SEC Regulators: Private Equity Is on a Crime Spree

By David Sirota, Jacobin

28 June 20

Securities and Exchange Commission regulators recently issued a scathing report that reads like a last-ditch plea for help in reeling in private equity billionaires, who have all but free rein to fleece whoever they want, whenever they want.

n 2017, Donald Trump appointed private-equity lawyer Jay Clayton as the chairman of the Securities and Exchange Commission (SEC), one of the agencies that is responsible for policing the financial industry. Soon after getting the job — and only a few years after the SEC fined major private equity firms for bilking investors — Clayton was pushing to change federal law to let asset managers funnel more money from retirees to those high-risk, high-fee firms.

Clayton finally got his way last week when the Trump administration issued a letter letting 401(k) plans move the savings of 100 million workers and retirees to private equity billionaires, some of whom have been among big donors to Donald Trump’s political machine. Clayton publicly celebrated the change, insisting it “will provide our long-term Main Street investors with a choice of professionally managed funds” that would benefit workers and retirees.

But in a stunning move yesterday, Clayton’s law enforcement agency effectively blew the whistle on its own chairman, issuing a scathing report documenting a private equity crime spree that is fleecing pension funds, university endowments, and other investors.

The timing of the alarm is particularly important. The SEC’s report reads like career regulators’ last-ditch plea for help at the very moment they see private equity billionaires on the verge of creating a lawless autonomous zone for themselves.

In a little-noticed ruling last week, the Supreme Court restricted the SEC’s power to punish private equity firms. With the agency successfully neutered, Trump is now trying to move Clayton into the job of US Attorney, overseeing Wall Street.

If his nomination is confirmed by the Senate, Clayton would be positioned to defang the prosecutors who are the last line of law-enforcement defense against the very private equity wrongdoing that SEC regulators are now frantically trying to blow the whistle on.

“Expenses That Were Not Permitted”

rivate equity firms are notorious for looting companies and torching the environment, while charging investors huge fees in exchange for middling returns.

In 2014, a top SEC official warned that there were “violations of law or material weaknesses in controls” in more than half of the private equity firms the agency had examined. The SEC’s new Risk Alert expands on that discovery, summarizing findings from hundreds of the agency’s examinations of private equity firms. It reads like a scathing rap sheet documenting a culture of abuse, misconduct, and theft — and it obliterates Clayton’s recent claims that the investments are good for workers and retirees.

For example: amid recent headlines about the private equity industry charging investors $230 billion in fees, one section of the SEC document shines a spotlight on fee gouging. Regulators report that private equity firms have “failed to follow their own travel and entertainment expense policies, potentially resulting in investors overpaying for such expenses.” The SEC also notes that firms are charging “clients for expenses that were not permitted” or not properly disclosed — including expenses for lavish annual investor meetings.

In practice, such fees and expenses are being paid for out of the money entrusted to private equity firms by investors such as pension funds, university endowments, and charities.

Similarly, SEC regulators seemed to bolster long-standing allegations that private equity firms mislead investors about the value of their assets. The agency reported finding private equity firms “that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients.”

The agency notes that in some cases, fraudulent valuations “led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.”

“As A Result, Some Investors Were Unaware of the Potential Harm”

n recent years, critics have asserted that private equity firms secretly give preferential treatment to certain politically connected investors — preferences that are paid for by exorbitant fees and abusive terms imposed on “dumb money” investors like pension funds.

The SEC appears to confirm these allegations.

“The staff observed private fund advisers that preferentially allocated limited investment opportunities to new clients, higher fee-paying clients, or proprietary accounts or proprietary-controlled clients, thereby depriving certain investors of limited investment opportunities without adequate disclosure,” the agency wrote. “The staff observed private fund advisers that did not provide adequate disclosure about economic relationships between themselves and select investors or clients.”

One example of particularly predatory terms that critics cite are provisions that could let preferred investors bail out early on failing investments, leaving the other investors, like pension funds, with all the losses. Again, the SEC confirms that this is happening.

“The staff observed private fund advisers that entered into agreements with select investors that established special terms, including preferential liquidity terms, but did not provide adequate disclosure,” the agency wrote. “As a result, some investors were unaware of the potential harm that could be caused by selected investors redeeming their investments ahead of other investors, particularly in times of market dislocation where there is a greater likelihood of a financial impact.”

A Private Equity Takeover

n 2016, a group of Rhode Island retirees requested federal law-enforcement action to investigate whether special preferences were harming their state’s pension fund. To date, that request has gone unanswered — and moves by the Supreme Court and Trump suggest they will remain unanswered.

The high court last week limited government regulators’ power to punish financial firms that rip off investors. While the ruling preserved the Securities and Exchange Commission’s power to order companies to return ill-gotten gains from illegal schemes, it limits the size of those financial punishments in order to make sure they don’t end up being a “punitive sanction” — the kind that is designed to deter crime.

