Mary L. Schapiro

Bloomberg has a story today about a former Securities and Exchange Commission official who left the agency to work as a securities lawyer, and the cozy relationship she maintained with her former employer. It's a long read, and a good one, reported out of FOIA'd emails between SEC employees and former agency commissioner Annette Nazareth—leaning on those emails to lift the curtain on the revolving-door phenomenon in which financial regulators leave government service for more lucrative work in service of financial firms.

The part that caught our eye concerns emails between Ms. Nazareth and David Becker, SEC general counsel and senior policy director in July 2009, and appear to concern Dodd-Frank's specification for a uniform fiduciary standard to govern the behavior of broker-dealers and investment advisers.

We reported on the stalled rule-making on the uniform fiduciary standard last month, noting a lack of progress despite the stated desire of consumer advocates and groups representing both broker-dealers and investment advisers to get a new rule hammered out.

READ MORE: Broken Brokerages: Finance Luminaries Join Fight Over Uniform Fiduciary Standard

At the time of the correspondence, Ms. Nazareth's law firm, Davis, Polk and Wardwell, had been hired by the six largest U.S. banks, the Securities Industry and Financial Markets Association, or Sifma, to serve as outside counsel on the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Ms. Nazareth was writing to Mr. Becker to share her thoughts on the U.S. Treasury's draft of the bill. From Bloomberg:

... on July 11, Nazareth e-mailed Becker to offer “just some Saturday morning thoughts” about the Treasury Department’s draft of the regulatory bill, noting that she found it “very peculiar in places, causing me to believe that it was not written by the SEC or fully vetted.”

That included a section of the legislation concerning whether brokers should have a fiduciary duty to their clients. Sifma was fighting to make sure brokers weren’t covered by the same requirement as investment advisers.

“The language is broad enough to suggest that any compensation creates a conflict of interest,” Nazareth wrote. “Are these services now going to be provided for free?”

Becker responded that the draft was left vague on purpose, to give the SEC the authority to set the rules itself, rather than have Congress do it. Still, he told Nazareth: “This has been unbelievably messy.”

We're not sure where to find the draft of Dodd-Frank that Ms. Nazareth was commenting on—if you know, let us know—but we do notice that the final draft of the financial reform law included language protecting broker-dealers' commissions-based model, while at least one earlier draft of the bill—dated July 22, 2009, by the Law Librarians Society of Washington D.C.—did not.

(Here's the language from the law that took effect in July 2010: "The receipt of compensation based on commission or other standard compensation for the sale of securities shall not, in and of itself, be considered violation of such standard applied to a broker or dealer. Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.")

There's no making a mountain of a molehill here—in our reporting on the fiduciary standard, we didn't come across any zealots in the RIA community who wanted to bar broker-dealers from charging commissions outright.

Meanwhile, it's the note from Mr. Becker to Ms. Nazareth that really grabbed our interest. We don't want to read too much into five words taken without full context, but in light of the stalled rule-making process, it's interesting to note Mr. Becker's early assessment. Despite SEC Chairman Mary L. Schapiro's stated support for a uniform standard, could it be that the agency always viewed reconciling broker-dealers and RIAs under one regulatory regime as an "unbelievably messy" prospect?

Lloyd Blankfein testifies at the insider trading trial of Rajat Gupta (r.) as Judge Jed Rakoff looks on. (Shirley Shepard/AFP/GettyImages)

For anyone who’d like to see the bank executives who led America into the teeth of the financial crisis strung up by the laces of their Prada wingtips, a trip to the Southern District courthouse in Lower Manhattan may be a deflating experience.

The Observer had come to the federal courthouse seeking succor. Late last month, Reuters laid hands on an internal memo from the Securities and Exchange Commission declaring its investigation into Lehman Brothers was unlikely to lead to criminal charges. In the time it took Dick Fuld to type “the Bros always wins!!” the SEC was feeding reporters the company line: Lehman prosecutions were still a possibility.

That claim became harder to credit this weekend, alas, when SEC enforcement director Robert Khuzami told C-Span cameras that the worst crisis-era bets on souring mortgage bonds were made below the level of the executive suite. (Hmm. Did someone forget to eat his Wheaties?)

U.S. v. Gupta was supposed to be another story. Southern District U.S. Attorney Preet Bharara has been on an insider-trading tear, after all, winning convictions or guilty pleas in 59 of the 66 cases his office has brought since 2009. In the most high-profile case, the government gained an 11-year sentence for Raj Rajaratnam, the billionaire hedge fund manager caught paying corporate insiders to convey privileged information.

