Month: December 2008

I’ve been paying close attention to the scandal involving
Bernard Madoff and the $50 billion Ponzi scheme that’s come crashing down around
his (and many others’) ears, not to mention the ears of an economy that could
scarcely afford yet another shock wave, much less one of this magnitude. I have
more than an academic interest in scandals like this, since, in an earlier life,
I was at the tip of the spear that enforced state and federal securities laws.
In fact, more years ago than I care to number, I successfully prosecuted the
first case of criminal securities fraud ever brought by a state.

While I was an enforcement attorney at the Washington, D.C.
headquarters office of the Securities and Exchange Commission, I investigated
cases of “insider” trading, as well as the frauds that eventually brought down
the likes of Ivan
Boesky and Michael
Milliken, massive accounting frauds at several major financial
institutions, and the systemic “pay-to-play” culture in many American
corporations that ultimately resulted in the enactment of the federal Foreign
Corrupt Practices Act whose provisions are every
bit as necessary today as they were when it was enacted, 30 years ago. It
was a heady time for me, a not-yet-30, damp behind the ears punk who could call
the CEO of a Fortune 500 company, announce I was calling from the S.E.C.’s
Division of Enforcement, and actually get him on the phone.

Forgive me for waxing nostalgic, but one of my proudest
moments was watching Walter Cronkite announce on the CBS Evening News, in

that unmistakably stentorian voice of his, a lawsuit I filed earlier that
day, on behalf of my employer, against a public company that I was primarily
responsible for investigating. I knew I had arrived when Mr. Cronkite, at the
time, the
most trusted man in America, announced on that night, as he did at the end
of every one of his broadcasts, “and that’s the way it is.” In the time since I
left the S.E.C. to practice law in Memphis, I have been involved in a number of
securities class action cases and quite a few cases of alleged fraud by
securities brokers and other investment professionals. So, as you can see, I
have had some skin in this game.

I have watched, sadly, as my brethren at the S.E.C. have
come in for more than their share of opprobrium for being asleep at the wheel
while the whole mortgage meltdown took place, and in particular, when the
tangled web of deception woven by Bernie Madoff came undone. Without, in any
way, trying to be an apologist for my old employer, I must observe that the
Madoff scandal is a prime example of a pigeon coming home to roost, and by that
I mean that the seeds of this disaster were sown many years ago, and by many
actors, all of whom share the blame/responsibility for this tragedy.

Securities fraud is a big business, and has been for as
long as there have been shareholders. It has been estimated that its cost to the
American public is on the order of $50 billion annually, a number that has now,
in one fell swoop, been doubled. It’s no accident that names like Enron and
Worldcom have become household words. The economic harm that results from fraud
has always been far worse than the economic harm that results from run-of-the
mill crime, including the violent kind.

But, the massive fraud we’ve experienced in the securities
markets just recently, and the failure of the regulators responsible for
reigning it in, has been foreseeable for some years, and owes its genesis in the
decisions made by all three branches of the federal government, as well as the
policy priorities of the agencies charged with enforcing the laws against
securities fraud. The federal agency I worked for was always woefully
underfunded. In spite of the fact that the S.E.C., unlike most other agencies in
Washington, brought in millions of dollars in fees from the industry it
regulated, it was always treated like a stepchild by congress and the president
when it came to funding its budget. It was constantly outgunned, outspent and
out-manned by the securities industry and the corporations it was charged with
regulating. And then, beginning with the “regulation is bad” mantra of Reagan,
and

taken up wholeheartedly by GWB, it was decimated even further.

So, while the securities industry mushroomed in size,
activity and impact during the go-go days of the 80’s and 90’s, to the point
where two in every three Americans was “in the market,” the S.E.C. continued to
labor with a short staff and ever-declining (in real dollars) budgets, because,
in fact, the powers that be didn’t really want effective regulation or
enforcement of the industry’s private preserve. The industry lobbied against it
and made generous campaign contributions to members of Congress who shared its
aversion to regulation. I remember my boss, the

legendary Stanley Sporkin, telling us that, if we were lucky, we would
ferret out less than 5% of the fraud that existed in the market. There was no
way the Commission was ever going to be able to effectively examine the
thousands of broker-dealers and investment advisers who registered with it, much
less review the thousands of filings made by public companies, or police a
burgeoning market in IPO’s and various secondary offerings. Instead, it relied
for the supplementation of its oversight responsibilities on a system known as
“self regulation.” What that meant was that organizations like the New York
Stock Exchange and the National Association of Securities Dealers were given the
responsibility to exercise supervision, oversight and enforcement powers over
their own members. If you think about it, you’ll realize what a bad idea that
was. It’s a little like putting the Medellin Cartel in charge of the “war” on
drugs.

