OT:A while back a link was provided to me by someone here and I wanted to know if they read this link from one of the well respected posters that says this?
The Potential for the Disastrous Rise of
Misplaced Power Exists and Will Persist
Forty-five years ago President Dwight David Eisenhower
warned America about the growing power of the Military-
Industrial complex and
it’s potential for unwarranted influence over the affairs of the
nation. He saw a need for continued vigilance against the rise
of such influence and recognized the dangers to liberty
inherent in any unaccountable concentration of power. He
believed that “Our toil, resources and livelihood are all
involved; so is the very structure of our society.” While the
name has changed, today we confront an even more
dangerous threat to the future of the Republic. Left
unchecked, it will soon cripple our ability to finance the defense
of our liberty against its enemies, both foreign and domestic.
In a world this dangerous, there is little time to waste.
Consider the evolution of the American economy in the years
since the General’s famous speech. The Military-Industrial
complex that he warned of has been supplanted by an even
more powerful and insidious force, the Financial-Legal
complex. The combination of the immense resources of
America’s financial giants, their control of the apparatus of
American capital formation, and the extraordinary level of legal
talent and political influence such resources can procure have
created a powerhouse unmatched in the history of modern
democratic society. At present there appears to be no
institutional check or balance available to resist the growing
power of the Financial-Legal complex. Those who hold this
immense power have shown a willingness to exercise it in ways
that do not comport with the long term interests of the nation.
They have publicly demonstrated a level of control over the
American financial and legal systems that is clearly inconsistent
with a constitutional democracy. This control must be
extinguished.
President Eisenhower never saw the rise of the Financial-Legal
complex, but his warning about its unchecked power rings true
today “The total influence - economic, political, even spiritual -
is felt in every city, every State house, every office of the
Federal government. We recognize the imperative need for this
development. Yet we must not fail to comprehend its grave
implications. In the councils of government, we must guard
against the acquisition of unwarranted influence, whether
sought or unsought, by the military-industrial complex. The
potential for the disastrous rise of misplaced power exists and
will persist.” For many years this power has had complete
control of the American capital markets, pursuing two goals
above all else – continuing the orgy of greed beyond the reach
of legitimate governmental regulation, while avoiding any
personal or institutional accountability beyond inconsequential
financial penalties.
The Financial segment of the complex includes the commercial
investment banks, hedge funds, venture capital firms and
certain large private investors, although crossover is so
widespread that these names have become completely
meaningless, even as to the distinction between regulated and
unregulated entities. The individuals and firms wet their beaks
everywhere they can, and very few questions are asked. Many
segments of the financial marketplace appear highly regulated,
but the rules are routinely ignored by participants with little or
no consequence. Even in the absence of any actual
enforcement activity, it is natural that those engaged in a
regulated industry would shift business into unregulated
markets, where they can eliminate mandatory disclosure and
reduce many fixed costs. It is obvious that the regulatory
scheme enacted over seventy years ago cannot account for a
multitude of technological and financial realities of today.
Our well regulated financial marketplace, established at the
depth of the Great Depression, has deteriorated to the point
that it has had a deleterious effect on the very business upon
which much of America’s financial success was founded. For
many years Wall Street, and its mythical crown jewel, the New
York Stock Exchange, was the most prestigious business
address in the world. Now, for the first time ever, new equity
listings in Hong Kong, completed under the direction and
supervision of firms and regulators acceptable to the Peoples
Republic of China, outpaced those of New York and London.
Of course, the Financial-Legal complex continues to earn on
these foreign IPO’s, because their profits are not dependent on
the American market. The American people are left with the
bleak future of a market with an international reputation for
widespread illegal activity and completely inactive law
enforcement.
New York City paid a consulting firm $600,000 to determine
why the tax revenue derived from the IPO business has
vanished. Here is a simple, logical answer, offered completely
free of charge - companies wishing to access the equity
markets had to choose between doing business with the
Peoples Army or the Gangs of Wall Street. More companies
choose to conduct business in Hong Kong. We cannot afford
to ignore this clear vote of no confidence by the world
markets. We should not waste time grasping at more palatable
explanations for this historic shift. America’s capital markets
always had higher costs, which were more than justified by the
international recognition, impeccable reputation and superior
trading performance of the NYSE and its revered specialist
system. There is no longer any compelling reason to do
business in America, and each successive scandal or
regulatory failure adds to the growing negative perception of
our market. It is essential that we restore the credibility of the
American market, and regain the confidence of the investment
world.
Another American century will not be possible if the systematic
abuse of our financial system is tolerated any longer. Current
and future generations of Americans require protection from
the financial entities operating under the protection of the
Financial-Legal complex. The business practices of these
firms and individuals appear better suited to organized crime
than a highly regulated financial market. Our great American
stock market, once the envy of the world, currently has no
door, no police and no jail. This is a hazardous combination.
Proper application of securities regulations was always
understood to require men and women with integrity and
character to provide interpretation and enforcement. While it
seems naive today, it was all done on an honor system. They
selected the name self regulatory organizations for a reason.
Participants that brought any negative public attention were
rebuked and ostracized, and serious violations always resulted
in a lifetime ban from the legitimate end of the business. There
were periodic scandals, and continuous sharp practice, but
negative public attention would not be tolerated for the simple
reason that it interfered with everyone getting rich.
Today, securities regulations are an inconvenience to be
ignored, avoided, or subjected to tortuous interpretation to
authorize nefarious activities. The mentality is that of criminal
defendants, which is quite logical, if totally unacceptable for
any activity involving an honor system. The regulatory history
of America’s most prominent and respected financial
institutions over the last 10 years reflects a comprehensive,
never ending effort to cheat, even in markets where there has
been a tradition of fair dealing, such as US Treasury Bills and
Bonds. Everything and everyone is considered fair game.
Honor is dead.
