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Tough Prosecutor or Servant of Wall Street?

The nomination of Mary Jo White to serve as Chair of the SEC has set off a firestorm of discussion. Matt Taibbi of Rolling Stone and John Cassidy of the New Yorker both think her ten years at Debevoise & Plimpton mean that her loyalties run to Wall Street, and that she is a continuation of the practice of appointing lap dogs to enforcement positions. This is a hallmark of President Obama approach to personnel. Neither failure nor close association with the lords of Wall Street is a bar to appointment.

Timothy Geithner presided over the NY Fed where all his contacts were from Wall Street. As Treasury Secretary he has been deeply involved in protecting Wall Street executives from investigation and prosecution. Attorney General Eric Holder came from decades of service to the corporate criminal class and didn’t investigate or prosecute Wall Street. Instead, he appointed Lanny Breuer as head of the criminal division of the Department of Justice. Breuer came from Covington & Burling, where he developed a taste for protecting Wall Street. He is afraid even to investigate Wall Street: he and his crack staff picked up a few documents, gave them a hard look, and then took the advice of the lawyers for the banksters that prosecution would be bad.

Robert Khuzami was appointed SEC Chief of Enforcement in the middle of the worst outbreak of securities fraud in the checkered history of capitalism, and couldn’t find a single criminal on Wall Street. He came from a prosecutorial background, including securities fraud, but then spent years at Deutsche Bank, which was deeply involved in RMBS frauds and foreclosure fraud, all of which has apparently gone without scrutiny from the SEC or the Department of Justice.

These are just the most obvious examples of the personnel approach of President Obama to appointments. He refuses to appoint serious enforcement people to positions of authority over the financial sector. His only concern is that his appointments come from the regulated sector, and have a background that can be cherry-picked to show a fierce approach to enforcement. Once in office, the truth comes out. His appointments refuse to take on their previous benefactors, and only enforce the laws against the hapless and the helpless: mortgage origination fraud cases against homebuyers and mortgage bankers, undocumented workers, pot smokers, whistle-blowers, computer activists and the like. Meanwhile, the thieves who wrecked the economy get richer and more demanding.

It’s this background that makes the nomination of Mary Jo White so interesting. Is she a continuation of the Khuzami practice or a change for the better? She certainly has the appearance of fierceness. The people who have worked for her think the world of her. One stands out to me: Neil Barofsky speaks very highly of her as administrator and prosecutor in his book, Bailout, and he has a strong track record of independence to the point of apparently being too hot for the current administration.

In February 2012, Barofsky hosted a panel with White, Eliot Spitzer and Breuer to discuss whether Wall Street got a free pass on criminal charges. Peter Lattman described it for the New York Times Dealbook Blog. I read it to say Spitzer gave chapter and verse on how publicly available information shows intent and fraud. Breuer whined that he was doing his best, and look, he busted a couple of Ponzi Schemes. Here are the White quotes:

Ms. White, the former prosecutor-cum-defense lawyer, echoed the note of caution.

“We must distinguish what is criminal from what is reckless behavior or bad business decisions and not bow to the frenzy,” Ms. White said. “And I worry the frenzy overrides reason and judgment sometimes.”

The Schneiderman task force had just been announced:

“The concern is that they announce the task force and there will be cases,” she said. “It gets back to my frenzy concern. You don’t want that in the system – that kind of pressure. You don’t want the search for scalps to be the metric for success. Politics doesn’t belong in this space at all, but it still is in the space.”

Both of these quotes are ambiguous, filled with qualifiers and hedging. But, if White were a Wall Street convert, she wouldn’t have bothered with qualifiers. She would have joined Breuer in complaining about the rush to judgment and discussed in detail the grave difficulties in proving intent in securities fraud cases. She didn’t. To me, that is telling. Just because you represent a criminal defendant doesn’t mean you think they are innocent; in fact, you probably are pretty sure they are guilty. At least on this occasion, White showed her independence.

Not all Wall Streeters are toadies. Gary Gensler, the Chair of the Commodity Futures Trading Commission, worked at Goldman Sachs for years. He left and went to work in government service, and has done a good job at the CFTC.

An early tell will be the nomination for Chief of Enforcement at the SEC. Will it be someone like Barofsky or someone like Breuer?

Photo courtesy of Columbia Law School

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