If Trump now successfully installs Clayton as US Attorney for the Southern District of New York, Clayton would be able to make sure there is no investigation or prosecution of the private equity industry that he worked with as a Wall Street attorney, that he personally invested in, and that is helping bankroll Trump’s reelection.

It would be the culmination of the private equity industry’s takeover of the federal law-enforcement system — at precisely the moment regulators are desperately trying to warn America about the industry’s crimes.

"This Guy Is the Devil": The Rosemary's Baby Theory of Attorney General Bill Barr

By Abigail Tracy, Vanity Fair

28 June 20

This week showed that justice, for Barr, is completely indistinguishable from what Trump wants.

t was a stunning display that capped off a head spinning four months at the Department of Justice. Sitting before the House Judiciary Committee on Wednesday, two current federal prosecutors, Aaron Zelinsky and John Elias, claimed under oath that on Attorney General William Barr’s watch the department had effectively become a tool to advance the political and personal interests of Donald Trump and his administration. “It’s remarkable for a sitting career assistant U.S. attorney not only to assess that their work has been politically corrupted and that they must withdraw from a case or even resign from the department,” David Laufman, a former Justice Department official, told me. “But to take the extraordinary step of serving as a whistleblower and provide testimony to Congress about the wrong doing they’re seeing at the Justice Department.”

Under oath, Zelinsky described a pressure campaign from the highest levels of the DOJ to curtail the sentencing recommendation for Roger Stone, a veteran of the Trump administration and longtime ally of the president who was convicted of lying to Congress and witness tampering. “In the United States of America, we do not prosecute people based on politics, and we don’t cut them a break based on politics,” Zelinsky, who worked on Special Prosecutor Robert Mueller’s team and is currently serving as an assistant U.S. attorney in Maryland, told the committee. “But that wasn’t what happened here. Roger Stone was treated differently because of politics.”

Elias struck a similar theme, testifying that Barr’s personal biases influenced antitrust investigations. Specifically, Elias alleged an abuse of power in probes into the marijuana industry and an agreement between the state of California and four automakers at the behest of the attorney general. “Personal dislike of an industry is not a valid basis upon which to ground an antitrust investigation,” Elias asserted.

The testimony of Elias and Zelinsky had the effect of completing the legal portrait of Barr—a person for whom there is no essential difference between belief in a strong executive and personally serving Donald Trump. It’s breathtaking in its completeness. There’s no bulwark against corruption—seemingly in Barr’s theory, the executive branch, of which the Department of Justice is a part, can take what it wants.

When Trump tapped Barr to lead the Justice Department, the pick drew praise from some, though he was viewed with skepticism from others. Having previously served as attorney general under George H.W. Bush, Barr was painted as an institutionalist who would hold his ground against Trump and restore the reputation of the department, tarnished under his predecessor Jeff Sessions. While there was widespread acknowledgment that Barr held an expansive view of executive power, few predicted his evolution into one of the president’s top defenders and loyalists. But it would be more apt to describe Barr as an opportunist who found in Donald Trump the perfect vehicle to empower the executive branch than a Trumpian lackey—even if in practice the outcomes might seem indistinguishable. Barr’s ideology just so happens to match Trump’s politics.

Justice Department spokeswoman Kerri Kupec said in a statement that Zelinsky “did not have any discussion with the Attorney General, the U.S. Attorney, or any other member of political leadership at the Department about the sentencing” and his testimony was “based on his own interpretation of events and hearsay (at best), not firsthand knowledge.” The Office of Professional Responsibility did look into the antitrust division’s probes of the marijuana company mergers and found no wrongdoing.

Barr set the tone for an unexpected Trumpian tenure in his handling of the Mueller report last year, when he chose to release a four-page letter effectively absolving the president and his campaign of wrongdoing. To many, the Mueller report moment marks when Barr crossed the Rubicon. The letter drew a rebuke from Mueller and his team. At the time, Barr was cast as doing Trump’s bidding and whitewashing the Russia investigation. But in hindsight, his motives appear more insidious. His message wasn’t that Trump didn’t obstruct justice, but a president can’t obstruct justice.

A series of decisions in the ensuing months have contributed to a narrative that Barr and Trump have politicized the Justice Department to pursue their own ends. It has become clear that Barr’s approach is no-holds-barred and seeks to make the presidency stronger; Trump just happens to be president. Between their accounts on Wednesday, Zelinsky and Elias added heft to these criticisms and provided evidence of a growing rot within the Justice Department as a result. “We’re now seeing continuous, unbridled, and apparently shameless effort to corrupt the Department of Justice and undermine its governing principles by manipulating cases and installing pliable officials for political purposes,” Laufman said. (A Vanity Fair request for comment was not returned by press time.)

