We have been Expecting to see more whistleblowers and revelations of secrets from the dungeons inside major institutions that are steering the path of nations, never-the-less, we are still surprised…
Institutional investors directing the capital flow of Trillions of dollars, and it is all connected in the global ponzi economy.
We look forward to more surprises as the global system collapses and the People wake up from the illusions. ~Ron
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Meet the Tax Lawyer Whistleblower Who’s Taking a Wrecking Ball to John Bogle’s Legendary Career at Vanguard
By Pam Martens and Russ Martens: August 12, 2014
Tax lawyers do not typically blow the whistle on their corporate employers because that law degree cost them (or their parents) a serious amount of money; the degree will result in outsized lifetime earnings; and, most importantly, because it is career suicide. Even when the tax lawyer may believe there is fraud that would trump the attorney-client privilege, whistle blowing in a court of law against one’s employer is a rarity for a tax lawyer.
So one must seriously ask what would motivate David Danon, a 1998 magna cum laude graduate of Fordham University School of Law who proceeded to work at top tier corporate law firms (where he obviously saw a lot of questionable tax deals) to blow the whistle on the gold standard of the mutual fund industry, the Vanguard Group, Inc. In making his claims, Danon is also besmirching the reputation of Wall Street legend, John Bogle, who founded Vanguard and has served as its top spokesperson for the past 40 years.
In his whistleblowing lawsuit, unsealed last month in New York State Supreme Court, Danon names only Vanguard Group, Inc. and two subsidiaries as defendants. But by calling the company a major tax cheat, Danon is challenging the reputation of Bogle and the company’s Big Four accounting firm, PricewaterhouseCoopers (PwC).
Danon went to work for Vanguard in Pennsylvania in August 2008, according to his LinkedIn profile. He continued to work there for the next 4 years and 11 months until June 2013. The month prior to his departure, on May 8, 2013, Danon filed his 40-page, sealed whistleblower lawsuit, making breathtaking claims against his employer, such as the following:
“Vanguard has operated as an illegal tax shelter for nearly forty years, providing services to the Funds at prices designed to avoid federal and state income tax, sheltering hundreds of millions of dollars of income annually, avoiding approximately $1 billion of U.S. federal income tax and at least $20 million of New York tax over the last ten years.”
By claiming that Vanguard has been running an illegal tax shelter for 40 years, Danon is aiming his slings and arrows right at the armor of its founder. Bogle started Vanguard in 1974; served as its CEO until 1996; and as Senior Chairman and Director until 2000. Bogle is still affiliated with the company as President of Vanguard’s Bogle Financial Markets Research Center.
One specific charge that Danon makes in his complaint may be tough to prove as a devious effort to dodge taxes. Danon states:
“Vanguard violates Section 211(5) and Section 482 by providing services to the Funds at artificially low, ‘at-cost’ prices. As a result, Vanguard shows little or no profit and pays little or no federal or state income tax despite managing Funds with nearly $2 trillion in assets.”
This at-cost pricing is so transparent at Vanguard that John Bogle explained it in testimony he gave to the U.S. Senate on November 3, 2003 when he was invited to lecture his industry on “Trading Practices and Abuses that Harm Investors.” In his written testimony submitted to the Senate, Bogle wrote:
“Vanguard was created as a mutual organization, with its member mutual funds as the sole owners of the management company, Vanguard Group, Inc. The company operates the funds on an ‘at-cost’ basis. Essentially, we treat our clients — the fund shareholders — as our owners, simply because they are our owners. We are the industry’s only mutual, mutual fund enterprise…”
This certainly makes what Vanguard was doing all these decades look pretty much like an open book that Congress and the IRS and PricewaterhouseCoopers understood to be legitimate. Vanguard even has a full page with graphs explaining further its structure and how it benefits the average investor in its mutual funds. One section explains:
“The typical fund management company is owned by third parties, either public or private stockholders, not by the funds it serves. These fund management companies have to charge fund investors fees that are high enough to generate profits for the companies’ owners. In contrast, the Vanguard funds own the management company known as Vanguard—a unique arrangement that eliminates conflicting loyalties. Under its agreement with the funds, Vanguard must operate ‘at-cost’— it can charge the funds only enough to cover its cost of operations. No wonder Vanguard’s average fund expense ratio in 2013 was 0.19%, less than one-fifth that of the 1.08% industry average. That means Vanguard fund investors keep more of any returns their funds earn.”
