[THS] !!!!!!! Matt Taibbi: Why Isn't Wall Street in Jail?

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article27499.htm

Why Isn't Wall Street in Jail?

Financial crooks brought down the world's economy — but the feds are doing more
to protect them than to prosecute them

By Matt Taibbi

February 17, 2011 "Rolling Stone" --  Over drinks at a bar on a dreary, snowy night
in Washington this past month, a former Senate investigator laughed as he polished
off his beer.

"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story
right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's fucked
up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw
virtually every major bank and financial company on Wall Street embroiled in obscene
criminal scandals that impoverished millions and collectively destroyed hundreds of
billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail.
Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con
artist, whose victims happened to be other rich and famous people.

The rest of them, all of them, got off. Not a single executive who ran the companies
that cooked up and cashed in on the phony financial boom — an industrywide scam
that involved the mass sale of mismarked, fraudulent mortgage-backed securities —
has ever been convicted. Their names by now are familiar to even the most casual
Middle American news consumer: companies like AIG, Goldman Sachs, Lehman
Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms
were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in
loans from its investors. Bank of America lied about billions in bonuses. Goldman
Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it
was selling. What's more, many of these companies had corporate chieftains whose
actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured
investors they would not lose even "one dollar" just months before his unit imploded,
to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld
conveniently failed to disclose. Yet not one of them has faced time behind bars.

Instead, federal regulators and prosecutors have let the banks and finance
companies that tried to burn the world economy to the ground get off with carefully
orchestrated settlements — whitewash jobs that involve the firms paying pathetically
small fines without even being required to admit wrongdoing. To add insult to injury,
the people who actually committed the crimes almost never pay the fines themselves;
banks caught defrauding their shareholders often use shareholder money to foot the
tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a
federal judge in the Southern District of New York, "it's management buying its way
off cheap, from the pockets of their victims."

To understand the significance of this, one has to think carefully about the efficacy of
fines as a punishment for a defendant pool that includes the richest people on earth
— people who simply get their companies to pay their fines for them. Conversely, one
has to consider the powerful deterrent to further wrongdoing that the state is missing
by not introducing this particular class of people to the experience of incarceration.
"You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and
all this bullshit would stop, all over Wall Street," says a former congressional aide.
"That's all it would take. Just once."

But that hasn't happened. Because the entire system set up to monitor and regulate
Wall Street is fucked up.

Just ask the people who tried to do the right thing.

Here's how regulation of Wall Street is supposed to work. To begin with, there's a
semigigantic list of public and quasi-public agencies ostensibly keeping their eyes on
the economy, a dense alphabet soup of banking, insurance, S&L, securities and
commodities regulators like the Federal Reserve, the Federal Deposit Insurance Corp.
(FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity
Futures Trading Commission (CFTC), as well as supposedly "self-regulating
organizations" like the New York Stock Exchange. All of these outfits, by law, can at
least begin the process of catching and investigating financial criminals, though none
of them has prosecutorial power.

The major federal agency on the Wall Street beat is the Securities and Exchange
Commission. The SEC watches for violations like insider trading, and also deals with
so-called "disclosure violations" — i.e., making sure that all the financial information
that publicly traded companies are required to make public actually jibes with reality.
But the SEC doesn't have prosecutorial power either, so in practice, when it looks like
someone needs to go to jail, they refer the case to the Justice Department. And since
the vast majority of crimes in the financial services industry take place in Lower
Manhattan, cases referred by the SEC often end up in the U.S. Attorney's Office for
the Southern District of New York. Thus, the two top cops on Wall Street are
generally considered to be that U.S. attorney — a job that has been held by
thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and
the SEC's director of enforcement.

The relationship between the SEC and the DOJ is necessarily close, even symbiotic.
Since financial crime-fighting requires a high degree of financial expertise — and
since the typical drug-and-terrorism-obsessed FBI agent can't balance his own
checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice
Department ends up leaning heavily on the SEC's army of 1,100 number-crunching
investigators to make their cases. In theory, it's a well-oiled, tag-team affair:
Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the
SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the
Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-
plate making and Salisbury steak.

