How did I get into this line of work?  Because I myself was a whistleblower when I worked as a Legal Advisor at the Justice Department and blew the whistle when my advice not to interrogate “American Taliban” John Walker Lindh without an attorney (and, parenthetically, not to torture him) was ignored and then “disappeared” from the file in contravention of a federal court discovery order. After I blew the whistle, the Justice Department retaliated against me by, among other things, placing me under criminal investigation, referring me to the state bars in which I’m licensed as a lawyer based on a secret report to which I did not have access, and putting me on the “No-Fly” List. (The D.C. Bar charges are still pending 8½ years later.) I write about the experience in my new book TRAITOR: The Whistleblower and the American Taliban. Glenn Greenwald, for whom I am substituting here, wrote an eloquent foreword for the book.

While the Bush administration treated whistleblowers unmercifully, the Obama administration has been far worse. It is actually prosecuting them, and doing so under the Espionage Act — one of the most serious charges that can be leveled against an American. The Espionage Act is an archaic World War I-era law meant to go after spies, not whistleblowers. Strangely, using it to target the media and sources is the brainchild of neo-conservative Gabriel Schoenfeld, who would have sources who disclose information to reporters, journalists who then write about it for newspapers, the newspapers that publish the information and the publisher itself all be held criminally liable.

Everyone wants to know why Obama, with his pledge to “protect whistleblowers,” would do this.  After all, Obama’s transition agenda recognized that “[o]ften the best source of information about waste, fraud, and abuse in government is an existing government employee committed to public integrity and willing to speak out. Such acts of courage and patriotism, which can sometimes save lives and often save taxpayer dollars, should be encouraged rather than stifled.”  That’s not just a broken promise, it’s a complete reversal.

At first I thought Obama’s war on whistleblowers was meant to appease the intelligence establishment, which saw him as weak. I soon recognized this assault as a devious way to create bad precedent for going after journalists. All the Espionage Act cases involve allegations that the government employee “leaked” information (or retained information for the purpose of leaking it) to journalists.

The government’s spectacularly failed case against NSA whistleblower Tom Drake claimed that he allegedly retained allegedly classified information for the purpose of leaking it to Siobhan Gorman, then with the Baltimore Sun. It turned out that he disclosed unclassified information about a failed and wasteful (multi-billion dollar) NSA spy program that compromised Americans’ privacy. FBI translator Shamai Liebowitz pleaded guilty to leaking information to a blogger. Leibowitz made his disclosure because of an all-too-real fear that Israel might strike nuclear facilities in Iran, a move he saw as potentially disastrous. State Department arms expert Steven Kim is accused of leaking to Fox News that North Korea was planning to respond to a U.N. Security Council resolution by setting off another nuclear test — surely of public interest to China and South Korea. And, of course, Army Private Bradley Manning is accused of leaking to WikiLeaks.

In the most extreme proof yet that the war on whistleblowers is also a war on journalists, Glenn Greenwald’s explosive piece last night detailed Department of Homeland Security (DHS) repeatedly detaining and interrogating Oscar- and Emmy-nominated documentarian Laura Poitras, who has filmed three of my NSA clients for the third installment of her War on Terror trilogy. Not surprisingly, her latest film will be about the government’s ever-expanding secret domestic surveillance, NSA treating our nation like a foreign country for spying purposes, and the war on whistleblowers.

In yet other examples, for the Espionage Act prosecution of former CIA officer Jeffrey Sterling, the government has subpoenaed New York Times journalist James Risen three times to testify about whether Sterling was his source. The issue is on appeal in the 4^th Circuit from a lower court ruling that Risen had a “qualified reporter’s privilege” not to do so. Going after the media is also evidenced by last week’s Indictment of CIA officer John Kiriakou, which is laced with thinly-veiled references to “Journalist A” (Matthew Cole of ABC News) and “Journalist B” (Scott Shane of the New York Times). “Journalist C” (Richard Esposito of ABC News), mentioned in the charges, mysteriously disappeared from the indictment.

