FISH OUT OF WATER
He’s got more guts than sense.
FIRST DAY
On January 25, 2010, I dropped two of my sons at their school in Manhattan. It was a typical cold winter day in New York City with the added twist of severe winter storm warnings bearing down on the city. After saying goodbye to the boys, I jumped on the express subway train and headed downtown to report for my first day at the New York regional office of the U.S. Securities and Exchange Commission (SEC) at the World Financial Center. The SEC is located in the American Express Tower building, which has tight security procedures, so I had to wait near the building’s main security desk for an administrator to come get me. Upstairs she handed me two thick black binders of the statutes governing federal employment and explanations of federal employee benefits. This was my first day as an employee of a U.S. government agency, and no one gave me an orientation. No one discussed “onboarding” for my duties. No one gave me a job description of my responsibilities in my new role as head of examinations of investment firms in New York and New Jersey—or advised me of the problems at the SEC and other regulatory agencies supposedly leading our nation out of the 2008 financial crisis.
Eventually, as there was no clear label for my position, I made up my job title for my business card: Associate Director of Investment Management Exams for the New York Region. The formal name of the nationwide SEC Exam office is the Office of Compliance Inspections and Examinations, a label that reminded me of some shadowy bureaucracy out of Dickens where people will be doing things to you with cold steel. SEC staff and we in the industry simply called it Exam or OCIE. The office conducts examinations by visiting broker-dealers, investment adviser and investment companies, securities exchanges, clearing agencies, transfer agents, and credit rating agencies to assess their compliance with the federal securities laws. Exam leaders decide which firms to visit and then send a team of examiners, typically from one of the SEC regional offices, to go to the firm and review trading records, e-mails, and the like to look for any wrongdoing. For investment management firms, Exam employs about 450 investigators covering more than 12,000 firms, so it relies on the data that firms present to decide on which companies to review. As part of this new adventure I was embarking on, I would now supervise about 100 of those 450 examiners, and we were responsible for policing investment managers in New York and New Jersey, where the bulk of the investment assets managed in the United States are located.
After having an ID picture taken, I sat in my office and thought about what to do first. My mind drifted back to a lunch I had a few months before with a high-ranking SEC official while interviewing for the job. He and I met at a Cosi restaurant in what was then the dingy food court of the World Financial Center. We grabbed salads, and I offered to buy lunch since I was in the private sector and not on a government salary. He said that as a government employee he couldn’t accept lunch from someone in the hedge fund business.
We squeezed into a booth. After eating quietly for a few moments, he looked over at me.
“Listen,” he said. “If you leave your job in the hedge fund business and come to the SEC hoping to change how exams of investment firms are done, certain employees in the New York office are capable of anything in trying to stop change.”
I told him that I thought my expertise in the investment management business could be helpful to the examiners after the SEC’s spectacular failure to discover the massive frauds committed by Bernie Madoff and Allen Stanford. He responded that some of the supervisors and employees in the New York office would resent any help from the outside, particularly from someone like me who had not conducted exams before.
When I asked what these people might do, he said that they could try to ruin my career. I was taken aback by these words, but I could not believe that examiners at an agency that had failed to detect fraud would not want assistance from someone with a background in the investment fund world.
I would soon be proved very wrong.
Later that day, back in my office at my hedge fund firm in Midtown Manhattan, I thought over what this official had said but was undeterred in my desire to join the SEC. I wanted to serve my country at this difficult time and believed I had the experience and legal expertise to handle myself in this new world. Looking back, I can see I was also a little naive in thinking that an organization that had suffered a massive failure would be open to outside help. During 20 years in the private sector practicing law and serving as general counsel of a hedge fund, I interacted with the SEC both as a lawyer seeking approval of transactions for clients and as an industry representative trying to educate the SEC staff about hedge funds. It was clear to me that many SEC employees did the best they could on hedge fund issues, but the agency had few people with expertise in the field. I had registered our firm with the SEC in the early 2000s and helped expand the business to offices in London, Hong Kong, and mainland China, working with regulators in all those places. I respected the regulators I worked with in the United States and abroad for their dedication to public service and for their efforts to police the industry. But the boom real estate market of the mid-2000s was too frothy to last, and I knew that a slowdown was inevitable, although in my wildest nightmares I did not foresee the massive crash of September 2008. After the crisis hit, I found it difficult to fathom what happened at the SEC, which was so embarrassed by its failures and savaged by critics in politics and the media that I had to avert my eyes.