As an aside, this is one of the reasons I find
President-elect Obama’s

appointment of Mary Schapiro, the head of one of the so-called
“self-regulatory organizations” known as

FINRA, to be the new S.E.C. chairman so troubling, and

I am not alone in that belief. In addition to putting what I consider to be
a fox (and I don’t mean that in the complimentary sense) in charge of the
henhouse, I find

Schapiro’s previous affiliations with Bernard Madoff and his family to be
even more troubling.

Well, as if the increasing disparity between the resources
of the securities markets and those of the regulators charged with oversight
becoming increasingly disproportional wasn’t bad enough, in 1999, as a result of
intense lobbying by the financial services industry (and, in particular, banks),
Congress repealed the so-called Glass Steagall Act by enacting the Gramm,
Leach Bliley act . The result was that the historical prohibition against
banks offering investment services was eliminated, and there was an explosion of
banks getting into the securities business. Congress, not surprisingly, didn’t
increase the S.E.C.’s budget to deal with this explosion. Indeed, the author of
the new legislation was, and remains,

an unrepentant advocate of less government regulation of the financial services
industry. Mr. Gramm’s law bears a substantial portion of the responsibility
for the financial meltdown we are now suffering, which
he labeled, famously, a “mental recession” fueled by a “nation of
whiners.” Mr. Gramm is, of course, now comfortably cosseted in the bosom of one
of the major beneficiaries of his legislative largesse, the Swiss bank holding
company, UBS. Sadly, Democrats have been just as guilty of tilting the balance
between Wall Street and Main Street decidedly
towards Wall Street, and thus share the blame for what’s happened with the
mortgage meltdown and the resultant economic crisis.

One of the arrows in the quiver of securities law
enforcement was supposed to be, and always has been, private actions (i.e.,
lawsuits) by victims of securities fraud. Even our Supreme Court has recognized
that public regulation and enforcement of securities laws needed to be
supplemented by private lawsuits. So, in theory, some of the frauds the
regulators didn’t find, or couldn’t get to, would be dealt with by class actions
and other private enforcement remedies. That was all well and good, until the
securities industry’s (and many of the corporations targeted by class actions)
bitching and moaning about class actions found its way to the halls of Congress.

What resulted was the

Private Securities Litigation Reform Act. Passed in 1995, and originally
proposed as part of Newt Gingrich’s “Contract for America (a revealing fact, in
and of itself), the law was passed over the veto of then-President Clinton, with
support from many congressional democrats. Not surprisingly, it was also
supported by most congressional Republicans, including Christopher Cox, at the
time a California congressman, and now the soon-to-be former chairman of the
S.E.C., who led the fight for its passage. It created substantial roadblocks to
the filing of securities class action suits. The U.S. Supreme Court followed
that with a series of rulings (including some by Bush’s appointees to the court)
that piled on additional obstacles to filing federal lawsuits for securities
fraud.

As a result of the PSLRA, more securities cases wound up
being filed in state courts, where the restrictions of the new law didn’t apply.
The Republican congress and President upped the ante in that cat-and-mouse game
by enacting the Securities
Litigation Uniform Standards Act, which, in essence, closed the state court
loophole in the PSLRA, and forced class actions to be filed in federal courts,
which, historically, have been more antagonistic to such cases, especially since
Bush has stacked
the

federal court system with Republican appointees who are generally more
receptive to corporate interests than to those of aggrieved individuals.

If you haven’t fallen asleep from all that detail, the end
result of these political and judicial machinations was that, in addition to
handcuffing the securities regulators with inadequate resources to do the job,
the Bush administration, with the help of its handmaidens in Congress and its
appointees to the federal courts, also eviscerated the private enforcement of
the federal securities laws.

Which brings us to Bernie Madoff. Should the S.E.C., in the
best of all possible worlds, have ferreted out his scheme? Maybe. Then again,
maybe it should have also ferreted out the massive tilt of the market players
towards risky mortgage securities. But ultimately, I believe the S.E.C. is being
scapegoated, and turned into the sacrificial lamb for a system of regulation and
oversight that was skewed heavily in favor of the “bad guys.” You can’t have a
government, and a Congress, that have been decidedly antipathetic to regulation,
and have hampered the systems put in place following the Great Depression to
avoid a repeat of some of the excesses that lead to that debacle, and then blame
the hampered regulators for the result.