Bogle is no slouch when it comes to accounting. This is an excerpt from testimony he gave to the Public Company Accounting Oversight Board on March 21, 2012:
“I’m pleased to have this opportunity to comment on my general views on auditor independence and specific views on audit firm rotation. I have been an observer of and participant in auditing issues throughout my 60-year career, most recently as one of four independent members of the Independence Standards Board (from 1997 to 2001, when it ceased operations), appointed by SEC Chairman Arthur Levitt, where we worked with the four CEOs of the major accounting firms to establish more rigorous standards for assuring that our public accountants remained truly independent of the firms that retain them for attestation services…”
In that same testimony, Bogle notes that two of his books, Don’t Count On It! and The Battle for the Soul of Capitalism deal with significant accounting issues.
At the risk of a very bad pun, it is simply mind-Bogleing that John Bogle or PricewaterhouseCoopers would not have gotten an all-clear letter from the IRS on this structure at some point over the past four decades.
The takeaway for investors is this: high mutual fund fees are already gobbling up your hopes to ever retire in comfort. As Frontline’s Martin Smith exposed in April of last year, if you’re receiving the typical long-term return of 7 percent on your 401(k) plan and your fees are 2 percent, almost two-thirds of your account will go to Wall Street over the course of your career. If Vanguard, the low-cost mutual fund provider is forced to restructure itself and incur higher operating expenses and taxes, the small investor loses.
Against that backdrop, it should also be noted that David Danon, should he prevail in his lawsuit, would be entitled to collect a portion of the back taxes owed by Vanguard.
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See Vanguard Complaint Filed by David Danon for the full text of the lawsuit.
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Credit Suisse CEO Says He Remains Confident in Dark Pools
By Julia Verlaine and Jeffrey Vögeli Jul 22, 2014
http://www.bloomberg.com/news/2014-07-22/credit-suisse-ceo-signals-confidence-in-dark-pools-amid-barclays.html
Credit Suisse Group AG (CSGN) Chief Executive Officer Brady Dougan said he remains confident in private trading venues following a probe into a dark pool operated by Barclays Plc. (BARC)
“Our view is that a lot of the electronic trading systems are actually very good for the market,” Dougan told Bloomberg Television’s Manus Cranny today. “You’re able to execute things these days at levels and with an ease that was not possible 10 years ago. There are a lot of good things there.”
Dark pools came under increased scrutiny after New York Attorney General Eric Schneiderman filed a complaint on June 25 saying that Barclays lied to customers and masked the role of high-frequency traders at its electronic trading venue. Credit Suisse, which operates Wall Street’s largest dark pool, had a 19 percent drop in trading volume the following week, data from the Financial Industry Regulatory Authority shows.
Trading fluctuations could be due to a number of reasons, Dougan said at a press conference in Zurich, when asked about the Finra data, adding that he doesn’t expect any material changes to the electronic-trading business as a whole.
“We don’t see anything that we would view as a trend,” he said.
Electronic Trading
Credit Suisse said it makes about $30 million in annual revenue from its Crossfinder venue. UBS AG (UBSN) and Bank of America Corp. are also among banks operating dark pools in the U.S.
The exchange uses computer algorithms to match buyers and sellers anonymously until a trade has been completed. This gives institutions the ability to trade large blocks of stock without exposing their position to the open market.
Two of the biggest currency-trading banks have heavily invested in electronic-trading platforms while cutting staff. Switzerland’s largest bank started UBS Neo, which replaced almost 100 internal systems with one that allows institutional clients to trade a range of asset classes.
Barclays last year started Gator, which allows clients to trade foreign exchange with the same technology its traders already used internally to quote prices.
“Obviously Credit Suisse has been very active in this area,” Dougan said, commenting on electronic trading. “We have over time developed good trading systems in these areas.”
System Abuses
Electronic dealing, which accounted for 66 percent of all currency transactions in 2013, up from 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81 percent of spot trading — the buying and selling of currency for immediate delivery — will be electronic by 2018, according to Aite.
Dougan said on a conference call he doesn’t see “any material issues” on dark pools, when asked about litigation risks, adding that “it’s early in the process.”
“Clearly there have been abuses to the system — we’ve actually worked hard to try to ensure that these abuses are actually driven out of the system and we’ll see how it develops over time,” Dougan said. “We continue to work closely with the regulators in making sure that market is structured in a way that provides a fair playing field for everybody.”
To contact the reporters on this story: Julia Verlaine in London at jverlaine2@bloomberg.net; Jeffrey Vögeli in Zurich at jvogeli@bloomberg.net
To contact the editors responsible for this story: Simone Meier at smeier@bloomberg.net Mark Bentley
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As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs
By Pam Martens and Russ Martens: January 7, 2014
http://wallstreetonparade.com/2014/01/as-citigroup-spun-toward-insolvency-in-%E2%80%9907-%E2%80%9908-its-regulator-was-dining-and-schmoozing-with-citi-execs/
Timothy Geithner Is Sworn in as 75th U.S. Treasury Secretary As His Wife, Carole, Looks On
Before Timothy Geithner became the 75th Secretary of the U.S. Treasury in 2009, he served as the President of the Federal Reserve Bank of New York for five years. The New York Fed is one of Wall Street’s primary regulators. But after leaving his post at the New York Fed, Geithner testified before the U.S. House of Representatives’ Committee on Financial Services on March 26, 2009 that he was not regulating Wall Street as he earned his $400,000 a year with car, driver and private dining room.
At the 2009 hearing, in response to a question from Congressman Ron Paul, Geithner said:
“That was a very thoughtful set of questions. I just want to correct one thing. I have never been a regulator, for better or worse. And I think you are right to say that we have to be very skeptical that regulation can solve all these problems. We have parts of the system which are overwhelmed by regulation…It wasn’t the absence of regulation that was a problem. It was, despite the presence of regulation, you got huge risks built up.”
When Geithner says, “for better or worse,” I think most Americans would agree that Geithner’s failure to know that he was a regulator at an institution he headed for half a decade that employed hundreds of bank examiners was probably worse for the country, not better, given that he oversaw the greatest financial collapse since the Great Depression and the most expensive taxpayer bailout in the history of finance.
In written testimony before the same hearing, Geithner added that “We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.” And yet, Geithner’s appointment calendar suggests that this is exactly what Citigroup did as Geithner accommodated it as willingly as a concierge at one of those exclusive Manhattan hotels.
According to Geithner’s appointment calendar for 2007 and 2008 (available online courtesy of an article the New York Times published in 2009), Geithner excelled in hobnobbing, despite the appearance of outrageous conflicts of interest. He was the Relationship Manager In Chief as he managed his own relationship with Citigroup into a job offer to be its CEO.
During 2007 and 2008, Citigroup entered an intractable death spiral owing to a decade of obscene executive pay, off balance sheet debt, toxic assets and mismanagement of its unwieldy disparate business lines. Instead of functioning as the tough cop on the beat in regulating Citigroup, Geithner hobnobbed, holding 29 breakfasts, lunches, dinners and other meetings with Citigroup executives.
When Sandy Weill stepped down from Citigroup in 2006, SEC filings show he still owned over 16.5 million shares of the company’s stock, in addition to the $264 million he had sold back to the company in 2003. As the company teetered toward insolvency in the 2007-2008 period, Weill had a vested interest not to see his stock position wiped out by a government receivership of Citigroup. The very last thing Geithner, as Citigroup’s regulator, should have been doing was meeting privately with Weill.
On January 25, 2007, Geithner not only hosted Weill to lunch at the New York Fed, but Geithner brought his teenage daughter to the lunch. Geithner’s appointment calendar shows Elise Geithner, his daughter, sharing his chauffeured car to work with her father and then joining him at lunch with Sandy Weill. In case you’re wondering, Take Your Daughters and Sons to Work Day was April 26 that year, not the day of this luncheon. A few months later, on May 17, 2007, Geithner joined Weill for breakfast at the expensive Four Seasons.
Another troubling aspect of Geithner’s obliviousness to the arms-length role expected of regulators and the firms they regulate, Geithner met privately, without other Fed staff, with top Citigroup execs and traveled to Citigroup’s corporate headquarters in Manhattan on most occasions to meet with them. His one on one meetings included Robert Rubin, former U.S. Treasury Secretary and Chair of the Citigroup Executive Committee; Charles “Chuck” Prince, CEO; Gary Crittenden, CFO (who would be later charged by the SEC for grossly understating Citigroup’s subprime exposure in October 2007); Sir Win Bischoff, Board Chairman; Vikram Pandit, who became CEO after the departure of Prince; Lewis Kaden, Vice Chairman; and Tom Maheras, co-head of Citigroup’s investment bank.
