Financial Fraud

Lessons From The FCIC Final Report In FHFA v. Nomura

The ruling of Judge Denise Cotes in Federal Housing Finance Administration v. Nomura Holding America, Inc., is a 361 page description of the fraud and corruption that went into just one group of real estate mortgage-backed securities. FHFA was formed after the Great Crash to oversee Fannie Mae and Freddie Mac. These two entities were the actual buyers of the RMBSs offered by Nomura Securities International, Inc., and RBS Securities, Inc., then known as Greenwich Capital Markets, Inc. The Court finds that a number of statements in the offering materials were false at the time of the offering, in violation of Section 12 of the Securities Act of 1933. It awarded a judgment in the amount of $806 million, and required FHFA to tender return of the securities.

This Reuters story is typical of the coverage of the decision, in the “we knew that” mold. Peter Eavis of the New York Times wrote a clearer explanation, pointing out that this decision undercuts any argument that Wall Street banks did not break the law in the sale of RMBSs. This is the first paragraph of the decision:

This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.

In this post, I’ll look at several aspects of the case: 1) the legal framework; 2) the discussion of the due diligence tracks the findings of the Financial Crisis Inquiry Commission in its Final Report; 3) the individual liability holdings; 4) the role of the Credit Rating Agencies; and 5) loss causation.

!. The Legal Framework.

The main theory of liability in this case is the Securities Act of 1933, 15 USC § 77a et seq., specifically Section 12. The operative language says that a person who

offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraphs (2) and (14) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission

is liable to the purchaser for any loss arising from the misrepresentations. The plaintiff has to prove that the offering materials contained an untrue statement of a material fact, and that the purchaser did not know about the falsehood. Sellers can defend by proving that they did not know and “in the exercise of reasonable care could not have known” of the falsehood. Sellers can also reduce their damages to the extent they bear the burden of proving that the losses of the buyer were not caused by the falsehood. The defendants did not claim that Fannie Mae and Freddie Mac knew that the offering materials were full of falsehoods. Thus, the main focus of the decision is the falsehoods in the offering materials.

2. The Due Diligence Defense and The Final Report of the FCIC

If the Defendants exercise reasonable care in preparing the offering materials, they are protected from liability. In fact, the risks of failing to exercise due care are so great that investors believe that financially strong sellers of securities wouldn’t take the risk of selling unless they had done good due diligence. Of course, our dominant ideology, neoliberalism, preaches that markets, whatever they might be, police themselves, and securities laws are unnecessary. Here’s a lovely example from John Spindler, now a business law professor at the University of Texas (it’s not on his CV). The Final Report also calls out this bizarre idea, beginning at P. 171 (.pdf page 198).

The Final Report looks at the due diligence across the universe of securitizers in Chapter 9, page 156 (.pdf page 184). It says that the securitizers did little or no due diligence themselves. Instead, they farmed it out to third parties. These vendors examined a sample of loans from a pool, and reported whether the loans met the guidelines that the originators claimed to follow, whether they complied with federal and state laws, and whether the valuations of collateral were reasonably accurate. They also looked for compensating features that might outweigh the defects. The sample loans were graded, and the securitizers could use these grades to kick out loans, or they could waive the defects, and in either case, they could use the information to negotiate the purchase price for the pool.

The Final Report says that vendors reported very high defect rates, and that securitizers waived in a high percentage of the defective loans. The originators then put the kicked-out loans into other pools proposed for sale. Disqualifying defects were discovered in 28% of the loans examined by one vendor, Clayton Holdings, for the 18 months ending June 30, 2007. Of those, 39% were waived in, so that 11% of defective loans were included in purchased pools. The samples were small, as low as 2 or 3%. There seems to be little effort to find the defective loans in the non-sampled portion, so it’s reasonable to assume that a similar or higher percentage of loans in the entire pool are defective.

Judge Cote follows a similar pattern. Nomura had no written procedures for evaluating loans. P. 48. After it won a bid for a pool, it conducted a review of the loans, relying on the information contained on the loan tape provided by the originator of the loans in the pool. The loan tape is actually a spread sheet containing information about the loans, including FICO scores, debt to income ratios, loan to value ratios, owner-occupancy status and other important data. P. 31. Nomura sent the loan tape to its vendors to conduct reviews for credit, compliance with originator’s stated underwriting guidelines, and valuation. The due diligence was done on a sample, in the range of 25-30%, but it was not a random sample, so the results could not be extended to the entire loan pool.

