NY Attorney General, Eric Schneiderman, sat down in a rare interview with Martin Smith for his Frontline film The Untouchables. A lot of that interview didn’t make into the PBS documentary film so the transcript of his entire interview has been released. The NY AG pumps up Obama’s mortgage task force as a vehicle that really helped him bring his civil fraud suit against JP Morgan for the sins of Bear Stearns RMBS trading group. I don’t think that’s what happen — in fact I know it’s not.
As the only journalist who published the first Bear Stearns/EMC on the record whistleblower in May 2010 for The Atlantic I was able to get a unique behind the scenes look at how every regulator and private litigator was or was not involved in figuring out how Tom Marano, Jeff Verschleiser and Mike Nierenberg orchestrated the double-dipping putback scheme the NY AG sued over. At some point they all called me. This is one of the reason’s Martin Smith approached me in July to help him learn about who the players in the fraud were and how the suit was built while he was choosing which Wall Street fraud stories would make it into his Frontline film. He told me the Bear Stearns double dipping scheme looked like the case with the most evidence that has escaped criminal prosecution and I agreed. He was equally interested in the battle it took just to get the series of stories I reported on the actions of Bear Stearns and JP Morgan and their lawyers published.
Martin did a great job getting tough and focused questions in front of the NY AG. It’s an accomplishment he even got him to sit down for an interview and talk about an ongoing case. It’s also too bad more of the interview didn’t make it into the film so I think it’s really important to talk about what the NY AG said or didn’t say.
First off the NY AG did not figure out the Bear double dipping scheme that is part of his civil fraud suit against JP Morgan. When I reported the story at The Atlantic in January 2011 the scheme had already been laid out in sealed court documents by the lawyers at Paterson Belknap in mid 2010. The law firm, known as PBWT, represented three monoline clients with initial losses of just over one billion. These details were discovered before the NY AG EVER took office.
Martin Smith tries to ask Schneiderman about this here:
MS: Were you drawn for any particular reason to the monoline (PBWT’s Work) cases? Did they offer an opportunity to get at the documentation inside or the due diligence work that had gone on?
NY AG: Well, some. We started our own investigation in the spring of 2011, and we’ve reviewed millions of pages of documents and interviewed dozens of witnesses and taken depositions. So it was really a supplement to that.
But we looked at those cases and we looked at other cases. We subpoenaed records, and there’s a big, fat spreadsheet of cases that have been brought by various players out there against these institutions. But you have to keep in mind, individual firms or investors can only sue for their damages. They can sue for the particular deals they worked on, or they bought shares in.
And what we’ve put together is a platform case, which is really much broader. It’s about the systemic pattern of conduct, because, as we allege in our complaints, no investor during this period of time would have purchased any mortgage-backed securities if they had realized that the due diligence process was a sham, that the quality control process was a sham, and that the representations about underwriters meeting standards and originators meeting standards was really not being followed through.
To me supplement means the NY AG would have come up with some new evidence in his suit or charged the Bear executives individually. He didn’t do that. His suit has paragraphs literally copied out of the Ambac v. JPM/ Bear suit that PBWT did the leg work on. His suit even got the name of the audit firm wrong who told Bear’s senior executives that the practice of the RMBS traders keeping dollars from mortgage putbacks and not passing them back to the security was ‘not industry practice’ (nice way of saying it’s wrong).Francine McKenna who writes for Forbes and American Banker figured this out and questioned the NY AG’s office about it who had to admit they made a mistake in the suit. Mistakes like that are made when you copy other lawyers work. Instead the only thing new the AG came up with was a fancy legal term ‘ the PLATFORM case’ to describe his lawsuit filed off of the private sectors work.
He sued for over $20bn in rmbs issued by the bank which is more than the monoline suits sued for but if he settles and gets less than a billion from JP Morgan then he’s fined them less than the actual damages of the total monoline suits. I guess that’s what the NY AG means by supplement?
The NY AG – unlike the DOJ who did not contact any of the Bear whistleblowers during my three years of reporting of the fraud – did at least interview whistleblowers used in my reporting. He also made the effort to contact Nick Verbitsky, doc film maker who had EMC whistleblowers on camera for his film, and ask for all his unedited tape – which I reported for DealFlow Media in mid 2011. Basically he just did a Fact Check for his role in his JP Morgan/Bear suit and clearly found that the work of reporters and lawyers at PBWT was enough to bring a fraud suit. Except he falls down on his sword and sues civilly without charging any individuals or charging a bank with criminal wrong doing.
PBWT’s suit named-names like Tom Marano, Mike Nierenberg, Jeff Verschleiser – that’s because internal Bear emails and over 30 whistleblowers gave them evidence to name these names. A judge eventually ruled out the Bear individuals as defendants but at least they tried.
The NY AG went on to tell Martin Smith that he’s not ruling out brining future charges against individuals – that is if more whistleblowers come forward. OK well how about going out to find some whistleblowers on your own like the DOJ had done in insider trading cases. Arrest one – I’d start with the Bear Stearns desk traders Jeff and Mike who were on the frontline of the double dipping scheme and see if they flip on bigger players like Marano or even Warren Spector his boss.
The NY AG is also racing against a time clock – which he points out in his Frontline interview – because of statute of limitations. Now if he tried to use civil RICO as a charge he could buy himself time.
The NY AG’s brag about coming up with a ‘platform case’, that shows this was a systemic problem, is a deviation to something former DOJ chief, Larry Thompson, put out in 2003 called the Thompson Memo. This memo told prosecutors how to negotiate with intuitions when deciding to sue or make plea deals in cases where their employees committed crimes. The heart of the directive was to find the individuals to charge criminally because by charging the whole bank, who has tons of employees who did NO harm, the effect of punitive justice is diminished by job and net worth loss to innocent people. Thompson was involved in the litigation that brought down Enron and saw Arthur Anderson destroyed as a result. The Thompson memo got watered down as new DOJ heads came in and I’d be scared to death to see what a Lanny Breuer (current head of DOJ criminal division) memo would look like.
The take away from Smith’s Frontline film was: The American people still don’t have a good reason for not going after bankers individually for financial crimes. And the excuse Lanny Breuer gave about worrying if it would crack the US financial system is making people want to scream even louder about serious problems in the leaders of our Justice departments.
Martin Smith interviewed me about where Tom, Jeff, and Mike went after Bear Stearns (all have million jobs at other big bank institutions) but none of that material made it into the film. Likely because he’d need another half an hour just to show all the evidence against this crew of former Bear traders. Until the NY AG charges these men with a crime that could cost them jail time or sues them so they lose their securities license and personally bankrupts them – his platform case is another way of saying I haven’t used the unique powers my job enables me to do yet.