Rajat Gupta was among those who supplied Mr. Rajaratnam inside dope, the government said, alleging the former Mc-
Kinsey & Co. chief executive used his standing as a board director at such corporations as Goldman Sachs and Procter & Gamble to pass secrets to Mr. Rajaratnam’s Galleon Group. In one damning-if-true instance, the government says Mr. Gupta telephoned Mr. Rajaratnam minutes after learning that Warren Buffett’s Berkshire Hathaway was primed to invest $5 billion in Goldman Sachs. Galleon bought Goldman stock—and turned a quick million-dollar profit.

But securities law, it turns out, is not the best fuel for populist outrage. We knew that white-collar prosecutions were notoriously hard to win, that wealthy defendants could spend vast sums on defense lawyers, that the complexities of financial cases could wilt the attention of the perkiest juries. It wasn’t until we’d planted ourselves on the hard wooden pews at 500 Pearl Street that we felt the full gravity of the conventional wisdom.

The resource gap between defense and prosecution was clear on the first day of the trial, when four attorneys from Kramer Levin Naftalis & Frankel huddled in the courtroom with an outside jury consultant, even as junior lawyers back at the firm’s Midtown offices poured over a real-time feed of the trial transcript. The prosecution objected. Surely it wasn’t fair for the defense to employ muscle outside the courthouse to research potential jurors’ names? They might as well outsource the voir dire to a team of freelance Facebook trawlers in Bangalore! But Judge Jed Rakoff—the same cranky legalist who’s made a reputation for hard treatment of financial institutions—allowed the outside help.

It got worse. Though the charges against Mr. Gupta are particularly egregious—a board director at Fortune 500 companies stepping out of a confidential meeting to funnel stock tips to a hedge fund manager is about as morally offensive as insider trading can get—the evidence is largely circumstantial. In its case against Mr. Rajaratnam, the government had smoking-hot wiretaps and corroborating witnesses to prove their case. It still took jurors a week to return a guilty verdict.

The evidence in Gupta was flimsier: witness testimony and phone records indicate that Mr. Gupta and Mr. Rajaratnam spoke around 3:55 p.m. on the day Mr. Buffett announced his Goldman stake, for instance, and in a wiretapped call the next day Mr. Rajaratnam told a Galleon trader that he’d received a tip that  “something good might happen to Goldman.” In a wiretapped call a month later, Mr. Rajaratnam told another trader that “I heard yesterday from someone who’s on the board of Goldman Sachs that they’re going to lose $2 a share, the market has them making $2.50.”

It wasn’t hard to connect the dots, but that doesn’t mean a jury will try.

The defendant, meanwhile, had the best lawyers money could buy poking holes in the government’s case. Since Gary P. Naftalis left a post as a Southern District prosecutor more than three decades ago, he’s been tapped by everyone from Kidder Peabody and Salomon Brothers to Michael Eisner and the former-CEOs of Arthur Andersen and WorldCom. The Times has dubbed Mr. Naftalis “Columbo with a law degree” for the lawyer’s disheveled looks and folksy sense of humor. In Judge Rakoff’s courtroom, Mr. Naftalis appeared as if he’d just stepped out of a rainstorm (it wasn’t raining). The Observer wasn’t fooled, of course, but we were a little bit charmed and certainly discouraged.

Mr. Naftalis is the type of lawyer you get when you have millions in the bank and a strong desire to stay out of prison. He’s the kind of lawyer that the prosecutors on the case, Reed Brodsky and Richard Tarlowe, may dream of one day becoming.

Mr. Naftalis’s goal was to blow some smoke, and he proved adept at it.

“If you’re the defense, the normal procedure is to get the jury confused and bored,” John Coffee, a Columbia law professor, told us. “If they’re bored, they miss the smoking gun when it’s produced. If the defense can get the legal issues convoluted, the jury is unlikely to send a man away over issues they can’t understand.”

He added: “I’ve testified as an expert witness in securities cases and looked over and actually seen jurors sleeping.”

“It’s part of the reason that there are so few criminal prosecutions,” said Steve Thel, a professor at Fordham Law. “Prosecutors are reluctant to take on complicated cases.”

Those selected to sit in judgment of the Gupta case included a registered nurse, an elementary school teacher and a freelance beauty consultant. “I am in awe of our jury because they have managed to remain attentive,” Judge Rakoff said last week, urging lawyers on both sides to make things more interesting.