I believe in the power of the U.S. securities markets and the prosperity they have brought the country for more than 200 years by providing capital for innovative businesses. Such healthy markets periodically produce manias like the one leading up to the 2008 crisis, but they also finance businesses too numerous to list. The usual sign of impending disaster is the inevitable article saying that “this time is different.” Many such pieces ran in 2006 and 2007 predicting that real estate would keep rising in value. I worried that the reaction to the crisis would harm the position of the United States as the financial center of the world. I believed my expertise in private funds and securities laws, which I had spent 20 years building, would be helpful to the SEC as it tried to recover from its debacle. So despite the prescient warning, I continued with my application to join the SEC’s New York office.
Once I’d made the decision, I felt excited to be entering public service for this great country—but also hesitant about what was to come. I gave up a partnership in a prestigious, established hedge fund manager at a time when my wife and I were raising four kids. I was not only taking a massive pay reduction but also stepping out of the industry where I’d made a good career. Happily, despite the challenges, it turned out to be the best experience of my working life.
I had been hired by New York office head George Canellos, with the approval of SEC chair Mary Schapiro, to overhaul the SEC’s processes in order to unearth the next Madoff or Stanford—before that person fleeced unwitting investors. When I started, the fallout from these failures was still reverberating. The SEC inspector general (IG)—a position created by Congress to investigate legal and compliance deficiencies and failures within the commission—had issued reports on the Exam division’s blunders. Congressional committee members demanded answers. The press was doggedly examining the negligence of the SEC.
I liked my new office more than I expected to. I had envisioned a cubbyhole with worn metal furniture that belonged in a government surplus warehouse. Instead I had a decent wooden desk and a small conference table. In addition I had access to a conference room across the hall that was big enough to meet with my direct reports and two counsels. The office exposed a wonderful view to the south of Ellis Island and New York Harbor. After 15 years in Midtown Manhattan, where you usually looked into another building, I took the splendid view to be a good sign.
However, I detected one oddity about the desk. Tradition holds that each U.S. president writes his successor a letter and leaves it in the desk in the Oval Office. The legacy left by my predecessors was more practical in nature: they had stuffed my desk with office supplies. Every drawer was chock-full of staplers, notepads, writing paper, paper clips, you name it. I even found a couple of metal mechanical items so archaic I wasn’t sure exactly what they were meant to do. I soon learned the reason for this stash: office supplies were chronically in short supply, so employees often hoarded them. (I packed up cardboard boxes of the supplies and asked my assistant to return them to the supply room so they would be available for everyone.)
The supply room itself in the New York office was always worth a laugh (or tears). You found very few if any pens, staples, or other useful items people needed. However, someone had shoved a large wooden pallet against the wall and stacked it nearly to the ceiling with packs of 8½- × 14-inch legal-size copier paper. Since almost nothing is printed or copied on legal-size paper anymore (except a few court filings), the stack stayed about the same size for years.
Most days, the regular 8½- × 11-inch copy paper, always in great demand, was not to be found. To print a document, I sometimes scavenged from copy room recycling bins for paper that I could load in my printer. It certainly wasn’t the sort of problem I encountered at my private sector jobs.
The SEC’s New York offices stood directly across the West Side Highway from the site of the new Freedom Tower—now called One World Trade—that was rising where the World Trade Center buildings collapsed on September 11, 2001. During law school I worked one summer in One World Trade Center. New Yorkers used the Trade Center’s Twin Towers to orient themselves since you could see them from almost anywhere; their absence felt strange to me. I was unnerved that something so familiar was no longer there. As it happened, on the awful day of the attacks, the SEC’s New York office, located in the World Trade Center complex, was destroyed. SEC staff moved first to a temporary location and then to these new offices. Thankfully, no SEC personnel were lost on 9/11.
Our offices were on the fifteenth floor of the American Express Tower, where the SEC had three other floors: one for examiners who inspected broker-dealer firms and two for enforcement lawyers and investigators. We had conference rooms on the fourth floor with armed guards posted at a security desk. When I was in the hedge fund business, brokers, lawyers, accountants, tech vendors, and others visited our offices all the time to pitch us products or work with us. At the SEC, however, outsiders were limited mostly to the fourth floor and not allowed upstairs without warnings e-mailed from security to the staff.
The SEC had good reasons to control visitors: the agency ran legally sensitive examinations and enforcement investigations that were high stakes for the targets of those activities. But no one had made the effort to consider the public image the SEC presented by failing to make the office space comfortable or welcoming for those who did visit us, including our customers, the American taxpayers. The conference rooms had ominous-sounding names like Hearing Room and Testimony Room, which made the investment professionals who visited us voluntarily to discuss policy or exam issues seem uneasy. The people in those rooms who’d come involuntarily because they were testifying or being investigated looked haggard and nervous. It was not a place that radiated trust or seemed open to input from the outside world. Later I will touch on the impact this isolation had on the agency’s ability to do its job.