Of the loans submitted beginning in 2006 and the first quarter of 2007, one vendor graded 38% as failing to meet the originator guidelines. Nomura waived in 58% of those. It also had very high kickout rates for the pools it purchased. That means that of the examined loans, about 22% had major defects, again not counting the unexamined loans. With high kick-out rates, the number of defective loans remaining would be much higher.

The offering materials for these RMBSs all claimed that the loans met the originator guidelines with some exceptions. Judge Cote says this was a false statement, and that there was no showing that the defendants had done the kind of investigation required to avoid liability.

3. Individual Liability.

The Judge looks at the liability of the five individual defendants in part IV.b.3. P. 234. These are the officers, directors and signatories of the entities responsible for the filing of the offering materials. The ruling is harsh:

All five Individual Defendants testified at trial. The general picture was one of limited, if any, sense of accountability and responsibility. They claimed to rely on what they assumed were robust diligence processes to ensure the accuracy of the statements Nomura made, even if they did not understand, or, worse, misunderstood, the nature of those processes. Not one of them actually understood the limited role that due diligence played in Nomura’s securitization process, and some of them actually had strong reason to know of the problems with the diligence process and of the red flags that even that problematic process raised.

Each Individual Defendant made a point of highlighting the aspects of Nomura’s RMBS business for which he claimed to have no responsibility. None of them identified who was responsible for ensuring the accuracy of the contents of the Prospectus Supplements relevant to this lawsuit, and, as this group of Individual Defendants furnished the most likely candidates, the only logical conclusion is that no one held that responsibility.

A detailed explanation of this summary follows. Apparently securitizers have terrible memories.

4. Misleading The Credit Rating Agencies

FHFA did not claim the ratings were false, but that the ratings were not based on accurate information about the actual collateral for the RMBSs. The Court found that the defendants gamed the credit rating agencies models by submitting only the loan tapes prepared by the originators, even when they knew that the loan tapes were full of errors that would affect the final rating. Page 202. The Court found that the ratings depended on factors like the loan to value ratio and the debt to income ratio. The Court found that the LTV ratios were lower than represented by Nomura in 18-36% of the loans, and that many LTV ratios were above 100%, which skewed the models of the credit rating agencies and bought Nomura undeserved AAA ratings. This is a nice piece of lawyering by the legal team at Quinn Emanuel.

The FCIC is not so forgiving towards the Credit Rating Agencies:

The Commission concludes that the credit rating agencies abysmally failed in their central mission to provide quality ratings on securities for the benefit of investors. They did not heed many warning signs indicating significant problems in the housing and mortgage sector. Conclusion to Ch. 10 at .pdf 240

But there’s no point in shooting at the credit rating agencies. They have a get out of jail free card from the judiciary, which says that they are just giving opinions and are protected by the First Amendment.

5. Loss Causation.

The defendants argued that they didn’t cause the loss. They claimed that it was the housing market crash. Judge Cote cites a recent decision from the Second Circuit, Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, — F.3d —, 2015 WL 1654120 at 8 n.2

… there may be circumstances under which a marketwide economic collapse is itself caused by the conduct alleged to have caused a plaintiff’s loss, although the link between any particular defendant’s alleged misconduct and the downturn may be difficult to establish.

Judge Cote tells us that the Second Circuit cited the Final Report of the FCIC for the proposition that the housing crash was linked to the “shoddy origination practices concealed by the misrepresentations” in the Nomura offering materials. Those shoddy practices contributed to the housing bubble, and were factors in the Great Crash. Crucially, she writes at 332:

Defendants do not dispute this. They do not deny that there is a link between the securitization frenzy associated with those shoddy practices and the very macroeconomic factors that they say caused the losses to the Certificates. This lack of contest, standing alone, dooms defendants’ loss causation defense, which, again, requires them to affirmatively prove that something other than the alleged defects caused the losses.

6. Conclusions

The legal team at Quinn Emanuel did a nice job of preparation. The people who prepared the testimony of the expert Dr. William Schwert deserve a special mention: that was really smart. See page 204 and previous material.

It looks like the Quinn Emanuel team and the Judge were deeply informed by the Final Report, and used it as a road map to digging up and presenting evidence of the fraud and corruption in the securitization process. It’s a terrible shame the spineless prosecutors at the Department of Justice couldn’t grasp the point of the Final Report. That is, unless the prosecutors did understand, and the decision was made by the neoliberals at the top, Lanny Breuer and Eric Holder, and the bankster’s best friend, Barack Obama.