Kiriakou is charged with identifying a covert agent, three Espionage Act counts, and making a false statement, for which he faces 50 years in prison. In the government’s own words: “The charges result from an investigation that was triggered by a classified defense filing [by attorneys representing Guantánamo detainees], which contained classified information the defense had not been given through official government channels, and in part, by the discovery . . . of photographs of certain government employees and contractors in the materials of high-value detainees.” In other words, instead of investigating the government’s withholding of exculpatory information from Gitmo detainees’ lawyers, the government investigated how the lawyers obtained the information. And instead of investigating the approximately 70 names and 25 photos of the detainees’ alleged torturers, the government investigated how the prisoners found them out.

Count I accuses Kiriakou of allegedly confirming the name of an allegedly covert agent — even though the covert agent’s name has never been made public. Count II alleges that Kiriakou violated the Espionage Act by affirming the allegedly covert agent’s (the same one whose name has never been made public) involvement with the “Rendition, Detention and Interrogation Program.” Counts III and IV stem from Kiriakou’s alleged communications with New York Times reporter Scott Shane, for a story he wrote in 2008 and for which Shane had some 23 other sources.  Count V alleges that Kiriakou tried to trick the CIA, but failed, during the pre-publication review process for his book, “The Reluctant Spy: My Secret Life in the CIA’s War on Terror.” The Indictment leaves out that Kiriakou took the “trick” information out of his book, and that the CIA cleared Kiriakou’s book in its entirety. More likely, the government is actually upset that Kiriakou’s book sharply criticizes the CIA’s torture program and reveals embarrassing information about the FBI – namely that the FBI shelved potentially-actionable intelligence in the aftermath of 9/11.

The indictment of John Kiriakou, like that of Tom Drake, is meant to chill whistleblowers and the journalists who report their stories.  After the Justice Department’s case collapsed, Drake’s prosecutor requested at sentencing that the judge impose a steep fine of $50,000 “to send a message” to intelligence community employees “who live by these non-disclosure agreements.” (“Non-disclosure agreements” are not to be confused with Omertà-style loyalty oaths. Federal employees do take an oath: to the Constitution, not to the President, an Agency, a boss, or a broken classification system.) The judge gave Drake no fine, but the government’s desired message is especially odious because Drake and Kiriakou are the only people to be prosecuted in relation to two of the Bush administration’s biggest scandals—warrantless surveillance and torture. After being put through what a federal judge called “four years of hell,” Drake is out a career, a federal retirement package, and almost a hundred thousand dollars in attorneys’ fees. Kiriakou himself has also spent tens of thousands in attorneys’ fees and is struggling to raise the million dollars his defense is expected to cost. Intelligence community employees with mortgages and mouths to feed no doubt get the message.

Kiriakou’s Indictment fails to mention that Kiriakou served the CIA and the United States at great personal peril – he survived at least one assassination attempt — for almost 15 years and was trusted with the country’s most sensitive secrets and counter-terrorism operations. It also fails to mention that he was the first CIA officer to call waterboarding “torture” and that he revealed that the CIA’s torture program was policy rather than aberrant playtime.  The law-breaking telecoms who received retroactive immunity from Congress, the interrogators who tortured prisoners, the officials who gave the orders, the attorneys who authored the torture memos, and the CIA agents who destroyed the interrogation tapes have not been held professionally accountable, much less been charged with crimes. National security and intelligence whistleblowers have become the glaring exception to the Obama administration’s mantra of “looking forward, not backward.”  If you committed crimes under the guise of national security and the war on terrorism, you will not be held criminally liable, but if you blow the whistle on crimes, you risk criminal prosecution under the Espionage Act.

As I keep saying, John Kiriakou is the new Tom Drake — an assessment with which Drake himself agrees. And the government’s latest dirty little secret?  For these heavy-handed, oh-so-serious, America-harming, foreign nation-benefitting Espionage Act charges, the government was willing to let Kiriakou plead guilty to a single felony with no jail time.  Desperate.

