not allowed,” he said.

Public Citizen, a watchdog group calling for greater Wall Street oversight, shared similar concerns about the vagueness of the proposal, but called it an “invitation for evasion” by banks.

According to the administration, the questions in the proposals show that agencies are being inclusive and responsive.

Republican lawmakers claim that regulators have not been exhaustive enough in assessing the potential economic impact of the rules.

After an investigation by inspectors general at the SEC and the CFTC, among other agencies, Sen. Mike Crapo (R-Idaho) expressed concern in June “that there are no uniform cost-benefit requirements for our financial regulators that focus on economic growth, job creation or competitiveness.”

Former SEC Commissioner Paul Atkins said the fundamental problem lies with Dodd-Frank itself, which he said forces regulators to climb “unscalable mountains” and issue rulings that are certain to face challenges in court.

The newly created Financial Stability Oversight Council, he said, faces the nearly impossible task of monitoring and quarantining “too big to fail” institutions. Atkins is skeptical that new entities such as the council can provide the kinds of safeguards being promised by the administration.

“Dodd-Frank,” he said, “is infused with this philosophy that a cabal of people like the oversight council can peer into the future at where a bubble is growing and prick it.”

Citigroup to Pay Millions to Close Fraud Complaint

Robert Khuzami of the S.E.C. said the bank should have been more forthcoming.

Πηγή: New York Times

By Edward Wyatt

Oct 19 2011

WASHINGTON — As the housing market began its collapse, Wall Street firms and sophisticated investors searched for ways to profit. Some of them found an easy method: Stuff a portfolio with risky mortgage-related investments, sell it to unsuspecting customers and bet against it.

Citigroup on Wednesday agreed to pay $285 million to settle a civil complaint by the Securities and Exchange Commission that it had defrauded investors who bought just such a deal. The transaction involved a $1 billion portfolio of mortgage-related investments, many of which were handpicked for the portfolio by Citigroup without telling investors of its role or that it had made bets that the investments would fall in value.

In the four years since the housing market began its steady descent, securities regulators have settled only two cases related to the financial crisis for a larger sum of money. This is also the third case brought by the S.E.C. accusing a major Wall Street institution of misleading customers about who was putting together a security and about their motive. Goldman Sachs and JPMorgan Chase & Company both settled similar cases last year.

The settlement will refund investors with interest and include a $95 million fine — a relative pittance for a giant like Citigroup. On Monday, the company reported that in the third quarter alone it earned profits of $3.8 billion on revenue of $20.8 billion. The settlement may also have trouble getting approval from Jed S. Rakoff, the federal district judge in New York who must ultimately sign off on the fine and who has taken a hard line on S.E.C. settlements.

Neither the S.E.C. nor the Justice Department would say whether the case raised questions about whether Citigroup had been involved in any criminal wrongdoing. But the case highlights a growing frustration felt by foreclosed homeowners, investors and Wall Street protesters alike that few, if any, senior banking executives have faced criminal charges for losses growing out of the financial crisis.

Citigroup has settled one case stemming from the crisis. Last year, it agreed to pay $75 million to settle federal claims that it hid from investors vast holdings of subprime mortgage investments that were losing value during the crisis and that ultimately prompted the federal government to rescue the bank.

“The securities laws demand that investors receive more care and candor than Citigroup provided” to investors in the security, said Robert Khuzami, director of the S.E.C.’s enforcement division, referring to Wednesday’s action. “Investors were not informed that Citigroup had decided to bet against them and had helped to choose the assets that would determine who won or lost.”

The complex amalgamation of investments known as Class V Funding III produced $126 million in profits for Citigroup’s brokerage subsidiary, and another $34 million in fees for putting it together. All of that, including interest and the $95 million fine, will now be going back to the investors; the government will not receive anything.

In a statement, Citigroup noted that the S.E.C. did not charge it with “intentional or reckless misconduct.” Rather, it settled charges that its actions were negligent and misleading to investors. Despite its profits on the current deal, over all Citigroup lost tens of billions of dollars on its holdings of mortgage-related investments.

“We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly,” the company said in a statement. “Since the crisis, we have bolstered our financial strength, overhauled the risk management function, significantly reduced risk on the balance sheet and returned to the basics of banking.”

The S.E.C. on Wednesday also brought a case against Credit Suisse, which played a smaller role in the transaction, and against one individual at each company. But those individuals were midlevel employees in each company’s investment and trading departments; no senior executives at either company were charged.

Credit Suisse, which managed the portfolio of mortgage bonds that served as collateral for the deal, agreed to pay $2.5 million, half of it in penalties, to settle the case. The company declined to comment.

Samir H. Bhatt, 37, a former portfolio manager at Credit Suisse, also agreed to settle, paying no fine but agreeing to a six-month suspension from association with any investment adviser.

Only Brian H. Stoker, 40, a former Citigroup employee who was primarily responsible for putting together the deal, has decided to fight the S.E.C.’s case. He left Citigroup in 2008.

“There is no basis for the S.E.C. to blame Brian Stoker for these alleged disclosure violations,” said Fraser L. Hunter Jr., a lawyer at WilmerHale who is representing Mr. Stoker. “He was not responsible for any alleged wrongdoing — he did not control or trade the position, did not prepare the disclosures and did not select the assets. We will vigorously defend this lawsuit.”

Mr. Stoker joined Citigroup at the height of the housing boom in 2005, and worked as a director on the structured product desk. His job tasks were largely behind the scenes, crunching numbers and assembling deals like Class V Funding III.

After the deal closed on Feb. 28, 2007, more than 80 percent of the portfolio was downgraded by credit ratings agencies in less than nine months. The security declared “an event of default” on Nov. 19, 2007, and investors soon lost hundreds of millions of dollars, the S.E.C. said, while Citigroup gained.

Among the losers was Ambac of New York, which insured financial instruments and was the largest investor in the deal, according to the S.E.C. Ambac’s role in the transaction was to assume the credit risk associated with a $500 million portion of the portfolio. When the value of the portfolio fell, Ambac had to make payments to those who had bet against the bonds, as Citigroup had.

In part because of losses tied to the financial crisis, Ambac filed for bankruptcy last year.

Criminal prosecutions related to the financial crisis have been few. Two former Credit Suisse brokers were sentenced to jail in their roles for misleading clients about purchases and thus inflating their sales commissions. Six executives at a mortgage company, Taylor, Bean & Whitaker, have pleaded guilty in a scheme to issue false mortgages to obtain federal mortgage money and bank bailout funds. Lee B. Farkas, a former chairman of Taylor Bean, was sentenced to 30 years in prison for his role in the case, which resulted in the demise of Colonial Bank of Montgomery, Ala.

Those crimes started long before the financial crisis. A prosecution of two former executives of Bear Stearns, the failed investment bank, ended in acquittals.

Revealed: Secret world of global oil and mining giants

‘Natural resources should help poor nations escape poverty but secrecy shrouds profits.’

Πηγή: The Bureau of Investigative Journalism
By Nick Mathiason
Sep. 19 2011


Ten of the world’s most powerful oil, gas and mining companies own a staggering 6,038 subsidiaries with over a third located in ‘secrecy jurisdictions’.

As a growing number of international think-tanks and campaign groups demand action to prevent an estimated $1 trillion flooding out of developing, but resource-rich countries, attention is focusing on states like Delaware in the US and the Netherlands.

Defined as secrecy jurisdictions, these are places where there are few requirements for companies to publish accounts and beneficial ownership details among a host of other key disclosures, which as a result can be kept hidden from public view.

Trawling annual reports and stock exchange filings of companies such as BP, Glencore and ExxonMobil, a five month investigation by Publish What You Pay Norway (PWYPN) found that:

2,083 (34.5%) of the 6,038 subsidiaries belonging to just 10 of the world’s most powerful extractive industry companies are incorporated in secrecy jurisdictions.
The global extractive industry’s favourite place to incorporate is by far the US state of Delaware with 15.2% of all subsidiaries located there.
The second favourite extractive industry company secrecy jurisdiction is the Netherlands, where 358 subsidiaries belonging to oil and mining giants are based.
Chevron is the most opaque extractive industry company in this study. 62% of Chevron’s 77 subsidiaries are located in secrecy jurisdictions. ConocoPhillips is the second most opaque oil and gas major in this report with 57% of its 536 subsidiaries incorporated in secrecy jurisdictions.

Glencore International AG is the most opaque mining company in the Piping Profitssurvey with 46% of its 46 subsidiaries incorporated in secrecy jurisdiction

None of the companies are breaking any laws nor any regulatory requirements of stock market listings. But the disclosure of the enormous scale of the $1.8 trillion extractive industry’s reliance on opaque locations comes as pressure mounts on US and EU policymakers to come up with so-called Country-by-Country Reporting (CBCR) measures to counter corruption and aggressive tax avoidance.

This would force companies to reveal key financial information – revenues, profits, taxes paid and reserved used – in every country where they do business. Currently EI giants ‘consolidate’ this information in one set of accounts. This makes it impossible for citizens in resource rich countries to get an accurate picture of how much oil, gas or minerals is extracted, how much is left and what kind of deal their country has struck for them.

In America, the Securities and Exchange Commission (SEC) is currently deciding how to adopt the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that forces all US listed companies to report detailed payments to any state it operates on a project-by-project basis.

Next month, the European Commission is expected to introduce similar legislation in the EU parliament. But there are serious concerns that the measures will be watered down before they become law.

Corporate secrecy harms poor nations

Mona Thowsen, national co-ordinator of Publish What You Pay Norway, said: ‘What this study shows is that the extractive industry ownership structure and its huge use of secrecy jurisdictions may work against the urgent need to reduce corruption and aggressive tax avoidance in this sector.

‘This is why there is a large and growing body of opinion throughout the world now demanding the introduction of CBCR because it is a vital tool to reduce corruption, secrecy and aggressive tax avoidance that particularly harms people in developing and emerging economies.’

The report, Piping Profits also involved journalists from Bolivia and Ecuador attempting to establish key financial and operational performance information from strategically important natural resource companies in their countries. However a month-long concerted attempt to gain information from companies yielded nothing, reflecting the veil of secrecy which citizens face in the campaign to find out what is happening to their resources.

‘I always heard it was very complex – and sometimes even dangerous – to obtain financial information about Extractive Industry activities,’ said Bolivian Marco Escalera, co-ordinator for major Southern Hemisphere campaign group Somos Sur, after spending six weeks attempting to draw out key financial information from EICs operating in his country.

‘Whether it is the extractive industries or the state itself, they close ranks against the common enemy: civil society questions. The story is repeated over and over again: Access to timely and reliable information is not good enough.’

Both Delaware and the Netherlands are attractive to corporations. Over 900,000 companies – more than its human population – choose Delaware as a place to incorporate. The Netherlands is the the largest host of conduit companies worldwide and is an important jurisdiction for shifting corporate debt around the same organisation.

Is the SEC Covering Up Wall Street Crimes?

Πηγή: RollingStone
By MATT TAIBBI

AUGUST 17, 2011

A whistle-blower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals.

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation's worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 ... including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or "Matters Under Inquiry" – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI."

Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.

The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission's records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission's improprieties.

As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC's inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating. In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.Much has been made in recent months of the government's glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn's accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been "infected with the Goldman mindset from within."

The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It's a symptom of the agency's terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America's banks fell and hit their head on a big pile of Wall Street's money – a blow from which the agency has never recovered. "From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," says Sen. Chuck Grassley, the ranking Republican on the Senate Judiciary Committee, whose staff has interviewed Flynn. "It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law."

How did officials at the SEC wind up with a faithful veteran employee – a conservative, mid-level attorney described as a highly reluctant whistle-blower – spilling the agency's most sordid secrets to Congress? In a way, they asked for it.

On May 18th of this year, SEC enforcement director Robert Khuzami sent out a mass e-mail to the agency's staff with the subject line "Lawyers Behaving Badly." In it, Khuzami asked his subordinates to report any experiences they might have had where "the behavior of counsel representing clients in... investigations has been questionable."

Khuzami was asking staffers to recount any stories of outside counsel behaving unethically. But Flynn apparently thought his boss was looking for examples of lawyers "behaving badly" anywhere, including within the SEC. And he had a story to share he'd kept a lid on for years. "Mr. Khuzami may have gotten something more than he expected," Flynn's lawyer, a former SEC whistle-blower named Gary Aguirre, later explained to Congress.

Flynn responded to Khuzami with a letter laying out one such example of misbehaving lawyers within the SEC. It involved a case from very early in Flynn's career, back in 2000, when he was working with a group of investigators who thought they had a "slam-dunk" case against Deutsche Bank, the German financial giant. A few years earlier, Rolf Breuer, the bank's CEO, had given an interview to Der Spiegel in which he denied that Deutsche was involved in übernahmegespräche – takeover talks – to acquire a rival American firm, Bankers Trust. But the statement was apparently untrue – and it sent the stock of Bankers Trust tumbling, potentially lowering the price for the merger. Flynn and his fellow SEC investigators, suspecting that investors of Bankers Trust had been defrauded, opened a MUI on the case.A Matter Under Inquiry is just a preliminary sort of look-see – a way for the SEC to check out the multitude of tips it gets about suspicious trades, shady stock scams and false disclosures, and to determine which of the accusations merit a formal investigation. At the MUI stage, an SEC investigator can conduct interviews or ask a bank to send in information voluntarily. Bumping a MUI up to a formal investigation is critical, because it enables investigators to pull out the full law-enforcement ass-kicking measures – subpoenas, depositions, everything short of hot pokers and waterboarding. In the Deutsche case, Flynn and other SEC investigators got past the MUI stage and used their powers to collect sworn testimony and documents indicating that plenty ofübernahmegespräche indeed had been going on when Breuer spoke to Der Spiegel. Based on the evidence, they sent an "Action Memorandum" to senior SEC staff, formally recommending that the agency press forward and file suit against Deutsche.

Breuer responded to the threat as big banks like Deutsche often do: He hired a former SEC enforcement director to lobby the agency to back off. The ex-insider, Gary Lynch, launched a creative and inspired defense, producing a linguistic expert who argued thatübernahmegespräche only means "advanced stage of discussions." Nevertheless, the request to proceed with the case was approved by several levels of the SEC's staff. All that was needed to move forward was a thumbs-up from the director of enforcement at the time, Richard Walker.

But then a curious thing happened. On July 10th, 2001, Flynn and the other investigators were informed that Walker was mysteriously recusing himself from the Deutsche case. Two weeks later, on July 23rd, the enforcement division sent a letter to Deutsche that read, "Inquiry in the above-captioned matter has been terminated." The bank was in the clear; the SEC was dropping its fraud investigation. In contradiction to the agency's usual practice, it provided no explanation for its decision to close the case.

On October 1st of that year, the mystery was solved: Dick Walker was named general counsel of Deutsche. Less than 10 weeks after the SEC shut down its investigation of the bank, the agency's director of enforcement was handed a cushy, high-priced job at Deutsche.

Deutsche's influence in the case didn't stop there. A few years later, in 2004, Walker hired none other than Robert Khuzami, a young federal prosecutor, to join him at Deutsche. The two would remain at the bank until February 2009, when Khuzami joined the SEC as Flynn's new boss in the enforcement division. When Flynn sent his letter to Khuzami complaining about misbehavior by Walker, he was calling out Khuzami's own mentor.

The circular nature of the case illustrates the revolving-door dynamic that has become pervasive at the SEC. A recent study by the Project on Government Oversight found that over the past five years, former SEC personnel filed 789 notices disclosing their intent to represent outside companies before the agency – sometimes within days of their having left the SEC. More than half of the disclosures came from the agency's enforcement division, who went to bat for the financial industry four times more often than ex-staffers from other wings of the SEC.Even a cursory glance at a list of the agency's most recent enforcement directors makes it clear that the SEC's top policemen almost always wind up jumping straight to jobs representing the banks they were supposed to regulate. Lynch, who represented Deutsche in the Flynn case, served as the agency's enforcement chief from 1985 to 1989, before moving to the firm of Davis Polk, which boasts many top Wall Street clients. He was succeeded by William McLucas, who left the SEC in 1998 to work for WilmerHale, a Wall Street defense firm so notorious for snatching up top agency veterans that it is sometimes referred to as "SEC West." McLucas was followed by Dick Walker, who defected to Deutsche in 2001, and he was in turn followed by Stephen Cutler, who now serves as general counsel for JP Morgan Chase. Next came Linda Chatman Thomsen, who stepped down to join Davis Polk, only to be succeeded in 2009 by Khuzami, Walker's former protégé at Deutsche Bank.

This merry-go-round of current and former enforcement directors has repeatedly led to accusations of improprieties. In 2008, in a case cited by the SEC inspector general, Thomsen went out of her way to pass along valuable information to Cutler, the former enforcement director who had gone to work for JP Morgan. According to the inspector general, Thomsen signaled Cutler that the SEC was unlikely to take action that would hamper JP Morgan's move to buy up Bear Stearns. In another case, the inspector general found, an assistant director of enforcement was instrumental in slowing down an investigation into the $7 billion Ponzi scheme allegedly run by Texas con artist R. Allen Stanford – and then left the SEC to work for Stanford, despite explicitly being denied permission to do so by the agency's ethics office. "Every lawyer in Texas and beyond is going to get rich on this case, OK?" the official later explained. "I hated being on the sidelines."

Goldman Sachs probed for involvement with Libyan government

Πηγή: The Bureau of Investigative Journalism
by The Bureau

August 10th, 2011

An investigation is underway into Goldman Sachs’ dealings with Libya’s sovereign fund, the Libyan Investment Authority (LIA).

Goldman’s compliance with the US Foreign Corrupt Practices Act is being examined following an enquiry by the Securities Exchange Commission (SEC) into whether banks, hedge funds and private-equity firms paid for access to government-run funds.

Forbes and the Telegraph reported in May that the LIA had entrusted $1.3bn to Goldman Sachs in 2007, of which the investment bank lost approximately 98%.

In return for the failed investments, Goldman Sachs offered enraged Libyan officials large stakes in the company and other investment options including, ‘preferred shares, unsecured debt, a special purpose vehicle in the Cayman Islands, and investments in credit default swaps.’

The Foreign Corrupt Practices Act forbids US companies from paying bribes to officials of overseas governments. Agents working with sovereign wealth funds can be considered government officials.

Goldman have given no further details about the investigation and the SEC declined comment.

The report is one of many looking at investment banks’ involvement with North African countries in the aftermath of the Arab Spring.

Earlier this year the Bureau and the Guardian reported on practices by HSBC in Egypt, which enabled the enrichment of senior government officials.

Reuters also reported in January that Tunisia’s first Islamic bank, Ziytouna Bank, was put under the control of the central bank. The bank is owned by Sakher Materi, the son-in-law of deposed leader Ben Ali.