Blog on the Run: Reloaded

Wednesday, August 17, 2011 10:43 pm

Postlegal America; or, This isn’t just regulatory capture, it’s regulatory summary execution

Filed under: We're so screwed — Lex @ 10:43 pm
Tags: ,

Matt Taibbi at Rolling Stone:

For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”

Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.

The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission’s records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission’s improprieties.

That’s right: To add farce to this tragedy, they’re trying to cover up a cover-up.

It’s a good thing Rick Perry is running for president on a platform of less regulation, or we’d be really screwed.



  1. Good expose…but the political point you make at the end is the wrong one. Less regulation is not the same issue as turning a blind eye to criminal activitiy. And no one, not even RicK Perry, is going to legalize insider trading. A good article turns out to be a cheap shot. Better to accuse the people who actually participated in the cover up at the SEC.

    Comment by Philip Lamachio — Thursday, August 18, 2011 7:08 am @ 7:08 am

  2. The problem is, Philip, if you deny a regulatory agency the resources and the institutional will to do its job — both of which happened at many agencies under Bush 43 — then what the law says doesn’t matter worth a damn; you have effectively legalized it. And the SEC has been a weak sister for longer than just Bush 43. One change that would help would be either to give it criminal enforcement power or make its prosecution recommendations to the Department of Justice presumptively binding.

    Comment by Lex — Thursday, August 18, 2011 8:41 am @ 8:41 am

  3. Comment by Fred Gregory — Sunday, August 21, 2011 3:50 am @ 3:50 am

  4. Those are blind who do not see. Thanks Canada

    Comment by Fred Gregory — Monday, August 22, 2011 1:35 am @ 1:35 am

  5. Fred, both parties played a role in this disaster. (As I noted above, the SEC has been doing a lousy job of enforcement since the Clinton years.) Byron Dorgan warned in 2000 that within 10 years the country would be sorry it had repealed Glass-Steagall (which repeal Clinton signed into law). He was wrong. It only took eight.

    Comment by Lex — Tuesday, August 23, 2011 9:51 am @ 9:51 am

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