That's the way it's supposed to work. But a veritable mountain of evidence indicates
that when it comes to Wall Street, the justice system not only sucks at punishing
financial criminals, it has actually evolved into a highly effective mechanism for
protecting financial criminals. This institutional reality has absolutely nothing to do
with politics or ideology — it takes place no matter who's in office or which party's in
power. To understand how the machinery functions, you have to start back at least a
decade ago, as case after case of financial malfeasance was pursued too slowly or
not at all, fumbled by a government bureaucracy that too often is on a first-name
basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to
Wall Street is so deeply ingrained in Washington that it raises a profound and difficult
question about the very nature of our society: whether we have created a class of
people whose misdeeds are no longer perceived as crimes, almost no matter what
those misdeeds are. The SEC and the Justice Department have evolved into a bizarre
species of social surgeon serving this nonjailable class, expert not at administering
punishment and justice, but at finding and removing criminal responsibility from the
bodies of the accused.

The systematic lack of regulation has left even the country's top regulators frustrated.
Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that
the criminal justice system is broken when it comes to Wall Street. "I think you've got
a wrong assumption — that we even have a law-enforcement agency when it comes
to Wall Street," he says.

In the hierarchy of the SEC, the chief accountant plays a major role in working to
pursue misleading and phony financial disclosures. Turner held the post a decade
ago, when one of the most significant cases was swallowed up by the SEC
bureaucracy. In the late 1990s, the agency had an open-and-shut case against the
Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their
books. But instead of moving swiftly to crack down on such scams, the SEC shoved
the case into the "deal with it later" file. "The Philadelphia office literally did nothing
with the case for a year," Turner recalls. "Very much like the New York office with
Madoff." The Rite Aid case dragged on for years — and by the time it was finished,
similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown
financial crisis. The same was true for another SEC case that presaged the Enron
disaster. The agency knew that appliance-maker Sunbeam was using the same kind
of accounting scams to systematically hide losses from its investors. But in the end,
the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap — widely regarded
as one of the biggest assholes in the history of American finance — was a fine of
$500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC
also barred Dunlap from ever running a public company again — forcing him to
retire with a mere $99.5 million. Dunlap passed the time collecting royalties from his
self-congratulatory memoir. Its title: Mean Business.

The pattern of inaction toward shady deals on Wall Street grew worse and worse
after Turner left, with one slam-dunk case after another either languishing for years
or disappearing altogether. Perhaps the most notorious example involved Gary
Aguirre, an SEC investigator who was literally fired after he questioned the agency's
failure to pursue an insider-trading case against John Mack, now the chairman of
Morgan Stanley and one of America's most powerful bankers.

Aguirre joined the SEC in September 2004. Two days into his career as a financial
investigator, he was asked to look into an insider-trading complaint against a hedge-
fund megastar named Art Samberg. One day, with no advance research or
discussion, Samberg had suddenly started buying up huge quantities of shares in a
firm called Heller Financial. "It was as if Art Samberg woke up one morning and a
voice from the heavens told him to start buying Heller," Aguirre recalls. "And he
wasn't just buying shares — there were some days when he was trying to buy three
times as many shares as were being traded that day." A few weeks later, Heller was
bought by General Electric — and Samberg pocketed $18 million.

After some digging, Aguirre found himself focusing on one suspect as the likely
source who had tipped Samberg off: John Mack, a close friend of Samberg's who
had just stepped down as president of Morgan Stanley. At the time, Mack had been
on Samberg's case to cut him into a deal involving a spinoff of the tech company
Lucent — an investment that stood to make Mack a lot of money. "Mack is busting
my chops" to give him a piece of the action, Samberg told an employee in an e-mail.

A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First
Boston. Among the investment bank's clients, as it happened, was a firm called Heller
Financial. We don't know for sure what Mack learned on his Swiss trip; years later,
Mack would claim that he had thrown away his notes about the meetings. But we do
know that as soon as Mack returned from the trip, on a Friday, he called up his
buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a
favor that netted him more than $10 million. And as soon as the market reopened
after the weekend, Samberg started buying every Heller share in sight, right before it
was snapped up by GE — a suspiciously timed move that earned him the equivalent
of Derek Jeter's annual salary for just a few minutes of work.

The deal looked like a classic case of insider trading. But in the summer of 2005,
when Aguirre told his boss he planned to interview Mack, things started getting
weird. His boss told him the case wasn't likely to fly, explaining that Mack had
"powerful political connections." (The investment banker had been a fundraising
"Ranger" for George Bush in 2004, and would go on to be a key backer of Hillary
Clinton in 2008.)

Aguirre also started to feel pressure from Morgan Stanley, which was in the process
of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank's
regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn't take
long for Morgan Stanley to work its way up the SEC chain of command. Within three
days, another of the firm's lawyers, Mary Jo White, was on the phone with the SEC's
director of enforcement. In a shocking move that was later singled out by Senate
investigators, the director actually appeared to reassure White, dismissing the case
against Mack as "smoke" rather than "fire." White, incidentally, was herself the
former U.S. attorney of the Southern District of New York — one of the top cops on
Wall Street.

Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a
major Wall Street executive — not handcuff the guy or impound his yacht, mind you,
just talk to him. In the course of doing so, he finds out that his target's firm is being
represented not only by Eliot Spitzer's former top aide, but by the former U.S.
attorney overseeing Wall Street, who is going four levels over his head to speak
directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his
boss's boss's boss's boss. Mack himself, meanwhile, was being represented by Gary
Lynch, a former SEC director of enforcement.

Aguirre didn't stand a chance. A month after he complained to his supervisors that
he was being blocked from interviewing Mack, he was summarily fired, without
notice. The case against Mack was immediately dropped: all depositions canceled, no
further subpoenas issued. "It all happened so fast, I needed a seat belt," recalls
Aguirre, who had just received a stellar performance review from his bosses. The SEC
eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.

Rather than going after Mack, the SEC started looking for someone else to blame for
tipping off Samberg. (It was, Aguirre quips, "O.J.'s search for the real killers.") It
wasn't until a year later that the agency finally got around to interviewing Mack, who
denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 —
just days after the five-year statute of limitations on insider trading had expired in the
case.

"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate
investigators would later conclude. "At worse, the picture is colored with overtones of
a possible cover-up."

Episodes like this help explain why so many Wall Street executives felt emboldened to
push the regulatory envelope during the mid-2000s. Over and over, even the most
obvious cases of fraud and insider dealing got gummed up in the works, and high-
ranking executives were almost never prosecuted for their crimes. In 2003, Freddie
Mac coughed up $125 million after it was caught misreporting its earnings by $5
billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but
executives who had overseen phony accounting techniques to jack up their bonuses
faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught
in a major accounting scandal that would indirectly lead to its collapse two years
later, but no executives at the insurance giant were prosecuted.

All of this behavior set the stage for the crash of 2008, when Wall Street exploded in
a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department
have shown almost no inclination to prosecute those most responsible for the
catastrophe — even though they had insiders from the two firms whose implosions
triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply
evidence against top executives.

In the case of Lehman Brothers, the SEC had a chance six months before the crash
to move against Dick Fuld, a man recently named the worst CEO of all time by
Portfolio magazine. A decade before the crash, a Lehman lawyer named Oliver Budde
was going through the bank's proxy statements and noticed that it was using a
loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's
compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best,
but they blew him off. "We're sorry about your concerns," they told him, "but we're
doing it." Disturbed by such shady practices, the lawyer quit the firm in 2006.

Then, only a few months after Budde left Lehman, the SEC changed its rules to force
companies to disclose exactly how much compensation in RSUs executives had
coming to them. "The SEC was basically like, 'We're sick and tired of you people
fucking around — we want a picture of what you're holding,'" Budde says. But
instead of coming clean about eight separate RSUs that Fuld had hidden from
investors, Lehman filed a proxy statement that was a masterpiece of cynical
lawyering. On one page, a chart indicated that Fuld had been awarded $146 million
in RSUs. But two pages later, a note in the fine print essentially stated that the chart
did not contain the real number — which, it failed to mention, was actually $263
million more than the chart indicated. "They fucked around even more than they did
before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher
& Bartlett, would later receive a lucrative federal contract to serve as legal adviser to
the TARP bailout.)

Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC
about Lehman's history of hidden stocks. Shortly thereafter, he got a letter back that
began, "Dear Sir or Madam." It was an automated e-response.

"They blew me off," Budde says.

Over the course of that summer, Budde tried to contact the SEC several more times,
and was ignored each time. Finally, in the fateful week of September 15th, 2008,
when Lehman Brothers cracked under the weight of its reckless bets on the subprime
market and went into its final death spiral, Budde became seriously concerned. If the
government tried to arrange for Lehman to be pawned off on another Wall Street
firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the
bill for a company with hundreds of millions of dollars in concealed compensation. So
Budde again called the SEC, right in the middle of the crisis. "Look," he told
regulators. "I gave you huge stuff. You really want to take a look at this."

But the feds once again blew him off. A young staff attorney contacted Budde, who
once more provided the SEC with copies of all his memos. He never heard from the
agency again.

"This was like a mini-Madoff," Budde says. "They had six solid months of warnings.
They could have done something."

Three weeks later, Budde was shocked to see Fuld testifying before the House
Government Oversight Committee and whining about how poor he was. "I got no
severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the
committee's chairman, mentioned that he thought Fuld had earned more than $480
million, Fuld corrected him and said he believed it was only $310 million.

The true number, Budde calculated, was $529 million. He contacted a Senate
investigator to talk about how Fuld had misled Congress, but he never got any
response. Meanwhile, in a demonstration of the government's priorities, the Justice
Department is proceeding full force with a prosecution of retired baseball player
Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At
least Roger didn't screw over the world," Budde says, shaking his head.

Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in
Lehman's raging tsunami of misdeeds. The investment bank used an absurd
accounting trick called "Repo 105" transactions to conceal $50 billion in loans on the
firm's balance sheet. (That's $50 billion, not million.) But more than a year after the
use of the Repo 105s came to light, there have still been no indictments in the affair.
While it's possible that charges may yet be filed, there are now rumors that the SEC
and the Justice Department may take no action against Lehman. If that's true, and
there's no prosecution in a case where there's such overwhelming evidence — and
where the company is already dead, meaning it can't dump further losses on
investors or taxpayers — then it might be time to assume the game is up. Failing to
prosecute Fuld and Lehman would be tantamount to the state marching into Wall
Street and waving the green flag on a new stealing season.

The most amazing noncase in the entire crash — the one that truly defies the most
basic notion of justice when it comes to Wall Street supervillains — is the one
involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As
chief of AIGFP, the firm's financial products subsidiary, Cassano repeatedly made
public statements in 2007 claiming that his portfolio of mortgage derivatives would
suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God
couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says
Turner, the agency's former chief accountant. "If the SEC can't make a disclosure
case against AIG, then they might as well close up shop."

As in the Lehman case, federal prosecutors not only had plenty of evidence against
AIG — they also had an eyewitness to Cassano's actions who was prepared to tell all.
As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano
during the summer of 2007. At the time, Cassano had already made nearly $500
billion worth of derivative bets that would ultimately blow up, destroy the world's
largest insurance company, and trigger the largest government bailout of a single
company in U.S. history. He made many fatal mistakes, but chief among them was
engaging in contracts that required AIG to post billions of dollars in collateral if there
was any downgrade to its credit rating.

St. Denis didn't know about those clauses in Cassano's contracts, since they had been
written before he joined the firm. What he did know was that Cassano freaked out
when St. Denis spoke with an accountant at the parent company, which was only
just finding out about the time bomb Cassano had set. After St. Denis finished a
conference call with the executive, Cassano suddenly burst into the room and began
screaming at him for talking to the New York office. He then announced that St.
Denis had been "deliberately excluded" from any valuations of the most toxic
elements of the derivatives portfolio — thus preventing the accountant from doing his
job. What St. Denis represented was transparency — and the last thing Cassano
needed was transparency.

Another clue that something was amiss with AIGFP's portfolio came when Goldman
Sachs demanded that the firm pay billions in collateral, per the terms of Cassano's
deadly contracts. Such "collateral calls" happen all the time on Wall Street, but
seldom against a seemingly solvent and friendly business partner like AIG. And when
they do happen, they are rarely paid without a fight. So St. Denis was shocked when
AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still
contesting the payments — an indication that something was seriously wrong at AIG.
"When I found out about the collateral call, I literally had to sit down," St. Denis
recalls. "I had to go home for the day."

After Cassano barred him from valuating the derivative deals, St. Denis had no choice
but to resign. He got another job, and thought he was done with AIG. But a few
months later, he learned that Cassano had held a conference call with investors in
December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion
to Goldman Sachs following the collateral calls.

"Investors therefore did not know," the Financial Crisis Inquiry Commission would
later conclude, "that AIG's earnings were overstated by $3.6 billion."

"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew.
I had been there. I knew they'd posted collateral."

A year later, after the crash, St. Denis wrote a letter about his experiences to the
House Government Oversight Committee, which was looking into the AIG collapse. He
also met with investigators for the government, which was preparing a criminal case
against Cassano. But the case never went to court. Last May, the Justice Department
confirmed that it would not file charges against executives at AIGFP. Cassano, who
has denied any wrongdoing, was reportedly told he was no longer a target.

Shortly after that, Cassano strolled into Washington to testify before the Financial
Crisis Inquiry Commission. It was his first public appearance since the crash. He has
not had to pay back a single cent out of the hundreds of millions of dollars he earned
selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out
from under prosecution, he appeared before the FCIC and had the enormous balls to
compliment his own business acumen, saying his atom-bomb swaps portfolio was, in
retrospect, not that badly constructed. "I think the portfolios are withstanding the
test of time," he said.

"They offered him an excellent opportunity to redeem himself," St. Denis jokes.

In the end, of course, it wasn't just the executives of Lehman and AIGFP who got
passes. Virtually every one of the major players on Wall Street was similarly embroiled
in scandal, yet their executives skated off into the sunset, uncharged and unfined.
Goldman Sachs paid $550 million last year when it was caught defrauding investors
with crappy mortgages, but no executive has been fined or jailed — not even Fabrice
"Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a
pal about the "surreal" transactions in the middle of a meeting with the firm's victims.
In a similar case, a sales executive at the German powerhouse Deutsche Bank got off
on charges of insider trading; its general counsel at the time of the questionable
deals, Robert Khuzami, now serves as director of enforcement for the SEC.

Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from
shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off
with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a
"facade of enforcement." So the SEC quintupled the settlement — but it didn't
require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal
trials, in which the facts of the crime are put on record for all to see, these Wall
Street settlements almost never require the banks to make any factual disclosures,
effectively burying the stories forever. "All this is done at the expense not only of the
shareholders, but also of the truth," says Rakoff. Goldman, Deutsche, Merrill,
Lehman, Bank of America ... who did we leave out? Oh, there's Citigroup, nailed for
hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi
for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary
Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined,
came to a whopping $180,000.

Throughout the entire crisis, in fact, the government has taken exactly one serious
swing of the bat against executives from a major bank, charging two guys from Bear
Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in
2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-
mail between the defendants admitting that "there is simply no way for us to make
money — ever" just three days before assuring investors that "there's no basis for
thinking this is one big disaster." Yet the case still somehow ended in acquittal — and
the Justice Department hasn't taken any of the big banks to court since.

All of which raises an obvious question: Why the hell not?

Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan
Stanley, thinks he knows the answer.

Last year, Aguirre noticed that a conference on financial law enforcement was
scheduled to be held at the Hilton in New York on November 12th. The list of
attendees included 1,500 or so of the country's leading lawyers who represent Wall
Street, as well as some of the government's top cops from both the SEC and the
Justice Department.

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is
not adversarial combat, with cops and crooks duking it out in interrogation rooms and
courthouses. Instead, it's a cocktail party between friends and colleagues who from
month to month and year to year are constantly switching sides and trading hats. At
the Hilton conference, regulators and banker-lawyers rubbed elbows during a series
of speeches and panel discussions, away from the rabble. "They were chummier in
that environment," says Aguirre, who plunked down $2,200 to attend the conference.

Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the
SEC regulators he had worked with during his failed attempt to investigate John Mack
had made a million-dollar pass through the Revolving Door, going to work for the
very same firms they used to police. Aguirre didn't see Paul Berger, an associate
director of enforcement who had rebuffed his attempts to interview Mack — maybe
because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the
same law firm that Morgan Stanley employed to intervene in the Mack case. But he
did see Mary Jo White, the former U.S. attorney, who was still at Debevoise &
Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who
had been so helpful to White. Thomsen had gone on to represent Wall Street as a
partner at the prestigious firm of Davis Polk & Wardwell.

Two of the government's top cops were there as well: Preet Bharara, the U.S.
attorney for the Southern District of New York, and Robert Khuzami, the SEC's
current director of enforcement. Bharara had been recommended for his post by
Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served
with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a
partner at Debevoise. What's more, when Khuzami had served as general counsel for
Deutsche Bank, he had been hired by none other than Dick Walker, who had been
enforcement director at the SEC when it slow-rolled the pivotal fraud case against
Rite Aid.

"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning.
Every single person had rotated in and out of government and private service."

The Revolving Door isn't just a footnote in financial law enforcement; over the past
decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs
at Wall Street banks or white-shoe law firms, where partnerships are worth millions.
That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of
college basketball stars waiting for their first NBA contract. Are you really going to
give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big
shot like John Mack was guilty of insider trading? "You take one of these jobs," says
Turner, the former chief accountant for the SEC, "and you're fit for life."

Fit — and happy. The banter between the speakers at the New York conference says
everything you need to know about the level of chumminess and mutual admiration
that exists between these supposed adversaries of the justice system. At one point in
the conference, Mary Jo White introduced Bharara, her old pal from the U.S.
attorney's office.

"I want to first say how pleased I am to be here," Bharara responded. Then,
addressing White, he added, "You've spawned all of us. It's almost 11 years ago to
the day that Mary Jo White called me and asked me if I would become an assistant
U.S. attorney. So thank you, Dr. Frankenstein."

Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made
an interesting joke. "I also want to take a moment to applaud the entire staff of the
SEC for the really amazing things they have done over the past year," he said.
"They've done a real service to the country, to the financial community, and not to
mention a lot of your law practices."

Haw! The line drew snickers from the conference of millionaire lawyers. But the real
fireworks came when Khuzami, the SEC's director of enforcement, talked about a
new "cooperation initiative" the agency had recently unveiled, in which executives
are being offered incentives to report fraud they have witnessed or committed. From
now on, Khuzami said, when corporate lawyers like the ones he was addressing want
to know if their Wall Street clients are going to be charged by the Justice Department
before deciding whether to come forward, all they have to do is ask the SEC.

"We are going to try to get those individuals answers," Khuzami announced, as to
"whether or not there is criminal interest in the case — so that defense counsel can
have as much information as possible in deciding whether or not to choose to sign up
their client."

Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's
enforcement director was saying, in essence, that firms like Goldman Sachs and AIG
and Lehman Brothers will henceforth be able to get the SEC to act as a middleman
between them and the Justice Department, negotiating fines as a way out of jail
time. Khuzami was basically outlining a four-step system for banks and their
executives to buy their way out of prison. "First, the SEC and Wall Street player make
an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the
Justice Department commits itself to pass, so that the player knows he's 'safe.' Third,
the player pays the SEC — and fourth, the player gets a pass from the Justice
Department."

When I ask a former federal prosecutor about the propriety of a sitting SEC director
of enforcement talking out loud about helping corporate defendants "get answers"
regarding the status of their criminal cases, he initially doesn't believe it. Then I send
him a transcript of the comment. "I am very, very surprised by Khuzami's statement,
which does seem to me to be contrary to past practice — and not a good thing," the
former prosecutor says.

Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments,
he sent the SEC a letter noting that the agency's own enforcement manual not only
prohibits such "answer getting," it even bars the SEC from giving defendants the
Justice Department's phone number. "Should counsel or the individual ask which
criminal authorities they should contact," the manual reads, "staff should decline to
answer, unless authorized by the relevant criminal authorities." Both the SEC and the
Justice Department deny there is anything improper in their new policy of
cooperation. "We collaborate with the SEC, but they do not consult with us when
they resolve their cases," Assistant Attorney General Lanny Breuer assured Congress
in January. "They do that independently."

Around the same time that Breuer was testifying, however, a story broke that prior to
the pathetically small settlement of $75 million that the SEC had arranged with
Citigroup, Khuzami had ordered his staff to pursue lighter charges against the
megabank's executives. According to a letter that was sent to Sen. Grassley's office,
Khuzami had a "secret conversation, without telling the staff, with a prominent
defense lawyer who is a good friend" of his and "who was counsel for the company."
The unsigned letter, which appears to have come from an SEC investigator on the
case, prompted the inspector general to launch an investigation into the charge.

All of this paints a disturbing picture of a closed and corrupt system, a timeless circle
of friends that virtually guarantees a collegial approach to the policing of high
finance. Even before the corruption starts, the state is crippled by economic reality:
Since law enforcement on Wall Street requires serious intellectual firepower, the
banks seize a huge advantage from the start by hiring away the top talent. Budde,
the former Lehman lawyer, says it's well known that all the best legal minds go to the
big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it
tough for the agency to track devious legal machinations, like the scheme to hide
$263 million of Dick Fuld's compensation.

"It's such a mismatch, it's not even funny," Budde says.

But even beyond that, the system is skewed by the irrepressible pull of riches and
power. If talent rises in the SEC or the Justice Department, it sooner or later jumps
ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms
take sabbaticals from their rich lifestyles to slum it in government service for a year or
two. Many of those appointments are inevitably hand-picked by lifelong stooges for
Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign
contributions from Goldman Sachs, Morgan Stanley and other major players in the
finance industry, along with their corporate lawyers.

As for President Obama, what is there to be said? Goldman Sachs was his number-
one private campaign contributor. He put a Citigroup executive in charge of his
economic transition team, and he just named an executive of JP Morgan Chase, the
proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that
this represents by Obama to everybody is just — we're not ready to believe it," says
Budde, a classmate of the president from their Columbia days. "He's really fucking us
over like that? Really? That's really a JP Morgan guy, really?"

Which is not to say that the Obama era has meant an end to law enforcement. On
the contrary: In the past few years, the administration has allocated massive amounts
of federal resources to catching wrongdoers — of a certain type. Last year, the
government deported 393,000 people, at a cost of $5 billion. Since 2007, felony
immigration prosecutions along the Mexican border have surged 77 percent;
nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was
caught lying about where she lived to put her kids into a better school district; the
judge in the case tried to sentence her to 10 days in jail for fraud, declaring that
letting her go free would "demean the seriousness" of the offenses.

So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero.
The math makes sense only because the politics are so obvious. You want to win
elections, you bang on the jailable class. You build prisons and fill them with people
for selling dime bags and stealing CD players. But for stealing a billion dollars? For
fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison is too
harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make
them say they're sorry. That's too mean; let's just give them a piece of paper with a
government stamp on it, officially clearing them of the need to apologize, and make
them pay a fine instead. But don't make them pay it out of their own pockets, and
don't ask them to give back the money they stole. In fact, let them profit from their
collective crimes, to the tune of a record $135 billion in pay and benefits last year.
What's next? Taxpayer-funded massages for every Wall Street executive guilty of
fraud?

The mental stumbling block, for most Americans, is that financial crimes don't feel
real; you don't see the culprits waving guns in liquor stores or dragging coeds into
bushes. But these frauds are worse than common robberies. They're crimes of
intellectual choice, made by people who are already rich and who have every
conceivable social advantage, acting on a simple, cynical calculation: Let's steal
whatever we can, then dare the victims to find the juice to reclaim their money
through a captive bureaucracy. They're attacking the very definition of property —
which, after all, depends in part on a legal system that defends everyone's claims of
ownership equally. When that definition becomes tenuous or conditional — when the
state simply gives up on the notion of justice — this whole American Dream thing
recedes even further from reality.

This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available
now on newsstands and will appear in the online archive February 18.