Growth Industry 2009: Criminal and Constitutional Law

It’s going to be all lawsuits all the time, as filings and indictments come fast and furious after January 20. In fact, a number are in the works already.

From the perspective of Wall St. crime, it will be interesting to see what Elliot Spitzer and Rudy Giuliani do. Keeping his hand in by writing for Slate, Spitzer’s wounded and has nothing to lose. Giuliani has got to smell blood and a loyal-to-the-point-of-absurdity Republican he is not.

Let’s start with . . .

Criminal Law

There’s a big one pending of the type that made the reputations of Spitzer and Giuliani in their US Attorney days—Insider Trading! As you remember, Giuliani’s high-profile conviction was Ivan Boesky and Spitzer’s was Martha Stewart. (No disrespect intended. What comes to mind when you think of Spitzer . . . let me qualify that, during his days as a US Attorney?)

Conveniently domiciled in their former district, Robert Rubin—former co-Chairman of Goldman Sachs, former Treasury Secretary under Clinton and on the board of, counsel to and briefly Chairman of Citigroup— was on the short list to be Treasury Secretary again. What happened?
When you want the low down, the New York Post is the paper of record. On December 4 it reported: "A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged [CDO-related] Ponzi-style scheme that's now choking world banking. [The two] are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.” However—and here’s the indictable offense—before Citi's stock collapsed, Rubin and other top insiders cashed out of more than $150 million in "suspicious stock sales" according to the lawsuit filed on behalf of investors. They never know when to stop, do they.

An Astounding Conflict of Interest

The disposition of this case is going to set quite a precedent. Apparently, stealing investors’ money is a crime.

Bernard Madoff, former head of the NASDAQ, surrendered to the FBI on December 11, after having been turned in by his sons Mark and Andrew for running a several-decades-long Ponzi scheme. Investors have been wiped out to the tune of $50 billion. What makes this case interesting is not only Madoff’s insider status, but that Mary Schapiro, nominee for SEC Chairman, has recently announced the appointment of Mark Madoff to a prominent role with the security-industry oversight agency. And there’s more.

According to the FBI, the SEC and other regulatory bodies received several written complaints about Madoff over the years, which were never pursued. It now has been learned that “Ms Schapiro, currently chief executive of the Financial Industry Regulatory Authority (Finra), employed (son) Mark Madoff to serve on the board of the National Adjudicatory Council — the division that reviews disciplinary decisions made by Finra,” according to the UK TimesOnline on December 18.

Madoff père is currently confined to his Park Avenue apartment awaiting trial.

Strange Treatment of Small Fry
This next case is small in terms of money—what’s a few hundred mil these days—but has an interesting twist. In another action by federal prosecutors of the Southern District of New York, they have arrested attorney Marc Dreir for stealing at least $380 million in “a brazen swindle of some of New York’s savviest investors by one of New York’s more accomplished lawyers,” as reported in the New York Times on December 14. Another $35 million is missing from escrow accounts at his 250-member law firm.

Why this case stands out is that the accused is actually in jail being held without bail. Can you believe it. He must be really dangerous. Or he lives in New Jersey.

Constitutional Law
This should be getting more ink, imo.

On December 10, the WSJ reported that the Fed “is considering issuing its own debt for the first time . . . which . . . would provide the central bank with more flexibility to tackle the financial crisis.”

Ordinarily, when short of cash the Fed turns to the Treasury. The Treasury can no longer fund the Fed because of its own massive borrowings set for 2009 and debt limits imposed by congress.

Issuing debt is not in the Fed’s charter. According to the Constitution as it is currently written, only congress through the Treasury has the power to borrow against the credit of the United States. What’s proposed by the Fed would give it extra-legal authority to exceed the debt ceiling set by congress. It also would usurp powers of congress and the Treasury and transfer them to the Fed, which is a private entity owned by member banks.

Paul Volker would be turning in his grave if he were dead.

mg