Subject: File No. S7-08-09
From: al ho

SEC Please Read: SEC Enforcement Chief Linda Thomsen Joins Davis Polk. Somebody Call Kreskin. Posted on 13 April 2009 Tags: David Rocker, Linda Thomsen, revolving door, SEC As a rule, I avoid criticizing individual public servants. Elected officials are fair game, in my view, but not public servants. They do not wake up and go into work wanting to do a bad job, I know, and I have had too many tailwinds in life to criticize wantonly people who devote themselves to public service of any kind, simply as a matter of principle. For recently retired SEC Enforcement Director Linda Thomsen, however, Ill make an exception. (As Mr. Buffett says, There are times when a man has to rise above his principles.) The first story I would like to tell about this Enforcement Director concerns an investigation that the SECs San Francisco office was conducting a few years into collusion among short-sellers and crooked journalists who shilled for them using ammunition provided by research shops which were fed their material by those same hedge funds, in a kind of serpent-eating-its-tail of financial hooliganism. It was a hard scheme to miss: any company shorted by Stevie Cohen (SAC), David Einhorn (Greenlight), Dan Loeb (Third Point), David Rocker, or a handful of others, could count on coming under the where-theres-smoke-theres-fire journalistic scrutiny of such worthies as Jim Cramer and Dave Kansas, Gary Scaramouche Weiss, Bethany Long, Slow Thing McLean and Roddy Boyd (both of Fortune Magazine), Carol Remond and Karen Richardson (both of DowJones), Floyd Norris and Joe Nocera, (both of the New York Times), and Herb Greenberg (MarketWatch), that smoke often being supplied by research shops of which those same hedge funds were clients. Invariably theyd be naked shorted as well, and show up on the Reg SHO Threshold List, and anyone noticing this constellation of facts occurring over and over with complete regularity could be counted on to be declared wacky by these same journalists. I learned about this investigation because I was invited to a meeting by the SEC investigators conducting it. Im pretty sure that invitation came in the form of a federal subpoena, but I am not completely clear on that, having over the last few years received enough such paperwork to wallpaper my bedroom. In any case, I arrived at the appointed hour, and was sworn in. My deposition was conducted by a man named Mark and overseen by his boss, Tracy, both of whose last names I see no reason to reveal. They both were the kind of federal employees that make one swell with pride: They displayed neither favor nor enmity, but simply, white collar professionalism such as has largely been lost in Corporate America. They were prompt, prepared, and business-like, and, without being rude, challenged me fairly aggressively while revealing to me as little as they could. That said, try as they did, it was impossible for them to be as blank to me as they wished. After all, if someone asks, What do you know about the possibility that Colonel Mustard killed his victim in the library with a rope?, then it is resonable to infor that the utterer suspects that Colonel Mustard may have indeed killed someone in the library with a rope. In this fashion, I became reasonably confident that while the New York financial press was bleating about how wacky I must be to notice patterns that many sane observers had noticed, those same patterns had been noticed by others better placed to do something about them than I. (Incidentally, normally I would be loathe to reveal the contents of such a deposition, but given that this is all moot now, yet tied to todays news, and the bad guys are using FOIA requests to get this stuff anyway, it seems like the right thing to do.) Somewhere around this time, Jim Cramer and others of the journalists mentioned above received their own subpoenas. All hell broke loose, because they made it break loose (see for example Herb Greenberg, The Worst Business Journalist in America, on the Conspiracy). Of course, in a world where editors still had integrity, it would have been considered somewhat unseamly to have journalists reporting on an investigation of which they, themselves, had become the targets (Im not sure why I mention that: I suppose it seems like it should be germane or something). But as a result, that investigation was promptly [redacted]. Theres no other way to describe it: the investigators were summoned to Washington, publicly crapped upon from a great height by SEC Chairman Chris Cox, the Enforcement Director who signed those subpoenas stood by idly while this happened to her staff, and we returned to our regularly scheduled programming of Muzak and bromide business reporting interrupted occasionally by B-list actors pitching Grandmother-Safe financial products and narcissistic hustlers promising that this time they really wanted to make you money, Mad Money Interestingly, not all the press backed up their brethren: editorials by Loren Steffy of the Houston Chronicle spring to mind in this regard. But by and large, the profession of business journalism stood mute while the reporting on a federal investigation was dominated by folks who were themselves the targets of that investigation. The second story I would like to tell about this SEC Enforcement Director concerns some