So, what’s been the Commission’s response to the
accusations against it? Falling on its sword, of course, both with respect to
the

implosion of Wall Street and with regard to the

Madoff scandal. And who better to take the fall for the Commission’s
shortcomings than the very man whose tenure at the agency advanced the cause of
loosened regulation, Christopher Cox himself.

If nothing else, the Wall Street meltdown and the Madoff
scandal will result in the re-regulation of the securities and financial
markets/industries. And that will be a good thing. But, in the meantime, it
would be well for the finger-pointers to remember the biblical phrase, “as ye
reap, so also shall ye sow,” and allocate responsibility for the breakdown of
our regulatory system where it belongs—on the institutions of government that
shunned regulation to begin with, and not on the regulators whose hands they
tied in the process.

Former Memphian Chip Saltsman, an active candidate to become Republican National Chairman and a close friend of Memphis businessman/impressionist Paul Shanklin, may have jeopardized his chairmanship bid after sending Rupublican National Committee members a Christmas gift CD mix consisting of selections from Shanklin’s latest commercial CD, We Hate the U.S.A., which contains a series of broadly burlesqued attacks upon assorted Democrats.

One of those selections, “Barack the Magic Negro,” purports to be a lyric sung by African-American activist Al Sharpton, playing off a newspaper column by that title written by L.A. Times writer David Ehrenstein and set to the tune of “Puff the Magic Dragon.”

The song achieved notoriety when first played in 2007 on the Rush Limbaugh syndicated radio show and was defended by Shanklin and Limbaugh as a piece of legitimate satire.

Shanklin insisted that the true target of his humor was the mixture of liberal guilt and hero worship of Obama that he thought was exemplified in the Ehrenstein column. That view was not widely shared by numerous critics, on the political left and elsewhere, who thought the “Magic Negro” lyric was blatantly exploiting past racial stereotypes, whatever else might be going on in it.

Saltsman also defended the song’s value as commentary. “I think most people recognize political satire
when they see it,” he told CNN when a storm broke this weekend over his inclusion of it on his widely distributed Christmas-gift CD.

Shanklin and Saltsman, now of Nashville, developed a friendly relationship back in the ’90s when Saltsman was a student at Christian Brothers University and both were active in the Shelby County Young Republicans and in other GOP organizations. They were also both involved in the 2008 presidential campaign of former Arkansas governor Mike Huckabee, whom Saltsman served as campaign manager.

Saltsman, whose father Bruce Saltsman was an adviser to former Governor Don Sundquist and was a member of his cabinet, has also served a stint as state Republican chairman.

“Barack the Magic Negro” lyrics

Barack the Magic Negro lives in D.C.

The L.A. Times, they called him that

‘Cause he’s not authentic like me.

Yeah, the guy from the L.A. paper

Said he makes guilty whites feel good

They’ll vote for him, and not for me

‘Cause he’s not from the hood.

See, real black men, like Snoop Dog,

Or me, or Farrakhan

Have talked the talk, and walked the walk.

Not come in late and won!

[refrain] Oh, Barack the Magic Negro, lives in D.C.

The L.A. Times, they called him that

‘Cause he’s black, but not authentically.

Oh, Barack the Magic Negro, lives in D.C.

The L.A. Times, they called him that

‘Cause he’s black, but not authentically.

Some say Barack’s “articulate”

And bright and new and “clean.”

The media sure loves this guy,

A white interloper’s dream!

But, when you vote for president,

Watch out, and don’t be fooled!

Don’t vote the Magic Negro in —

‘Cause — ’cause I won’t have nothing after all these years of sacrifice

And I won’t get justice. This is about justice. This isn’t about me,
it’s about justice.

It’s about buffet. I don’t have no buffet and there won’t be any church
contributions,

And there’ll be no cash in the collection plate.

There ain’t gonna be no cash money, no walkin’ around money, no phoning
money.

Now, Barack going to come in here and —

If the audio link in the title above does not play, here is a link to a YouTube video of the song, with video supplied not by Shanklin but by an unidentified person (affiliated with “Jesters Domain” )who posted it.