Mark Mitchell over at DeepCapture.com is reporting on the SEC
cover up involving Gary Aguirre, who in 2006 helped break open the
scandal of naked short selling. Here are his words:
There was an article in The New York Times yesterday about
the SEC’s disgraceful ruling that it will take no
disciplinary action against the SEC cronies at the center of the
Gary Aguirre scandal. Read through the Times’ false veneer of
objectivity, and it seems that reporter Walt Bogdanich is trying to
say that it’s pretty damn strange that a corrupt SEC has been
allowed to adjudicate its own corruption.
Stranger still, no other journalist has expressed outrage over
this. Meanwhile, the nation’s mainstream media (The New York
Times included) has yet to deliver a story describing the Aguirre
scandal’s most important component – the bit that makes
it the greatest scandal in the history of the SEC and which helps
explain why the commission failed to stop a crime that later
contributed to the near total collapse of the American financial
system.
Readers of the mainstream media know only that Aguirre is the
former SEC attorney who claimed that he was fired for political
reasons after pursuing an “insider trading” case
against Morgan Stanley CEO John Mack and a hedge fund called Pequot
Capital. The real story – the one you don’t read in the
papers – is that Aguirre has, all along, made it perfectly
clear that his investigation – the one he says that Mack
“stopped in its tracks” – was about much more
than the relatively minor crime of “insider
trading.”
Aguirre blew this scandal wide open in 2006, when he wrote an
18-page letter to the U.S. Congress. The letter reads: “I
believe our capital markets face a growing risk from lightly or
unregulated hedge funds just as our markets did in the 1920s from
unregulated pools of money – then called syndicates, trusts
or pools. Those unregulated pools were instrumental in delivering
the 1929 Crash….There is growing evidence that today’s
pools—hedge funds—have advanced and refined the
practice of manipulating and cheating other market
participants.”
Aguirre then described the investigation that he had led at the
SEC. “The investigation was two-pronged,” he wrote. One
prong concerned “insider trading.” However, the second,
and far more important prong, concerned “market
manipulation.” Specifically, Aguirre and his colleagues were
investigating “two suspected violations: wash sales and naked
shorts.”
“My colleagues,” Aguirre wrote, “believed [the
naked short selling] held a greater potential to severely injure
the financial markets.”
That is, Aguirre and his colleagues believed that naked short
selling (hedge funds selling stock that they have not yet purchased
or borrowed in order to drive down prices and destroy public
companies) ranked high among the tactics that “were
instrumental in delivering the 1929 Crash” – a repeat
of which now seemed entirely possible since the tactic had been
“refined” by hedge funds intent on “manipulating
and cheating other market participants.” But the SEC
rank-and-file’s attempt to investigate this crime was
“stopped in its tracks” by SEC leaders who had been
corrupted by Wall Street fat cats.
At the time when Aguirre released his letter, a small clique of
influential journalists with close ties to certain Wall Street fat
cats were going to great lengths to whitewash the crime of naked
short selling (see “The Story of Deep Capture ” for details).
Unsurprisingly, some of these journalists quickly sought to
discredit the SEC whistleblower. They reported that Aguirre’s
investigation concerned only the minor infraction of insider
trading, and that he had failed to present evidence that this minor
infraction had occurred. The journalists also declared that Aguirre
was untrustworthy – an eccentric who had been fired for poor
performance.
After a year long investigation into the matter, however, the
Senate Judiciary Committee completely vindicated Aguirre. It noted
that Aguirre had been fired just two weeks after his supervisors
had raved about his “unmatched dedication” in glowing
written evaluations of his performance. It presented clear evidence
that Mack’s lawyers were given special access to meetings in
which Aguirre’s investigation was discussed. While the SEC
was busy quashing the investigation and firing Aguirre for
complaining about it, Paul Berger, then the SEC associate director
of enforcement, was interviewing for a job at Mack’s law
firm.
The Senate investigators concluded that they were “deeply
troubled” by the SEC’s failure to look into
Aguirre’s claims. “At worst,” the Senate report
said, “the picture is colored with overtones of a possible
cover-up.”
As part of this cover-up, the SEC eventually claimed that
although Aguirre had been fired, the commission had nonetheless
pressed forward with its “insider trading”
investigation, finding no evidence that Pequot or Mack and
committed any violations. However, the SEC has yet to reveal
whether its rank-and-file were allowed to complete their
investigation into the naked short selling that had the greater
potential to “seriously injure the financial
markets.”
SEC leaders remained uninterested in the crime until this past
summer. Data for June showed that “failures to deliver”
(phantom stock sold by naked short sellers) had peaked at more than
2 billion shares – an all time record. More important, the
SEC’s cronies on Wall Street were now victims of the very
crime that they had perpetrated and covered up. An avalanche of
naked short selling, timed to coincide with a false news report on
CNBC, had sparked the run on the bank that took down Bear Stearns.
Now, other Wall Street institutions (including, yes, Morgan
Stanley) were getting similarly clobbered. In mid-July, the SEC
pronounced that naked short selling had the potential to
“seriously damage” the financial system. It issued an
“emergency order” protecting 19 big financial
institutions (including Morgan Stanley) from the crime.
That kept the big banks safe for a time. But ultimately,
short-sellers proved to be more skilled at cronyism than their
former accomplices at the big banks. In August, under pressure from
the short seller lobby, the SEC lifted its “emergency
order.” In the next three weeks, a half-dozen major financial
institutions were eliminated or nationalized. Morgan Stanley CEO
John Mack (no doubt regretting that he had quashed the Aguirre
investigation) hollered that he was next — that law-breaking
short sellers were taking down his bank. The SEC responded by
banning short selling outright in 900-plus companies. Meanwhile,
everyone from Hillary Clinton to John McCain implicated naked short
selling in the biggest financial cataclysm since 1929.
A few weeks later the SEC inspector general issued a 191-page
report vindicating Gary Aguirre. The otherwise detailed report
conspicuously failed to mention the naked short selling component
of Aguirre’s investigation, but it contained many of the same
findings that the Senate had described. The report, compiled over
many months, concluded that Mack’s interference with
Aguirre’s investigation raised “serious questions about
the impartiality and fairness” of the SEC. The inspector
general recommended that disciplinary action be taken against
Aguirre’s supervisors, including SEC Director of Enforcement
Linda Thomsen.
But last Friday, having spent no more than a few days reviewing
the evidence, an SEC administrative judge declared that the SEC did
not mishandle the Aguirre case, and that no disciplinary action
would be taken. As Bogdanich’s story in The New York Times
makes clear (though in not so many words), the ruling stinks to
high hell.
For one, it remains unclear why in the world an SEC judge, as
opposed to an independent court, is ruling on this matter. For
another, it seems that the judge, Brenda Murray, was not even
acting in the capacity of a judge. Rather, she issued her
not-guilty verdict in the capacity of “an individual”
who was asked by the SEC executive director to evaluate the
inspector general’s findings.
In other words, there is good evidence that the leaders of our
nation’s market regulator are as corrupt as Banana Republic
cops on the brothel beat – that they have engaged in a
cover-up that might have helped rock the very foundations of the
American financial system – but this evidence will be
evaluated in no court. There will be no legal proceeding
whatsoever. Instead, an “individual” at the SEC, as a
favor to the SEC executive director, says the SEC did no
wrong…and that’s it – end of story.
Really, end of story. Because, aside from Walt Bogdanich at The
New York Times (a paper that won’t call an
“outrage” by its proper name, and which seems incapable
of printing the words “naked short selling”), no
mainstream journalist seems to give a flying hoot.