But perhaps the most disheartening aspect of the layout is how poorly lit all four floors were. Even on a gorgeous sunny day the light remained dim inside most of the offices. Light fixtures were sparse and powered with extremely low-wattage bulbs. (Whether this was a budget issue or simply poor design I still cannot say for sure.) It also didn’t help that the office color scheme was a drab brown that absorbed what little light there was. I was literally—and figuratively—stumbling in the dark.
Early on I befriended Ken O’Connor, a supervisor in the Exam division who had been there for more than 10 years and who had a great sense of the absurdity of the government. Ken worked hard to rise above the impediments the SEC tossed at him but heard all the stories of the futility of it all. Ken also had a good working knowledge of construction, from his house renovations. So I asked him once why the office was so dark.
Adding to the absurdity, Ken said that when the space was being prepared for the move from the temporary post-9/11 location, the government hit its budget limit; since the lighting had yet to be installed, the agency had no choice but to skimp on the number of fixtures! It didn’t take me long to realize that almost everything at the SEC was passed down by word of mouth like a child’s game of telephone. Ken’s renovation budget story may have been true, but like all the other SEC lore passed along over the years, you never really knew. Regardless, the effect the lighting created was of an office environment with the appeal of the furniture pickup warehouse at IKEA.
A NOT SO SUBTLE WARNING
It was one of those old-fashioned interoffice envelopes, the brown manila kind that most of us haven’t seen in years. As I untied it, I noticed it had been coiled shut many times, and I wondered what could be in the thick package that couldn’t have been e-mailed to me as a PDF. It was my second week at the SEC, and I’d entered a time capsule of pre–digital era conventions where fax confirmation sheets were still a part of daily office life and people still waited in line at the copying machine.
I pulled out an anonymous letter, and my stomach sank with dread.
The letter amounted to a 10-page tally of allegations against my friend and predecessor, Tom Biolsi, dated about six months before he walked out the door from the SEC in 2009. According to this document, he’d engaged in serious wrongdoings: holding staff parties with alcohol in the office, using ethnic slurs I can’t imagine him making, showing favoritism to certain staff. The letter described everyday events with toxic innuendo and seemed to distort well-meaning actions into politically incorrect blunders. For instance, it suggested an office gathering, which I suspect was intended to promote team unity, was exclusionary because of its St. Patrick’s Day theme.
Tom Biolsi did not remotely resemble the person described in the letter. Because Tom died a few years later in 2013 at age 57, he can no longer defend himself, but I knew it was all a lie. I attended his funeral along with hundreds of others from our industry who admired, trusted, and respected him. Tom served in the U.S. Air Force from 1974 to 1978 before working two stints at the SEC, where he was highly regarded. Early in his career he had spent nine years in the New York office as an examiner and then branch chief, supervising other examiners. In 2006 he left a lucrative compliance consulting practice at Price Waterhouse to be the associate director for examinations in New York until he returned to consulting in 2009. Before he left, Tom encouraged me to apply to take his place, and that was one of the main reasons I wound up at the SEC in early 2010. Anyone who knew Tom would find the memo preposterous—unless it was written with other motives.
I reached inside the envelope and found a stack of fax confirmation sheets showing that while Tom was still working at the SEC, this anonymous screed had been sent to every senior official at the SEC as well as members of Congress—essentially all around Washington. It was a missile sent to destroy someone’s life, the work of a coward. There was only one reason why a copy would have been sent to me in my second week at the SEC. Clearly this was a warning to me not to step out of line. Someone wanted to intimidate me right away before I even got acclimated to the job.
Was this what I could face if I instituted the changes I had come there to make: an anonymous note faxed all over Washington? Had I been incredibly naive to come to the SEC? I left the office at 7 p.m., scared and wondering if the author of the libel was watching. (I learned I didn’t need to worry. The flexible work schedules and work-from-home programs enjoyed by some SEC employees meant there was almost never anyone else in the office at that hour.)
Later I shared the document with Carlo di Florio, the head of Exam, who also knew Tom well. I told Carlo that I thought the letter, which at this point was more than a year old, had been an attempt to force Tom out because he was trying to revamp the New York Exam office, including trying to fire the deadwood. I saw the delivery of a copy of the letter to me as a warning of what would happen if I followed a similar path. Carlo nodded in agreement as he marveled at the petty tone of the letter, especially given that there was so much else to do at the agency.
Even before the copy of the letter arrived, I concluded that trying to fire anyone, no matter how derelict, was a losing proposition. My counsel Jim Capezzuto and other colleagues had explained to me how civil service protections and union grievance procedures made it nearly impossible.