UPDATE: Journalist Jane Mayer (who won the prestigious George Polk Award for Magazine Reporting for her New Yorker story on NSA whistleblower Tom Drake) just e-mailed me that during the awards ceremony, “I pointed out that when our sources are prosecuted, the news-gathering process is criminalized, so it’s incumbent upon all journalists to speak up.  I thanked the Polk judges especially for picking Tom’s story, for that reason.” She’s paraphrasing, of course, because the transcript of the awards ceremony is not yet available, but her point is clear.

UPDATE II: “Journalist A” in the Kiriakou indictment, Matthew Cole (who allegedly received illegal leaks from Kiriakou), is turning out to be a mercurial character.  As Politico’s Josh Gerstein reported, Cole “worked until earlier this year as a producer for ABC News’s investigative unit … Cole’s alleged role also raises questions about whether Cole, whose website indicates he was working on a book at the time, was straddling the line between traditional journalism and information-gathering for lawyers representing Guantánamo detainees. … Public court papers don’t offer much in the way of context for Cole’s interaction with the defense investigator.” Nor does Cole’s website, which was taken down after Gerstein’s article on Monday but can be seen here, elucidate the matter.

Cole’s removed website also says that Cole is “currently under contract to write a book for Simon & Schuster,” but as Jason Leopold—lead investigative reporter for Truthout.org – told me, Cole’s Simon & Schuster contract was cancelled.

A military style raid on peaceful protesters camped out in the shadow of Wall Street, ordered by a cold ruthless billionaire who bought his way into the mayor’s office.

If you think about it, that short sentence is a perfect description of both the essence of America’s political culture and the fuel that gave rise to the #OWS movement in the first place.

* * * * *

Jesse LaGreca, who justifiably received substantial attention as an insightful and articulate spokesperson for OWS’s grievances, here condemns what he describes as the “1-party bankster owned oligarchy” (for more on what he means, see here). Meanwhile, here’s a photo of the police earlier this week clearing out Occupy Chapel Hill in North Carolina; the Baghdad-like scene is but a small taste of how para-militarized America’s domestic police forces have become and what we’re likely to see much more of if (more accurately: when) protests, disruptions and other forms of unrest continue to emerge in the face of a disappearing middle class and exploding inequality:

UPDATE: A New York state judge this morning temporarily enjoined the city from keeping the protesters out of Zuccotti Park, but Mayor Bloomberg is simply ignoring the Order and deliberately breaking the law by refusing to allow them back in. Put another way, Bloomberg this morning has broken more laws than the hundreds of protesters who were arrested. But as we know, the law does not apply to the Michael Bloombergs of the nation; the law, instead, has simply been exploited into a weapon used by the politically and financially powerful to prevent challenges to their standing.

Could #OWS have scripted a more apt antagonist than this living, breathing personification of oligarchy: a Wall Street billionaire who so brazenly purchased his political office, engineered the overturning of a term-limits referendum and then spent more than $100 million of his personal fortune to stay in power, and now resides well above the law?

UPDATE II: To justify his raid, Mayor Bloomberg said: ”We must never be afraid to insist on compliance with our laws.” Leaving aside the fact that torturers, illegal eavesdroppers, wagers of aggressive war, Wall Streets defrauders, and mortgage thieves are some of his best friends who thrive and profit rather than sit in a jail cell, this is the same Mayor Bloomberg who, now beyond all dispute, is knowingly and deliberately breaking the law by violating a Court Order of which he is well aware. He’d be arrested for that if he weren’t a billionaire Mayor (and indeed, having seen that bevvy of political and financial elites break the law in the most egregious ways with total impunity over the last decade, why would Bloomberg be afraid of simply ignoring the law?). Today really is the most vivid expression seen in quite some time of the two-tiered justice system I wrote my new book to highlight; the real criminals are not only shielded from the law’s mandates, but affirmatively use it as an instrument to entrench themselves in power and protect their ill-gotten gains.

