I’ve become increasingly convinced that DOJ’s head of Criminal Division, Lanny Breuer is the rotting cancer at the heart of a thoroughly discredited DOJ. Which is why I’m not surprised to see this speech he gave at the NYC Bar Association selling the “benefits” of Deferred Prosecution Agreements. (h/t Main Justice) He spends a lot of his speech claiming DPAs result in accountability.
And, over the last decade, DPAs have become a mainstay of white collar criminal law enforcement.
The result has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts. Companies now know that avoiding the disaster scenario of an indictment does not mean an escape from accountability. They know that they will be answerable even for conduct that in years past would have resulted in a declination. Companies also realize that if they want to avoid pleading guilty, or to convince us to forego bringing a case altogether, they must prove to us that they are serious about compliance. Our prosecutors are sophisticated. They know the difference between a real compliance program and a make-believe one. They know the difference between actual cooperation with a government investigation and make-believe cooperation. And they know the difference between a rogue employee and a rotten corporation.
One of the reasons why deferred prosecution agreements are such a powerful tool is that, in many ways, a DPA has the same punitive, deterrent, and rehabilitative effect as a guilty plea: when a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing, agree to cooperate with the government’s investigation, pay a fine, agree to improve its compliance program, and agree to face prosecution if it fails to satisfy the terms of the agreement. All of these components of DPAs are critical for accountability.
But the real tell is when he confesses that he “sometimes–though … not always” let corporations off because a CEO or an economist scared him with threats of global markets failing if he held a corporation accountable by indicting it.
To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. [my emphasis]
None of this is surprising, of course. It has long been clear that Breuer’s Criminal Division often bows to the scare tactics of Breuer’s once and future client base. (In his speech, he boasts about how well DPAs and NPAs have worked with Morgan Stanley and Barclays, respectively.)
It’s just so embarrassing that he went out in public and made this pathetic attempt to claim it all amounts to accountability.
First we confirm what we long suspected–bankers were manipulating the LIBOR rate to benefit themselves, corrupting one of the “market” measures at the core of the financial system.
And now, in an Abu Dhabi Commercial Bank suit against Morgan Stanley over residential backed mortgages, we get proof that banks pressured ratings agencies to rate shitpile as gold and even wrote their own ratings reports.
For example, when the primary analyst at S.& P. notified Morgan Stanley that some of the Cheyne securities would most likely receive a BBB rating, not the A grade that the firm had wanted, the agency received a blistering e-mail from a Morgan Stanley executive. S.& P. subsequently raised the grade to A.
And when a Morgan Stanley colleague asked for information about the Cheyne deal, Rany Moubarak, an analyst at Morgan Stanley on the deal, wrote in an e-mail: “I attach the Moody’s NIR (that we ended up writing)” referring to the new issue report published by Moody’s in August 2005.
The court filings also demonstrate a lack of methodology for analyzing the Cheyne debt. For example, in an e-mail before the deal was sold, S.& P.’s lead analyst wrote to a colleague: “I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it. The documents show that the lead analyst at Moody’s noted there was “no actual data backing the current model assumptions” for segments of the Cheyne deal.
Bloomberg has an excellent catch from the HB Gary emails, revealing that Morgan Stanley was one of the 20-200 companies targeted by the Chinese-based Aurora hack in 2009.
Morgan Stanley experienced a “very sensitive” break-in to its network by the same China-based hackers who attacked Google Inc.’s computers more than a year ago, according to e-mails stolen from a cyber-security company working for the bank.
The e-mails from the Sacramento, California-based computer security firm HBGary Inc., which identify the first financial institution targeted in the series of attacks, said the bank considered details of the intrusion a closely guarded secret.
“They were hit hard by the real Aurora attacks (not the crap in the news),” wrote Phil Wallisch, a senior security engineer at HBGary, who said he read an internal Morgan Stanley report detailing the so-called Operation Aurora attacks.
As McAfee made clear when it first announced the hack, the hackers were after the targets’ intellectual property (though note the understanding of the timing of the hack has changed).
Similar to the ATM heist of 2009, Operation Aurora looks to be a coordinated attack on many high profile companies targeting their intellectual property. Like an army of mules withdrawing funds from an ATM, this malware enabled the attackers to quietly suck the crown jewels out of many companies while people were off enjoying their December holidays.
Now, Bloomberg–with backing from an FBI officer and a reminder that Morgan Stanley is the world’s larger mergers and acquisitions adviser–seems to be most concerned about what the hackers learned about impending M&A.
FBI Deputy Assistant Director Steven Chabinsky said that hackers have increasingly targeted information related to mergers and acquisitions, data that can give companies involved an advantage in negotiations.
But the description of the targeted information as IP immediately made me think about quant code, the algorithms that banks use to conduct high frequency trading. When Sergey Aleynikov attempted to sell Goldman Sachs’ high frequency trading code, the Goldman and the government treated it like a capital offense. For good reason, because if another firm got that code, it would be able to game out Goldman’s moves. So how do we know that these hackers didn’t steal MS’ quant code?
In any case, the hack seems to raise real questions about disclosure. Should Morgan Stanley have had to reveal this to its stockholders and potential M&A clients (remember that MS led GM’s IPO last year, though hopefully long enough after this hack for the merger not to be exposed by it). Should MS have had to reveal this–with the potential implications for markets–to Congress? Did it?
I just can’t help but think that the Aurora hackers may well have gotten the same kind of information that Congressional oversight committees have requested from the Fed, but were refused.
Add one more thing to the "no one could have imagined" file: The GAO reports that Citigroup and Morgan Stanley have been sneaking their money off shore so as to avoid paying taxes.
The new Government Accountability Office (GAO) report, released today by Sens. Byron L. Dorgan (D-N.D.) and Carl M. Levin (D-Mich.), lists Citigroup and Morgan Stanley as having set up hundreds of tax haven subsidiaries, along with American International Group and Bank of America. Also in the tax-haven list are well-known companies and such federal contractors as American Express, Pepsi and Caterpillar.
"This report shows that some of our country’s largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And, some of those companies have even received emergency economic funds from the government," Dorgan said. "I think we should take action to shut down these tax dodgers, and we will be introducing legislation to do just that."
To illustrate the problem, Levin said the report found that Citigroup has set up 427 tax haven subsidiaries to conduct its business, including 91 in Luxembourg, 90 in the Cayman Islands and 35 in the British Virgin Islands. He said other havens include Switzerland, Hong Kong, Panama and Mauritius.
What Levin didn’t say, of course, is that these tax havens allow them to avoid financial oversight, too.
But I’m sure that won’t stop anyone from dumping billions of money into these firms–no questions asked–so they can continue to sneak the money off to the Caymans while the US goes broke.