Grasping for a silver lining, I naively thought that perhaps retaining staff would help me avoid the poison pens of unidentified witch-hunters—but I was wrong.
ANONYMOUS COMPLAINTS ARE FREE WEAPONS
I soon learned that the anonymous complaint is a common tool in the SEC and throughout the federal government. I gave a copy of the note to Mary Schapiro’s chief of staff, Didem Nisanci, who told me that she received anonymous notes all the time! Carlo and I later spoke to the SEC inspector general, David Kotz, who had of course received the note directly at the time it was first sent. Kotz did not have to investigate the note since Tom had left the agency. However, he indicated he would be required to investigate the allegations, no matter how ludicrous, if Tom ever wanted to return to the SEC. Kotz routinely received anonymous notes and had to determine if they were worth investigating.
During my time as a senior manager at the SEC, I received many complaints against other managers and employees. This had never happened before in my entire professional career, not in my law practice or at the hedge fund. In the private sector, it wouldn’t take long for people to figure out who was making anonymous complaints, and they would not trust that person going forward.
While I am sure there are exceptions, in the worlds of finance and law we try to establish clear lines of authority and accountability to make sure everyone is moving in the same direction. For the most part, we put issues about performance on the table and discuss them openly to reach solutions.
Anonymous notes undermine what is generally a fairly transparent system where supervisors give their direct reports meaningful feedback. Talented, ambitious people aren’t going to tolerate a toxic environment where unsigned notes are allowed to float around the company. They’ll take their talent and ambition elsewhere.
As with staff in other bureaucracies, SEC employees cannot be disciplined, fired, or sanctioned except for the most extreme behavior such as committing fraud or sexual harassment. Congress has passed job protection measures practically guaranteeing federal employees lifetime employment, thereby giving some SEC staffers license to send the IG and others these types of anonymous grievances without fear of consequences. Those opposed to change use anonymous notes to protect the status quo. As a result, it became part of SEC culture for some staff members from around the country to use such weaponized notes to advance their personal agendas and for vendettas against supervisors, colleagues—whomever they chose. During the five years that I was involved in efforts to transform the SEC into a businesslike, more rational organization, these nameless complaints appeared constantly.
INVESTIGATING COMPLAINTS
While some of the SEC’s functions are handled centrally in Washington, DC, the Exam and Enforcement divisions primarily are administered regionally in cities across the country.
When I later became the deputy director of Exam, I teamed up with one of the senior officials in Enforcement, Margaret McGuire, to investigate anonymous complaints in several of these regional offices. We spent a great deal of time traveling the country together visiting regional offices and interviewing employees to see what we could learn about the charges.
You might ask yourself, why didn’t we just ignore these complaints when they seemed to come from certain employees with their own agendas? My answer is that we knew that the complaints also could have been made to the agency’s internal watchdog (the inspector general) or to Congress. Then we might be questioned about how we responded.
When complaints did go to the inspector general, he sometimes sent them to us for action. As much as I would have liked to announce that we refused to act on many of these “nastygrams,” as we began calling them, that was a nonstarter because the IG would be breathing down our necks. In fact, if we did nothing, we could have been investigated. Our efforts rarely turned up any facts to substantiate the misconduct alleged in the anonymous notes.
I found it hard to follow up on these complaints because they inevitably left out critical details such as the office where the note originated or specific examples of wrongdoing. Most importantly, I couldn’t interview the person who made the complaint. (The SEC copes with the same phenomenon regarding the many anonymous complaints made by the public alleging misconduct by investment managers.) The time we spent on chasing down the illegitimate complaints could have been spent on improving exams or enforcing the securities laws, our one true mission. Keep in mind, at Exam our 450 investment management investigators only completed on average a little more than two exams per person per year!
The SEC didn’t have a single formal procedure for dealing with the myriad means that nameless complaint writers could use to attack managers or coworkers. Yes, you read that correctly. For the most part, the SEC lacked formal procedures for anything—which some of us changed in the years ahead. When I was there, we did the best we could with the complaints we received. At least I could investigate complaints that came to me; some complaints were made to other forums where the damage could be even worse.
A BUNCH OF COMPLAINTS
I’m sure some of my colleagues saw the anonymous notes as one of the annoying, unavoidable quirks of having a safe, secure job in the federal government. Something to put up with—and stay clear of. But what if your career is put in the crosshairs for petty or personal reasons? What’s more, many of us saw the hitman culture as another symptom of a fundamental loss of direction at the agency. I quickly realized that an agency in which its employees are guaranteed lifetime employment, have complete flexibility in setting their hours (including in one group up to five days a week at home), and enjoy myriad other taxpayer-funded benefits, cannot be laser-focused on its mission of protecting investors and the country’s entire financial system.