In his manifesto, Anders Breivik the perpetrator of the Oslo attacks cited among his inspirations many prominent intellectuals and media figures whose ideas he admired and whose views on topics such as Islam and immigration he strongly identified with. Although many of these individuals have strongly insinuated that perpetrating mass violence in the service of their anti-Muslim agenda is laudable and desirable, it can be reasonably argued that it is unfair to condemn them for actions which, though perpetrated in the name of their ideas, were carried out without their specific consent. Regardless of whether one puts forth odious and potentially dangerous ideologies it can be justifiably said that holding individuals accountable for how others may interpret and act upon their opinions goes against freedom of expression and is potentially deleterious to the marketplace of ideas which should exist in all free societies.

However, what is notable then about the case of Breivik is not so much whom he cited as potentially unwitting inspirations to his act of terrorism, but those who actually leapt to support and justify his actions after it had become undeniably clear that he was in fact a terrorist. While they may distance themselves from the individual, they go out of their way in the wake of his murderous terrorist attack to justify and validate the ideals he killed for.

Here are a few choice quotes regarding the Oslo attack:

• “I shed no tears for these HAMASnik campers with a Scandinavian dialect. Perpetrators are not victims. Sorry. HAMAS collaborators don’t get my pity. They never will.”

• “Karma is a bitch . . . especially for Jew-haters who were Fatah’s bitch. You hang out with snakes, you get bitten.”
• “Victims” or Perpetrators?” — Debbie Schlussel, 7/28/11
• “There was a shooting at a political camp, which sounds a little like the Hitler youth..” — Glenn Beck, 7/25/11
• “The more that is revealed about that youth indoctrination center, the more grotesque the whole story becomes”
• “The jihad-loving media never told us what antisemitic war games they were playing on that island. Utoya Island is a Communist/Socialist campground, and they clearly had a pro-Islamic agenda.” — Pamela Geller, 7/31/11
• “The youth camp he attacked was engaged in what was essentially a pro-terrorist program.” — Barry Rubin, 7/31/2011

Try to imagine what the reaction to comments such as these would be in the wake of an attack by Islamic extremists. Aside from the vile slander against the victims of a horrifying crime, these words are a clear attempt to justify and legitimize the actions of Breivik. Claiming to oppose violence while simultaneously characterizing the victims of said violence as Nazis and terrorists sends the implicit message that such violence is in fact understandable and laudable. After all, who wouldn’t be inclined to view as permissible violence committed against Nazis and terrorists, and how could one who does commit violence against those parties be said to be unequivocally condemnable? The supreme twisted irony is that those who claim to be appalled by his act of violence while steadfastly defending his motivations very closely mimic the position of Breivik himself who described his actions as being “atrocious but necessary.” Violence against “Nazis and terrorists” may not be “nice,” but hey, they are “Nazis and terrorists.”

In the context of fighting a war against terrorism, and with all the dot-connecting, guilt by-association tactics which that entails, the individuals who inspired and then defended the bigoted motivations of the Oslo terrorist have largely escaped recrimination. Those so open about their sympathies with an ideology which had just given rise to such an atrocity would normally come under harsh, justified scrutiny, not just from the public but perhaps also from law enforcement agencies tasked with preventing the fomentation of further terrorism. By sole virtue of the race and religion of the terrorist in this case those who motivated him have been left unchecked and continue to openly expound the nihilistic ideals which may well inspire the next Anders Breivik.

On her website, Pamela Geller in 2007 shared approvingly an email she received from a source in Norway whom she has kept anonymous. The email reads as follows:

From Israel the hordes clawing at the walls of Jerusalem proclaim cheerfully that next year there will be no more Israel, and I know Israel shrugs this off as do I, and will mount a strike during the summer against all of its enemies in the middle east. This will make the muslims worldwide go into a frenzy, attacking everyone around them.

