west bashing the SEC 2
Two days later Westergaard was advised that he would be personally charged with securities fraud. Until the SEC learned about Westergaard's health condition there had not been a hint that personal charges would be brought. The alleged reason for bringing the personal chargbe was that as a contributing editor Westergaard had relayed to the webmaster the decision to change Westergaard Broadcasting Network.com's marketing philosophy and therefore the need to alter the disclosure statement.
From that point the SEC's focus was on John Westergaard personally. On December 27, 2000, Westergaard was charged in federal court with securities fraud. As a measure of how important the Commission considered the case -- which speaks to the fact that it was not about 17(b) but about First Amendment -- seven staff lawyers were on the SEC end of a conference call with Westergaard's counsel Bob Arnold when advising him of the decision to file charges.
The target of the SEC's action had thus become no longer the alleged perpetrator of the fraud as originally charged on May 26, 2000 -- namely the two corporate entities -- but the messenger of the alleged fraud who had been singled out weeks later for passing on instructions to the webmaster.
Having destroyed Westergaard financially -- his entire net worth had been tied up in the company -- and considering his medical condition, the Commission was confident that he did not have the will nor the resources to pursue vindication in Federal Court.
They were correct about the resources but not about his will to fight and they hadn't counted on his stubbornness and eventually the extraordinary goodwill of a prestigious lawyer associated with a leading New York firm who appeared literally out of nowhere with an offer to take the case pro-bono.
Upon being advised that this certain individual and firm -- Paul Curran of the New York firm of Kaye Scholer LLP, a former Attorney for the Southern District, New York (one of the half dozen most prestigious U.S. law enforcement positions), former Special Counsel to the Justice Department in the Carter White House drug investigation, and once Republican primary candidate for Governor of New York State -- was taking charge of the case, the SEC quickly folded. It proposed to withdraw the 10b-5 fraud charge if Westergaard would sign a consent decree neither admitting nor denying the 17(b) "jaywalking" violation.
That was easy. Westergaard had from the beginning admitted instructing the webmaster to delete the dollar amount from the disclosure statement. If the SEC was to consider that to have been a 17(b) violation, so be it. It was a jaywalking equivalent violation hardly worth fighting over. A consent decree on 17(b) could have been settled when the matter first came up May 26, 2000 and saved taxpayers and others somewhere in the neighborhood of one million dollars spent pointlessly, and that says nothing about the tens of millions of dollars lost by shareholders.
Ironically, in the interim between May 26 and December 26, 2000 the SEC had changed policy on ratcheting up violations of section 17(b) of the '33 Act to allegations of fraud under section 10b-5 of the '34 Act. This policy employed by the Enforcement Division whereby minor 17(b) violations were upgraded to 10b-5 fraud had become an issue at the Commission level (there are five appointed Commissioners).
When on August 10, 2000 the Commissioners by a 3 to 1 vote passed a new Full Disclosure Regulation referred to as "FD" having to do with simultaneous public access to information provided by corporations to security analysts, The Wall Street Journal noted the following morning:
"Mr. Levitt said several revisions were made to satisfy concerns of Commissioner Isaac Hunt, who agreed to support the measure only in the past several days. For instance, the final draft makes it clear that violating disclosure rules isn't considered fraud."
Thus, whereas following issuance of Regulation FD on August 10, 2000 a violation of SEC disclosure rules was not to be considered fraud, Westergaard was nonetheless to be charged with fraud in federal court four months later for precisely such a violation. The Westergaard case had in effect been grandfathered.
Spring 2001: It ain't over 'til it's over!
With Westergaard having agreed to sign a consent decree for the regulatory equivalent of jaywalking, one might assume the matter would have closed without further contention. Not so! The SEC would not let go!!! It demanded penalties in the form of a permanent injunction allowing the Commission to assess Westergaard's future income were he to recover financially.
Upon advice of Mr. Curran, Westergaard refused. The case went to court June 29, 2001 before Federal Judge Deborah A. Batts, Southern District, New York. In the course of a 40 minute meeting in her chambers attended by Paul Curran and Joseph Hansen of Kaye Scholer LLP representing Westergaard and SEC staff lawyers John Hunter, Kelly McCormick and Jason Gettinger, Judge Batts crossed out the unacceptable section on penalties and implied in the margin in strong language that she expected the SEC to settle the matter.