The overall record screams for itself – IPO scandal, research
analyst conflicts, market timing scandal, specialist scandal,
derivatives scandals, hedge fund collapses, corporate
implosions, near universal failure to retain E Mail and other
required records, incomplete data production, insider trading,
market manipulation, felony convictions, wash sales, naked
shorts, no employee trading surveillance. This list seems
endless, but the list of those participating in these schemes
includes all the usual suspects, constituting a virtual “Who’s
Who” of American high finance. Payment of relatively small
fines or settlements, which are often tax deductible or covered
by liability insurance magically make each succeeding
investigation and lawsuit disappear, no questions asked.
The Legal segment of the complex includes regulators,
prosecutors, Judges and private attorneys for both defendants
and plaintiffs. The regulators have been completely
emasculated, as evidenced by the recent “investigation” into
insider trading by Pequot Capital. The lead SEC attorney was
fired for objecting to political influence forcing the Commission
to alter and ultimately kill an investigation. The existence of
sufficient documentary and other evidence to justify at least
continuing the investigation was simply of no concern to any of
the attorneys involved, except the one that wanted to interview
the logical prime suspect before criminal prosecution would be
barred. Defense counsel appears to have been intent on
making the target's problem go away by any means necessary,
and came very close to succeeding.
The Commission ultimately allowed the target to answer
questions regarding these alleged activities only after the
statute of limitations had expired. This is a unique approach to
questioning suspects in a felony investigation. High level SEC
counsel responsible for implementation of this curious legal
strategy first had to fire the lead SEC attorney while he was on
vacation, despite having just given him a two grade, merit
based pay raise. He had been continuously objecting to the
disposition that was being arranged by defense counsel for his
investigation. After this problem was eliminated, and the
Statute of Limitations had run, the target was formally
interviewed, and the all clear was given by the Commission. No
stone appears to have been left unturned in protecting the
target. The apparent and actual impropriety of what was
required to accomplish this task was of no concern whatsoever
to any of those responsible. To date there appear to be no
consequences for those involved.
Chairman Cox has made announcements about a new SEC
hedge fund investigation initiative in the upcoming year, as if
this past year never happened. Instead of any more SEC led
investigations, it is imperative that Congress direct an actual
law enforcement agency, preferably the FBI, to perform a
comprehensive investigation into the apparent control of the
SEC by the Financial-Legal complex. High level criminality and
the obstruction of government investigation and prosecution of
such activities require law enforcement, not another
effectiveness review of the Commission.
Aside from the required post mortem investigation of what may
be the most brutal application of unelected power and
influence ever revealed to a modern democratic society, many
other critical questions demand answers. How many other high
level crimes remain uninvestigated, waiting to be ignored long
enough to be forgotten? How many other major investigations
have been more quietly and efficiently killed over the years?
Are any more statute of limitations deadlines about to expire?
How have the SRO’s, upon whom the SEC is completely reliant,
performed their regulatory and investigative responsibilities?
How have the SRO’s treated the target, the tipee and his
hedge fund? In general, how are other powerful, influential
parties treated? If not the FBI, where can we find individuals
with the skills, experience, integrity and strong stomach
required to actually get to the bottom of all of this high level
malfeasance? Who else can assure that the American people
will actually get a credible report about this politically
radioactive investigation?
Why would questions of such critical importance be delegated
to mere bureaucrats by our elected representatives? Is it
possible that they just can’t handle the whole truth? The
situation prompting this investigation involves high powered
officers of the court acting at the behest of those powerful
enough to orchestrate absolute, unilateral regulatory and
prosecutorial surrender. How can Congress authorize an
investigation into crime, and the obstruction of prosecution for
crime, without actual law enforcement? It appears that the
same forces responsible for obstructing the original SEC
investigation continue to prevent the involvement of actual law
enforcement. This relentless effort to achieve the desired
result in the face of extensive public exposure provides clear
and convincing evidence that the misplaced power that
President Eisenhower warned us about exists today.
Continual Congressional oversight, hearings, investigations
and findings of failure and deficiency at the SEC have not
prevented the descent of our capital markets into the current
situation. This is a question of how to deal with rampant
lawlessness, not another difficult policy question to be
delegated off the table. Taking on the immense power of the
Financial-Legal complex requires nothing less than the rapid
deployment of lawyers with firearms. This will show the world
that we understand the gravity of the problem, and are serious
about cleaning house. The reputation and integrity of those
chosen by the FBI for this historic task can provide great
reassurance that the report resulting from the investigation will
be free from any appearance of outside influence.
The FBI will be up to this challenge, and can surely complete
this monumental investigation into the corrupted bowels of
American high finance. These powerful forces were able to
prevent any possibility of prosecution for high level financial
felonies that were being investigated by an arm of the United
States Government. Their subjugation of upper level SEC
personnel was complete. How dangerous are forces that can
deploy superlawyers ready, willing, and able to arrange the
extermination of the target’s criminal liability, and get the
regulatory investigation into his business closed down in this
manner. This was all done in what amounts to broad daylight,
on Main Street, in front of 100 witnesses, but nobody saw a
thing. The cop on the beat when all of this allegedly took place
was even sent on long term vacation. The time has come for
another generation of American criminals to understand the
grand tradition of G-Men chasing down bad guys, and throwing
them in jail for a very long time.
Credible, independent investigation by law enforcement is
indispensable to the process of restoring public confidence in
the American markets, and the American legal system. The
whole world is watching to see how America responds to
exposure of this publicly humiliating, homegrown challenge to
the rule of law. This challenge comes directly from the giants
of the American financial and legal worlds. It is a most
fundamental question - is this a nation of laws, or a nation of
very important men. We dare not reward our enemies by
failing this test, and caving in to these domestic warlords yet
again. The time has once again come for America to walk the
walk.
Financial preeminence was never America’s entitlement, it was
earned through years of providing a fair deal compared to
other markets. Not a perfect deal, but the best anyone could
find. Accurate financial statements, timely disclosure and
reasonable, consistent enforcement of the rules were, and
must again become the building blocks of American success.
The financial advantages we have come to rely on will be lost
forever if the reputation of the American marketplace is not
restored to its proper place through swift corrective action.
Publicly available details of this national embarrassment
confirm the totality of the emasculation of the regulators.
