Many of Wall Street’s former top cops now represent firms they once investigated. Though these ex-regulators insist their integrity is intact, critics are questioning this rotation of prestigious government alumni through : THE REVOLVING DOOR
As Securities and Exchange Commission chairman in the late 1980s, David S. Ruder demanded tougher laws and harsh penalties for penny stock brokers who fleeced small investors.
So a few jaws dropped at the SEC when Ruder--now a part-time law professor and a partner in Chicago’s Baker & McKenzie law firm--disclosed last year that he had a new client: Chatfield Dean, reputedly one of the nation’s biggest penny stock firms.
The top executives of the Englewood, Colo., company had learned their trade at the most notorious penny stock brokerage of all, the now-defunct Blinder Robinson. At Chatfield Dean, they were accused of letting the firm manipulate share prices of the low-cost, little-supervised securities, and of allowing it to overcharge customers by as much as 180% above the true market price for stocks.
Arguing that the firm had turned over a new leaf, Ruder negotiated settlements this winter with the SEC and the National Assn. of Securities Dealers. The agreements imposed relatively mild penalties--penalties that allow Chatfield Dean to remain in business.
“I believe in the concept of rehabilitation for people,” Ruder explained. “I thought, ‘Wouldn’t it be wonderful to go from being a leader in knocking out penny stock firms and now be a leader in producing a firm that was honest and reliable?’ ”
In representing the kinds of firms he once helped prosecute, Ruder is by no means alone. Life is lucrative these days for Wall Street’s former top cops who, following a time-honored path, often come to represent the firms they once probed.
The federal prosecutors, SEC lawyers and other regulators who just a few years ago seemed on a moral crusade against lawless greed nearly all have left government for private practice, where they represent alleged inside traders, accused crooks and large brokerage firms charged with cheating thousands of customers.
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“So many of my friends had gone before me,” said John Carroll, who led the federal prosecution of Michael Milken. Carroll is now a partner at New York’s Rogers & Wells, where his clients include a Prudential Securities executive who is a potential target of a federal criminal investigation, as well as other individuals and companies under investigation by the Justice Department and the SEC.
“They (my friends) said, ‘We’re happy doing what one does on this side,’ ” Carroll said.
The revolving door between government and the regulated is hardly new. Colonels and commanders leave the military to join defense firms. Members of Congress become Washington lobbyists. Law school graduates traditionally have spent a few years as prosecutors to gain the experience needed to become highly paid defense lawyers.
But with the recent wave of brokerage scandals--from the Salomon Bros. Treasury bond debacle to Prudential to a rash of penny stock cases--never before has there been such heavy demand from securities firms for legal representation by former top regulators.
Consider Prudential. The firm has faced numerous civil and criminal investigations as well as massive civil lawsuits as a result of its failed limited partnerships, which raised $8 billion from investors in the 1980s. To try to minimize the damage to the firm, it hired a list of lawyers that reads like a Who’s Who of former top regulators:
* Gary Lynch, the SEC enforcement chief from 1985 to 1989, negotiated for Prudential a recent settlement of fraud charges with the SEC.
* Helping him was Arthur F. Mathews, another former senior SEC enforcement lawyer.
* Until recently, Prudential’s lead defense lawyer in the pending federal criminal investigation was Robert B. Fiske Jr., formerly the U.S. attorney in Manhattan. While Fiske serves as the special counsel in the inquiry into President Clinton’s involvement in the Whitewater affair, another partner in his firm--Scott Muller, a onetime assistant U.S. attorney in New York--has taken his place.
* Prudential also hired former state securities commissioners, including F. Daniel Bell III of North Carolina, to negotiate its settlements with individual states.
John P. Murray, a Prudential Securities executive vice president, makes no secret of the fact that the brokerage chose former regulators as its lawyers.
“What you want is people with expertise in a particular area,” Murray said. “If you have people like Gary (Lynch) who are familiar with how the SEC works and the kinds of expectations the SEC has on certain issues, that’s really an asset.”
When regulators step down, federal ethics rules ban them for one year from representing clients before their former agencies. Also, they usually may not represent clients in the specific cases they handled for the government. Other than those limitations, ethics rules impose few restrictions on former regulators.
While ex-regulators may be complying strictly with the canons of ethics, several of the nation’s leading legal ethics experts say the stampede to white-collar defense work raises questions.
Are Wall Street malefactors who prey on small investors getting off easy because they are able to tap into the old boys’ network of the regulatory establishment? Does zealous representation by some former regulators enable dishonest firms to remain in business as they continue defrauding investors? Do some former regulators in effect sell government secrets?
No one knows the answers for certain; everyone involved insists his or her integrity is intact, adding that the American legal system works best with vigorous, experienced advocates on both sides.
Yet in a book on legal ethics, Hofstra University law professor Monroe H. Freedman notes that because of the revolving door, “the federal regulators and the law firms that battle them are, to a great extent, the same people.”