Assistant U.S. Attorney Brodsky started dumbing down the financial lingo with his very first witness, asking Mr. Rajaratnam’s former executive assistant to define a hedge fund. “It’s a place where stocks are traded,” the witness answered. And we thought it was the loose bills our Auntie Vera keeps stashed in a coffee can to pay for gardening supplies! The next day, Assistant US Attorney Tarlowe asked a witness what an index was. “It’s a stock made up of other stocks,” came the reply.

At least the defense left those definitions uncontested. On day three of the trial, the defense unleashed a barrage of objections to Mr. Tarlowe’s examination of the trader who executed Mr. Rajaratnam’s infamous Goldman trade.

“What does it mean to raise $2.5 billion in a common stock offering?” Mr. Tarlowe asked.

“Objection,” offered the defense. Sustained.

“What is your understanding of what it means to raise $2.5 billion in a common stock offering?” Mr. Tarlowe reworded.

“Objection,” said the defense. Sustained.

“Do you know how a stock offering works?” Mr. Tarlowe attempted.

“Yes,” said the witness.

“How do you know?” asked Mr. Tarlowe.

“Objection.”

“Was that objection on foundation or relevance?” Judge Rakoff chimed in. “Foundation and relevance,” Mr. Naftalis quipped, turning to the press gallery, “and whatever else we can think of.”

There were other moments of drama. After one cross-examination, Mr. Naftalis exclaimed “Got him!” loud enough for the jury to hear. On another occasion, the defense counsel made a thumbs-up as he walked away from the witness stand. Mr. Brodsky complained about the grandstanding. Mr. Naftalis complained about Mr. Brodsky’s treatment of a witness. “I think we’re down to a very polite form of name-calling and that’s not what I want to hear from either counsel,” Judge Rakoff scolded, but the defense had gotten the better of the exchange.

Prosecutors don’t generally try cases they can’t win, and the government may have a key element on its side. “Juries pick up signals from the judge,” said Mr. Coffee. “If the judge is leaning one way or another, the jury tends to lean in the same direction.” Judge Rakoff has developed a reputation in recent years as a thorn in the side of financial firms, most recently blocking an SEC settlement with Citigroup and chiding the watchdog for letting the bank off the hook without either a fine or an admission of wrongdoing. “The most disturbing thing about this case is what it says about business ethics,” Mr. Rakoff told the courtroom in the Gupta case. “It’s not a case of one bad apple, but a bushelful.”

Nor would we trivialize the government’s efforts. If Mr. Gupta used his position as a corporate director to feed Galleon Group profitable secrets, Mr. Gupta should go to jail. But we confess to having held out hope, in whatever naïveté, that the government still had bigger fish to fry. After all, Lehman’s bankruptcy examiner Anton R. Valukas reported that Lehman Brothers moved up to $50 billion in bad assets off the firm’s balance sheet in so-called Repo 105 transactions, concealing the bank’s failing state from shareholders and regulators alike. The SEC is pursuing cases against senior officers at Fannie Mae and Freddie Mac, but the claims seem to stop short of criminalizing the mortgage giants’ role in the foreclosure crisis. Indeed, whatever the government’s chances in Gupta—Mr. Coffee handicapped the trial at 60-40 in favor of a conviction—our visit to Judge Rakoff’s courtroom didn’t do much to engender hope of bigger cases.

There’s another challenge to securing convictions in white-collar cases: tangible victims are often lacking. Indeed, it was Mr. Gupta—a silver glint in his combed-back hair, mouth frozen in a dignified grimace—who gave off the air of the wronged party. Behind him sat two benches full of supporters, often including his daughters, who looked just as polished as you would expect from a foursome who holds seven Ivy League degrees. What’s that you say? What about the shareholders in the firms Mr. Gupta allegedly betrayed, or the taxpayers who propped up failing financial institutions?

We suppose those victims were everywhere in the Southern District courthouse, whether they realized it or not.

pclark@observer.com

Vikram Pandit, CEO of Citigroup.

Yesterday, U.S. District Judge Jed Rakoff blocked a settlement between the S.E.C. and Citigroup, criticizing the S.E.C. for settling a case without proving the factual nature of its allegations and allowing the bank to pay a fine and admit no wrongdoing. His published opinion, which might provide some satisfactory morning reading to some of those New Yorkers enjoying "passive recreation" in Zuccotti Park, is scathing.

In the case, the S.E.C. claimed Citigroup had committed fraud by knowingly selling investors mortgage-backed securities the bank knew would tank but portrayed as sound. Investors lost $700 million in the deal, but the bank made a net profit of $160 million by offloading the assets. Under the terms of the settlement, Citigroup would pay a $285 million fine, some of which would possibly be returned to investors, and admit nothing. Judge Rakoff decided to draw a line.