America must once and for all lose its condescending attitude
about corruption in any other nation, and soberly digest the
totality of what has happened here. The orchestration of the
legal system by business and government powers is
unacceptable. Powerful interests assured there would be
neither criminal prosecution nor SEC action, despite 18
separate insider trading referrals and many relevant E Mails.
The pattern is so strong, one regulator that referred many of
these cases to the SEC is described as being of the opinion
that Pequot’s trading was “just too lucky.”
While Pequot’s luck appears to have run out, it appears that
the American people are really the lucky ones here. Pequot
actually preserved and produced to regulators some
incriminating E Mail from the highest levels of the company. In
the secret, unregulated world of hedge funds, one cannot
imagine any greater luck than this type of damning, dispositive
evidence actually reaching the light of day.
Many hedge funds reject the notion that they should so much
as register with regulators, much less comply with any actual
regulations. The likelihood of such entities preserving
evidence of this probative value and producing it to regulators
approaches zero. Against all odds, the American people will
have an opportunity to see behind the curtain of the Financial-
Legal complex. If history is any indication, we are unlikely to
have this chance again.
Consider the record of pervasive, systematic failure by the
“highly regulated” investment banks to preserve, retain and
produce E Mail and other documents as required by law. Next
consider the relative cost of the small financial penalties
imposed for even comprehensive, long term failure to
preserve, compared to the great benefit gained by destroying
the proof needed by regulators and plaintiffs to learn the truth.
Even in cases where the regulators acknowledge that failure to
produce E Mail and other documents has compromised their
ability to investigate wrongdoing, the fines are small, and the
investigations are closed. Complete understanding of the
benefits and costs involved requires very little beyond the
beaming smile of Frank Quattrone, who should be resurfacing
with his new hedge fund any day now.
We have been afforded a unique opportunity to examine
hedge fund conduct, as they are by design financial black
holes. From a very limited public production by just one
principle of Pequot Capital Management, we see the outlines of
a pattern of systematic extraction and illegal use of material,
non public information. This illegal activity has allowed the
firm, its principles and innumerable affiliates to amass
unbelievable wealth. There are many thousands of similar
financial black holes in the universe, each operating beyond
the reach of legal and regulatory supervision for many years.
Every market participant in each black hole has the means,
motive and opportunity to engage in this, and any other illegal
financial misconduct. Respectable, regulated financial markets
should not include entities requiring masks.
The federal judiciary appears inclined to go easy on many
involved in even massive financial fraud. In the Enron related
prosecutions alone one Judge ignored a previously accepted
plea bargain, and reduced the sentence of the CFO from 10
years to 6. Several other high level Enron felons were jailed
after conviction, including the head of investment banking for
Merrill Lynch. They were unexpectedly sent home from jail to
await the outcome of their many appeals, free to spend their
fortunes, living in luxury, surrounded by their families. The
latest Enron judicial pass was given to the former corporate
secretary and investor relations executive. She was sentenced
to two years probation instead of the decade in jail she faced.
These arrangements all seem unreasonably generous.
The decisions regarding what prohibited activities merit criminal
enforcement also reflect very confusing priorities, as illustrated
by two very different investigations completed in 2005. The
first case involved the demutualization and IPO of a Mutual
Savings Bank. The perpetrators used existing depositors as
strawmen to purchase pre IPO shares at discount prices,
assuring a guaranteed profit upon resale at the IPO price.
Some of the reported $1.75 million in profit generated by this
scheme was shared with the strawmen, who had a legal right to
buy pre IPO shares, but were prohibited from assigning this
right to others. While this scheme clearly violates the law, it
does not seem particularly damaging to the marketplace as a
whole, especially since the resale of discounted pre IPO shares
is easily absorbed into the market.
The regional SEC Administrator clearly had a different opinion:
"This action is a message to all those who would seek to
deprive mutual bank depositors of their rightful opportunity to
participate in their bank's IPO. Hopefully, the actions taken
today by the SEC and the Justice Department will deter anyone
considering this type of misconduct in the future." The Local
US Attorney filed criminal charges. After one defendant
cooperated, the two remaining defendants faced 185 and 85
years in jail if convicted on all charges.
The second case was considerably more complicated. It
involved a major hedge fund. Those behind this scheme
created dozens of legal entities that opened over 1,000
accounts at various brokerage firms. The accounts were
opened solely to execute market timing trades in mutual fund
shares without detection. These entities opened variable
annuity contracts, misrepresenting the true purpose of the
accounts. They traded in small lots and held small positions in
the accounts to deflect suspicion. They traded through
clearing firms that utilized omnibus accounts and used brokers
with multiple registered rep numbers. This was all done to hide
their identity and permit their ongoing theft from the mutual
fund shareholders to continue undetected.
This scheme continued for years. Directing this many men to
take their briefcases across state lines to obtain accounts
under false pretenses for the exclusive purpose of committing
fraud against thousands of mutual fund shareholders is exactly
the type of conduct that one would think public policy should
attempt to deter. Apparently neither punishment nor
deterrence is a priority when it comes to hedge fund crime.
For some inexplicable reason, no criminal referral was made in
this case. The principles were barred from the securities
business for only three years, and paid $180 Million
disgorgement and penalties. The attorney involved was also
suspended from Commission practice for six months. This was
clearly not a case of failure to supervise, and these
perpetrators were only required to pay back $180 million,
accept a three year ban, hire another compliance overseer
and form another compliance committee. The failure to pursue
criminal sanctions for fraud on this scale is inexplicable, as is
the prospect of returning counsel consenting to these findings
to Commission practice after six months. If this scheme does
not result in a lifetime ban for everyone involved, exactly what
level of misconduct is required to get life?
Basic securities regulation requires any marketplace to include
at least three indispensable elements - a door, police and a
jail. The absence of a door on the American market is
illustrated by the story of Paul Johnson, a one time stock
analyst for Robinson Stephens. He received a five year ban
for securities fraud related to undisclosed conflicts in
companies he covered as a research analyst. Mr. Johnson is
considered a great risk to repeat the violations because of his
current position. He is a hedge fund manager. Mr. Johnson’s
case is incontrovertible proof that wrongdoers can no longer
be excluded from the marketplace, an essential regulatory
function.
