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Pecora in Perspective: Why Do We Need a New Commission?


Is Nancy Pelosi right? Do we need a new Pecora Commission? After all we have the rules and regulations of the stock exchanges, we have the SEC, we have FINRA (formerly NASD for old folks like me), we have the FDIC and the Federal Reserve. Isn’t that enough oversight?

Maybe not. If those institutions were functioning as they should; if they had teeth and their people had a driving sense of mission, it would be almost impossible for this nation’s economy to be in the mess it’s in. Just like mildew will reappear on your shower tile grout if you don’t scrub your bathroom periodically, and the dandelions will take over your lawn if you don’t get out there this weekend with a taproot spade, institutions need maintenance and periodic renovation or Spring cleaning to stay true to their purpose.

Once again, history is repeating itself. In 1933, the Senate Committee on Banking and Currency–which had created the Pecora Commission–requested the New York Stock Exchange to institute an inquiry into a violent fluctuation in prices in the stock of alcohol companies between May 15, 1933 and July 24, 1933 to ascertain whether such price swings had been the result of a form of market manipulation know as "pooling." The NYSE returned its investigation report on October 16, 1933 and concluded "that ‘there were no material deliberate improprieties in connection with transactions in these securities’ and there was no evidence of ‘activities which might have stimulated improperly the activities in these stocks’." (Pecora Commission Report at 56.)

Many a Senate staff lawyer might have been stymied by this; might have thrown up his hands and deferred to the "experts" and looked forward, not back; might have deferred to the collective wisdom and power and wealth of the Masters of the Universe that governed the NYSE; but not the intrepid ex-prosecutor from New York.

Nope, ex- New York County ADA Ferdinand Pecora did not fall for the "who you gonna believe? me, or your lying eyes?" whitewash from the NYSE. Upon review of the limp and anemic NYSE report, the Senate Banking Committee undertook its own robust investigation.

The evidence adduced from that investigation was made public at a series of hearings. "The record of those hearings is replete with proof of manipulation of prices in the repeal [a/k/a alcohol company] stocks, of pool operations in which corporate officials participated and profited, and of unsavory practices in connection with the listing of securities." (Id.)

The conclusion drawn from that investigation was that the system of oversight needed reform. Pecora wrote "[t]he failure of stock-exchange authorities even to discover these flagrant abuses indicate how urgent was the need for a Federal Regulatory body equipped to deal with such practices." Id.

Today, we read stories in the press about SEC employees violating insider trading rules by trading on confidential information received by them by virtue of their positions at the SEC. We see a revolving door system with Masters of the Universe rotating in and out of oversight positions[1] at the SEC, the Federal Reserve, and throughout the Department of Treasury interspersed with their far more lucrative jobs at major firms like Goldman Sachs, Chase, Citibank, etc. and the white shoe law firms that service them. Like so (pdf).

The SEC’s enforcement rate has fallen off dramatically, and what enforcement exists is anemic–a shadow of its former oversight. Similarly, DOJ’s own antitrust, insider trading and other corporate crime enforcement activities have both decreased in number and firmness. Witness the progressive watering down of the "Thompson Memo" and it’s antecedent "Holder Memo" on corporate accountability and prosecution devised by the DOJ Corporate Fraud Task Force back when that body was comprised of the likes of then USA SDNY James Comey, USA NDIL Patrick Fitzgerald, Then USA EDNY Rosalind Mauskaupf (who came to the job having been NYS Inspector General and consequently a broad white collar crime background) and other major figures in the prosecution of financial crime.

Subsequent amendments of the memo have watered it down to the point where deferred prosecution is the default setting (and see here-scroll down to 12/08))and the white collar criminal defense lawyers focus their efforts on gaming the "corporate reforms" that the company is supposed to enact, to the point where the monitor is either a highly paid rubber stamp or frustrated by lack of access and cooperation that makes it extremely hard to do a thorough job, yet might not quite cross the line into flagrant violation of the deferred prosecution agreement. This is further compounded by the problem that the particular AUSA who prosecuted the case and negotiated the agreement often leaves the office soon after to cash in on the biggest case of his/her career. So, the monitor does not have someone with a vested interest, or skin in the game, to push for full enforcement of the terms of the deferred prosecution agreement. To see the granddaddy of DPA’s–back when they actually worked–click here.

All in all, the current oversight and regulatory system seems to have deteriorated over time. It is in need of thorough examination, followed by renovation and renewal of its mission and vigor. As happened in the past, a special focus commission-not staffed by the same revolving door crowd from Wall Street-might just be the best vehicle to accomplish this objective.

[1] See, Huffintgon Post, "Wall Street’s Best Investment", by Robert Weissman.

"Nothing evidences the revolving door — or Wall Street’s direct influence over policymaking — more than the stream of Goldman Sachs expatriates who left the Wall Street goliath, spun through the revolving door, and emerged to hold top regulatory positions. Topping the list, of course, are former Treasury Secretaries Robert Rubin and Henry Paulson, both of whom had served as chair of Goldman Sachs before entering government. Goldman continues to be well represented in government, with among others, Gary Gensler, President Obama’s pick to chair the Commodity Futures Trading Commission, and Mark Patterson, a former Goldman lobbyist now serving as chief of staff to Treasury Secretary Timothy Geithner."

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Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.