To follow to conclusion the case of The SEC v. Westergaard and the First Amendment as a backdrop to a discussion of a wide range of issues relating (1) to the SEC's crypto-fascist enforcement culture, (2) to the SEC's repeated violations of First Amendment rights, and (3) to the SEC's failure to enforce full disclosure by U.S. corporations of environmental issues and third world labor practices, visitors are requested to register here. There is no charge.
Horace Flashman Interviews Johnny Dotcom
QUESTION: John, you refer to the SEC as crypto-facist. What does that really mean and isn’t that a rather extreme characterization?
JOHNNY DOTCOM: Merriam-Webster defines crypto as “not openly avowed or declared -- often used in combination such as crypto-fascist”. A crypto-fascist is thus a fascist who does not openly declare himself as such.
Certainly the individuals at the SEC who destroyed me are not conscious fascists, but they act as fascists because they are tools of a fascist system. If you consider the methods they employ they are in fact the same fascistic techniques that police state tyrannies employed throughout the 20th century. Fascists control large populations by randomly charging people with modest crimes, convicting them without due process, and then applying extreme penalties that have no relation to the alleged crimes committed. The Chinese call it killing the chicken to scare the monkeys as I explain above in A Personal Note From John Westergaard.
The political philosopher Hannah Arendt, whose The Origins of Totalitarianism (1951) is among the most important books of the 20th century, later published Eichmann in Jerusalem (1963). Eichmann, an S.S. lieutenant colonel with responsibility for transporting Jews to the death camps, was captured by Israeli security forces in 1960, tried, convicted and executed.
Arendt portrays Eichmann as a bureaucrat who did his duty and followed orders, not the raving ideologue animated by demonic anti-Semitism. Rather than embodying "radical evil," Eichmann exemplified for Arendt "the banality of evil." Eichmann had performed evil not because he had a sadistic will to do so, nor because he had been deeply infected by the bacillus of anti-Semitism, but because he failed to think through the consequences of what he was doing. Eichmann was simply thoughtless.
That is a precise description of the culture of the SEC. Without thought and without intention, the culture of the SEC has evolved characteristics of the major tyrannies of the 20th century. With a staff of 2900 called to regulate an industry employing millions, the SEC resorts to pursuing chickens such as Westergaard by ratcheting up minor violations to accusations of fraud in order to warn the monkeys to think twice before pulling the next investor swindle. With a limited budget and personnel, the SEC simply doesn’t have the resources to go after the monkeys directly so it hits on the chickens.
What's going on here in the final analysis is a thourghtless absence of conscience which is associated with the rise of mass society in the 20th century. The officers and staff of the Enforcement Division and in other SEC divisions (but less so) are conditioned to suspend conscience as did Eichmann and other Nazis.
One is reminded of Burt Lancaster portraying a respected German judge under trial in Judgment at Nuremberg. Lancaster, cast in the role of a relatively minor figure in the Nazi scheme of things, is convicted for having violated the classic injunction of jurisprudence -- to think clearly and to act according to conscience. He had thoughtlessly condoned evil acts for the greater good of Germany.
Same with the staff of the SEC which accused John Westergaard of securities fraud knowing that the charges were specious. Indeed, when they announced their intention to accuse Westergaard of fraud, they hadn't established a list of specific charges. Those came six weeks later. Simply by making the ungrounded accusation fraud in the midst of a financing the Commission succeeded in destroying the business which was their objective in the first place.
QUESTION: If these SEC officers and staff lawyers are guilty only of thoughtlessness and of suspending conscience, aren't they victims of an evil SEC culture as much as you are?
JOHNNY DOTCOM: Yes, and it seemed that the staff lawyers were not comfortable carrying out orders from their superiors. But isn't executing orders the nature of fascism? Didn't Stanley Milgram in his famous experiment demonstrate that 75% of people will increase the level of shock on an innocent party if told to do so by an authoritarian figure? |