Some highlights of his opinion:

..the Court has spent long hours trying to determine whether, in view of the substantial deference due the S.E.C. in matters of this kind, the Court can somehow approve this problematic Consent Judgment. In the end, the Court concludes that it cannot approve it, because the Court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.

He goes on to opine:

Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.

His conclusion is openly critical of the S.E.C.:

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.

As is pointed out a number of times in the article, this is a difficult task, since what makes people good at business might coincide with the things that make them good at white collar crime. The FBI is using studies in pattern recognition and "victimology" - which, as the report notes, usually boils down to very well-educated people becoming blinded by greed and making very stupid decisions in the hopes of securing outsized returns on their investments. So whenever you see a bunch of people like that... run?

The article doesn't specify whether any of the people whose questionable behavior was condemned in last week's senate report on the financial crisis will have their behaviors analyzed, but somehow we guess not.

[Reuters]

And yet, for all the affection, Ms. Schapiro finds herself in the firing line as she attempts to restore her credibility in light of her close friendship and connections with Bernie Madoff and members of his family. Ms. Schapiro's general counsel, David Becker, recently resigned after the trustee in the Madoff case sued him to recoup the $2 million he and his brothers made when they liquidated their mother's account with Mr. Madoff.

Critics have questioned Ms. Schapiro's competence as the S.E.C. attempts to come to terms with the sweeping new regulations contained in the Dodd-Frank financial reform bill. The S.E.C. will have the power to regulate the derivatives market beginning this summer, although Ms. Schapiro has asked for an extension even as opponents of Dodd-Frank seek to gut the regulations.

The issue here may not be personal, but institutional. The S.E.C., founded in reaction to the irrational exuberance of the 1920s, may have become too big to succeed. Its new oversight responsibilities may paralyze rather than re-energize an already unwieldy agency whose sense of purpose has eroded over time.

Sensing an opportunity to gut the agency, Republicans in the House of Representatives are trying to starve the S.E.C. so that it will be unable to enforce the Dodd-Frank regulations. That would be a step backward. The White House and Ms. Schapiro need to rethink the regulatory model without simply scrapping the very idea of regulation, which is what many Republicans would prefer.

The S.E.C. needs to become more nimble and accountable. That requires strong leadership. The question is whether the popular, likable Ms. Schapiro can provide it.

"Mary is extraordinarily smart, open-minded and her integrity is absolutely above reproach," said Susan W. Phillips, an economist and a former chairwoman of the Commodity Futures Trading Commission, who employed Ms. Schapiro as an executive assistant during the 1980s.

Niceness and an open mind aren't usually the first qualities one looks for in a sheriff, someone who would rarely be able to maintain her integrity and be universally beloved at the same time. Perhaps that's why some outside Washington look at Ms. Schapiro and see someone a little less fearsome than Wyatt Earp, Eliot Ness or Theo Kojak.

"Well, you've got to think she's at least extraordinarily incompetent," said Tom Ferguson, a political science professor at the University of Massachusetts who specializes in financial regulation, referring to the recent scandal around Ms. Schapiro's general counsel, David Becker.

He resigned in February after being sued by the trustee in the Bernard Madoff bankruptcy case over $2 million he and his brothers made in 2005 liquidating their mother's then still fictitiously profitable account with Mr. Madoff. Mr. Becker told Ms. Schapiro about the account, but did not see this tricky inheritance as a reason to recuse himself from writing a legal brief reversing the agency's long-standing pyramid-scheme policy so that "long-term investors" in Mr. Madoff's fraudulent fund (like his late mother and her heirs) would be entitled to favorable terms during its unwinding.

Ms. Schapiro told Congress she was aware of Mr. Becker's connection to Mr. Madoff, and the lapse is jarring in light of the embarrassment Mr. Madoff has already caused not only the agency but Ms. Schapiro personally. She and Mr. Madoff were friends--"dear friends" according to his testimony to the S.E.C.'s inspector general, David Kotz, who is currently probing Mr. Becker's misbehavior. In her previous job as head of the Financial Industry Regulatory Authority (FINRA), Ms. Schapiro named Mr. Madoff's son, Mark Madoff, to a post on a disciplinary board. Whatever the difference between the criminals and the cops, all parties tend to be on friendly terms.

Ms. Schapiro grew up middle class on Long Island, and at college she majored in anthropology and captained the field hockey team, the Franklin & Marshall Diplomats. She came to Washington for law school at George Washington in 1977 and never left. She was by all accounts the type of person--moderate, wholesome, ambitious, a "team player"--who thrives in D.C.