In the Trump era, Barr critics charge, there is no longer one rule of law. “The worst part is the Department of Justice has long been able to pride itself on being above politics and on the notion of equal justice before the law. Instead, Attorney General Barr seems to be running the place as if equal justice applies to some people, but just not to Trump’s friends,” Bennett Capers, a former SDNY prosecutor, told me. “We all recall Trump telling an audience of law enforcement officers on Long Island a few years ago that when they throw ‘thugs’ into the back of ‘a paddy wagon,’ ‘Please, don’t be too nice.’ He was talking about the rest of us. For his friends, it’s the red-carpet treatment.”

Along with Zelinsky’s claim that the upper echelons of the Justice Department pushed for a more lenient sentence for Stone because of politics, many see former National Security Adviser Michael Flynn’s case as further evidence of politics infecting cases. Last month, Barr instructed the DOJ to drop the prosecution against Flynn, who twice pleaded guilty to lying to the FBI about his conversations with the former Russian ambassador to the U.S., Sergey Kislyak. In a major victory for Flynn, a federal appeals court sided with the Justice Department and ordered U.S. District Judge Emmet Sullivan to abandon the Flynn case. (The ruling can still be overturned.) Both examples certainly benefit Trump, but a critical through line is the executive branch trumping the courts.

“Barr is doing enormous damage to the reputation of the Justice Department for evenhanded and nonpartisan law enforcement,” Washington, D.C., defense attorney William Jeffress, who worked on the Valerie Plame leak case, told me. “Reading Zelinsky’s opening statement, together with the motion filed in the Flynn case, makes me think of how many career prosecutors must be disappointed and ashamed at how far and how often DOJ has gone to protect the president and his friends in cases where ordinary people would get the book thrown at them.”

Barr defenders say he is course-correcting and push back on the argument that the attorney general is politicizing the department. “The politics was in the previous administration,” Republican Congressman Jim Jordan said during the Judiciary Committee hearing Wednesday. “Bill Barr is doing the Lord’s work trying to clean it up so that it doesn’t happen again.”

To achieve his goal of expanding the powers of the presidency, Barr has effectively relied upon removal precedents and a key authority bestowed on the executive branch in Article II of the Constitution: the Appointments Clause. A string of personnel decisions have prompted concerns that Barr is strategically installing loyalists in key positions throughout the Justice Department. Earlier this year, Barr broke with standard department practice when he named Timothy Shea, then his counsel at the department, as acting temporary U.S. attorney for the District of Columbia when Jessie Liu left the post. (Shea notably recommended on the lighter sentence for Stone and filed a motion to dismiss the charges against Flynn.)

Then on Friday, Barr announced that Geoffrey Berman, the U.S. attorney for the Southern District of New York, was leaving his post and Jay Clayton, the chairman of the Securities and Exchange Commission would be appointed to lead the powerful office. But Berman refused to resign his post. The resulting standoff ended when Trump officially fired Berman. Questions have since been raised as to whether Berman’s ouster was due to ongoing investigations involving individuals with ties to Trump, including the president’s personal lawyer Rudy Giuliani. (“I recognize that the nomination process is multifaceted and uncertain, and it is clear the process does not require my current attention,” Clayton said Thursday during previously scheduled testimony before the House Financial Services Committee.)

“They don’t want good Republicans,” former U.S. Attorney Harry Litman, told me, noting that Berman is a registered Republican who had reportedly donated to Trump’s campaign. “They want loyalists and loyalists here means people who will distort the facts and the law in order to serve the president. They want Roy Cohn and many Roy Cohns.” As career prosecutors are either purged or flee from the Justice Department, Litman likened the dynamic to Rosemary’s Baby. “Like, holy shit, you go to the top and the guy is with the devil. You’re completely trapped and you know, it’s not supposed to be that way,” he told me. “It’s so disheartening. It’s also damaging to the root and branch and DNA of everything the department stands for.”

Democrats and Barr critics see little recourse to address what they see as the politicization of the Justice Department. A Barr impeachment has largely been written off as a politically viable option. Barr, through a spokesperson, did agree to appear before the House Judiciary Committee on July 28. If Barr does appear—a major if—it would mark the first time the attorney general will have testified before the House since his appointment early last year and will likely devolve into little more than a partisan bickering match. But it is clear Barr, leaving a politicized and hollowed-out Justice Department in his path, seeks to empower the presidency, not genuflect before Congress. The only real remedy is to elect a different president who won’t allow or encourage their top lawyer to run roughshod over America’s system of checks and balances.

“The president’s sacred duty is to take care that the laws be faithfully executed,” Neal Katyal, who served as acting solicitor general in the Obama administration, said. “[Trump] has completely fallen down on the job and is taking the Justice Department down with him. It’s disgraceful.”