I told Mary Schapiro that I found it unbelievable that some staff had time to fire scud missiles at colleagues without any concern about blowback. While unemployment and home foreclosures were near record highs and banks and other financial institutions were fighting to survive with bailouts, I was squandering my precious hours and energy on anonymous political hit jobs. Mary had been at the commission before, in the late 1980s and early 1990s, but did not remember character assassins during that period, let alone tolerating such behavior. She was of the same mind—that the crisis facing the United States was so dire that we each needed to be working as if the economy were a runaway prairie fire we could only extinguish by working together. Mary brought that sense of urgency to all of us who were empowered to rebuild the agency and the economy.
When an organization is in crisis, everyone who has a stake in it must charge directly into the emergency at hand. Internecine scores can be settled later. At least that’s how most organizations act. But at the SEC, where a staffer’s sworn duty is to protect U.S. investors, we had a lot of work to do yanking some heads on straight and making improvements to help all employees succeed. Without Mary’s support and leadership in the wake of the 2008 financial crisis, we could not have done it.
The Madoff and Stanford disasters put Exam on its heels. In addition, the major broker-dealers (such as Goldman Sachs and Morgan Stanley) needed to become banks during the crisis to survive and were now subject to Federal Reserve supervision. The Fed likes to keep its oversight behind its thick closed doors, so the SEC was on the outside looking in at the fate of these major firms. Congress had a field day firing questions at Mary and Carlo about the SEC’s humiliating breakdowns in Madoff and Stanford. If our senators, House members, and the media swept open the curtain on other aspects of the SEC—the anonymous notes, the lax schedules, the telecommuting—the embarrassment would have been far worse, as this conduct persisted even after the crisis.
So what could have been the motivation for certain employees to ambush their superiors or colleagues, guns a-blazing, especially in the throes of a world economic meltdown? One of my fellow senior officers was convinced that some members of the staff simply did not want any supervision over what they were doing. They couldn’t be fired, but we on the leadership team could be! I came to believe that the bomb hurlers could not abide change, just like the difficult employees in any institution. But Congress had inadvertently empowered them to resist any urgency to fix the kinds of problems that led to the Madoff and Stanford failures.
Mary, Carlo, and I were charged with making the kinds of changes that would ensure that the agency would catch the next Ponzi scheme before it did violence to innocent investors’ savings. We’d have to use all our leadership prowess to inculcate our mission into the bloodstream of the staff so problem and passively resistant employees would redirect their weapons toward the bad guys, not fellow staffers. More importantly, we needed to streamline processes and remove bureaucratic obstacles so the hardworking, dedicated staffers could do their jobs. I realized early on that we had a big challenge ahead of us. While daunting, we made positive change to support the efforts of motivated staffers and it was incredibly rewarding.
THE MANY, MANY INSPECTORS GENERAL
If the nameless authors of accusations characterize a manager’s actions as a violation of federal rules or equal protection, they can anonymously send them to the SEC inspector general or the Equal Employment Opportunity (EEO) office, both of which, by statute, are obligated to evaluate such complaints. The deadliest weapon in the federal employee arsenal is the IG. Most federal agencies have an office of the inspector general to root out wrongdoing at U.S. government agencies and departments, particularly in places like the Department of Defense, where procurement programs are at risk of being defrauded by corrupt government employees. But as with so many well-intentioned plans out of Washington, the inmates have taken over the asylum. The mission of the inspectors general across the government has been undermined by the bureaucracy and twisted into a tool for subverting accountability.
David Kotz, the IG when I arrived at the SEC, took a wide view of what he should investigate, which led to a great deal of confusion about whether he was investigating wrongdoing or simple incompetence. During an inspector general investigation, an SEC employee is not entitled to representation by SEC lawyers. Those employees who can afford outside counsel are much better off in these investigations. But those who cannot are at a tremendous disadvantage facing investigators without the assistance of counsel. Supervisors are on their own, but the union can send shop stewards with staff. As a lawyer I found this abhorrent: all people subject to investigation should have a right to counsel. I spoke with an official in New York, who recounted the ordeal of being questioned by the IG without counsel. He was called to a meeting to discuss Madoff failures but not advised that he would be questioned by IG investigators. He ended up fine although a little shell-shocked by the experience.
The EEO offices pursue discrimination complaints. This is another mechanism for employees to file grievances anonymously, which in turn saddles the supervisors who are targeted with costly expenses to defend themselves. In one instance, our human resources department announced a new policy about how pay would be calculated that applied to everyone in the agency. An employee who was a member of a minority group told me about a plan to talk to EEO because the policy discriminated against the employee as a member of a minority group, a novel argument given that it affected all employees similarly situated. These kinds of complaints put the director of the EEO office of the SEC, Alta Rodriguez, in a tough spot. Alta had to investigate complaints and report on those investigations to Congress, but she tried her best to mediate some of the more fantastic ones to see if a resolution could be worked out. Alta was one of the most professional and helpful executives at the agency, constantly making efforts to broaden the SEC’s hiring across all groups of Americans.