In 1980, Ms. Schapiro landed her first job, in the enforcement division--the wing of any regulator that investigates and prosecutes alleged fraud and other violations--of the Commodity Futures Trading Commission. She often recalls in interviews that that year the division began investigating two right-wing oil billionaires, Nelson and Herbert Hunt, who were suspected of scheming to corner the silver market. "I was fascinated with the whole concept that there were people out there who thought that they could corner a truly international market like silver," Ms. Schapiro said in a 2005 interview with the S.E.C. Historical Society. "I think it was the anthropologist in me" she told Time in 2009, "that was fascinated by this idea that people thought they could control a world commodity."

What is perplexing about these statements is the implication that some force existed to prevent the brothers Hunt from achieving their bold market manipulation fantasy, when in fact they not only made between $2 billion and $4 billion, controlling with their partners at least two-thirds of the international silver market and driving the price of silver from less than $2 an ounce to more than $50 before the scheme collapsed, but they did so with almost total impunity and certainly very little to fear from the then five-year-old regulator. Even bolstered by a fierce legal and public-relations campaign waged by Tiffany and other jewelers, the CFTC repeatedly failed to do much to rein in the brothers.

When a silver market crash ultimately wiped out the Hunts' highly leveraged positions, their billion-dollar bank bailout was backed by the Federal Reserve. Seven years later, a team of lawyers and investigators hired by a Peruvian state-owned bank that had lost heavily on silver produced a painstakingly documented reenactment of the conspiracy, but by then it was too late for the government to pursue a criminal case. And although they were technically bankrupted by the lawsuits made possible by the Peruvians' revelations, the Hunts' trust funds were legally immune from those claims. In 1999, Nelson Hunt was able to return to his old passion for thoroughbred breeding. "At my age," said Mr. Hunt, born in 1926, "I don't plan to do any breeding or buy a farm; I just want to have some fun and try to get lucky racing."

It has since the 1980s become easier for schemers like the Hunts to get lucky in the markets because regulators like Ms. Schapiro generally spent the next two decades rescinding most substantive requirements that traders disclose anything to them. The silver market once again looks to be the locus of a massive, multiyear price-manipulation scheme, but three years into its investigation, the CFTC has yet to sue (much less charge) anyone, leading one frustrated commissioner to go "rogue" with his allegations that a major bank controlled 25 percent of the market. This inscrutable state of affairs is all theoretically supposed to change this summer, on the one-year anniversary of the passage of the Dodd-Frank financial reform bill, which awards the federal government the long-denied authority to regulate derivatives. Both Ms. Schapiro and her CFTC counterpart, Gary Gensler, have asked for extensions. In the meantime, lobbyists, lawyers and Republicans are waging a formidable campaign to prevent the reforms from being implemented, ever.

 Ms. Schapiro was not long for the enforcement world. When Ronald Reagan appointed a woman, the libertarian finance professor Susan Phillips, to one of the five commissioner slots in 1981, Ms. Schapiro sought and obtained an assistant position in her office. 

"She wanted to get out of enforcement and into the policy side," Ms. Phillips told The Observer. Two years later, when Ms. Phillips rose to the commission's chairmanship, she made Ms. Schapiro her chief of staff. "That's when she told me she had registered as an independent," Ms. Phillips said. "She had been a Democrat before that. I don't know why she did that; she didn't need to."

Ms. Schapiro was nevertheless nominated by President George H.W. Bush in 1989 to one of the designated Democratic slots on the five-member Securities and Exchange Commission after attracting the attention of then Treasury Secretary Nicholas Brady at a conference, according to a former colleague who remembers him inquiring about the identity of "the blonde" delivering a presentation at a futures industry conference. When Bill Clinton took office in 1993, he promoted her to the acting chairmanship of the S.E.C., and the next year the chairmanship of the CFTC.

Then, as in 2009, Ms. Schapiro inherited an agency that had been gutted by an ideological Republican predecessor, the economist Wendy Gramm, an ardent exponent of the strain of libertarianism that opposes any government policing of financial fraud. (During her tenure, Ms. Gramm appointed one administrative law judge out of the University of Chicago who promised never to rule on behalf of a plaintiff; two decades later, he is still making good on the promise despite numerous complaints and reprimands from the agency.) Then, as in 2009, a GAO investigation documented the regulator
's dysfunction in vivid detail, describing the enforcement division as having "no clearly articulated goals and no clear lines of authority." The endlessly repeated cliché about the S.E.C. being "asleep at the switch" has often proven accurate, but Ms. Schapiro's predecessor, Chris Cox, had been nominated with the specific mandate of turning the switch off entirely in the wake of an unexpectedly aggressive chairman, Bill Donaldson.