We are stockpiling and caching weapons, ammunition and equipment. This is going to happen fast.

Before, I thought about emigrating to Britain, Israel, USA, South Africa, etc. for taxes and politics, but instead (although I believe we are the very last generation on earth before the return of God) I will stay and fight for the right to this country and indeed the entire peninsula, for the God-fearing people, just in case this isn’t the end of the world after all. Doesn’t hurt to have a backup plan.

Individuals engaged in racial and religious demagoguery have succeeded in giving rise to terrorism in the name of their ideals, and in the wake of what their actions have produced they’ve shown no remorse or reticence about continuing to fan the flames of hatred and violence. If those who enthusiastically promote ideologies which inspire terrorism are unwilling to even report or disclose details of planned violence by their followers, the question must be asked as to what level of darkness we must descend before their destructive actions are taken seriously.

Yet there is undeniable evidence of institutionalized fraud, such as widespread document fabrication in foreclosures (mentioned in the motion filed by New York state attorney general Eric Schneiderman opposing the $8.5 billion Bank of America settlement with investors) and the embedding of impermissible charges (known as junk fees and pyramiding fees) in servicing software, so that someone who misses a mortgage payment or two is almost certain to see it escalate into a foreclosure. And these come on top of a long list of runup-to-the-crisis abuses, including mortgage bonds having more dodgy loans in them than they were supposed to, banks selling synthetic or largely synthetic collateralized debt obligations as being just the same as ones made of real bonds when the synthetics were created for the purpose of making bets against the subprime market and selling BBB risk at largely AAA prices, and of course, phony accounting at the banks themselves.

Louise Story and Gretchen Morgenson lament this sorry state of affairs in an article today on a $10 billion lawsuit expected to be filed today by AIG against Bank of American over dodgy mortgage securities: 

The private actions stand in stark contrast to the few credit crisis cases brought by the Justice Department, which is wrapping up many of its inquiries into big banks without filing any charges. The lack of prosecutions — the Justice Department has brought three cases against employees at large financial companies and none against executives at large banks — has left private litigants, mainly investors and consumers, standing more or less alone in trying to hold financial parties accountable. 

“When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,” said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.” 

But this isn’t really true. Even when the plaintiffs in these suits prevail, it just transfers funds from one company to another. The real perps, the executives and line managers involved in the bad behavior, almost always get off scot free. The few cases where we have seen individual executives targeted, such as Angelo Mozilo of Countrywide and Gary Crittenden of Citigroup, the fines are chump change compared to their compensation.

This sorry situation parallels the aftermath of the Great Crash in 1929. Precisely because the securities laws were weak to non-existent, conduct that was fraudulent by common sense standards (“deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage“) was kosher under the law. The only high profile case in the wake of that crisis was the remarkable fall from grace of patrician Richard Whitney, former head of the New York stock exchange. As the marvelous book Once in Golconda recounts, Whitney had the unfortunate combination of having a very costly lifestyle and being a terrible speculator. He filled the gap for a while by borrowing from friends but finally resorted to embezzlement. Whitney, unlike our modern miscreants, ‘fessed up to his crimes when they came to light, took responsibility for them, and went to Sing Sing.

But that era’s publicity and investigations did lead to well though out, durable financial reforms that served the US well for over 50 years Why have they proven to be useless in the new millennium?

It would take a book to recount how once well regulated financial markets were turned back into a casino, and one of the best one stop accounts of the legal changes is Frank Partnoy’s Infectious Greed. But let me describe some of the major culprits.

The first measure, and its effects go well beyond the financial markets, was to make the courts far more friendly to business. A well funded effort dates back to the early 1980s to change the teaching of law to produce more pro-business attitudes. An overview of the law and economics movement from “ECONNED”: 

The third avenue for promoting and institutionalizing the “free market” ideology was inculcating judges. It was one of the most far-reaching actions the radical right wing could take. Precedents are powerful, and the bench turns over slowly… While conservative scholars like Richard Posner and Richard Epstein at the University of Chicago trained some of the initial right-leaning jurists, attorney Henry Manne gave the effort far greater reach. Manne established his “law and economics” courses for judges, which grew into the Law and Economics Center, which in 1980 moved from the University of Miami to Emory in Atlanta and eventually to George Mason University. 