Freedman, in an interview, said this leads to favored treatment for companies that hire prestigious government alumni. They also gain access to privileged information--knowledge of case files, for instance, and of the circumstances under which an agency is likely to bring suit or settle.
“It puts a premium on putting up for private sale to a particular law firm or client what should either be confidential information or should be available to the public generally,” he said.
Nearly all regulators who leave for private practice go into corporate and other white-collar defense work; in interviews, six recent alumni of the SEC or U.S. attorney’s office in Manhattan could not name a single former regulator who hadn’t.
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The attraction is obvious. An SEC staff lawyer in Washington with a decade of experience earns about $70,000 a year, according to an SEC spokesman. Profits per partner at the country’s top 50 law firms ranged from $370,000 to $1.4 million, according to a 1993 survey by the American Lawyer newspaper.
Many lawyers--not least the former regulators themselves--argue that this is a blessing, not an evil.
“I believe 100% in the revolving door,” said Ira Lee Sorkin, who has been through it several times.
Now in private practice in Manhattan, Sorkin has been vigorously defending Stratton Oakmont, a Long Island penny stock firm charged with making wildly false claims about the small companies whose stock it brought to market and with manipulating the stocks’ prices.
Over the past 23 years, Sorkin has moved in and out of federal government service--working as an SEC enforcement lawyer and deputy chief of the U.S. attorney’s criminal division in Manhattan, then going into private practice for some years before returning to government service from 1984-86 as the SEC’s New York regional administrator.
Sorkin and others argue that service on both sides gives lawyers vital perspective: It keeps prosecutors from being overzealous and provides defense lawyers with insight into the tactics and thinking of prosecutors.
“What do you want somebody to do after serving their country for 15 years?” asks Philip A. Feigin, Colorado’s securities commissioner. “Become a divorce lawyer?”
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As SEC enforcement chief in the late 1980s, Gary Lynch was to Wall Street what Wyatt Earp was to Dodge City. Spearheading an assault on the decade of greed, he brought the SEC’s successful cases against Michael Milken, Ivan Boesky and Dennis Levine.
Lynch then joined the prestigious New York law firm Davis Polk & Wardwell. Last fall, he battled for lenient treatment for client Prudential, negotiating directly with his former employees at the SEC--including the man he endorsed as his successor as enforcement chief, William McLucas.
In doing so, Lynch sidestepped a conflict of interest. As enforcement chief in 1986, he had brought a case against Prudential Securities, then called Prudential-Bache. Without admitting or denying guilt, the firm settled SEC charges that it had systematically failed to monitor compliance with securities regulations and had taken no action against a group of brokers and branch managers who defrauded investors.
In the new charges filed last October, the SEC accused Prudential of repeatedly violating that settlement. The SEC also charged that Prudential knowingly defrauded hundreds of thousands of mainly elderly investors by making false claims about the safety of limited partnership investments.
Normally, Lynch would have been barred from representing Prudential in the case. But he steered clear of the prohibition on former regulators switching sides in specific cases by representing Prudential only on the charges involving the limited partnerships. When supervision issues arose in the settlement talks, McLucas said, Lynch left the room. Negotiations on those alleged violations were handled by Arthur Mathews, a partner with Washington’s Wilmer Cutler & Pickering, who was a senior SEC enforcement lawyer until 1969.
Lynch declined to be interviewed about his switch to corporate defense or his representation of Prudential.
In a statement read over the phone, he said, “I appear before the SEC on numerous matters on behalf of numerous clients, and Prudential is one of those clients.” His work for Prudential, he said, complies with all laws and ethics rules.
“Any suggestion to the contrary could only be made by someone who doesn’t know what he or she is talking about,” Lynch said.
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For his part, McLucas said, “If anyone thinks they can buy favorable treatment or influence a prosecutorial recommendation of this division, then they don’t understand how this division operates.”
Indeed, he contends that agency lawyers often fight harder against former SEC luminaries. “It’s almost like playing tennis,” McLucas said. “When people come in who you know are good lawyers and are competent, sometimes it raises your game.”
The settlement Lynch and Mathews negotiated for Prudential was costly. The firm must pay a minimum of $371 million in fines and restitution.
But that is substantially less than many state securities regulators and investors’ lawyers had sought. Investor organizations and many investors’ lawyers have sharply criticized the settlement, because the penalties are smaller than those imposed on Drexel Burnham Lambert and its junk bond chief Milken in cases in which there were far fewer easily identifiable victims.
They object, too, that it requires customers to submit proof that they were misled by individual Prudential brokers or sales material even after the SEC itself concluded there was systemic fraud in the partnership program. The settlement provides no punitive damages or attorney fees and is structured so that most of it will be tax-deductible for Prudential.
No one connected with the case has said there is any evidence that Lynch’s former position with the SEC made a significant difference in the settlement negotiations.
But SEC sources and state regulators confirm that the SEC agreed to settle well before completing a detailed investigation of the brokerage’s mammoth limited partnership business. The SEC began looking earnestly into that aspect late in the case--only after extensive publicity about the alleged fraud and after state regulators were well into their own probes.