DEA Likely Has More than One Dragnet

As yesterday’s USAT story on the DEA dragnet reported, DOJ’s Inspector General is investigating DEA’s dragnet. I first reported that in April 2014.

As I also reported in February, FBI is obstructing that investigation — so much so, that DOJ’s Inspector General Michael Horowitz encouraged Congress to start using appropriations to force it to stop.

The unfulfilled information request that causes the OIG to make this report was sent to the FBI on November 20,2014. Since that time, the FBI has made a partial production in this matter, and there have been multiple discussions between the OIG and the FBI about this request, resulting in the OIG setting a final deadline for production of all material of February 13,2015.

On February 12, 2015, the FBI informed the OIG that it would not be able to produce the remaining records by the deadline. The FBI gave an estimate of 1-2 weeks to complete the production but did not commit to do so by a date certain. The reason for the FBI’s inability to meet the prior deadline set by the OIG for production is the FBI’s desire to continue its review of emails requested by the OIG to determine whether they contain any information which the FBI maintains the OIG is not legally entitled to access, such as grand jury, Title III electronic surveillance, and Fair Credit Reporting Act information.

DOJ IG’s comments about this investigation are worth reconsideration for two reasons.

First, FBI’s obstruction of the investigation emphasize what we already knew from the Shantia Hassanshahi case (via which we first learned about this database). The FBI is (was) also using this database, and for purposes that far exceed counter-narcotics (Hassanshahi was busted for sanctions violations). And, as the Homeland Security investigator’s dramatically changing stories about how he first identified Hassanshahi suggest, for each of those usages, there’s likely some kind of parallel construction going on.

How many cases have been based off this giant dragnet?

But also look at how DOJ’s IG has described this investigation.

Administrative Subpoenas

The OIG is examining the DEA’s use of administrative subpoenas to obtain broad collections of data or information. The review will address the legal authority for the acquisition or use of these data collections; the existence and effectiveness of any policies and procedural safeguards established with respect to the collection, use, and retention of the data; the creation, dissemination, and usefulness of any products generated from the data; and the use of “parallel construction” or other techniques to protect the confidentiality of these programs.

DOJ IG is investigation DEA’s use of subpoenas to obtain broad collections of data or information. Its review will address the legal authority underlying these data collections.

Collections, plural.

Admittedly, we already know of two DEA dragnets: the international dragnet described by the USAT, and the domestic one — Hemisphere — though that resides at least partially with the White House Drug Czar.

But the authority used in the USAT dragnet, 21 USC 876, is the drug equivalent of Section 215, permitting the agency to obtain “tangible things” relevant to (that phrase again) an investigation. We know FBI used equivalent language under Section 215 to collect financial and Internet records as well.

Hell, the DEA couldn’t very well track drug cartels without following the money, via whatever means. Plus, we know cartels have used things like travelers checks and gift cards to move money in recent years.

So I would be willing to bet more than a few quarters that DOJ IG’s use of the term “collections” suggests there’s more than just these telecom dragnets hiding somewhere.

Chelsea Manning Warned of Nuri al-Maliki’s Corruption in 2010. David Petraeus’ Subordinates Silenced Her.

In early 2010, Chelsea Manning discovered that a group of people Iraq’s Federal Police were treating as insurgents were instead trying to call attention to Nuri al-Malki’s corruption. When she alerted her supervisors to that fact, they told her to “drop it,” and instead find more people who were publishing “anti-Iraqi literature” calling out Maliki’s corruption.

On 27 February 2010, a report was received from a subordinate battalion. The report described an event in which the FP detained fifteen (15) individuals for printing “anti-Iraqi literature.” By 2 March 2010, I received instructions from an S3 section officer in the 2-10BCT Tactical Operations Center to investigate the matter, and figure out who these “bad guys” were, and how significant this event was for the FP.

Over the course of my research, I found that none of the individuals had previous ties with anti-Iraqi actions or suspected terrorist or militia groups. A few hours later, I received several photos from the scene from the subordinate battalion.


I printed a blown up copy of the high-resolution photo, and laminated it for ease of storage and transfer. I then walked to the TOC and delivered the laminated copy to our category 2 interpreter. She reviewed the information and about a half-hour later delivered a rough written transcript in English to the S2 section.