Manne had gotten the backing of over 200 conservative sponsors, including some known for extreme right-wing views, such as the Adolph Coors Company, plus many of the large U.S. corporations that were also funding the deregulation effort….

Manne approached his effort not simply as education, but as a political movement… The program expanded to include seminars for judges, training in legal issues for economists, and an economics institute for Congressional aides…

It is hard to overstate the change this campaign produced, namely, a major shift in jurisprudence. As Steven Teles of the University of Maryland noted:

Moving law and economics’ status from “off the wall” to “controversial but respectable” required a combination of celebrity and organizational entrepreneurship. . . . Mannes’ programs for federal judges helped erase law and economics’ stigma, since if judges— the symbol of legal professional respectability—took the ideas seriously, they could not be crazy and irresponsible.

Now why was the law and economics vantage seen as “off the wall?… The law and economics promoters sought to colonize legal minds. And, to a large extent they succeeded. For centuries (literally), jurisprudence had been a multifaceted subject aimed at ordering human affairs. The law and economics advocates wanted none of that. They wanted their narrow construct to play as prominent a role as possible.

The second route was getting more conservative judges on the bench. Most readers are probably aware of the ongoing fight over Federal judicial appointments, as both Democratic and Republican administrations seek to install sympathetic jurists, and the opposing party, when it can, fights the effort. But less well known is the state and local analogue to this effort, and here again, the campaign by corporate interests has paid off handsomely.

My favorite illustration is the Alabama Supreme Court. Alabama was once one of the favored states for launching class action litigation, since Alabama residents were particularly keen on handing out big damage awards. The Alabama Supreme Court elections are now the most expensive state supreme court elections in the nation, with the spending exceeding that of Alabama gubernatorial campaigns. And the effort has provided a great return on investment. The Alabama Supreme Court is guaranteed to reduce any punitive damages award to at most $1 million. In the financial arena, the difficulty of launching criminal cases is both statutory and bureaucratic. Securities law, thanks to the Depression-era reforms, is the most favorable grounds for action, since it sets forth a very high standard for disclosure. The critical language come in Rule 10b-5 of the Securities Act of 1934:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

The requirement in (b) is particularly important, the prohibition against making material omissions. Now with this great weapon, why hasn’t the SEC done more? One basic reason is it can’t pursue criminal prosecutions on its own. It needs to go through the Department of Justice. Needless to say, the DoJ has been missing in action for pretty much all of the Obama administration.

A second reason is that the statute of limitations on securities litigation is effectively three years. Since the market for subprime dreck died permanently in July 2007, it’s too late to file claims using securities law theories (unless they relate to continuing statements in SEC filings). Wronged parties can still use contract law theories, but the standards for fraud are higher (more on that shortly).

The third is that the SEC has been kept budget starved for years, starting in the Clinton Administration. Former SEC chief Arthur Levitt, who was generally industry-friendly but was serious about protecting consumers, was regularly threatened by the Senator from Hedgistan, Joe Lieberman. As a result, the SEC has become incompetent at pursuing anything other than insider trading cases (it did score a big success in Enron, but seemed unable to build on that).

A fourth barrier is the use of lawyers and accountants as shields. Do you remember the Lehman Repo 105 chicanery, in which it moved over $50 billion off its balance sheet at the end of the quarter in what was pure and simple accounting chicanery? The bankruptcy examiner Anton Valukas concluded there was no basis for criminal charges, and the reason was simple: they’d gotten a UK law firm to bless the ruse. 