If Geithner did not believe he was a regulator, why was he meeting with these individuals on a private basis. Two troubling answers come readily to mind.
In an article by Jo Becker and Gretchen Morgenson published by the New York Times on April 26, 2009, Geithner admits that Sandy Weill spoke with him about becoming Citigroup’s CEO after Prince resigned following multi-billion dollar losses in late 2007. Were Geithner’s many trips to Citigroup actually job auditions? Geithner turned down the job offer and went on to become U.S. Treasury Secretary in 2009 where his advocacy for Citigroup’s survival played a far more important role than he could have as its CEO.
The other troubling possibility is that Geithner did not take other staff with him from the New York Fed because he was strategizing with Citigroup on how to resolve their massive financial problems. Indeed, on April 7, 2008, Geithner’s appointment calendar shows that a meeting was convened at the New York Fed and given the title: “Citigroup Strategy, Structure & Personnel Issues.” The meeting was attended by Geithner, Citigroup CEO Vikram Pandit, Citigroup Vice Chairman Lewis Kaden, and several staffers at the New York Fed. The meeting was held after hours, from 5:30 to 6:30 p.m.
Strategizing on a company’s structure and personnel issues does not sound like the job of a regulator but the job of a competent CEO and Board of Directors.
While all of this wining, dining and strategizing was going on between Geithner and Citigroup, the company was melting away and showing an insatiable appetite for taxpayer support. On October 28, 2008, Citigroup received $25 billion in Troubled Asset Relief Program (TARP) funds. On November 17, 2008, the company announced it was terminating 52,000 workers. Four days later, its stock closed at $3.77, a loss of 60 percent of its market value in one week. Its market cap was worth less than the government had invested just three weeks prior.
On November 23, 2008, Citigroup had to be completely propped up by the government with another TARP infusion of $20 billion and asset guarantees on $306 billion of securities held by Citigroup. In addition, by 2010, the Government Accountability Office would report that it had soaked up over $2 trillion in below market-rate loans from the bailout lending programs – most of which were operated by the New York Fed.
Geithner, who is said to be writing his own memoir on the era and has announced he is joining the Wall Street firm Warburg Pincus as President, was not held in high esteem in three major books written about his handling of the Wall Street crisis. In Ron Suskind’s Confidence Men, Geithner is said to have ignored a direct order from President Obama to wind down Citigroup. In Neil Barofsky’s Bailout, Geithner is portrayed as heartless in his assessment of the Home Affordable Modification Program (HAMP), viewing it as a way to “foam the runways” for the banks, slowing down the foreclosure stream so the banks could stay afloat, with no sincere intention of helping struggling families stay in their homes.
But no one was harsher on Geithner than former FDIC Chair during the crisis, Sheila Bair, in her book, Bull by the Horns. Bair believes that Citigroup’s two main regulators, John Dugan (a former bank lobbyist) at the Office of the Comptroller of the Currency and Geithner, as President of the New York Fed, were not being forthright on Citigroup’s real condition. In the book, Bair explains Citigroup’s situation in 2008 as follows:
“By November, the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate. It had loaded up on exotic CDOs and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”
Another red flag with Geithner, according to Bair, was his proposal for the FDIC to provide all out support to Citigroup, guaranteeing all of its debt, including its half trillion in foreign deposits. Bair refused to permit this. With Geithner’s 29 meet and greets with Citigroup, one has to wonder just who whispered this idea into Geithner’s ear.
The FDIC did agree to guarantee Citigroup’s issuance of new debt, providing it was used for lending to help stimulate the economy. What the FDIC examiners found was that “Citi was using the program to pay dividends to preferred shareholders, to support its securities dealer operations, and, through accounting tricks, to make it look as if funds raised through TLGP [Temporary Liquidity Guarantee Program] debt were actually raising capital for Citi’s insured bank.”
Last October, Carmen Segarra, a bank examiner and lawyer employed at the New York Fed, filed a lawsuit alleging that Relationship Managers at the New York Fed attempted to intimidate her into changing her critical review of another Wall Street firm. When she refused, she says she was fired. There is now enough hard evidence to warrant a full scale Congressional investigation of the New York Fed’s fitness to continue as Wall Street’s regulator.
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