JOB SECURITY NOT ENOUGH
The sheer volume and variety of these complaints mystified me, because staff members had no fear of losing their jobs whether they were making the complaint or were the object of one. What was the point then of the whole process? I was coming from a world where the primary mission was to make sure that the funds my firm managed performed well for investors. If they did, you got to keep a job that was stimulating and paid well. In general in the hedge fund business, two years of bad performance leads to investors fleeing and traders and other employees shown the door marked exit. At the SEC, on the other hand, in my five years on the job I was involved in a grand total of two people getting canned, one after she was arrested for a fraud and the second after he failed to show up for work for at least five years!
Joe DiMaria was an assistant director on my Exam staff who always helped put things in perspective. He pulled together a talented team who got exams done quickly and frequently uncovered wrongdoing such as an investment manager charging client accounts fees that he was not entitled to collect. I asked Joe why it was so hard to fire people at the SEC. He described how even when human resources staff would help a manager compile the detailed record needed to substantiate action against an employee, HR would ultimately not terminate the employee who would be retained. I wondered whether HR managers also feared complaints against them that would suck up all their time and energy defending. I loved talking to Joe. He was superb at hiring excellent supervisors, and he motivated them by trusting them and turning them loose to find infractions at investment firms.
He and I would talk about the different ways to encourage people, first by finding out what motivates them. Some of our staff who performed exams wanted more public recognition, so we asked the PR folks at the Enforcement division to include examiners’ names in press releases when their efforts resulted in violations and enforcement actions. Other staff members desperately wanted to avoid the spotlight but relished knowing they’d helped in making wronged investors whole by having the investment firms that overcharged them make payments to clients called recoveries. These recoveries provided immediate gratification to examiners because they did not have to slog through a long enforcement action to win a penalty.
An article in USA Today in 2011 captured the problem of lifetime employment in the federal government when it reported that federal employees had a far better chance of dying before they retired than being fired. That same article showed that for the fiscal year ending September 30, 2011, five SEC employees were ousted out of a workforce of almost four thousand. That is about one-eighth of one percent of the workforce. By contrast, the article stated that the private sector fires around 3 percent of its employees each year for poor performance. The data in the article showed that the majority of the firings in the federal workforce occurred during the initial two-year probation period in use at many agencies, including the SEC. After that, job security was almost total.1
For those in the private sector, the job security enjoyed by federal workers sounds like an artifact from the 1950s. In many ways, it is. Civil service employment protections were originally intended to prevent each new presidential administration from coming in and canning all the workers and replacing them with their supporters. The process that is required to fire someone, including the appeal that often results in reinstatement, has had the unintended consequence of making federal civilian employment equivalent to a Supreme Court appointment. When the SEC staff voted in 2000 to be represented by a public employee union, they added another buffer between managers and the employees on their team. In a 1937 letter to Luther C. Steward, the president of the National Federation of Federal Employees, President Franklin Roosevelt (notoriously for many labor groups) wrote, “All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations.”
The SEC collective bargaining agreement allows unionized employees to file grievances on many issues, including termination, and, together with civil service rules, provides one obstacle after another for managers seeking to get rid of poor performers.2 In one case, when an employee using civil service procedures made an appeal outside the SEC to the Office of Special Counsel—which I had never even heard of—its ruling returned this problematic employee to his job because of some perceived procedural violation by his supervisor. The aftermath of all this futility: managers rarely even bother to weed out the worst performers in their midst.
One day I was in Ken’s office down the hall from mine when he mentioned the difficulty he was having even getting an employee to accept some constructive feedback on his performance. I worried that the SEC staffer could feel free marching up and down the halls, if not working from home, shouting gripes at the top of his lungs without any consequences. A supervisor might appeal to him to be a little quieter, but that was about it. And because the SEC and the union representing SEC employees had never agreed on a “pay for performance” system, compensation rose automatically every year for all employees regardless of the quality of any individual’s work, the state of the economy, and the taxpayers who shoulder the burden. Union-won benefits were generally extended to supervisors as well. This is fair, but it also erodes motivation in managers. I saw over and over again where hard chargers came into the agency but gradually were worn down by a system that provided little reward for working hard.