I read the transcript, and followed up with her, asking for her take on its contents. She said it was easy for her to transcribe verbatim since I blew up the photograph and laminated it. She said the general nature of the document was benign. The documentation, as I assessed as well, was merely a scholarly critique of the then-current Iraqi Prime Minister, Nouri al-Maliki. It detailed corruption within the cabinet of al-Maliki’s government, and the financial impact of this corruption on the Iraqi people.

After discovering this discrepancy between FP’s report, and the interpreter’s transcript, I forwarded this discovery, in person to the TO OIC and Battle NCOIC.

The TOC OIC and, the overhearing Battlecaptain, informed me they didn’t need or want to know this information any more. They told me to “drop it” and to just assist them and the FP in finding out where more of these print shops creating “anti-Iraqi literature” might be. I couldn’t believe what I heard, (24-25)

At the time, David Petraeus was the head of CENTCOM, the very top of the chain of command that had ordered Manning to “drop” concerns about Iraqis being detained for legitimate opposition to Maliki’s corruption.

Manning would go on to leak more documents showing US complicity in Iraqi abuses, going back to 2004. None of those documents were classified more than Secret. Her efforts (in part) to alert Americans to the abuse the military chain of command in Iraq was ignoring won her a 35-year sentence in Leavenworth.

Compare that to David Petraeus who pretends, to this day, Maliki’s corruption was not known and not knowable before the US withdrew troops in 2011, who pretends the US troops under his command did not ignore, even facilitate, Maliki’s corruption.

What went wrong?

The proximate cause of Iraq’s unraveling was the increasing authoritarian, sectarian and corrupt conduct of the Iraqi government and its leader after the departure of the last U.S. combat forces in 2011.  The actions of the Iraqi prime minister undid the major accomplishment of the Surge. (They) alienated the Iraqi Sunnis and once again created in the Sunni areas fertile fields for the planting of the seeds of extremism, essentially opening the door to the takeover of the Islamic State. Some may contend that all of this was inevitable. Iraq was bound to fail, they will argue, because of the inherently sectarian character of the Iraqi people. I don’t agree with that assessment.

The tragedy is that political leaders failed so badly at delivering what Iraqis clearly wanted — and for that, a great deal of responsibility lies with Prime Minister Maliki.

Unlike Manning, Petraeus adheres to a myth, the myth that this war was not lost 12 years ago, when George Bush ordered us to invade based on a pack of lies, when Petraeus and his fellow commanders failed to bring security after the invasion (largely through the priorities of their superiors), when Paul Bremer decided to criminalize the bureaucracy that might have restored stability — and a secular character — to Iraq.

Of course, Petraeus’ service to that myth is no doubt a big part of the reason he can continue to influence public opinion from the comfort of his own home as he prepares to serve his 2 years of probation for leaking code word documents, documents far more sensitive than those Manning leaked, as opposed to the 35 years in Leavenworth Manning received.

Which is, of course, a pretty potent symbol of our own corruption.

Did John Brennan Confirm NSA’s Role in Tracking Finance?

In his talk at the Council on Foreign Relations, John Brennan was asked about terrorists’ use of offshore bank and shell companies (just after 50:00)

I must say that the US Department of the Treasury as well as other institutions of the US government have been very very effective and successful working, again, with international partners to try to uncover and uproot this, but it’s not just for terrorism purposes, it’s for organized crime, narco, um, cartels and others.

It would be thoroughly unsurprising if NSA were spying on monetary flows. After all, their dominance of international telecom cables mean they dominate the infrastructure tracking that flow. Plus there’s that whole SWIFT thing.

But it’s nice to know from John Brennan that those “other institutions” have so thoroughly uncovered and uprooted that kind of intelligence, while presumably ignoring the crimes of Jamie Dimon.

BREAKING: Venezuela Has Worse Human Rights Problems than Saudi Arabia … ?

President Obama imposed sanctions on a number of Venezuelans yesterday, including — among others — the woman prosecuting Caracas MayorAntonio Ledezma Diaz, Katherine Nayarith Haringhton Padron. Apparent intelligence officers seized Ledezma on February 20, and since then, Nicolas Maduro, has been tying Ledezma’s seizure to a purported coup plan launched by exiles in the US, but also using the tools of American hegemony.