The absence of police in the American market is proven by the
story of Gary Aguirre, who has provided an invaluable public
service by pushing hard enough to get fired by those currently
in charge of the SEC, and by being bold enough to confront
these powerful forces, both inside and outside the Commission,
during his extended vacation. Even with proof in hand, the
only cop doing his duty was kicked to the curb, his investigation
shut down, his target cleared of all these false charges against
him. Could the E Mail revealing the secret of Pequot Capital’s
trading prowess be written by a person with any fear
whatsoever of detection and prosecution by authorities for
conducting his business in this blatantly illegal manner?
The absence of a jail for the American market is demonstrated
by the kind, gentle treatment afforded to these two large hedge
funds, both of which were actually identified by authorities as
wrongdoers. The first hedge fund settled a huge securities
fraud case, involving years of highly profitable market timing for
$180 million cash and a 3 year "ban". In addition to this
generosity, the deal includes no criminal prosecution for any of
the architects of the scheme.
The second hedge fund had a large number of uninvestigated
regulatory referrals relating to suspected insider trading which
attracted the attention of authorities. The possibility of criminal
charges against the target of one “investigation” was wiped out
by cooperative regulators more concerned with the targets
powerful and influential friends, or their own personal career
prospects, than with pursuing the peoples business. Being a
regulator is primarily a law enforcement position. Dereliction of
duty simply cannot be tolerated. It seems time for these overly
cooperative regulators to be shown the door, where they
should find multiple partnership offers waiting for them.
Only the willingness of Gary Aguirre to courageously speak the
truth in the face of great resistance affords us the opportunity
to address this clear and present danger to America’s
economic future. To quote the hero who warned of the rise of
just this type of unaccountable power almost a half century ago
“We must never let the weight of this combination endanger
our liberties or democratic processes. We should take nothing
for granted.” America should heed this warning. The
pernicious power of the Financial-Legal complex and its ability
to influence our elected officials should not be taken for
granted. These officials may still fail to utilize law enforcement
to investigate this matter due to their fear of the Financial-
Legal complex. The people must track their performance and
hold accountable at the voting machine those who fail to make
extinguishing the power of the Financial-Legal complex a top
priority.
The current situation with Pequot Capital provides the perfect
opportunity to prove to the world that America truly is a nation
of laws, not a nation of men. This is historic, but addressing
the simultaneous collapse of market regulation and law
enforcement is actually of far greater importance. The fate of
two prominent insiders trading tips is inconsequential
compared to the disastrous, long term effect on the market of
the destructive pestilence of the Financial Legal complex. A
market without a door, police and a jail is doomed to fail. This
is what we will leave to future generations in America, thanks to
the relentless greed of this generation of financial titans, and
the ongoing failure of the proper authorities to enforce the law
of the land. If criminals were using masks and guns to steal
this much money, and the investigations into the crimes were
publicly shut down by influential defense counsel, how long
would it be tolerated by public officials?
The highly publicized spectacle resulting from this heavy
handed application of influence and its proximity to the national
mid term elections provides an opening to pressure our
representatives. Another internal bureaucratic whitewash will
not suffice. The systematic failure by the proper authorities to
fully investigate and refer for prosecution those responsible for
this pattern of illegal, highly profitable activities demands
comprehensive investigation by the Federal Bureau of
Investigation. It is clearly best positioned to avoid any
suspicion of continued influence by these insidious forces.
Despite lingering doubts about the importance of the voice of
the people to our elected representatives, the only hope of
addressing these issues is through the political process. It is,
after all, mid term election season. If it can be made clear that
the people really are “mad as hell”, there is still a chance our
representatives can be forced to confront this ongoing
menace. Contact your Congressman, Senators, favorite
candidates, local radio and television hosts, and advise your
friends and relatives around the country to do the same. This
is the ultimate law and order issue, and our representatives
must understand that fact. Insist that Congress authorize the
FBI to investigate the SEC.
By leveraging the power of the internet, we believe in the
current and future effectiveness of a grass roots movement
devoted to the concept of communication by the general public
directly with their elected representatives and governmental
agencies. Input by the public on important issues of the day is
the goal. Never in American history have the people enjoyed
the power of having a direct line of communication with their
representatives. We encourage citizens to exercise this power,
as the Financial-Legal complex has demonstrated its
willingness to exercise the power it has usurped to date.
We must assure that the FBI is allowed to investigate this
situation without external interference, and report what they
find, good and bad, to the people and the prosecutors. This is
a time tested American response to high level malfeasance.
America will always survive these painful public episodes which
constitute the proper operation of our constitutional process.
The enduring spectacle of American justice being publicly
abused and subjugated by the Financial-Legal complex must
never be forgotten. It makes clear just what we are dealing
with, and the importance of resisting these insidious forces.
The people must and will prevail over the power of the
Financial-Legal complex.
One SEC attorney fighting back is the only reason America has
been alerted to the vast reach of the Financial-Legal complex.
Fortunately, in a free country, this is all it takes. The alarm
must be spread far and wide, and the internet is the means to
do so. The ongoing criminal conduct, and the control of the
SEC by the Financial-Legal complex represent a clear and
present danger to the nation. The power exercised by the
Financial-Legal complex over legitimate operations of
government must be extinguished by any and all available legal
means. The power of the people must be used to achieve this
goal.
The Financial-Legal complex exercises this dangerous level of
control over the American financial and legal systems without
the inconvenience of constitutionally mandated accountability
to the people. Agents of the Financial-Legal complex have
supplanted appointees of the President of the United States
that are authorized to enforce the Federal Securities Laws.
They arranged that no criminal prosecution would be possible.
The investigation was closed, the target was cleared, and
everyone was expected to just go back to sleep. The financial
power upon which the last American century was built will be
lost if the power behind this ongoing legal fix of America’s
financial markets is allowed to prevail. It is still possible for the
people to beat back the advances of the Financial-Legal
complex and save our stockmarket, and our legal system, for
future generations. The time to act is now.