I have to give credit to one of the SEC’s most famous whistleblowers for not remaining anonymous when she believed supervisors were also engaged in unaccountable behavior. Julie Preuitt, an assistant director in the Fort Worth office, had lobbied others at the SEC to further investigate the Stanford Financial Group for running a massive, $7 billion Ponzi scheme. Preuitt had been the examiner for the Stanford Group in 1997 and immediately called out the company’s financial returns as ludicrously unsound. As reported in the Washington Post after the 2011 hearings held by the House Committee on Financial Services, “The SEC then flagged Stanford Group as a ‘possible Ponzi scheme.’ . . . In the years that followed, SEC examiners repeatedly pressed the agency to investigate, but the SEC enforcement staff made little if any meaningful effort to do so, Kotz said.” The article contended that leaders in the SEC’s Fort Worth office believed that headquarters wanted more cases, which meant that complicated cases (Stanford supposedly invested in Antigua) did not warrant investigation as they would not produce quick results.3
Julie didn’t hide behind anonymity in warning the SEC that she believed the Texas regional bosses were marginalizing her for having warned about the Stanford mess. She sent “rocket” e-mails to Chair Schapiro complaining about her treatment. Not only did she sign her name, but she had the courtesy to copy me so that I could be ready when a member of Mary’s staff, usually Chief of Staff Didem Nisanci, would inevitably call me soon after the e-mail.
When Preuitt testified at the 2011 hearings, she said she interpreted a job transfer as an effort to drive her out of the agency, and she argued that the move was “part of a cultural problem” that continues to undermine the SEC’s effectiveness.4
I accompanied Julie and her mother to the House hearing for her testimony. Julie’s mother worried that Julie could encounter further repercussions from SEC management. I told her that she didn’t have to worry, that going public shielded her, but also promised to alert the SEC chair and protect her if any incidents came to pass.
I HAD MY SHARE
During my five years at the agency, at least two bellyachers sent anonymous notes about me to my boss, the chair of the SEC, and the inspector general. One complained about my office being located in the New York Regional Office, which had been the case from my first day, and the other lodged various complaints about one of the reorganizations I implemented at the SEC even though no staffers were ever let go. Both the inspector general and the Equal Employment Opportunity office were forced to investigate me based on these screeds. Once again, it was an entire waste of the chair’s, the IG’s, and the EEO’s time, and in each instance, it was found that I’d done nothing wrong. But that only tells the end of the story.
I was not going to lose sight of a key part of my mandate: to reform the dysfunctional aspects of the agency that were crippling our mission and preventing dedicated staffers from doing their jobs. That’s not to say that they weren’t a distraction and time suck. The chair’s office and the EEO showed me the nastygrams. No matter how many times I read notes about others, to see fictitious, ghastly allegations against me in writing took my breath away. All for trying to do the right thing for the agency and U.S. investors. I was met with gratitude from the chair’s office for taking the time to refute each nonsensical charge in the nastygrams against me. I was gladdened by the support but didn’t need it, because I was determined to defend my good name against these attacks.
One reward when I decided to serve the federal government was having to dole out thousands of dollars on a lawyer to help me navigate these investigations; and thousands more on an accountant to prepare my required annual financial disclosure form to make sure it was accurate. I was one of the lucky ones who could bear such unforeseen expenses. It was awful to witness the devastating personal cost to managers and staff who weren’t so fortunate when they were targets of bogus accusations of misconduct made against them, need I say it again, anonymously. It was an epidemic of falsehoods, but that did not mitigate the pain, emotional and financial, that they inflicted. And the repercussion: a culture of fear and paranoia. And this is the agency meant to protect our country’s citizens. As you will discover in later pages, the time and energy wasted on these internecine battles could have been better used on examinations and enforcement to catch fraudsters such as Bernie Madoff.
The failure to document policies and procedures, as any well-run business would, left the motivated examiners without the tools to do better.
That said, I was mightily inspired by those of the staff and managers at the SEC who tirelessly persevered to make the agency better despite all the obstacles and deceptions. They were the best of the best, so I jumped in the foxhole with them to do battle with inertia and soulless bureaucracy, to rebuild a broken system, and to make a real difference for U.S. investors and the U.S. financial markets.
MY EXPERIENCE AT THE SEC
Despite my frustrations with the decayed and debilitated culture of parts of the SEC when I arrived that I have described in this chapter, the surprising truth is, for all the challenges, my time there will always be the epitome of my professional career. I was given the gift of making real change in an agency that, arguably more than any other government entity, suffered the most damage to its reputation in the financial crisis. I served with many dedicated individuals who devoted their lives to public service and the preservation of the U.S. capital markets, the financial center of the world. It was an honor that I will cherish for the rest of my life. More than once I would pinch myself and ask, “Did you really come to the SEC and get to do these jobs?” The opportunity was humbling, and I never took for granted the opportunity the role afforded me. I endured the deceptions, the character assassinations, and the bureaucratic fatuousness as the cost of admission: to make policy at the highest levels of American government in a time of crisis.