Few doubted Ms. Schapiro could turn the agency's switch on again in the near term, but after her underwhelming performance holding Wall Street accountable to old laws, can she be expected to hold the financial system to 2,300 pages of new laws? It's a fair question, but as is generally the case in Washington, the people posing it do not have the remotest interest in fairness. The Republican Congress has called Ms. Schapiro to testify before seven hearings so far this session, and over the past year, Congressional Republicans have demanded at least four inspector general investigations into agency practices. While NPR and Planned Parenthood have gotten most of the press, the S.E.C. is high the G.O.P. list of targets for budget downsizing next fiscal year; while the Obama administration is seeking $1.4 billion to fund the agency this year, the Republican proposal calls for about $850 million, a figure that would render Dodd-Frank financial reforms effectively unenforceable.

"Which is insane," said former SEC commissioner Isaac Hunt to The Observer about the proposal. "With all the new bills she has to enact?" Like most Washington lifers over a certain age, Mr. Hunt, who from worked at the S.E.C. from 1996 to 2002, fondly remembers a time when Republicans and Democrats were allowed to agree on certain issues. "I served under Arthur Levitt, and I served under Harvey Pitt, and there was no ideological shift in the commission whatsoever." Of course, he conceded, back then everyone seemed to agree that "self-regulation" was the way of the future. "Arthur Levitt never told me about the fights he was having with Brooksley Born," the woman who replaced Ms. Schapiro as CFTC commissioner after she drew up a proposal to regulate derivatives. Mr. Levitt, then the S.E.C. chairman, has since publicly regretted his bullying of Ms. Born on behalf of the deregulating mandarins of the Clinton years, Robert Rubin and Larry Summers of the Treasury and Fed Chairman Alan Greenspan.

Ms. Schapiro's futile campaign as CFTC chair to regulate derivatives earned her the moniker "Bloody Mary" and, she joked at the time, a tie with Vince Foster as the subject of negative Wall Street Journal editorials. The Chicago exchanges still dominated the industry, and a bellicose coalition of floor traders and imperious Chicago School economists met every departure from Ms. Gramm's anti-regulatory approach with vehement indignation.

When Ms. Schapiro reminded the Chicago Board of Trade that they were behind schedule on introducing new systems for recording trades and preventing illegal front-running, the board's pugnacious chairman, Tom Donovan, a former aide to Mayor Daley, assured the board that he would not be "intimidated by some blonde five-foot-two girl." When she fined the German oil refiner MG Refining & Marketing $2.25 million for threatening systemic risk with its profligate trading in unregulated oil futures contracts, the Nobel Prize-winning economist and Chicago Mercantile Exchange board member Merton Miller wrote a paper defending the trades as theoretically profitable, chalking up its billion-dollar losses to the ignorant meddling of cowards and bureaucrats. When Orange County, Calif., declared bankruptcy in 1994 after an official invested in some exploding swaps, it barely helped her case. The most significant public response to the bankruptcy at the time was the rise of a "tax protest" movement calling for the privatization of local government services.

Feeling "beleaguered" by the end of 1995, Ms. Schapiro gave up and interviewed for a position running at the National Association of Securities Dealers, the independent "self-regulatory" group that licenses stockbrokers and investment advisers. "I think she was ready to make some money," Ms. Phillips told The Observer.

News reports at the time estimated the move immediately tripled the $125,000 salary she made in the government. The NASD was renamed FINRA in 2007. By the time of her 2008 nomination to the S.E.C., she was making $3.1 million a year running the organization. Her relatively controversy-free 12-year tenure in the job was a boon when Mr. Obama was vetting potential S.E.C. chairpersons. She was also known to be a favorite of Mr. Rubin, who first bonded with Ms. Schapiro when he interviewed her for the CFTC post in 1994, when she was nine months pregnant. Ms. Schapiro in 2009 was ranked by Forbes as the 56th most powerful woman in the world, 54 slots behind Ms. Bair. In 2010, Ms. Schapiro rose to the 17th spot on the list, published a month after the agency announced its $550 million settlement with Goldman Sachs over the infamous ABACUS trades.

"She's just so violently focused on the hot-button, HuffPo-sexy, like, 'Goldman Sachs' headlines," said Roddy Boyd, a former trader and the author of Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide. "And no one's gotten nailed for institutional fraud?"

