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August 2, 2011

The real SEC revolving door problem

Andrew Sorkin at the New York Times has an interesting column today entitled “Revolving Door at S.E.C. Is Hurdle to Crisis Cleanup.”  It’s a good article describing how a current SEC lawyer formerly worked as an outside lawyer to the hedge fund run by John Paulson – yes, THAT John Paulson of shorting the subprime market and collecting billions of dollars.  And, yes, THAT John Paulson who allegedly picked the securities in the Abacus CDO deal put together by Goldman, Sachs and pulled apart by Sen. Levin in the Senate hearings last year.  Mr. Sorkin reports that this current SEC lawyer actually signed off on the Abacus deal, which is why he was being deposed in the SEC case against Fabrice Tourre (and which Goldman itself settled last year for $550 million dollars).  (There is no suggestion that the lawyer did anything wrong.)  Mr. Sorkin uses these circumstances to discuss the implications of the SEC hiring lawyers from Wall Street to help them go after Wall Street.

I agree that this looks bad and could increase public distrust of the SEC and other agencies supposedly fighting crime on Wall Street with the very lawyers who spent years defending Wall Street, creating or helping to create some of the toxic securities and activities they peddled, and legally blessing those concoctions.  Yes, they also pocketed millions on the way to the financial meltdown like the bankers and the rest of Wall Street (even if it was less millions than the bankers). 

But, the real revolving door scandal works the other way: lawyers leaving the SEC, becoming defense lawyers and appearing before the their recent colleagues (many of whom they hired, promoted, gave raises to, are friends with, etc.) on critically important cases.  They know the arguments that will be most persuasive to their former colleagues.  They know their direct numbers.  They are highly regarded.  They know all the internal procedures.  Often, they still socialize with them.  All of this knowledge is put to service of the latest client, who hired them to use that access, influence and knowledge to prevent the SEC from bringing charges against their client.  

That’s the much bigger revolving door scandal.  



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