April 29 (Bloomberg) -- The Securities and Exchange Commission is certainly looking all spiffy and new these days.
Mary Jo White, the former federal prosecutor and Debevoise & Plimpton law partner, has taken over as chairman. She tapped her longtime deputy at the Southern District of New York and Debevoise, Andrew Ceresney, to share the hugely important job of director of enforcement with George Canellos, a longtime SEC hand.
On paper, anyway, this team represents a vast improvement over the oft-negligent regime of the last chairman, Mary Schapiro, and her director of enforcement, Robert Khuzami. The question is whether changing the roster will actually lead to better enforcement of the rules governing Wall Street.
The New York Times’s DealBook blog seems to think so, as evidenced by its laudatory April 24 article on the commission’s “thriving” whistle-blower program, which rewards employees of financial firms who reveal wrongdoing. The Times got a scoop in revealing that whistle-blowers helped the SEC uncover wrongdoing that caused a trading disaster at Knight Capital Group Inc. in 2012 (and almost caused its collapse), and that a private-equity fund at Oppenheimer & Co. had mismarked the value of its investments to make the fund’s performance look better than it was. We also learned that a cowboy-hat-wearing auditor, Dee Dee Stone, blew the whistle on fraud at a Texas company with the unlikely name of China Voice Holding Corp. Stone has collected $46,000 “to date” for her tips.
If you needed any more convincing of the commission’s resurgence, the Times interviewed Harry Markopolos, the research analyst who for years tried to warn the SEC about Bernie Madoff’s Ponzi scheme without success. He says the new regime at the whistle-blower office is now “very thankful” when he calls: “They actually do investigations.”
Nowhere in all the hype over the SEC, of course, is anyone talking about Peter Sivere’s experience as a whistle-blower. And until we have evidence that the commission understands and is seeking to rectify the misdeeds of its past, there is little reason to have faith in the new regime.
Sivere, readers may recall, was a compliance officer at JPMorgan Chase & Co. who reported wrongdoing in the way the bank chose to comply with the SEC’s investigation into charges of late-trading in the mutual-fund industry. JPMorgan Chase fired him in 2004, despite a history of excellent evaluations.
That, I suppose, is to be expected in this day and age. What is shocking, though, is the SEC lawyer he called to report the wrongdoing, George Demos, turned around and ratted him out to JPMorgan Chase. (After he left the SEC years later, Demos had the audacity to run for Congress.)
This surely cannot be a page in the SEC’s playbook for how to make effective its whistle-blower program. If a whistle-blower can’t trust an SEC lawyer to keep his or her confidence, then the SEC’s whistle-blower program isn’t going to be of much use, is it?
Sivere, who is now at Barclays Plc’s investment-banking unit in New York, has always wanted to know why top SEC officials never disciplined Demos for violating his trust. He enlisted Representative Nita Lowey, a New York Democrat, to write a letter last year to Schapiro asking what happened. Schapiro responded a few months later that because it was “a confidential personnel matter,” she couldn’t disclose the “supervisory response.”
Now we know why Demos skated free. Using the Freedom of Information Act, Sivere recently obtained a copy of a July 27, 2009, memo from James Clarkson, then the acting director of the SEC’s New York office, to H. David Kotz, then the SEC’s inspector general. (Kotz was the one who initially investigated the case and discovered that Demos had betrayed Sivere’s confidence.)
In the memo, Clarkson told Kotz that he had seen the case file and spoken with members of the SEC’s New York office. “Based on my review of these documents and on my conversations with a number of people linked to this matter,” he wrote. “I have concluded that no disciplinary action is needed.”
Clarkson’s justifications for not disciplining Demos were extraordinary. He told Kotz that “among the factors” he considered in his decision was that the “relevant events occurred almost five years ago” and “the non-public information allegedly released in this case” -- that Sivere had blown the whistle on his employer -- “did not negatively impact the SEC’s investigation.” (It certainly negatively impacted Sivere’s career at JPMorgan Chase, but no matter apparently.)
Clarkson wrote that he believed “an argument can be made that it was not necessarily inappropriate” for Demos to have discussed “JPMorgan’s response to the SEC’s subpoena directly with their counsel.” He didn’t elaborate on what that argument would be. He added that he “gave significant weight to the fact” that Demos’s supervisor “counseled” Demos after he ratted out Sivere about the “importance of maintaining the confidentiality of non-public information to which the Commission’s staff has access -- a principle which I fully support.” Good to know!
Not surprisingly, in an e-mail to me, Sivere said he found Clarkson’s explanation for not disciplining Demos “truly disgraceful.” It’s hard to disagree. It is also of little comfort to know that Clarkson’s final words to Kotz were to inform him that that George Canellos had just been sworn in as the permanent head of the SEC’s New York office. And now Canellos is a co-head of the SEC’s enforcement division. That doesn’t give me much confidence that we’ll see change for the better in Mary Jo White’s SEC.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost an arbitration case over his dismissal. The opinions expressed are his own.)
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