MANAGING CHANGE AT THE SEC
When I started in Exam, the second largest group at the agency with about 950 of the agency’s nearly 4,000 employees, my team in New York helped me adjust to the different and difficult realities of government service. My counsel, Jim Capezzuto, was a talented lawyer who helped me grapple with the fact that hundreds of investment management firms in our region had never been examined by the SEC. He patiently answered all my questions and was brutally honest about the challenges we faced. I was thrilled that after I left the New York job to be national deputy director, Jim took my place.
Carlo di Florio became another trusted colleague, mentor, and ally. Carlo took his oath of office as the national director of Exam in Washington, DC, on the same day I started at the SEC in New York. Carlo and I had met shortly before we both started at the agency (through Tom Biolsi), and we worked together almost nonstop for the next 2½ years, developing a deep friendship. Within six months Carlo asked me to be his deputy. Carlo had been a consultant at Price Waterhouse and had a great understanding of governance and how to assess the changes that an organization needed. We teased Carlo a little about some of the consultant lingo he used, such as “operationalizing” a change that we were discussing, but he was a strong leader who patiently gathered information about the problems and led the effort to craft solutions to address them. Carlo and I had the backing of our boss, Mary Schapiro, who was committed to improving the expertise of Exam and making it better equipped to find fraud and inform policy choices at the SEC. We did this by following the money—that is, by taking the hard facts the examiners discovered about how financial firms were running their businesses and ferreting out any issues that needed to be addressed.
For example, I was surprised to learn that Exam operated with no cohesive set of written policies and procedures on how to conduct examinations and carry out other critical functions. It wasn’t an oversight on my first day that I wasn’t given a manual for the operation of New York exams: it didn’t exist! Carlo and I, working with a team of Exam lawyers, started reorganizing the office to address the issues uncovered by the crisis. We wrote a much-needed policy manual so everyone would play by the same rules, hired more experts who knew how the securities business operated, automated exam reports so all examiners could see them in a national database, and put more supervisors in the field to do the actual exams.
During the reorganization of Exam, I got to know SEC Chair Mary Schapiro much better. Ultimately, Mary entrusted me with an assignment to avert the imminent collapse of a massive broker-dealer, which would have been the largest failure ever of such a firm (it had about a million customers and 3 million accounts). On the basis of this experience and other projects where we worked together, Mary ultimately asked me to be the director of the Division of Investment Management.
I was thrilled with the offer. Imagine that you are asked to become the chief policymaker for the federal government in your field of expertise. But it was also a culture shock, as the division had the same problems that plagued Exam, as well as some of its own. Having acclimated to Exam, I was once again the proverbial fish out of water at Investment Management (or IM, as it is known at the SEC and around the industry). However, soon after the appointment, I was asked to wade into national policy issues such as implementing the Volcker Rule and reforming the troubled money market fund industry. If I was going to make other changes within IM, I’d have to find the time. Thank goodness I’d already learned something about changing the tires on a moving car.
As the director of one of the SEC’s principal policy divisions, I started working closely with staffers at the U.S. Treasury, the Federal Reserve, the FDIC, and other federal regulators within the newly created Financial Stability Oversight Council. Having joined the SEC six months before the postcrisis bill called Dodd-Frank passed and was signed into law by President Obama, and having stayed until 2015, I had a front-row seat at numerous financial regulation mixed martial arts battles.
The story that follows is my five-year journey through the SEC as I and other leaders tried to make the agency work for investors again. Whether it was in Exam where I started or in the Division of Investment Management where I ended up, we reorganized the programs to tear down the walls encasing the fiefdoms and replaced them with a culture of cooperation. We savored the successes and bemoaned the failures; we rode out moments of high drama and weathered periods of hopelessness. At some points when we beheld progress being made, dispiriting times would follow, and I feared nothing would change. All the while it was a human endeavor: people showing strength and courage to make the agency function better but sometimes suffering setbacks at the hands of powerfully determined bureaucratic and institutional forces opposed to change. This is an intensely personal story of leaders making sacrifices to try to repair an agency that had become terribly insular and ill-equipped in significant ways to perform its functions in the fields it regulated. The U.S. capital markets are still the deepest and best in the world, one of the shining strengths of the U.S. economy, and the SEC plays a critical role in preserving and expanding those markets for the prosperity of future generations of Americans. In spite of all the black eyes, bloody noses, and sleepless nights, I would do it all over again in a heartbeat because it was the most rewarding experience of my professional life.