The federal government spent years persecuting a company lawyer who dutifully uncovered and disclosed wrongdoing by a company employee, as I discuss below. But as The New York Times’ Joe Nocera noted yesterday, the government can’t be bothered to prosecute anyone at MF Global, which stole vast sums of money entrusted to it by its clients, committing an obvious crime. (MF Global was headed by former New Jersey Governor and Goldman Sachs CEO Jon Corzine, a high-profile supporter of the Obama administration.) As Nocera notes, MF Global executives looted their customers:
In late October, during the final, desperate days before it entered bankruptcy proceedings, its executives took money from segregated customer accounts — money that belonged not to MF Global but to the farmers and commodities traders that were its clients — and used it to prop up its rapidly collapsing business. Nor was this petty cash: of the $6.9 billion in customer assets that MF Global held, a stunning $1.6 billion is missing. There is virtually no chance that the full amount will ever be recovered.
Let’s not mince words here. These executives committed a crime. Virtually every knowing violation of the Commodities Exchange Act is a crime, but taking money from segregated customer accounts is at the top of the list. And for good reason. Customer money is supposed to be sacrosanct. If a broker-dealer goes bankrupt, the segregated accounts are supposed to remain safe, a little like the way bank deposits remain protected if a bank goes under. Indeed, customers need to be able to trust the fact that their money is segregated and protected at all times. Otherwise, the markets can’t function.
Earlier, the Obama administration used the AIG bailout to give billions in legally unnecessary payments to Goldman Sachs, which is so rich that it has admitted it didn’t even need the money. Goldman Sachs, one of the Democratic Party’s biggest donors, used its political connections to reap record profits. Now, Goldman Sachs has come under criticism from a senior employee for ripping off its own clients.
Greg Smith, an executive director at Goldman Sachs, published a devastating op-ed blasting the company in today’s New York Times, charging that it has lost all integrity and doesn’t serve its customers, and saying that he is quitting his job today. These days, he says, the way to rise in the ranks at Goldman is by “persuading your clients to invest in the stocks or other products that we are trying to get rid of.” In internal meetings at Goldman Sachs, “not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them.” “It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets.'” “These days, the most common question I get from junior analysts about derivatives is, ‘How much money did we make off the client?'”
While the government turns a blind eye to the guilty, it persecutes the innocent for exposing wrongdoing, as a recent Bloomberg News story illustrates:
When Theodore Urban, general counsel at Ferris, Baker Watts Inc., spotted and questioned a broker’s suspicious trading patterns in 2007, he triggered a five-year probe by U.S. regulators who said he failed as a supervisor.
After the U.S. Securities and Exchange Commission began its investigation, Urban, who had worked at the SEC and U.S. Commodity Futures Trading Commission before joining the broker-dealer, said he had urged senior executives to fire the broker.
Even though an administrative law judge exonerated him, his ordeal didn’t end until Jan. 26, when the full commission dismissed the matter without an opinion.
In dropping the case, the commissioners didn’t explain when a compliance officer or in-house counsel at a broker-dealer or investment adviser becomes a supervisor liable for an employee’s actions. Without knowing where their responsibilities lie, compliance officers and in-house lawyers may be reluctant to report wrongdoing when they find it.