By Pam Martens: August 25, 2012

If you want a hearty laugh, check out the web page for the SEC’s official whistleblower office. They’d like us all to know that “Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission.”

Really? Let’s take a walk down memory lane at what happened to past whistleblowers attempting to promote justice at the SEC.

First up is Gary Aguirre, a lawyer and investigator at the SEC who thought the powerful former Morgan Stanley honcho John Mack should receive a subpoena to give testimony about his potential involvement in insider trading. Mack was protected; Aguirre was fired via a phone call while on vacation — just three days after contacting the Office of Special Counsel to discuss the filing of a complaint about the SEC’s protection of Mack.

This is how Aguirre, who was eventually vindicated by Congress, explained it to the U.S. Senate Committee on the Judiciary on December 5, 2006:

“My testimony today will focus on a favor. Senior SEC officials gave it. Morgan Stanley and its CEO, John Mack (Mack), accepted it.

“The favor was an invisible shield. It was put in place by senior officials within the SEC’s Division of Enforcement. It shielded Mack from an SEC subpoena seeking his testimony and records in the PCM insider trading investigation. That evidence was a critical step in proving whether Mack had tipped PCM’s CEO, Arthur Samberg (Samberg), of General Electric’s (GE) pending acquisition of Heller Financial (Heller). Mack was the only suspect. Blocking the investigation of the only suspect blocked the SEC’s investigation of PCM’s trading in GE-Heller. Without that investigation, the SEC would never be able to even consider the filing of insider trading charges arising out of PCM’s trading in GE and Heller against Mack, Samberg, PCM or anyone else.

“The favor had positive effects for some. It cleared the way for Mack’s return on June 30, 2005, as Morgan Stanley’s CEO. Without the favor, Mack would have faced the risk of an SEC lawsuit for insider trading over the next year. Without the favor, Morgan Stanley had two options: (1) it could pass on Mack as its new CEO and look for other candidates or (2) it could hire Mack and take the risk of an SEC insider trading case against him. According to Morgan Stanley’s head of compliance, the risk of an insider trading case against Mack was one Morgan Stanley did not want to accept. The favor made that risk go away.

“The timing of the favor was perfect. The search for the source of the GE-Heller tip began in May and began to point to Mack by mid-June. My supervisors authorized me to seek a criminal investigation of Mack and Samberg on June 14. An SEC subpoena for Mack’s testimony and records was the next logical step in the investigation. That should have occurred during the week of June 20. But just then the shield appeared out of nowhere: one of my supervisors blocked the subpoena…

“So, why would senior SEC officials give such a favor? My immediate supervisor, Branch Chief Robert Hanson, gave me the answer when he first blocked the Mack subpoena: Mack had powerful political connections. He made similar statements on other occasions. I questioned this decision up the chain of command, but only got back silence at first. Mack’s political influence is of course indisputable fact.

“If Justice at the SEC has lost her blindfold, the capital markets are in trouble. The SEC regulates the securities markets. Its success ‘is a bulwark against possible abuses and injustice which, if left unchecked, might jeopardize the strength of our economic institutions.’ Few principles are more deeply engrained in Title 17 of the Code of Federal Regulations, which regulates the SEC’s operation, than the mandates obligating the SEC to handle all of its affairs, including the enforcement of the securities laws, with impartiality. No conduct would stray farther from those mandates than a double set of laws: one for the politically well connected and another for everyone else.

“After my September 2, 2005 letter informed Chairman Cox of the favor, he directed his Inspector General (IG) to conduct an ‘investigation’ of my allegations. The IG employed a unique investigatory method; his staff interviewed and took evidence from only those senior SEC officials who were the subject of my charges. The IG staff never contacted me. Not surprisingly, those charged with misconduct offered little evidence against themselves. The IG was therefore duty bound to find them blameless. This kind of an investigation has a name; it is called a ‘whitewash.’”

Read Aguirre’s full testimony here.

Then there was Darcy Flynn, also an attorney for the SEC. Flynn made the stunning discovery that the SEC had been shredding evidence it had obtained during investigations that did not turn into enforcement actions, rather than preserving the documents as it was required to do under law. As Matt Taibbi of Rolling Stone explains in-depth, Flynn appealed to SEC Chair Mary Schapiro, promising not to go outside the agency for review of the matter if she would grant Flynn protection against reprisal. No such offer was forthcoming. Flynn was forced to go to the SEC Inspector General and three Congressional committees as the SEC engaged in some very fancy footwork attempting to downplay the violations.

And, of course, there was whistleblower Harry Markopolos from outside the SEC who pounded on the SEC’s door for years, providing lengthy dossiers explaining in detail why Bernie Madoff was running a ponzi scheme, all to no avail. Madoff’s earlier investigatory files had also been shredded at the SEC.

More recently, on September 27, 2011, the SEC Inspector General released a heavily redacted report suggesting that SEC attorneys now understand that whistleblowing is the fast track to the unemployment line or a demotion, so they now operate incognito. The case involved an employee at the SEC who had sent an anonymous letter to the Inspector General, blowing the whistle on the SEC Director of Enforcement, Robert Khuzami, over his handling of charges that Citigroup executives had intentionally misled public investors about its exposure to subprime mortgages, understating the amount by $37 billion in the Fall of 2007. The report explains:

“…just before the staff’s recommendation was presented to the Commission, Enforcement Director Robert Khuzami had a ‘secret conversation’ with his ‘good friend’ and former colleague, a prominent defense counsel representing Citigroup, during which Khuzami agreed to drop the contested fraud charges against the second individual. The complaint further alleged that the Enforcement staff were ‘forced to drop the fraud charges that were part of the settlement with the other individual,’ and that both individuals were also represented by Khuzami’s friends and former colleagues, creating the appearance that Khuzami’s decision was ‘made as a special favor to them and perhaps to protect a Wall Street firm for political reasons.’ The complaint also alleged that Khuzami’s decision had the effect of protecting Citigroup from private litigation, and that by not telling the staff about his secret conversation, Khuzami ‘directly violated recommendations by Inspector General Kotz in previous reports about how such special access and preferential treatment can cause serious appearance problems concerning fairness and integrity of decisions that are made by the Enforcement Division.’ ”

The report essentially whitewashed the claims against Khuzami, ensuring that fewer and fewer whistleblowers within the SEC or outside the SEC will take the time or trouble to report wrongdoing. Nothing less than a full scale house cleaning at the SEC will do, together with a three-year ban on going to or coming from a Wall Street company or law firm representing Wall Street.