__________________________________________________
The Indictment of Milberg Weiss -
Why So Many Pundits Totally Miss the Point
Many commentators, experts and legal scholars have
expressed opinions regarding the indictment of Milberg Weiss,
and partners Steven Schulman and David Bershad. While the
undisclosed compensation paid to lead plaintiffs is universally
recognized as prohibited, many appear to consider these
arrangements to be a private affair between counsel and
client. Pundits have shown a disturbing tendency to minimize
the gravity of these allegations, rationalizing perjury by a lead
plaintiff at the direction of lead counsel in securities class
actions as only lying to the court. Claims of damages to the
interests of the classes represented by Milberg Weiss and
these house plaintiffs are often dismissed as speculative and
uncertain. Nothing could be further from the truth.
The role of a lead plaintiff in federal securities class actions
involves far more than owning or trading stock during the
applicable class period. The payment of undisclosed
compensation to lead plaintiffs by lead counsel is not a benign
technical violation of procedural rules or a questionable way to
cut corners. There is far more at stake than lead counsel
cheating other firms out of the financial benefit of running a
particular case or the sharing of legal fees with non lawyers.
These hidden arrangements eliminate an important safeguard
for the class members being represented by these lawyers and
plaintiffs. Alteration of the relationship between a lead plaintiff
and their chosen lead counsel has serious consequences for
all class members. There is far more going on here than
meets the eye.
It is true that gaining the role of lead counsel was the initial
benefit of having house plaintiffs on the payroll. While getting
appointed is obviously a key first step it is far from the only
important benefit of this arrangement to lead counsel. In
practice, even after the Court appoints lead plaintiff and
counsel for a case, the house plaintiff retains great value. The
conduct of the case is completely in the control of lead
counsel. This power extends far beyond control of the legal
fees. The Court simply does not evaluate or question in any
way the judgment of lead counsel regarding conduct of the
case. The oversight of lead counsel by the lead plaintiff is the
only protection afforded class members by the statutory
scheme.
The house plaintiff will always be completely satisfied with the
course of the litigation. The Court will only ask one substantive
question of lead counsel. Is the settlement fair, reasonable
and adequate? There is never an objection to any proposed
settlement from the house plaintiff. This is assured by the
additional compensation they receive. Neither the Court
approving the settlement nor the class members that are
legally bound by its terms know anything about this additional
compensation. The house plaintiff is the only party legally
entitled to challenge the absolute power of lead counsel to
conduct the case and propose settlements as they see fit. How
many plaintiff objections could we expect if any class was fully
informed about the secret payments made by lead counsel to
the class representative selected by the Court?
The lead plaintiff can unilaterally kill any settlement proposal by
lead counsel. Objections raised by the lead plaintiff have
dispositive weight with any Court. Institutional shareholders
are preferred by most courts to serve as lead plaintiff precisely
because of this oversight function. The legislative history of
each rule change relating to this process clearly reflects the
essential failsafe role that the lead plaintiff is expected to play
in class actions. The only chance for oversight of the lawyers
is eliminated by the payment of undisclosed compensation to
house plaintiffs. This ongoing value of house plaintiffs is
confirmed by the continued payment of undisclosed
compensation to lead plaintiffs by Milberg Weiss years after the
race to the courthouse was discontinued by statute.
The importance of lead plaintiff independence has been
repeatedly demonstrated in an ongoing class action against
Halliburton. Many estimates of the damages in the case
exceed $2 billion. Counsel attempted to push through a
settlement for $6 million, with $2 million of that to be taken for
legal fees and expenses. Fortunately one of the four lead
plaintiffs had outside, independent legal representation. The
Archdiocese of Milwaukee Supporting Fund was apparently not
consulted about this meager settlement and had its counsel
object. The objection makes it reasonable to assume that the
Archdiocese was not a house plaintiff for its chosen counsel.
Needless to say the settlement was not approved by the
Court. The Executive Committee on the case was
reconstituted, but now this plaintiff has been forced to ask the
Court to remove lead counsel a second time. Counsel and
client were concerned with the distraction provided by their new
court approved lead counsel, the publicly unidentified “Partner
B” from the Milberg Weiss indictment. A sitting Vice President
was CEO of Halliburton during the class period and this
incomprehensible settlement was proposed by lead counsel.
What have these lawyers and firms been willing to do in cases
where there were no public figures involved, and the only
oversight was provided by their own house plaintiff?
The role of lead counsel includes built-in conflict. As a rational
business they want the most pay for the least work. As a
lawyer they are obligated to proceed with the case in the
clients’ best interest. Lead counsel is not obligated to go
bankrupt taking a weak case to trial, yet they are not allowed to
settle a strong case for a song after doing a personal cost
benefit analysis. It is a judgment call each and every time,
which is why the integrity of the selection process for lead
counsel was considered so important. Trust is the key element
overlooked by those seeking to minimize the effects of this
pernicious conduct on the classes represented.
One would like to think that the corruption of this process by
Milberg Weiss is unique to the firm. Milberg Weiss invented
and dominated the field of securities class actions for decades,
and great success breeds competition. Firms competing with
Milberg Weiss and its stable of house plaintiffs were in a
difficult situation. Some firms found legitimate ways to create
great success, such as developing a relationship with a few
institutional investors, or aggressively searching for clients with
large losses. Others remained content to be well paid
secondary firms, billing time where possible and referring their
potential lead plaintiffs to better situated lead counsel firms.
Another group of firms replicated the business model of
Milberg Weiss on a smaller scale through development of their
own house plaintiffs.
There is currently no smoking credenza or other clear proof of
wrongdoing for most Milberg Weiss imitators, but the effect of
house plaintiffs on the representation of class members is the
same. The business model has evolved by developing other
ways to circumvent the rules. There is an inherent conflict in
using a house plaintiff, regardless of the formal structure of
their relationship with lead counsel. At worst, a house plaintiff
deprives class members of the honest services of counsel
operating with the intended oversight of a legitimate lead
plaintiff. At best, it just looks that way to most observers.
Even if Milberg Weiss were to be completely eliminated by
further government action, the problems created by use of
house plaintiffs will persist. The process of selecting lead
plaintiffs and counsel in securities class actions has been
completely corrupted by years of Milberg Weiss’ unfair
dominance. Everyone else was forced to search for ways to
level the playing field and replicate the success of Milberg
Weiss. All these years later the race to the bottom is complete.
Some firms appear to utilize legitimate good works to retain the
services of house plaintiffs. Naturally everyone will deny the
existence of a quid pro quo, but the appearance of conflict and
the necessity of disclosure to the Court are undeniable.
Suppose that over a number of years lead counsel develops a
pattern of charitable giving consistent with the wishes of their
house plaintiff. The only real question is how many cases and
related charitable contributions or other inspired good works
are required before the financial element of the relationship
between lead counsel and the house plaintiff requires
disclosure to the court.
Many firms other than Milberg Weiss have house plaintiffs that
have appeared in multiple cases which earned the firms many
millions of dollars in fees. This form of undisclosed charitable
compensation raises the same questions as bags of cash or
checks to third parties. Even if there are only good intentions
and good deeds, at some point lead counsel is clearly required
to disclose to the Court the existence of the ongoing financial
relationship with the house plaintiff.
While it is admittedly distasteful to denigrate charity under any
circumstances there are other more troubling permutations of
the Milberg Weiss business model. A partner at one prominent
class action firm appears to have been involved in a limited
partnership. The limited partnership acted as plaintiff in
multiple class action cases. This partner of the law firm was
repeatedly listed in regulatory filings as one of the beneficial
owners of the limited partnership. After some publicity about
his status as beneficial owner of his own plaintiff there was an
amended filing made. The partners name was removed as a
beneficial owner. Years of incorrect regulatory filings on behalf
of the partner were attributed to “human error”.
One of the remaining beneficial owners of the limited
partnership is a securities executive. Two months after the
amended filing by the limited partnership this executive, his
employee and his firm were charged by the SEC as part of a
market manipulation scheme. The manipulation was done at
the behest of a large holder of the target company’s
convertible bonds. Three weeks of illegal short selling drove
the price of the target company’s common stock under one
dollar. The bondholder obtained millions of additional shares
of stock by converting the bonds at the manipulated price.
Charges of this nature against the beneficial owner of a house
plaintiff create even more troubling issues than the Milberg
Weiss business model described in the indictment.
House plaintiffs that are under the control of market
manipulators and used by plaintiffs counsel are an infamnia
regardless of the actual level of involvement or control
exercised by the lawyer. No possible explanation or assurance
can offset the destructive effect this type of arrangement has
on public confidence in the legal profession. The short seller -
house plaintiff combination is an obscenity that is capable of
destroying a target financially, profiting on all sides of the stock
price moves, and can later be used as a plaintiff in legal action
against the target. The repeated use of such an enterprise as
a house plaintiff and the complete lack of any public
repercussions or bad publicity demonstrate just how far this
practice area has fallen, and how little scrutiny it has been
subjected to until now.
Absent the human error blamed for years of incorrect
regulatory filings, this dangerous relationship likely would have
remained completely undetected. How many firms have
created entities to act as lead plaintiff, but were more careful in
concealing the true parties of interest? The entire practice
area has been hopelessly polluted by the years of cheating to
compete with Milberg Weiss. Every revelation about Milberg
Weiss and its imitators reinforces the need to fix the disaster
that currently passes as securities litigation.
I repeat for emphasis – even if Milberg Weiss were to be
completely eliminated by further government action, the
problems created by use of house plaintiffs will persist. These
same remaining firms will very likely be appointed by Federal
Courts to run many Milberg Weiss cases. They stand to earn
billions of dollars in fees representing millions of class
members in hundreds of Milberg Weiss cases. Many have just
begun producing documents to the government relating to
payments to a Milberg Weiss serial witness. It appears that the
legal problems for many firms associated with Milberg Weiss
are just beginning.
There are thousands of experienced, skilled lawyers in the
country that are untouched by these widespread plaintiff
problems. They are ready willing and able to take on the
work. Many firms can provide the financial backing to assure
that plaintiffs are not overmatched. We can surely do better
for these class members when replacing Milberg Weiss than
handing them over to the usual suspects. The fact that the
lead plaintiff has had to remove lead counsel for a second time
in the Halliburton case demonstrate the need to provide class
members with legal representation that is above reproach.
Finding qualified counsel that have no demonstrated
involvement in these dubious plaintiff practices or other targets
of the government investigations should not be difficult.
The issues raised by the indictment of Milberg Weiss involve
the essence of class action representation. A lead plaintiff is
expected to act as a representative of the class. The oversight
function of the lead plaintiff is an essential element of the
statutory scheme created for class action cases. The Court
relies on the lead plaintiff, as does the class. There is nobody
else authorized to supervise the lawyers. The effects of these
arrangements are the same whether lead plaintiff is paid by
cash, check or deductible contribution. Any undisclosed
compensation paid to lead plaintiffs exposes class members to
representation by attorneys who operate outside the law when
winning appointment as lead counsel, when eliminating
oversight by a legitimate lead plaintiff and when directing their
house plaintiff to lie to the Court about the additional
compensation.
The concept that these are benign activities with little or no
effect on the value of the settlements negotiated is laughable.
There have been years of questions by class members and
commentators about securities class action settlements
recovering damages of pennies on the dollar, or shareholders
receiving useless corporate governance changes in lieu of
cash compensation for huge financial losses. Even the
strongest, airtight cases will not be pursued through trial.
Whenever the lead plaintiff receives undisclosed compensation
the interests of Class members are unprotected and the
recovery of the Class suffers. The Milberg Weiss indictment
and the effects of the activities it describes confirm what critics
have claimed for years but could never prove. We finally have
a definitive answer to the longstanding mystery of how the
lawyers in these cases consistently obtain court approval of
huge fees despite the clients ending up with next to nothing.
Unsupervised lawyers are putting their own interests ahead of
their clients because nobody is watching and the Courts are
unable or unwilling to stop it. Unfortunately the answer is just
that simple.
__________________________________________________
"Of all the forms of tyranny, the least
attractive and the most vulgar is the tyranny
of wealth."
Theodore Roosevelt
The American public remains blissfully unaware of the threat to
their financial future that continues to be ignored by both legal
authorities and regulatory bodies. America could always
withstand any financial turbulence because our system was
reasonably fair and equitable. There was always theft and
fraud but it was usually far removed from mainstream
businesses with household names. Detection resulted in
severe consequences or at least total banishment.
In today's financial universe all major players are recidivist
offenders that repeatedly ignore rules, cheat customers and
other market participants and consistently conceal and destroy
evidence of their activities. The general mindset and standard
of behaviour appears to that of criminal defendants. This is
very destructive, particularly in light of the absence of
regulatory oversight and mysterious lack of criminal
prosecutions for even egregious large scale financial frauds.
We can be certain that the children and grandchildren of
today's captains of law and finance are already well provided
for. Those less fortunate will have to rely on whatever is left of
the once mighty American capital markets. The American
century was built on the power of our capital markets. If the
situation continues to be ignored our descendants will be poor
and subject to control of foreign financial forces. Swift
corrective action is required.
In America the Government, big business and the legal
profession should not be permitted to abuse the public interest
in this crude and obvious manner. We do not live in a
totalitarian society. Many thousands have died so we can
speak out against those who are stealing the financial future of
the Nation. This pestilence must be eradicated. Every voice is
needed to end this tyranny of wealth.
__________________________________________________
The evolving concept of "Vanishing Fraud"
Federal Courts have become unwilling to find any duty owed
by financial advisors and investment bankers to shareholders
of a Public Company. The Public Company presumably pays
fees to the advisors and bankers for honest services. Instead
of honest services the banker/advisor commits or at the very
least aids and abets the fraud of the Executives by knowingly
helping the Company to engage in illusory transactions. These
sham deals are used to create false and misleading public
filings and financial statements.
In addition to this unwillingness to find civil liability for this
corporate malfeasance and a general absence of criminal
convictions Federal Courts have continued to allow certain
elements of the plaintiffs bar to abuse the public trust in an
equally destructive fashion (See Archives "The Indictment of
Milberg Weiss -Why So Many Pundits Totally Miss the Point").
The results of this tolerance are beginning to surface.
Two major cases have recently been thrown out on Appeal.
The Enron fraud and the IPO Securities Litigation are
historically recognized frauds perpetrated through the acts of
major investment banks. The banks do not deny the acts, just
any civil or criminal liability. Despite enormous damages
shareholders may not recover in either case.
Despite the indictment of Milberg Weiss and the obviously
unidentified Partners "A" and "B" both cases were allowed to
continue under their direction. Both cases have been thrown
out, placing the recovery of millions of shareholders at risk.
For Partners "A" and "B" there is no risk. In both cases Class
counsel has managed to "earn" a huge fee before their clients
case was thrown out of Court.
Even after the indictment of Milberg Weiss Mel Weiss was still
afforded complete latitude by the Court when directing every
facet of the IPO Securities Litigation. One Enron Lead Plaintiff
has successfully removed Partner "B" from the Halliburton
case because of the racketeering indictment. It took counsel
two years to obtain relief from Partner "B" and other suspect
plaintiff firms in that case. There is clearly something very
wrong when absent class members continue to be subjected to
this type of representation at the hands of indicted racketeers
under the auspices of the Federal Courts of the United States.
The public is led to believe that in America there are Courts of
Law to provide protection. This has proven to be an outdated
concept. Courts now believe that these investment banks
need protection from greedy plaintiffs lawyers, and no duty to
the shareholders of the defrauded company exists. These
shareholders are first defrauded by executive crooks who steal
with the direct knowing participation of banker crooks. The
shareholders sue in Federal Court and are then assigned
lawyer crooks who defraud them a second time.
Even after these lawyer crooks are indicted as racketeers
Courts allow them to exercise fiduciary duties on behalf of
millions of shareholders. Courts even approve these firms as
lead counsel in many additional new cases. Now another huge
payday is at hand for Partners "A" and "B" despite losing the
cases and recovering next to nothing for their clients. The
investing pubic around the globe will shun the financial markets
of a nation which officially sanctions such systematic
institutional theft under cover of judicial process. The national
interest requires an end to official sanction for stealing by
bankers and lawyers.
Cause and Effect of the Improper
Termination of Counsel
The recent testimony of Attorney General Gonzalez explaining
the termination of 8 U.S. Attorneys was very interesting. There
is no dispute that the President has the power to remove any U.
S. Attorney. The important question here is who directed the
removal process and were appropriate selection criteria used
in identifying those who would be removed. This is a far
different matter than the wholesale removal of all U.S.
Attorneys.
The legal profession has historically maintained a fairly strict
code of conduct when the employment of attorneys was
terminated. This was especially true when the attorneys had
public regulatory or law enforcement responsibilities. Of
course there have always been retaliatory acts, bad
performance reviews and financial and other behind the
scenes pressure applied to counsel but outright termination
was always considered both a red flag of possible wrongdoing
and a professional embarrassment to all involved. As with the
auditing profession a noisy exit by counsel under any
circumstances was always a clear sign of serious problems and
also a very rare occurrence.
It is now common practice in both business and government to
utilize counsel as just another fungible asset to be deployed in
pursuit of any legal, business or political objective. The
rewards of advancing to partnership or senior in house counsel
are so great it is easy to understand why many lawyers are
willing to blindly accept the guidance of senior counsel
regarding questionable ethical issues. When the utility of a
particular lawyer ends or any difficulty arises that lawyer is
simply removed and replaced with another more useful or
compliant party. Generous severance packages, excellent
references and continued access to good connections assure
post employment loyalty. Most lawyers have been well paid
and have lucrative future career prospects so everyone
accepts their fate quietly.