Instead, Ms. Schapiro's agency has elected to focus its energies prosecuting the insider trading racket around Raj Rajaratnam's hedge fund Galleon Group currently being detailed before a federal jury downtown. The firm is accused of making $36 million--a fraction of Ivan Boesky's alleged gains from his similar exploits a quarter-century ago. When Goldman Sachs CEO Lloyd Blankfein was called to the stand, Mr. Rajaratnam's lawyers were barred from asking him about his role in the financial crisis and thus distract the court from the case at hand by turning its attention to the infinitely larger systemic con the government was not seeking to punish.

Ms. Schapiro's agency has been so aggrieved for so long now that most of the headlines it makes are also allegorical meta-stories: an inspector general report that chronicled the epidemic of porn addiction that seized agency attorneys in 2008, as a wave of (warranted) panic was washing over the credit markets. A lesser publicized 2009 internal probe detailed the less prurient workplace pastimes of a pair of S.E.C. enforcement attorneys in the Dallas office who shared a passion for day trading, in violation of the agency's rules against investing in stocks; both ended up losing money. The S.E.C.'s repeated failure to pay attention to the steady stream of credible and evermore substantive tips about Mr. Madoff's Ponzi scheme was the subject of another epic inspector general report.

But most indicative of the woeful state of the S.E.C. has been its 2009 suit against Bank of America over the billions of dollars in bonuses the bank haphazardly agreed to pay Merrill Lynch employees as part of the firms' shotgun 2008 merger. The case was complicated by the fact that, according to Bank of America CEO Kenneth Lewis' later testimony before Congress, the Fed coerced the marriage and that former Merrill Lynch CEO John Thain had done nothing apparently illegal in coaxing Mr. Lewis into agreeing to pay $3.62 billion in early Christmas bonuses to Merrill employees as a condition of the merger. The compensation was doled out despite the $15 billion in "unexpected" mortgage losses they were on the verge of reporting. And the merged bank was on the receiving end of the second-largest handout of federal bailout funds.

In September 2009, when the S.E.C. filed a motion to settle its case against Bank of America for a miniscule $33 million, the federal judge assigned to the case was alarmed. Assailing the settlement as a "contrivance designed to provide the SEC with the facade of enforcement" that failed to "comport with the most elementary notions of justice or morality," Judge Jed Rakoff threw out the proposed agreement
and told regulators to revisit the case.

The S.E.C. dutifully reopened its investigation, while at the request of the House Oversight Committee its inspector general opened its own investigation into the initial investigation, and the agency returned five months later with a new figure: $150 million, along with a more detailed list of assurances that everyone involved conducted themselves in accordance with the law. The day before the agency brought its amended settlement proposal before the court, the New York attorney general's office sued the bank, alleging that the bank had orchestrated a cover-up and in due course fired its vociferously opposed general counsel because he "knew too much." For its part, the S.E.C. stuck to its conclusion that everything was basically kosher, and the termination had been wholly "unrelated" to the merger. Judge Rakoff responded with an approval more incredulous than his rejection: "Given the somewhat tortured background of these cases and the difficulties this motion presents, the Court is tempted to quote the great American philosopher Yogi Berra: 'I wish I had the answer to that question because I'm getting tired of answering that question.'"

The 100-page report on the internal investigation into the case is sympathetic to Ms. Schapiro's agency. Staffers are quoted complaining that the New York attorney general's office mostly refused to cooperate with them. The report claims that such turf battles weren't specific to the two agencies but commonplace in New York City white-collar-crime cases, where prosecutors compete to pack as many big cases onto their résumés before selling out to provide defense in criminal cases. (The team that sued Bank of America was led by a former S.E.C. enforcement attorney, who has since left the AG office for Goldman Sachs.)

But many of S.E.C.'s problems getting along with other investigators seem unmistakably political: Staffers also complain of suspecting TARP overseer Neil Barofsky of conspiring with the New York lawyers against them. Separately, they also lament an apparent unspoken mandate to go easy on TARP recipient banks like Bank of America. The obvious--but seemingly unrecognized--subtext is that the agency is hamstrung by the political agenda of the Obama administration, which openly loathes Mr. Barofsky and most other critics of the bailout program White House officials like to tout as one of their landmark achievements.