So even if you aggressively shopped for a dubious opinion to give you cover for something that didn’t pass the smell test, you as executive can bat your baby blues and say, “Gee, I’m just a businessman, I defer to experts on these matters,” and you are home free as far as fraud is concerned.

But….you may squawk, what about going after the unscrupulous lawyers and accountants? Well, it just so happens we can’t bust any more accounting firms, since we are down to four and so they are all too big to fail, and no prosecutors seem willing to sue big white shoe law firms (perhaps because they aren’t terribly well staffed and a large firm would seek to engage in a costly war of attrition, as well as enlist all of its deep pocket fancy firm peers to fund his opponent in the next election). And private plaintiffs are barred from action. As incredible as it seems, if an investor loses money, say because a crooked accounting firm cooked the books, he can’t sue the accountant. Only his client, meaning the company that hired him, can. Again from “ECONNED”: 

[The Supreme Court, via a 1994 decision, reduced investor protection. In a stunning show of illogic, the court ruled in Central Bank of Denver v. First Interstate Bank of Denver that plaintiffs could not sue advisors like investment bankers, accountants, and lawyers for aiding and abetting securities fraud. A suit against them could only proceed if the defendant was charged with primary liability, meaning the damaged party was his client. This was a radical decision, reversing sixty years of court and administrative rulings. Thus, for instance, if an accountant signed off on fraudulent financial statements that an investor relied upon, the investor could no longer pursue the accountant to recover any losses that resulted from the unraveling of the fraud. Yet in criminal law, an accessory, like the car driver in a bank robbery, is subject to prosecution along with the gunmen who took the cash. 

In theory, the SEC has another big weapon it could use, Sarbanes Oxley. Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.

This makes for a politically less risky path for the SEC. It could file a civil claim, and if it prevailed, it has what would seem to be a virtual slam dunk in then filing criminal charges, since the language of the two sections (302 and 906) track each other.

It is blooming obvious that for a financial firm, “internal control” has to include risk controls, and at virtually all the big financial firms, they were woefully deficient, by design. Risk management is politically weak; the staff are typically trying to curry favor with the business side to get more lucrative jobs with them; risk managers are generally loath to tangle in a serious way with profit centers. It’s almost certain that you can’t have an adequate system of internal controls if you all of a sudden drop multi-billion dollar loss bombs on investors out of nowhere. Banks are not supposed to gamble with depositors’ and investors’ money like an out-of-luck punter at a racetrack. It’s pretty clear many of the banks who went to the wall or had to be bailed out because they were too big to fail, and we can toss AIG in here as well, since they had no idea they were betting the farm every day with the risks they were taking.

So why hasn’t the SEC used Sarbox? Our reading is they were deterred by a widely overlooked ruling in SEC v. Mozilo, in which the judge (with no explanation) nixed that the SEC could file both securities laws charges and Sarbox charges in that case (the judge treated it as double dipping). The judge’s negative ruling on a separate Sarbox charge on securities violations does not rule out other types of Sarbox charges, but the SEC incorrectly seems to have reacted this way. Remember, the part of Sarbox that gave a lot of boards fits was that the CEO and the CFO certify the adequacy of internal controls (Section 404). That goes above and beyond traditional SEC representations.

What about legal theories for fraud ex securities law? If a party is suing for fraud in most other commercial contexts, they must establish intent, that is, that they meant to deceive. That isn’t as easy as it sounds. Even if you find damning-sounding e-mails, as the SEC did in its failed effort to sue the managers of two Bear Stearns hedge funds, there are often other communiques in the same time frame that can muddy the waters. It is frequently possible for people who have engaged in bad conduct to offer up plausible-sounding rationales and point to actions that appear to support it.

So the only solution, it seems, is to go back and have another go at rewriting the rules. It’s worth noting that Dodd Frank got at none of these issues, so it appears we need to have another crisis to create a second opportunity. And it may be starting as we speak.

Yves Smith is the creator of the blog Naked Capitalism and author of “ECONNED: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism“