The Derailment of the SEC – Part I: How a Former Senior SEC Official Manipulated the System for His Clients' and His Own Benefit
Apr 29 2014
Two years ago, Spencer C. Barasch, a former high-ranking Securities and Exchange Commission official based in Fort Worth, Texas, paid a $50,000 fine to settle civil charges brought against him by the United States Department of Justice for allegedly violating federal conflict-of-interest laws. The Department of Justice had alleged that Barasch, as a private attorney, had represented R. Allen Stanford, a Houston-based financier who was later found to have masterminded a $7 billion Ponzi scheme. Barasch had done so even though he'd played a central role at the SEC for years in overruling colleagues who wanted to investigate Stanford’s massive fraud. Federal law prohibits former SEC officials from representing anyone as a private attorney if they played a substantial or material role in overseeing the individual's actions while in government.
In part because of that episode, Barasch, rightfully or wrongfully, has served as an example for critics of the SEC who say that it—and the US government as a whole—has done too little to hold accountable those financial institutions responsible for the 2008 financial crisis and other corporate wrongdoers. James Kidney, a respected trial attorney for the SEC, recently drew attention when he asserted in his retirement speech that the agency’s pervasive “revolving door” has led to a paucity of enforcement actions against seemingly untouchable Wall Street executives. More than two dozen current and former SEC officials that I have interviewed about these matters largely agree with Kidney on the takeaway: Quite simply, American investors can no longer expect the protection they once did, and powerful Wall Street executives who have violated the law will continue to go unchecked.
A three-month investigation by VICE has uncovered evidence of numerous similar instances of misconduct and potential violations of federal conflict-of-interest regulations and law by Barasch since he left the SEC. And while Barasch’s legal representation of Stanford might have been the single most consequential and egregious example of such misconduct, the new information shows that Barasch’s actions in representing Stanford were hardly an anomaly. The new disclosures serve as further ammunition for those who argue that the SEC has been tepid in its enforcement of such regulations and its punishment of those who would violate them.
David Kotz, who served as the SEC’s inspector general from 2007 to 2012, investigated the agency's regulatory failure in pursuing Stanford’s Ponzi scheme and wrote a scathing report criticizing the actions of Barasch and other officials. Information that Kotz uncovered during that investigation led to the Justice Department’s charges that Barasch violated federal conflict-of-interest laws by representing Stanford.
After examining the new information and previously undisclosed documents uncovered for this story, Kotz said: “Based upon the documents and information you provided me, and given the record of Barasch’s previous actions, I would say that there are questions about several matters in which Barasch had conversations about while he was at the SEC—during the same time that he was engaged in discussions for prospective employment—that should be scrutinized further to determine whether there were violations of conflict-of-interest statutes and regulations.”
Barasch, through his lawyer, Paul Coggins, a former United States attorney for the Dallas-Fort Worth area, declined to comment for this story. “Neither Spencer nor I will be commenting for the story,” Coggins said in an email.
The broad findings of my investigation are as follows:
- Inspector General Kotz concluded in 2010 that Barasch may have violated federal conflict-of-interest rules through his legal representation of a Plano, Texas–based electronics company, Microtune. Barasch represented Microtune as a private attorney even though he had earlier investigated the company while working as a SEC enforcement official. According to previously confidential SEC records, Barasch escaped any punishment as a sole result of the SEC’s then general counsel setting aside Kotz’s recommendation that evidence about the alleged wrongdoing be referred to two bar associations for further investigation.
- During his final days at the SEC, Barasch was being courted by Houston law firm Andrews Kurth, where he is now currently employed as a partner who leads the firm’s corporate-governance and securities-enforcement team. According to confidential internal emails from Andrews Kurth, the firm apparently considered using Barasch to learn inside information about a potential civil fraud lawsuit that, at the time, the SEC was considering filing against the law firm. The potential lawsuit concerned legal work Andrews Kurth did for Enron, the Houston-based energy and commodities company, before it went bankrupt in December 2001 and following the discovery that the company’s leadership had engaged in one of the largest accounting frauds in US history. Confidential Andrews Kurth emails suggest that the firm's partners were eager to learn what action if any the SEC might take against them, and hoped Barasch, still with the SEC, could find out. Any discussion by Barasch with anyone at the SEC regarding Andrews Kurth’s representation of Enron would constitute a violation of federal conflict-of-interest laws, SEC officials and outside experts told me in numerous interviews.
- Less than three months before Barasch and the principals of Andrews Kurth began discussing the possibility of bringing him on as a partner, Barasch settled a foreign bribery case with an oil-and-gas services-and-equipment company, BJ Services, which was being represented in the matter by Andrews Kurth. Barasch supervised the SEC’s investigation of BJ Services, negotiated directly with Andrews Kurth partners to settle the case, and settled on terms favorable to the company, according to confidential records. “I like him and as I mentioned had some really good dealings with him in connection with resolving BJ Services FCPA [Foreign Corrupt Practices Act] problems,” one Andrews Kurth partner emailed another, as the firm was trying to recruit Barasch in December 2004. While by themselves Barasch’s talks with Andrews Kurth about taking on a job after his employment at the SEC might have been technically within the confines of the law, former colleagues he worked with at the SEC say they believe Barasch should not have discussed employment with a law firm with which he had only recently been negotiating to settle a case: “It is not just optics. What he did creates an appearance of impropriety,” a former SEC official who had worked with Barasch said.
This story is based on more than 1,000 pages of confidential records from inside Andrews Kurth—hundreds of emails, personal notes of partners of the firm, and billing records. Hundreds of pages of previously confidential SEC files, as well as public court records and public SEC records, were also reviewed. And more than two dozen former SEC officials and private attorneys who have worked with Barasch or Andrews Kurth spoke with me.
From 1998 to 2005, during his tenure as the chief enforcement officer of the SEC’s Dallas–Fort Worth regional branch, Barasch overruled examiners in his own office who wanted to investigate Stanford. Year after year, and with increasing urgency, they warned Barasch that Stanford was likely running a “massive Ponzi scheme” and also engaged in international money laundering. But each time the examiners sought to open a file, Barasch quashed any potential investigation.
The SEC examiners weren’t able to persuade their superiors to investigate Stanford until 2005—exactly one day after Barasch left the agency to become a partner at Andrews Kurth. By then, investors in the US and overseas had lost additional billions of dollars. When Stanford was eventually arrested and charged, in March 2009, he had stolen more than $7 billion—the second largest Ponzi scheme in American history. Only Bernard Madoff stole more.
To date, no concrete evidence has surfaced that Barasch’s suppression of the various potential probes of Stanford was anything more nefarious than bad judgment. Stanford ran his Ponzi scheme from his offshore bank, the Stanford International Bank, on the Caribbean island of Antigua. Barasch and others at the SEC said they did not believe that the SEC had proper jurisdiction to investigate, and that it would be difficult to obtain the necessary records from overseas. The SEC’s bungling the investigation of the Stanford Ponzi scheme is considered by many to be one of the worst—and most costly—regulatory failures in the history of the US government.
But more so than quashing the potential Stanford probes, it was what Barasch did almost immediately after leaving the SEC that deeply angered many of his former SEC colleagues: He briefly represented Stanford as a partner with his new law firm, Andrews Kurth. Barasch appeared to be cashing in on his own missteps as a government official.
Moreover, federal law explicitly prohibited Barasch from representing Stanford: Former SEC officials are barred from representing as private attorneys individuals or corporations about whom they have made substantial or material decisions while in the government. This resulted in the Justice Department bringing civil charges against Barasch. On January 13, 2012, Barasch agreed to a $50,000 settlement. The Justice Department alleged that Barasch’s “supervisory position at the SEC,” during which he engaged in the “oversight of the investigation of Stanford Financial Group… restricted him from future private representation of Stanford Financial Group before the SEC." Barasch had chosen to defy the lifetime restriction on representing Stanford.
Besides the $50,000 fine, Barasch also agreed to a one-year ban on appearing before the SEC as punishment for his representation of Stanford. In agreeing to settle matters with the Justice Department and SEC, Barasch was not required to admit to any wrongdoing.
Asked by then SEC inspector general Kotz why he was so determined to represent Stanford, Barasch candidly responded: “Every lawyer in Texas and beyond is going to get rich over this case. OK? And I hated being on the sidelines.”
A former Andrews Kurth employee told me that Barasch informed his law partners that the firm stood to earn $2 million or more from representing Stanford: “There is lot pressure for a new partner just walking in the door to prove themselves. And the way to do that here was to bring in a new client who could pay high fees. It’s not surprising that some corners were cut.”
Barasch’s behavior in attempting to get Stanford’s business for Andrews Kurth is strikingly similar, my investigation found, to his involvement with another client he helped bring to the firm: Microtune, the Texas electronics firm that specialized in manufacturing semiconductors.
At the SEC, Barasch had overseen a 2005 securities-fraud investigation of Microtune. At Andrews Kurth, Barasch represented Microtune when it came under a second investigation for an entirely new and separate matter, during which time Barasch met with former colleagues at the SEC without conferring with the SEC’s ethics counsel. The role that Barasch played in representing Microtune is detailed in hundreds of pages of internal Andrews Kurth records.
Then SEC inspector general Kotz concluded in a 2010 memo that Barasch potentially violated federal conflict-of-interest rules by meeting with former colleagues without prior ruling from the SEC’s ethics counsel that it would be legal or ethical to do so.
The inspector general recommended that his findings be forwarded to the bar associations of Texas and the District of Columbia, where Barasch was licensed to practice law. Previously confidential SEC records indicate that no action was taken because the SEC’s general counsel at the time, David Becker, did not believe that Barasch’s alleged wrongdoing was strong enough to warrant such action.
Two sources—one of whom is a former Andrews Kurth employee—say that Andrews Kurth earned $1.5 million from the firm’s representation of Microtune. One of these people explained to me: “Why would you put your reputation or livelihood at risk? Why would you put your law firm at risk? Because there is so much money to do so, and unfortunately little down side if you are caught.”
Barasch and Andrews Kurth jumped at the chance to represent Microtune. In 2005, Microtune settled a civil case brought by the SEC alleging accounting fraud. Barasch supervised that investigation of Microtune, according to government records and interviews.
In 2007, the SEC opened a new inquiry as to whether Microtune had engaged in securities fraud by misstating to its stockholders the backdating of stock options to some of its top executives. Microtune wanted to get out in front of the investigation and tasked Andrews Kurth with conducting its own internal investigation of the allegations Microtune was facing. (Increasingly, corporations conduct internal investigations of their own conduct to gain leniency from the government by disclosing their own wrongdoing and, critics say, to sometimes deflect attention and protect senior corporate executives by laying blame on subordinates.)
Because Barasch had overseen the earlier investigation of Microtune, he was required by federal regulation to seek permission from the SEC’s ethics counsel as to whether he could represent the company in private practice. Because he did not do so, the SEC inspector general concluded that he had violated federal law by meeting with former colleagues at the SEC about the matter without obtaining such approval.
Retaining Barasch and Andrews Kurth to advocate their case paid off for Microtune. On June 30, 2008, the SEC filed a civil lawsuit alleging that Mictrotune and two of its highest executives “perpetrated a fraudulent and deceptive stock option backdating scheme” in which they “awarded themselves” and their colleagues millions of dollars in compensation not properly reported to stockholders. On the very same day the SEC’s charges were filed, Microtune settled the case on highly favorable terms. In settling the SEC’s lawsuit, Mictrotune was not required to admit any wrongdoing or even pay a fine.
Two former executives of Microtune, however, did not fare so well. The firm’s former chairman and CEO, Douglas Bartek, and its chief financial officer and general counsel, Nancy Richardson, fought the charges. Both of them were cleared after a federal appeals court ruled in August 2012 that the SEC had not filed the charges against the two executives until the statute of limitations had expired.
Unsurprisingly, this raised some eyebrows among Barasch’s former colleagues at the SEC, as the internal investigation he participated in had largely exonerated Microtune and laid blame squarely on Bartek and Richardson who had both been made wholly expendable by leaving the company.
And some of Barasch’s former colleagues I interviewed thought he held a personal vendetta against Bartek. During the initial SEC investigation of Microtune, which Barasch had supervised, he originally sought to bring charges against Bartek, but other enforcement officials at the SEC counseled that they did not believe they had a viable case against him. And as the then CEO of his own company, Bartek had the financial resources to fight any possible charges. According to one of Barasch’s former colleagues at the SEC, Barasch was told by Bartek's legal team, “If [the SEC] bring this case we are going to fight tooth-and-nail.” Barasch begrudgingly backed down.
Another former SEC colleague of Barasch’s told me, “Spencer believed that Bartek unjustly escaped the noose the first time… He was still smarting from [not being able to charge] the first time. Now he had a second bite at the apple.”
Even though Kotz concluded that Barasch likely violated federal conflict-of-interest laws, the SEC did absolutely nothing. It did not refer Kotz’s findings to the bar associations, as per his recommendation. Nor did it take any disciplinary action against Barasch. This was because the SEC’s then general counsel David Becker overruled Kotz. As Becker saw it, even though Barasch had overseen the earlier investigation of Microtune while at the SEC, the new options-backdating case was different enough to conclude that Barasch had not violated conflict-of-interest regulations, according to previously confidential SEC files. Because, in Becker’s view, there was no conflict of interest, Barasch did not deserve to be punished for having circumvented the SEC’s ethics counsel. Another former senior SEC official told me, “What harm could have come from someone simply examining the evidence? Becker’s decision foreclosed even that possibility.”
Six former SEC officials told me in interviews that it was suspicious that Barasch had never sought the advice of the SEC ethics counsel. “It is the first call that I make—that any of us make—when we are considering a representation,” one official put it succinctly. “It takes a few minutes to make the call, and you are in the clear if you get approval. It’s necessary to do if you want to cover yourself. There is just too much downside to your reputation, your career, and, most of all, your firm.”
Another former SEC attorney, who worked with Barasch, told me, “The only reason that you would not check is because you thought the answer might be no and you wouldn’t be able to do the representation. The only reason you would not check with the ethics office first is if you were trying to get around the system… Barasch agreed to represent Microtune without talking to the [SEC] ethics office. He represented Microtune without asking the ethics office. He didn’t in the first case because he knew the answer would be no. He didn’t in the second case because he knew there was a chance he would be told no.”
Barasch’s actions in regard to his representation of Microtune were strikingly similar to his alleged illegal representation of Stanford. In the case of Microtune, Barasch never contacted the SEC ethics counsel at all. In the case of Stanford, shortly after leaving the SEC in 2005, Barasch had sought to represent Stanford and sought out guidance from the SEC ethics counsel about whether he would be allowed to do so—only to be told by the counsel that he could not represent Stanford. Barasch complied.
In 2006, the SEC would intensify its investigation of Stanford, and in turn Stanford sought out Barasch to represent him. This time, however, Barasch simply began representing Stanford without seeking consent from the SEC’s ethics counsel. Barasch’s representation only ended when he called a former colleague to discuss the case, causing an uproar among several of Barasch’s former colleagues in the SEC’s Dallas–Fort Worth office. Barasch ended his representation of Stanford only when the ethics counsel told him that to continue to do so would be flat-out illegal.
But Barasch’s alleged ethical lapses were potentially profitable (in the case of Stanford) and actually profitable (in the case of Microtune, Andrew Kurth earned $1.5 million). Barasch told his law partners that he stood to make as much as $2 million or more if Andrews Kurth defended Stanford before the SEC, according to a former firm employee.
“People ask why corporations are given a slap on the wrist,” a former SEC litigation attorney told me in an interview. “Well, look at the regulators—and how they are regulators. If the SEC gives a slap on the wrist to someone powerful on Wall Street, look at the slap on the wrist for the regulators. Spencer Barasch and Andrews Kurth stood to earn millions if they represented Stanford. Barasch’s punishment: a $50,000 fine. You tell me they made $1.5 million from Microtune. Nobody even got in trouble for that one.”
Many enforcement attorneys who still work for the SEC, or have since left, feel similarly. But those who continue to work there are not allowed to voice their criticisms publicly. And many of those who have left the SEC are loath to publicly make such comments, because once in private practice they have to represent clients before the Commission.
Thus, it was left to one of the SEC’s most respected trial counselors, James Kidney, to say what his colleagues could not and cannot. Kidney worked as a lawyer for the SEC but never went through the revolving door, making him one of the rare enforcement officials who is able to speak freely. After a long and distinguished career, Kidney gave a poignant speech at his retirement party on March 27 of this year, in which he inexorably tied the SEC’s tepid response to bringing cases against the powerful to its conflict-of-interest revolving door. Kidney told his former colleagues:
The revolving door is a very serious problem. I have had bosses, and bosses of my bosses, whose names we all know, who made little secret that they were here to punch their ticket. They mouthed serious regard for the mission of the Commission, but their actions were tentative and fearful in many instances… Don’t take risks where risk would count. That is not the intended message from the ticket punchers, of course, but it is the one I got on the occasions when I was involved in a high-profile case or two. The revolving door doesn’t push the agency’s enforcement envelope very often or very far.
The attitude trickles down the ranks… It is no surprise that we lose our best and brightest, as they see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or a corporate job punched. They see an agency that polices the broken windows on the street level and rarely goes to the penthouse floors. On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement—risky enforcement—is subject to extensive negotiation and weakening.
Just as Barasch was preparing to leave the SEC, Andrews Kurth was facing legal problems of its own. The firm was under investigation by the SEC for legal advice it had given to the failed energy giant Enron. The firm’s partners were anxious for any word as to whether the SEC might bring charges.
Barasch told his soon-to-be law partners that before he could formally accept their offer, he wanted to go to Washington, DC, to visit with his superiors and see whether they were fine with his leaving. According to confidential emails, Barasch worried that some at the agency might think he was simply too valuable to leave. If told so in DC, Barasch informed his suitors at Andrews Kurth, he might just have to stay.
Several of Barasch’s former SEC colleagues told me that this was a bit of puffery at the expense of truth: “There is nobody at the SEC who doesn’t leave whenever they want. There is no such thing as anyone, even the chairwoman, who is not free to leave.” Another said, “Nobody was going to tell Spencer Barasch that he was too important to leave. That's just not even close to reality.”
According to the same batch of confidential emails, Barasch then informed his soon-to-be colleagues at Andrews Kurth that one of the persons he was seeing in DC—to ask permission to leave the agency—was Linda Thomsen, the then deputy enforcement chief, who also happened to be the head of the SEC’s Enron task force. In other words, she was the single person who not only knew but would make the final decision as to whether the SEC would sue Andrews Kurth for its Enron work.
Just as Barasch was about to leave for the capital, Jerry Beane, a senior partner at Andrews Kurth, who had been working to lure Barasch from the SEC, sent Barasch an email detailing various litigations against the firm under the heading “Update Concerning Enron Litigation—ATTORNEY CLIENT PRIVILEGE.”
Beane wrote in the email: “As we have previously reported to you, the Firm is a defendant in two Enron-related lawsuits pending in federal district court in Houston…” At one point in the email, Beane bleakly reported that Enron stockholders were alleging that Andrews Kurth assisted Enron in transactions that allegedly allowed Enron to distort its financial condition. Beane wrote: “Although we hope otherwise and firmly believe that the shareholders have not plead a cause of action under federal securities laws, it may well be that [the federal judge hearing the case] rules… that the pleadings in the… case sufficiently allege a course of action against us.”
The following day, Andrews Kurth then-managing partner Howard T. Ayers—who had been copied on Beane's email to Barasch—sent a two-word email to both of them, simply asking, “Any word?”
Ayers’s question suggests that he and others at Andrews Kurth might have been asking about whether their law firm was going to be sued for their Enron work. Or it could be interpreted as asking whether Barasch had been given the go-ahead by the SEC to leave and join the firm.
A subsequent email suggests that Ayers believed that Barasch might learn something about the SEC’s plans as to whether or not to sue Andrews Kurth over its Enron work.
On February 27, Ayers emailed several of his law partners, writing:
I talked to Spence this evening. All systems are go for him leaving the SEC and joining AK. He will be in DC on Wednesday thru Friday of this coming week. He will be telling the SEC folks that he is leaving to go to AK. One of the people he will be talking to is the head of the Enron task force. Spence had some questions about the upcoming meeting between AK and the SEC. I told him that Ross [another Andrews Kurth partner] was the best person to provide the details. There is no problem with Spence. He just wants to respond if there is any question of comment. Ross, can you call Spence at his office on Monday or Tuesday to discuss?
Ultimately, the SEC did not sue Andrews Kurth for its Enron work.
But in January 2007, Andrews Kurth agreed to pay Enron’s bankruptcy estate $18.5 million for alleged malpractice committed by the firm. Earlier, Neil Baston, a court-appointed examiner responsible for distributing money to Enron’s creditors and defrauded investors, stated in a report to the court that an examiner he retained “concluded that there is sufficient evidence from which a fact-finder could determine that Andrews Kurth committed malpractice” and violated Texas bar-association rules while representing Enron.
Under terms of the agreement to settle the civil Enron litigation, Andrews Kurth did not admit any wrongdoing. At the time, Howard Ayers was quoted as saying, “We have continuously denied wrongdoing and culpability with respect to our work for Enron… We felt, though, after the passage of five years, that it was expedient to enter into the settlement to put this matter behind us.”
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