President Maduro played the audio of a conversation held between Carlos Manuel Osuna Saraco, a former Venezuelan politician living in New York, and a soldier, in which Osuna dictates the statement that the rebel soldiers should read out during the coup.

The Venezuelan leader informed viewers that he would soon call upon the United States to extradite the suspect Osuna for trial in his home country.

Maduro also noted that in addition to the call from Osuna’s base in New York, there was a second phone call from Miami.

Ledezma was in constant coordination with Osuna in New York via telephone.


Maduro also showed a copy of a new “100-day Plan for Transition”, designed by the coup plotters and the opposition, which stipulated a series of measures which would be implemented by the planned governing junta.

The plan would take effect immediately after the coup, calling for early elections and the privatization of all public services.

The transitional government would request all of the current Venezuelan officials to turn themselves into the police within a period of 180 days. It also requested every Cuban worker within the government to turn themselves in unarmed to their local police station.

The plan also contemplated a role for the IMF, the World Bank and the Inter-American Development Bank to intervene in the Venezuelan economy.

In response, the US has been saying Maduro is making this whole coup thing up, even accusing him of making up some of the intelligence he was showing to make his case.

And then, even while claiming Maduro was making shit up about the US engaging in economic war and using its tools of hegemony to conduct regime change in Venezuela, President Obama used its dominant financial position to undermine Maduro’s regime.

The order imposing sanctions, like all such orders, makes a convoluted explanation for why the US has to use its purported capitalistic tools against foreigners. First, because Venezuela poses a threat to US national security.

I, BARACK OBAMA, President of the United States of America, find that the situation in Venezuela, including the Government of Venezuela’s erosion of human rights guarantees, persecution of political opponents, curtailment of press freedoms, use of violence and human rights violations and abuses in response to antigovernment protests, and arbitrary arrest and detention of antigovernment protestors, as well as the exacerbating presence of significant public corruption, constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States, and I hereby declare a national emergency to deal with that threat.

It then defines sanction targets as those who undermine democratic processes, engage in violence or human rights abuses (including — though purportedly not limited to those involved in anti-government protests), those that limit freedom of expression, and those involved in public corruption.

(ii) any person determined by the Secretary of the Treasury, in consultation with the Secretary of State: (A) to be responsible for or complicit in, or responsible for ordering, controlling, or otherwise directing, or to have participated in, directly or indirectly, any of the following in or in relation to Venezuela: (1) actions or policies that undermine democratic processes or institutions; (2) significant acts of violence or conduct that constitutes a serious abuse or violation of human rights, including against persons involved in antigovernment protests in Venezuela in or since February 2014; (3) actions that prohibit, limit, or penalize the exercise of freedom of expression or peaceful assembly; or (4) public corruption by senior officials within the Government of Venezuela;

The fact sheet on these sanctions also argues Venezuela is the among the most corrupt countries in the world (but doesn’t mention that it ties with Yemen, and beats out Libya, Iraq, and Afghanistan, as well as allies like Uzbekistan — all of also which rank much worse for human rights abuses than Venezuela.

In other words, the Administration is claiming that Venezuela’s corruption and human rights abuses present a much bigger threat to the US than a string of countries we’ve already destabilized that are worse in terms of corruption and human rights, as well as (in the latter category) Egypt and Saudi Arabia’s more severe human rights abuses.

All of which is receiving more scrutiny than it normally would, not least because the claim that Venezuela is a threat to US national security is so obviously bullshit.

As an official whose identity couldn’t be revealed because Obama’s is the Most Transparent Evah™ explained the other day, it’s actually normal for the government to claim that sanction targets are a threat to this country.

So I can start off and say in terms of how unusual this is, most of our sanctions programs began with the declaration by the President of a national emergency that results — that’s a threat to the national security, foreign policy, or economy of the United States.  And so most of the sanctions programs that we have, from Iran to Syria, Burma, across the board, rely on these same types of national emergency declarations.

So in that sense, it’s a usual part of the process.  And we have somewhere between 20 and 30 sanctions programs, depending on the way you measure them, that are based on these same types of national emergency declarations.

Either the same or another SAO insisted that this is not about the US bigfooting in Venezuela.

Can I just also — let me just say that there’s been a lot of commentary about interference in internal affairs of other countries by the Venezuelan government.  The actions we take today are clearly sovereign actions by a country about its own financial system.  These actions we take are sovereign decisions about who comes into the United States.  They’re not actions taken to involve ourselves in another country.