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This, some state regulators say, is exactly where influence by respected former colleagues often plays a role: Overburdened, they make key prosecutorial decisions without thorough investigation, relying on the assessment of defense lawyers whom the regulators trust.
State officials say this is simply relying on the ex-regulators’ credibility. But the line between credibility and influence can be hard to distinguish.
“I don’t have the staff or the resources--and I don’t think the SEC or the NASD or any state has the resources--to investigate every case that exists out there,” said John R. Perkins, Missouri’s securities commissioner. When an ex-colleague-turned-defense-lawyer offers his assurance, Perkins adds, “you have a higher level of comfort with what you’re being told.”
While few lawyers or ethics experts advocate banning regulators from white-collar defense work, many say lawyers ought to weigh the moral considerations when they select their clients and the kinds of cases to which they devote their professional lives. Even many white-collar defense lawyers say they personally would not want to represent a brokerage firm that is continuing to commit major fraud, partly out of worry that their vigorous representation--the essence of being a good lawyer--would enable the firm to go on harming investors.
“I would have a hard time representing people who committed crimes for a living,” said Bruce Baird, who headed the U.S. attorney’s securities fraud unit in Manhattan during much of the Drexel and Milken investigations. Baird is now a defense lawyer with Covington & Burling in Washington.
Other lawyers say they have no qualms at all about such representation.
Mathews, for example, represented Meyer Blinder, head of Blinder Robinson, which from 1983 to 1990 fended off move after move by the SEC to shut it down. Regulators had accused the firm of duping investors who bought stocks it had underwritten. It was also accused of stock price manipulation and deception.
Mathews fought intensely, inventing novel legal strategies that were widely credited with allowing Blinder Robinson to continue operating for years. Among them: an attempt--ultimately unsuccessful--to convince the courts that the SEC’s enforcement power was unconstitutional.
Only after private lawsuits and other developments forced the firm into bankruptcy--and after Meyer Blinder was indicted on criminal charges--did Blinder Robinson go out of business. (Blinder himself was later convicted.)
“It would be a tremendous threat to the liberty of our society and our citizens if people start to say defense counsel aren’t entitled to vigorously defend someone,” Mathews said. “Unless you have your best professionals keeping the government honest in every aspect of litigation and prosecution, then you end up having a government of totalitarian leaders.”
As with Blinder Robinson, it had been widely expected that regulators would try to shut down Chatfield Dean, or at least permanently ban its principals from the industry.
Chatfield had acquired the branches of another penny stock brokerage, Stuart James--characterized by investigators as “boiler rooms” that used high-pressure telephone sales tactics to victimize investors--and it occupied Blinder’s old headquarters in Englewood, Colo.
The firm had been the subject of two disciplinary proceedings by the NASD in 1991, as well as multiple actions by state regulators. Principals Sanford D. Greenberg and Robert L. Lemon had worked for years at Blinder, where Greenberg had been censured by the NASD.
In charges filed last December, the NASD said Chatfield Dean had overcharged customers for stocks, manipulated stock prices and failed to promptly execute customers’ orders. The SEC filed similar charges last month.
But Ruder saved the day, pressing Chatfield’s defense that it was no longer a penny stock firm and instead had become a mainstream brokerage focused on selling mutual funds and other securities.
The NASD and SEC settlements included fines and restitution payments totaling $3.3 million, along with six-month suspensions for Greenberg and Lemon--with each taking turns being suspended so the firm can continue operating.
A condition of the NASD settlement was that Chatfield continue to employ Ruder and his law firm to monitor compliance--in effect guaranteeing Ruder a client for at least the next two years.
Assisting him is a Baker & McKenzie partner in Washington--Daniel Goelzer, a former SEC general counsel.
FIVE WHO’VE GONE THROUGH
DAVID RUDER: As Securities and Exchange Commission chairman, called for a crackdown on penny stock brokerages. As a private lawyer, negotiated settlements this winter imposing mild penalties on penny stock firm Chatfield Dean.
GARY LYNCH: Was the SEC’s tough enforcement director in the late 1980’s, heading probe of Michael Milken. In private practice, negotiated Prudential Securities’ settlement with the SEC and states over misconduct in sales of limited partnerships.
ROBERT B. FISKE, JR.: Prosecuted securities scofflaws as U.S. attorney iN Manhattan. As a private lawyer, headed Prudential’s defense team in a pending federal criminal investigation. Now serving as special counsel probing the Clintons’ conduct in the Whitewater affair.
IRA LEE SORKIN: In and out of government service through the years, was the SEC’s regional administrator in Manhattan in the mid-80’s. Again in private practice is defending Stratton Oakmont, a Long Island, N.Y., penny stock firm charged with stock manipulation.
ARTHUR F. MATHEWS: A senior SEC enforcement official in the 1960’s, now a prominent Washinton lawyer. Helped Lynch negotiate Prudential settlement and represented Meyer Blinder, head of Blinder Robinson, a penny stock firm forced out of business by prosecutors’ persistence.