When improper targeted attorney terminations involve high
level law enforcement it is very damaging to the system. This
type of improper removal creates a chilling effect on the
exercise of independent judgment by all attorneys and Police
Officers. Official judgment by Officers of the Court and law
enforcement personnel should never include any calculation
relating to the risk of getting fired for angering the wrong party
by doing what the law requires. This is the key reason why
continued examination of these suspect terminations is
required.
This rotation of counsel was exposed at the highest levels of
the financial regulatory structure by the termination of Gary
Aguirre at the SEC. The targets of a criminal insider trading
investigation exerted total control over the regulators
conducting this official SEC investigation. Aguirre, the lead
attorney responsible for the investigation was fired after being
sent on vacation by his superiors. He had uncovered long
ignored documentary and circumstantial evidence reflecting
the development of a legitimate investigation into a pattern of
felonies committed by two Captains of Wall Street. Defense
counsel and their associates at the SEC operated as if Aguirre
and the evidence generated by his investigation did not exist.
Counsel was terminated and a more compliant SEC reviewer
appears to have determined that this evidence in fact did not
exist.
In addition to Gary Aguirre there was another fungible asset
deployed by the targets of this SEC investigation which
revealed another way the rotation of counsel is used. Paul
Berger from the SEC was involved in the firing of Aguirre. He
was later hired by the very firm that successfully killed this
investigation. Any consideration of reputational consequences
for attorneys and firms exercising such clearly improper power
over official investigations into multiple violations of Federal
securities laws appears naive. The reward of partnership was
given to one of the regulators willing to do this dirty job. The
fact that he participated in this matter at all, let alone
improperly intervening for a party of interest that was
represented by his new employer in a Commission
investigation is both astonishing and reprehensible. The fact
that there is such limited interest in this travesty shown by our
elected representatives is reflective of the amounts of money
available to those pulling these strings. One hundred years
ago Theodore Roosevelt described a developing “Tyranny of
Wealth” in America. We appear to have arrived. These
respected business giants hold lawyers in their pockets “like so
many nickels and dimes” and change of a dollar is never a
problem.
Other examples of these revolving back doors abound. One
attorney involved the Department of Justice terminations has
just been deemed worthy of private partnership. The lead
prosecutor that developed the case and filed the RICO
indictment of Milberg Weiss and its partners was hired away by
corporate counsel just as the investigation was expanding to
include others. In private practice thousands of attorneys that
had some role in frauds including Enron, Worldcom and
countless other financial felonies are quickly recycled. They
remain completely unaffected by their professional proximity to
such documented illegal activities. There appears to be no
applicable standard of conduct for anyone other than proof of
guilt beyond a reasonable doubt.
Attorney General Gonzalez proclaims great progress in
protecting our country from terrorism, defending our
neighborhoods against the scourge of gangs and drugs,
shielding our children from predators, and preserving the
integrity of our public institutions. In light of the existing record
this claim raises even more questions than his Reaganesque
inability to recall details of important events even with extensive
preparation. Our ports remain virtually unprotected, security
recommendations of respected public official and security
professionals ignored for many years. Semi automatic
handguns and other firearms are available for purchase by the
clearly mentally ill and other dangerous parties. Public safety
relies on these dangerous individuals being identified during
an instant background check in a local retail firearms outlet by
an employee without proper training, resources or incentives.
Popular television provides hours of actual sexual predator
interdiction for the entertainment of the masses every week. It
appears this type of internet trolling operation could easily
obtain programming for multiple stations 24 hours a day seven
days a week.
Our financial markets are virtually unregulated, resulting in
widespread crime. Powerful interests control the regulatory
apparatus. Law enforcement investigation and prosecution of
serious financial crime is limited to high profile scapegoats.
Electronic evidence of these crimes is illegally destroyed
without consequence. The true identity of the perpetrators is
hidden behind unregulated entities and overseas shell
companies. Prosecutors ignore information from convicted
insiders when the alleged wrongdoers are properly connected.
Sentences are stayed and convictions overturned by
understanding courts. Convicted lobbyists and administration
officials conduct public business using outside computer
accounts and claim a right to destroy the records to prevent
legitimate public scrutiny.
Basic constitutional guarantees and years of superior military
tradition have been damaged. Videotaped prisoner
mistreatment, illegal domestic surveillance and Presidential
claims of broad new powers are only the most glaring examples
of our deterioration. The President appears to believe he can
legally set aside the enforcement of hundreds of properly
enacted laws because he deems them unconstitutional. I am
unsure of the position of either the President or the Attorney
General on the future role of Courts of Law, which have
traditionally performed this function as a constitutional balance
to executive power.
There is only one way I can be satisfied and fully reassured
that nothing improper was done by those currently proclaiming
such great strides in the face of these facts. We need to hear
from the career professionals – investigators, analysts,
prosecutors, lawyers, and administrative staff – that Mr.
Gonzalez credits for the numerous accomplishments during his
time in office. If his decision to ask for the resignations of
these U.S. Attorneys is in fact justified these independent
officers of the Court and career government employees are
clearly in the best position to provide the truth to the American
people. Those who have worked with the terminated
prosecutors can surely select a reasonable number of
representatives from each local office to provide the American
people their unique perspectives under oath, in open session.
This will assure that the true facts about this matter are
brought to light.
It will also assure that those eight attorneys Mr. Gonzalez has
apologized to for this undignified spectacle will have those facts
to help restore whatever they can of their reputations. I am
sure this will mean more to them than even the most sincere
apology. We should never forget that the eight attorneys and
the two identified resignations under pressure will through no
fault of their own always be inexorably connected with this sorry
episode. The American people and these terminated attorneys
need answers. It is clear that the President had the legal
authority to terminate counsel. It is also clear that the SEC has
the legal authority to fire employees. The real question is who
is in charge of the termination process, were proper criteria
used and how was the process conducted. This is after all the
peoples business. If Mr. Gonzalez truly wants the American
people to be reassured about the integrity of the termination
process and there really is nothing to hide he should be willing
to agree to this testimony as a basic yet critical confidence
building measure.
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