In Washington, where passing laws is somehow considered a sexier business than enforcing them, all that matters now is whether Ms. Schapiro can win the fiscal stalemate with Republicans and secure the funding to hire the 800 new employees she and most sober-minded analysts estimate are needed to enact the Dodd-Frank reforms. If she can, no one will even remember how valiantly she fought the unwinnable war with Wall Street. And if she fails, the blame will mostly lie in the fact that the war was unwinnable to begin with.

editorial@observer.com

Bloomberg got a copy of the Facebook investment profile Goldman provided to its clients, and found an interesting little tidbit from Goldman: "GS Group may at any time further reduce its exposure to its investment in Facebook (through hedging arrangements, sales or otherwise), without notice to the fund or investors in the fund." This maneuvering comes on top of the Securities and Exchange Commission's inquiry as to whether the investment vehicle Goldman set up to offer Facebook shares to clients as a way to escape federal disclosure requirements. Bloomberg has more:

"There may be conflicts of interest relating to the underlying investments of the fund and Goldman Sachs," according to the Facebook offering document's disclosures section. Material in the documents "is not guaranteed as to accuracy or completeness."

Bloomberg then helpfully points out that Goldman's $550 million settlement with the SEC last summer stemmed from its dealings in a collateralized debt obligation called Abacus, which Goldman had allegedly engineered with the help of John Paulson so that it would self-destruct once investors bought it.

Whatever may happen to Facebook shares -- and plenty of people seem to think they will rise in value -- Goldman's collecting some handsome revenue by dealing with the stock.

Goldman Sachs is charging 0.5 percent of any capital committed to the partnership as an "expense reserve" as well as a 4 percent placement fee and 5 percent of any gains, according to the document.

Meanwhile, The New York Times reports that a segment of Goldman Sachs called Goldman Sachs Capital Partners refused to buy Facebook shares.

To recap: a teeming horde of investors is willing to pay hefty fees to buy shares in Facebook from a firm that has engineered an investment deal to help Facebook avoid disclosure environments. That firm also is not necessarily going to keep its money invested in Facebook, and in fact its wealth management division has declined an opportunity to buy. The scenario raises a question that seems to answer itself: Who's more likely to win on this trade -- Goldman or its customers?

mtaylor [at] observer.com | @mbrookstaylor

• Goldman Sachs' investment in Facebook may help the social-networking site escape the added regulatory scrutiny that comes with an IPO. [NYT]
• On the other hand, the Securities and Exchange Commission is already conducting an inquiry into Goldman's plan to give its clients access to Facebook shares. Regulatory scrutiny may come one way or another. [Bloomberg]
• Many -- as in 1.53 million -- U.S. consumers filed for bankruptcy in 2010. That's 9 percent more than the year before and also a five-year high. [Reuters]
• President Barack Obama's nightmarish moratorium on deepwater drilling is set to end in several weeks, in a move that will hopefully return the Gulf of Mexico to the carefree days of April 2010. [WSJ]
• Wondering how to invest in the bond market in 2011? U.S. News & World Report has a few tips to help, including: don't just buy bonds; buy stocks too. Also: the economy may grow, but it also may shrink. [USNWR]

mtaylor [at] observer.com | @mbrookstaylor

Much of that so-called "secondary trading" is happening in tech companies, specifically the social networking giants Twitter, Zynga and Facebook--especially Facebook.

The increase scrutiny could implicate New York City's own SecondMarket, which Dealbook calls "the leading trading exchange" handling these types of trades. SecondMarket is on track to do $400 million in trades involving about 40 private companies this year according to the company.

Last month, SecondMarket auctioned approximately $40 million worth of Facebook stock.

The stock comes from employees, although the company has banned employees from selling their shares and new employees are issued restricted stock that only has value if the company goes public or gets bought.

Some exchanges create an entity to buy the shares, and then sell positions in the entity to multiple investors. The SEC may decide that this workaround constitutes additional investors, which would throw a wrench in all this sub-public activity. Companies are subject to disclosure requirements when the number of shareholders exceeds 499.

SecondMarket directly connects shareholders of private company stock with buyers, and does not create funds or other vehicles to purchase shares.

SecondMarket hasn't been contacted by the SEC yet, the company told The Wall Street Journal.

UPDATE: This post originally incorrectly stated the way SecondMarket sells shares of Facebook and other private companies. SecondMarket directly connects current shareholders with buyers.

ajeffries [at] observer.com | @adrjeffries

If you're looking for a story of redemption and reinvention to come out of this, don't hold your breath:

Those hoping for big changes to the company's organization and conduct may be disappointed, however. Some of the recommendations mentioned in the report, say people familiar with the matter, including the spin-out of Goldman's proprietary-trading units, are already underway. Others include a suggestion that the firm improve its financial disclosure, said one of these people.

The polished, final copy of Goldman's ethics report should be ready by January, at the earliest. Will there be any revisions beyond the occasional caught typo, elimination of passive voice or added footnote? We'll have to wait and see.

mtaylor [at] observer.com | @mbrookstaylor