Other countries — notably Russia and China — are both affirmatively rolling out measures to counter our dominance in the financial world, in ways that could significantly undermine our obviously selective choice for sanctions targets. Whatever else these Venezuela sanctions do, they will also likely elicit more scrutiny of just how illegitimate our use of sanctions is (and to a significant extent, has long been).

34 Years Later, Treasury Is Still Operating without Procedures to Protect Americans under EO 12333

With almost no explanation, PCLOB just released this table ODNI compiled showing the status of procedures Agencies follow to protect US person information when using data obtained under EO 12333. This is something PCLOB has been pushing for since August 2013, when it sent a letter to Attorney General Holder pointing out that some agencies weren’t in compliance with the EO.

As you know, Executive Order 12333 establishes the overall framework for the conduct of intelligence activities by U.S. intelligence agencies. Under section 2.3 of the Executive Order, intelligence agencies can only collect, retain, and disseminate information about U.S. persons if the information fits within one of the enumerated categories under the Order and if it is permitted under that agency’s implementing guidelines approved by the Attorney General after consultation with the Director of National Intelligence.

The Privacy and Civil Liberties Oversight Board has learned that key procedures that form the guidelines to protect “information concerning United States person” have not comprehensively been updated, in some cases in almost three decades, despite dramatic changes in information use and technology.

So I assume the release of this table is designed to pressure the agencies that have been stalling this process.

The immediate takeaway from this table is that, 34 years after Ronald Reagan ordered agencies to have such procedures in Executive Order 12333 and 18 months after PCLOB pushed for agencies to follow the EO, several intelligence agencies still don’t have Attorney General approved procedures. Those agencies and the interim procedures they’re using are:

The Department of Homeland Security’s notoriously shoddy Office of Intelligence and Analysis: Pending issuance of final procedures, I&A is operating pursuant to Interim Intelligence Oversight Procedures, issued jointly by the Under Secretary for Intelligence and Analysis and the Associate General Counsel for Intelligence (April 3, 2008).

United States Coast Guard (USCG)- Intelligence and counterintelligence elements: Pending issuance of final procedures, operating pursuant to Commandant Instruction – COMDINST 3820.12, Coast Guard Intelligence Activities (August 28, 2003).

Department of Treasury Office of Intelligence and Analysis (OIA): Pending issuance of final procedures. While draft guidelines are being reviewed in the interagency approval process, the Office of Intelligence and Analysis conducts intelligence operations pursuant to EO 12333 and statutory responsibilities of the IC element, as advised by supporting legal counsel.

Drug Enforcement Administration, Office of National Security Intelligence (ONSI): Pending issuance of final procedures, operates pursuant to guidance of the Office of Chief Counsel, other guidance, and: Attorney General approved “Guidelines for Disclosure of Grand Jury and Electronic, Wire, and Oral Interception Information Identifying United States Persons” (September 23, 2002); Attorney General approved “Guidelines Regarding Disclosure to the Director of Central Intelligence and Homeland Security Officials of Foreign Intelligence Acquired in the Course of a Criminal Investigation” (September 23, 2002).

I’m not surprised about DHS I&A because — as I noted — most people who track it know that it has never managed to do what it claims it should be doing. And I’m not all that worried about the Coast Guard; how much US person spying are they really doing, after all?

One should always worry about the DEA, and the fact that DEA has only had procedures affecting some of its use of EO 12333 intelligence is par for the course. I mean, limits on what it can share with CIA, but no guidelines on what it can share with FBI? And no guidelines on what it has dragnet collected overseas, where it is very active?

But I’m most troubled by Treasury OIA. In part, that’s because it doesn’t have anything in place — it has just been operating on EO 12333, apparently, in spite of EO 12333’s clear requirement that agencies have more detailed procedures in place. But Treasury’s failure to develop and follow procedures to protect US persons is especially troubling given the more central role OIA has — which expanded in 2004 — in researching and designating terrorists, weapons proliferators, and drug kingpins.

OIA makes intelligence actionable by supporting designations of terrorists, weapons proliferators, and drug traffickers and by providing information to support Treasury’s outreach to foreign partners. OIA also serves as a unique and valuable source of information to the Intelligence Community (IC), providing economic analysis, intelligence analysis, and Treasury intelligence information reports to support the IC’s needs.