comments she made in 2008 in a keynote address before the United States Chamber of Commerce. In a pattern that observers of this issue have seen before, when asked about naked short selling, the Enforcement Director avoided the question by simply talking about the virtues of short selling, an issue which is not in contention. This pattern of avoiding the subject of naked short selling has been used time and time again by apologists for the practice (imagine someone being asked about sexual harassment, and answering with a response about the virtues of sex). Unfortunately for the Enforcement Director, her interlocutor, who was standing in the front row, directly in front of her podium, using a microphone that broadcast his voice loudly to the whole room (and you will see in a moment why that is relevant) pressed her on the distinction in a way that we would never see happen in any of the captured business media such as CNBC, New York Times, or Fortune. The Enforcement Directors subsequent answer (she blamed the victim companies and excused the crime) is instructive because it confirmed, as though further confirmation were necessary, that there are in fact two and only two plays in the apologists playbook: first, conflate naked short selling with short selling and discuss the benefits of short selling second, blame the victim companies and excuse the crime. 3:00 p.m. - 3:30 p.m. Regulatory Keynote Address: A View from the Division of Enforcement: Perspectives and Priorities Linda C. Thomsen, Director of the Division of Enforcement, U.S. Securities and Exchange Commission Introduced and moderated by: Michael J. Ryan, Senior Vice President and Executive Director, Center for Capital Markets Competitiveness AUDIENCE MEMBER: You spent a lot of time talking about insider trading and penny stock fraud, but you failed to mention an issue thats of great concern to the Chamber, and that is naked short selling and the unsettled trades that can result from that. How can the Commission claim that it is serious about enforcement when millions of trades fail to settle every day and companies remain on Reg SHO Threshold Lists for years and years? And, second part of the question, why is the new rule 10b-21 necessary when, as Commissioner Casey pointed out, it makes illegal activity that is already illegal? SEC ENFORCEMENT DIRECTOR: Um I didnt hear all of it, unfortunately, but as to the issue of short selling, we recognize that short selling is - AUDIENCE MEMBER: My question was not about short selling. We all know that short selling is legal, and a necessary and efficient part of the market process. Im talking about naked short selling-the selling of shares one does not have in inventory and probably has no intention of locating or borrowing. SEC ENFORCEMENT DIRECTOR: As to naked short selling, and more generally market manipulation generally (sic), it is an area we are focused on. We have seen fewer cases in that arena because, often times, this is not necessarily with respect to naked shorts, but shorting or market manipulation more generally, because often the components of something that might look to be manipulative are all legal trades as you point out. So its a hard case to bring, which is not to say that it isnt something that we dont investigate, because we do. So I .. hear and understand the frustration of many on the subject of short selling generally. When we hear complaints about short selling-and, frankly, it is both short and naked short, it is a combination of both-we routinely hear from companies whove come in, who worry that theyre being shorted in an illegal way. We routinely take all that information in and look into it. And often times, as I think many defense counsel would be happy to tell you, when we dig in, what we find is that some of the information that has caused people to be shorting is actually true as to the company, and we may very well be confronted with two issues, one on the company and its disclosure side as well as on the trading side. But theyre very difficult cases, which is not to say that we arent focused on them and interested in them and indeed this new focus that we have on some smaller companies and smaller issuers will wrap some of those concerns into their focus as well. As you may have gathered, that SEC Enforcement Director was Linda Thomsen. That would be the same Linda Thomsen who, for the entire 14 year duration of her service in the Enforcement Division of the SEC (the last four as Director), missed the $67-billion-and-counting walking Ponzi scheme/human brown stain known as Bernie Madoff, though concerned citizen Harry Markopolis not only did the work for the Enforcement Division, he all but spray-painted his findings on the lovely Italian marble of the SECs posh new DC headquarters. That would also be the Linda Thomsen who, regarding Mr. Markopolis, acquitted herself so handily in this now-famous exchange with New York Democratic Congressman Gary Ackerman. That would be the same Linda Thomsen against whom the SECs Office of the Inspector General recommended disciplanary action for her role in hanging out to dry SEC Senior Investigator Gary Aguirre, due to his impertinence in trying to subpoena Morgan Stanley CEO John Mack simply because a trail of clues in the most important insider trading case in 30 years led directly to him. Aguirre had failed