Riley: The Yates Doctrine

Tuesday, September 22, 2015

Michael G. Riley, GoLocalProv MINDSETTER™

Sally Yates

A recent article by William D. Cohan in the New York Times described a memo released by Sally Yates, the Deputy Attorney General of the United States. Her seven-page memo was directed to every United States attorney as well as the senior management of the Justice Department. She emphasized that pending and future investigations of corporate wrongdoing would no longer be concluded without holding responsible those individuals who misbehaved. No more “ too big to jail “ instead a new and intense focus on individual wrongdoing and holding individuals accountable.

In January 2013 the SEC and Mary Jo White had the same announcement and mission.

A January 24, 2013 AP story read as follows:

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“President Barack Obama on Thursday nominated Mary Jo White, a former U.S. attorney who built a reputation prosecuting white-collar criminals, terrorists and mobsters, to lead the Securities and Exchange Commission. The agency has a lead role in implementing changes on Wall Street.”

She also promised to hold individuals accountable. As part of this effort the MSRB which focuses on the Municipal securities markets. A speech one year letter again pointed out the effort was to charge individuals.

Ms. White’s speech mysteriously referred only to Corporate wrongdoing ,while much of the MSRB(Municipal Securities) focus was on intentionally misleading information produced by State and Local Government employees and elected officials. White’s speech appeared exactly the opposite of the speech given by Commissioner Daniel Gallagher, just a few days later. Gallagher focused heavily on the role of State and Local Government Officials as “white collar criminals."

SEC Commissioner Gallagher said:

“The lack of transparency can amount to a fraud on municipal bond investors, and it does a disservice to state and local government workers and retirees by saving elected officials from making the hard choices either to fully fund the pension promises that were made to public employees or not to make the promises in the first place.

In the private sector, the SEC would quickly bring fraud charges against any corporate issuer and its officers for playing such numbers games. And, we would also pursue and punish the so-called fiduciaries who recklessly seek yield to meet unrealistic accounting assumptions. We should not treat municipalities any differently.”

Further Gallagher said:

“Moreover, I agree with Lynn Turner’s suggestion that we should require disclosures similar to those required of companies that are faced with an auditor’s going concern opinion. Specifically, where a plan’s solvency is threatened, for example by a legislature’s failure to make adequate contributions, specific disclosure of the existence of the threat, and plans to address it, should be required.”

New Federal Crackdown on White Collar Crime

Recent headlines from the SEC threaten to go after all white collar crime and the articles invariably refer to the accounting crimes at Enron or WorldCom where people were fined and jailed. The authors almost universally lament the fact that no one was jailed for the manipulation of currencies or interest rates. I share that frustration. How could I not? People who clearly have committed crimes and mislead public shareholders should be accountable. I agree whole heartedly. But even more so should Government Officials like Mayor, and now Congressman David Cicilline and Mayor Angel Taveras. They represent the public trust and the both were in Public fiduciary roles. They both knowingly misled municipal bond investors and the taxpaying public about the assets in the Providence Pension Plan. They signed off on official documents verifying those assets. Adding to the self-serving lack of disclosure, both mayors who headed the Investment Commission responsible for managing, investing and verifying the assets of thousands of retired Rhode Island Municipal Employees, went years continuing the fraud and never asked for the “false assets." Overstating Assets is even more egregious than the usual hijinks (overstated discount rates) that are associated with municipal officials lying about their pension status and ARC. Providence did what no other City has ever done. They “created” a short term asset on the balance sheet of the pension plan (money they took from the plan) and rolled this loan over for decades still never paying it back.

It’s a Crime right?

If there was ever a poster child for “white collar crime” this is it. Some will say “it’s not a crime “because the Mayors and other officials didn’t personally benefit. Really? David Cicilline outright lied about the financial condition of Providence, with no charges having been brought Cicilline was soon elected to Congress endorsed by Mayor Taveras, the guy who cried foul. David is paid quite a bit by US taxpayers. His political career has a present value of tens of millions of dollars. He has power. Is this what Ms. White or Mr. Gallagher mean by holding people accountable?

I estimate the two Mayors were responsible for as much as $200 million in assets that should be repaid to the pension fund. The harm economic to all taxpayers and municipal bond investors in the $3.7 trillion dollar municipal bond market likely dwarfs the harm caused to individual shareholders by accounting fraud in Enron or World Com.

Additionally there exists a large group of legal firms ready and willing to sue corporations on the behalf of shareholders. Who provides this role for taxpayers or pensioner who have been purposely misled or defrauded by public officials? Does a taxpayer have standing to sue the mayor of his town for lying about pensions? Surely everyone is harmed by these illegal and selfish actions. Some who defend negligent office holders seek to limit criminal corruption charges to only those who actually received money, or tangible payment. This really misses the truth and the very obvious game being played in politics. Being elected to public office is a path to wealth and power. Most of us did not need Rod Blagojevich to spell it out but every political office has a theoretical monetary value worth fighting, lying and cheating for and unfortunately worth enough to commit major crimes.

This is what is happening now in Providence Rhode Island and has been going on for at least a few decades. Elected and appointed officials in Rhode Island have purposely lied and misled municipal bond investors, taxpayers, ratings agencies and pension beneficiaries about the true financial condition of the City of Providence.They have lied about phony assets in the pension fund purposely distorting its Pension Funded condition. Providence Officials have done this in order to gain or maintain power and further their careers which can amount to millions in direct benefits. One of Providence's Mayors went to jail and now is a radio host. One blatantly lied and was elected to congress. The Last Mayor who also lied is purported to be eying a senate seat in Rhode Island. Most of us would agree that white collar crime seems completely out of control but in Rhode Island the white collars are worn by house Speaker Gordon Fox, three Providence Councilmen, the former Mayor of Central Falls and the possibly dozens of criminals yet uninvestigated in 38 Studios a State Securities offering.

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Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.

Riley: The Yates Doctrine

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