As it is, such designations and the criminalization of US person actions that might violation sanctions imposed pursuant to such designations are a black box largely devoid of due process (unless you’re a rich Saudi business man). But Treasury’s failure to establish procedures to protect US persons is especially troubling given how central these three topics — terrorists, weapons proliferation, and drugs — are in the intelligence communities overseas collection. This is where bulk collection happens. And yet any US persons suck up in the process and shared with Treasury have only ill-defined protections?

Treasury’s role in spying on Americans may be little understood. But it is significant. And apparently they’ve been doing that spying without the required internal controls.


Loretta Lynch: Not Enough Evidence to Charge HSBC Banksters

As part of her Questions for the Record, Attorney General nominee Loretta Lynch was asked about her role in the HSBC handslap in 2012. (See Q 38, h/t Katherine Hawkins)

38. As United States Attorney for the Eastern District of New York, you helped secure nearly $2 billion from HSBC over its failure to establish proper procedures to prevent money laundering by drug cartels and terrorists. You were quoted in a DOJ press release saying, “HSBC’s blatant failure to implement proper anti-money laundering controls facilitated the laundering of at least $881 million in drug proceeds through the U.S. financial system.”

You stated that the bank’s “willful flouting of U.S. sanctions laws and regulations resulted in the processing of hundreds of millions of dollars in [Office of Foreign Assets Control]-prohibited transactions.” Still, no criminal penalties have been assessed for any executive who may have been involved.

a. Did you make any decision or recommendation on charging any individual with a crime?

i. If so, please describe any and all decisions or recommendations you made.

ii. Please explain why such decisions or recommendations were made.

b. If you did not make any decision or recommendation on charging any individual with a crime, who made the decision not to prosecute?

RESPONSE: On December 11, 2012, the Department filed an information charging HSBC Bank USA with violations of the Bank Secrecy Act and HSBC Holdings with violating U.S. economic sanctions (the two entities are collectively referred to as “HSBC”). Pursuant to a deferred prosecution agreement (“DPA”), HSBC admitted its wrongdoing, agreed to forfeit $1.256 billion, and agreed to implement significant remedial measures, including, among other things, to follow the highest global anti-money laundering standards in all jurisdictions in which it operates. As the United States District Judge who approved the deferred prosecution found, “the DPA imposes upon HSBC significant, and in some respect extraordinary, measures” and the “decision to approve the DPA is easy, for it accomplishes a great deal.” Although grand jury secrecy rules prevent me from discussing the facts involving any individual or entity against whom we decided not to bring criminal charges, as I do in all cases in which I am involved, I and the dedicated career prosecutors handling the investigation carefully considered whether there was sufficient admissible evidence to prosecute an individual and whether such a prosecution otherwise would have been consistent with the principles of federal prosecution contained in the United States Attorney’s Manual.

I want to reiterate, particularly in the context of recent media reports regarding the release of HSBC files pertaining to its tax clients, that the Deferred Prosecution Agreement reached with HSBC addresses only the charges filed in the criminal violations of the Bank Secrecy Act for failures to maintain an adequate anti-money laundering program and for sanctions violations. The DPA explicitly does not provide any protection against prosecution for conduct beyond what was described in the Statement of Facts. Furthermore, I should note the DPA explicitly mentions that the agreement does not bind the Department’s Tax Division, nor the Fraud Section of the Criminal Division. information, which are limited to violations of the Bank Secrecy Act for failures to maintain an adequate anti-money laundering program and for sanctions violations. The DPA explicitly does not provide any protection against prosecution for conduct beyond what was described in the Statement of Facts. Furthermore, I should note the DPA explicitly mentions that the agreement does not bind the Department’s Tax Division, nor the Fraud Section of the Criminal Division. [my emphasis]

Lynch seems to want to have her cake and eat it too.

Sure, she and her prosecutors were unable to find the evidence in Carl Levin’s gift-wrapped case. But trust her, she seems to be saying, she might one day see fit to charge some warm bodies with fraud if she’s confirmed.

And note she makes no mention of material support for terrorism????

Because if you’re a bank, such things are legal, apparently.

Mapping Treasure: Looking Beyond the Yield of Traditional Insider Trading

Money by Kevin Dooley via Flickr

[graphic: Money by Kevin Dooley, via Flickr]

A former SAC hedge fund manager, who cooperated with law enforcement, avoided a prison sentence this week after the FBI’s investigation into insider trading found criminal activities. It’s a rather typical story in which persons unfairly benefited from information they would not otherwise have access to outside their work as traders. Six persons were ultimately convicted in connection with this case.