to regonize that the law of the land does not apply to Mr. Mack because he has too much juice, as Aguirres boss Robert Hanson put it while shutting down the investigation. According to a subsequent report of the United State Senate Judiciary Comittee, by juice Hanson meant, meaning they could directly contact the Director or an Associate Director of Enforcement. That Director was, again, Linda Thomsen, and the Associate Director was Paul Berger, who was, at the time of these events, negotiating for a job with Mr. Macks law firm, Debevoise Plimpton, a job which Mr. Berger ultimately took. That report by the US Senate Judiciary Committee summarized the culture of Enforcement Division under Director Linda Thomsen: Staff Attorney Gary Aguirre said that his supervisor warned him that it would be difficult to obtain approval for a subpoena of John Mack due to his very powerful political connections. Aguirres claim is corroborated by internal SEC emails, including one from his supervisor, Robert Hanson. Hanson also told Aguirre that Macks counsel would have juice, meaning they could directly contact the Director or an Associate Director of Enforcement. SEC management delayed Macks testimony for over a year, until days after the statute of limitations expired. After Aguirre complained about his supervisors reference to Macks political clout, SEC management offered conflicting and shifting explanations. The SEC fired Gary Aguirre after he reported his supervisors comments about Macks political connections, despite positive performance reviews and a merit pay raise. After being contacted by a friend in early September 2005, Associate Director Paul Berger authorized the friend to mention his interest in a job with Debevoise Plimpton. Although that was the same firm that contacted the SEC for information about John Macks exposure in the Pequot investigation, Berger did not immediately recuse himself from the Pequot probe. Berger ultimately left the SEC to join Debevoise Plimpton. When initially questioned, Bergers answers concerning his employment search were less than forthcoming. The SECs Office of Inspector General failed to conduct a serious, credible investigation of Aguirres claims. That would be the same Enforcement Director to whom the SECs new Inspector General was obliquely referring, in page after page, for 55 pages, in a report explaining how three well-organized 6th graders could have handled the nations naked shorting complaints better than did the SEC Director Linda Thomsens Enforcement Division. That Linda Thomsen is the same one whose resumption of employment with white-shoe law firm Davis Polk Wardwell (I say resumption because Ms. Thomsen worked at Davis Polk until she joined the SEC in 1995) was announced today in this gem (SEC Enforcement Chief Joins Davis Polk) from the Blog of Legal Times (Law and Lobbying in the Nations Capital). The announcement reads, with no detectable irony: Linda Thomsen, who headed the SECs enforcement division until February, is starting as a partner in the firms white-collar defense and government investigations and enforcement practices in June. She will be joining former SEC commissioner Annette Nazareth, who started at Davis Polk last year, and Robert Colby, who joined the D.C. office this year after serving as deputy director of the SECs trading and markets division Thomsen practiced in Davis Polks New York office before joining the SEC in 1995. She started at the commission as assistant chief litigation counsel and went on to become head of enforcement in 2005. After leaving the SEC earlier this year, Thomsen says, I had no preconceived ideas about where I was going to go, or what I was going to do. - Translation: I swear, it never occurred to me to go work for the law firm defending wealthy clients against whom I was overseeing cases until weeks ago. At the firm, Thomsen will advise clients on internal investigations and defend them against SEC probes. - Comment: Probes such as those ones she was overseeing weeks ago. After serving at the agency for 14 years, Thomsen says she understands the kind of questions clients should be asking themselves to stay out of trouble with the commission. I think I know and can see the kind of issues that get people into trouble, and the kinds of processes that cause them to, perhaps, ignore warning signs, says Thomsen. - Comment: Yes, I am sure Ms. Thomsen is one of the worlds most recognized experts on the subject of processes that cause people to ignore warning signs. Thomsen headed the enforcement division as it came under fire for failing to catch Bernard Madoffs Ponzi scheme, as well as problems that contributed to the meltdown on Wall Street. In response to critics, Thomsen vehemently defends her former division. I think the professionalism in the division of enforcement is really unparalleled, she says. If you look at the totality of the enforcement effortsits really a record that I know Im proud of. Considering the world-historic implosion of the US capital market occurring to vamp-til-ready accompaniment of Ms. Thomsens blind-piano-player-in-the-cathouse Enforcement Division, Im at something of a loss for words with which to comment upon Ms. Thomsens pride. But it is nice she landed on her feet. I'm glad you protect average American Citizens from Financial Terrorism on US soil,I feel safe now, NOT