Friday, August 19, 2016

Deutsche Bank whistle blower refuses SEC award

A former investment banker who blew the whistle on Deutsche Bank in a case involving wrong valuation of its derivatives portfolio has declined the $8.5 mn award given to him by SEC ( his ex-wife and lawyers have a claim on some of it).

In an article in the FT, he explains he's doing so because he's unhappy that the SEC let off senior executives of the bank:
But Deutsche did not commit this wrongdoing. Deutsche was the victim. To be precise, the bank’s shareholders and its rank-and-file employees who are now losing their jobs in droves are the primary victims.
Meanwhile, top executives retired with multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet. It is therefore especially disappointing that in 2015, after a lengthy investigation helped by multiple whistleblowers, the SEC imposed a fine on Deutsche’s shareholders instead of the managers responsible.
Compare this outcome with a contemporaneous SEC enforcement action against the less connected executives of a smaller firm, Trinity Capital, and its subsidiary Los Alamos National Bank. The violations at Trinity seem similar to Deutsche, but orders of magnitude smaller. Five executives at Trinity were charged, the chief executive settled and paid a fine, and litigation continued against two senior officers. 
He explains that this happened because of the "revolving door" sydrome about which I have written often:
So why did the SEC not go after Deutsche’s executives? The most obvious concern is that Deutsche’s top lawyers “revolved” in and out of the SEC before, during and after the illegal activity at the bank. Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC’s chief counsel in 2013. Robert Khuzami, Deutsche’s top lawyer in North America, became head of the SEC’s enforcement division after the financial crisis. Their boss, Richard Walker, the bank’s longtime general counsel (he left the bank this year) was once head of enforcement at the SEC.
This goes beyond the typical revolving door story. In this case, top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were ongoing.
This is a classic case of regulatory capture. And because regulations will always be weak and will be undermined by crony capitalism, the idea that free markets can function efficiently, subject to their being regulated properly, will remain a myth.

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