A fresh spin on insider trading also made news this week, when the SEC filed a lawsuit against two Capital One fraud investigators who made 1800 percent on their investment over three years, based on their use of a Capital One credit card user database.

The two investigators, Bonan Huang and Nan Huang, grew an investment of $147,300 to $2.8 million based on thousands of searches across a database comprised of credit card customer transactions. Noting the volume of use of credit cards at a particular fast food company, they bought and traded the company’s stock based on this data.

Over time they made similar stock trades based on transactional volume and other publicly available news about three different companies.

Had the database been one for sale by a company rather than their employer’s proprietary database, the Huangs would have been lauded as investment rock stars. But because the method they used “misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information,” the two men are being sued for insider trading.

The Huangs’ trading experience gives pause when one considers the value of metadata, and of the data breach at JP Morgan Chase this past year.

Metadata can offer a volume of transactional activity, though it will not disclose the value of a transaction. Imagine smartphones indicating they are being used at particular devices – point-of-sale devices – at any retailer, from fast food to hard lines. An uptick in overall activity at a specific retailer indicates greater volume of business, the data fresher than that reported in a 10-Q report filed publicly with the SEC. What could an investor do with this kind of data? One could imagine success not much different than the Huangs experienced, provided they also understood other publicly available information about the retailers under observation. Continue reading

The 702 Crimes Include Cybersecurity, Infrastructure, and “Transnational Crimes”

Bob Litt is giving a speech. In it he described what “serious crimes” FBI can use 702-derived information to investigate and prosecute. They include:

Can use for 702: Crimes involving death, kidnapping, bodily harm, v minor, infrastructure, cybersecurity, transnational crimes.

Both cybersecurity and infrastructure are big, and potentially egregiously interpreted. They surely can include a whole slew of innocent protestors who are deemed a threat to things like fracking or city infrastructure.

But also, if FBI can use 702 to investigate “transnational crime” then why isn’t Jamie Dimon in prison?

Lanny Breuer’s Conflicts

NYT has a story based off a CREW FOIA for details of FBI’s investigations into John Ensign’s efforts to buy off his mistress’ husband. While the details show Ensign was even more sleazy than we knew, I’m at least as interested in this passage:

The Justice Department’s decision not to charge Mr. Ensign was widely seen as a sign of its skittishness about prosecuting and potentially losing public corruption cases in the wake of stinging courtroom defeats against former Senators Ted Stevens of Alaska and John Edwards of North Carolina. The documents confirm that speculation: In an internal email in 2011 assessing the chances of prosecuting Mr. Ensign, a top prosecutor wrote that “the legal theory is possible with the right facts” but that the “mere response” of helping a former Senate employee to find work “is not enough.” Another prosecutor wrote that “this is a really tough case to win.”

The documents show that the investigation was also complicated by a legal conflict; Lanny A. Breuer, head of the Justice Department’s criminal division at the time, had worked with a defense lawyer in the Ensign camp at Mr. Breuer’s prior law firm, Covington & Burling. Mr. Breuer was temporarily recused from the Ensign investigation as a result of the conflict, the records show, but later got a waiver that allowed him to oversee it with certain restrictions, officials said.

In 2012, Mr. Breuer and the Justice Department decided not to bring criminal charges against Mr. Ensign.

Even the Senate (!) was willing to discipline Ensign. But DOJ chose not to. And at the center of that decision was Lanny Breuer, whose once and future firm, Covington & Burling, represented Ensign. And yet Breuer found a way to un-recuse himself from the case.

It is not at all a surprise that Breuer didn’t manage his conflicts well. I argued that he didn’t back in 2009, when he made the decision to bury Dick Cheney’s CIA leak investigation interview (and make no mention of his quasi-grand jury appearance), even though he had represented John Kiriakou in the CIA leak case (and in helping him avoid grand jury testimony, hide that Cheney and Libby knew Plame was CIA earlier than they said they did).

Ironically, that was also for a CREW FOIA.

Maybe CREW should just skip the interim step and FOIA all the times Breuer ignored the conflicts he had on issues he presided over?

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emptywheel @JimmyHeartache No. It makes you a not-asshole. @LazarilloConcha @jesseberney
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