Fox, Henhouse?

One of our readers emailed in a link to this Bloomberg story about the new “chief operating officer” of the enforcement division of the SEC: Adam Storch, “a 29-year-old from Goldman Sachs Group Inc.’s business intelligence unit” who “had worked since 2004 in a unit at that reviewed contracts and transactions for signs of fraud.”

I went back and forth about posting this because, as far as I can tell, it’s not that important a job; according to the WSJ, “Mr. Storch will oversee division operations that include budget, information technology and administrative services. He will also supervise the workflow associated with the collection and distribution of fair funds to harmed investors.” It’s back-office administration, not deciding whom the SEC is going to pursue. I don’t think this is in the same league as, say, Goldman’s chief lobbyist becoming the Treasury secretary’s chief of staff. (Note, however, that Zero Hedge says it is “arguably the most critical post at the SEC.”)

But still, even if it is a routine back-office job, why someone from Goldman who makes Neel Kashkari look like an elder statesman? As our reader pointed out, there are some relevant themes here. One is the revolving door. Another is cognitive capture: why does the SEC think it needs a Goldmanite to handle its budget, IT, and administrative services? There are other good companies out there, really, somewhere, or we have a much bigger problem on its hands.

Maybe he’s independently wealthy and immune to job offers from Wall Street. Maybe he’s a genius and aced his job interview. You’d think there must be something special about him that convinced the SEC to give him the job despite all the additional “Government Sachs” fodder it creates. I hope he does a wonderful job.

By James Kwak

52 thoughts on “Fox, Henhouse?

  1. Lets just say, if we have another crisis, and some of it can be traced to back this talented guy’s “errors” which happen to benefit Goldman, who he then returns to on a salary 100s of times bigger than the median US salary….

    Would anyone be able to claim surprise?

  2. This is weird. There is an IT guy named Adam Storch that was associated with something called “Entology” at one point, and lately at something called “Micro Strategies”

    Here’s the search results.

    Same guy? Related? You can’t find him if you use the search box on the micro strategies website, so maybe he’s not there anymore?

    A young (British?) Adam Storch came up in search results that produced early 2000’s news articles related to the Oxford Student Union, but you get “page not found” when you try to go there. Any relation to this guy?

  3. Apologies, but this cracked me up (from the Micro Strategies website):

    “and a Certified Technical Trainer certification from Chauncey Group International.

    David can often be found sailing, bike riding, going to the gym, and gardening in his spare time.”

  4. Here is a story from Bloomberg about the new legislation that is being drafted for derivatives. It is SUPPOSED to improve the current regulations and make banks safer. But, according to this story there is a loophole in the language of the bill which would allow almost all firms to skirt (go around) the law. Barney Frank’s version of the law would exempt corporations from the derivatives regulations if they are using the derivatives for “risk management” purposes.

    This extremely vague definition of derivatives used for “risk management” leaves it very open for argument (legal or otherwise). This means that many (virtually all) corporations would go unregulated for derivatives trading.

    This of course means investment banks, bank holding companies, and hedge funds can continue trading derivatives exactly the same way they were before the bank crisis if they say they are using derivatives for “risk management” purposes.
    Here is the link to the Bloomberg story. Written by Tina Seeley and Dawn Kopecki

    Does anyone know if Wall Street Journal is covering this story, or do they let Bloomberg do the heavy lifting now??? Someone please let us know.

  5. Great analytics on the 29 yr. old Storch, Baseline. A lot of eyebrows were raised with this announcement. And given the nature of the 24 hour news cycle, it lapsed downstream to focus on BalloonBoy. I feel pretty sure there is a relevant backstory regarding this hire. And it’s not just the age thing, although the revolving door scenario – back to the bank with a fresh insight and contacts is inevitable, – but the whole Goldman thing. That is worse than suspicious, just by fact of the name at this particularly poisionous time, stinks. I don’t wish him well, I hope that some decent dilligent investigator outs the rat.

  6. The red flag in his new job description is “IT”. Ask yourself this: Do you really want anyone from Goldman tinkering with the SEC’s IT infrastructure and, more importantly, its database? More sinisterly and likely to the root of his appointment, does anyone want Goldman colocating a server next to the SEC mainframe? Because that is exactly what will happen. And since no one will ever know it (or make it public should someone know it), Goldman will have the inside track on all SEC activities for trading or other purposes. Welcome to the “US of GS.”

  7. Another member of Kwak’s Hall Of Fame, perhaps? The last one was Kopeckne family bright spot and labor hero, Ted Kennedy.

  8. I’m with CertifiedRez – here is a new position for the SEC – nothing important, just Chief OPERATING Officer.

    If I wanted to know if any of my staff were even potentially a subject of an investigation, what would I do? Hmmmmm…

    Maybe, get a young ambitious mole/gopher installed in a senior role.

    Make sure position is new so there is no existing work to slow you down.

    Position has to have enough authority so that his passkey gets into any facility.

    Get an IT-geek installed so that fast, non traceable access to data is assured.

    No one will complain.

  9. Maybe we shouldn’t call him ‘rat’, just yet.

    Better, ‘GS plant’, but not rat. BTW is the tar and feathers cupboard well stocked? Just asking.

    Incidentally did others read the Blankfein explanation of his GS responsibility? Responsibility specifically is only to his stockholders. Now tell me again about self-regulation and rely on ‘do unto others as you would have them do unto you’!

    We may just as well deregulate road rules! I’m not sure whether some of the nonsense comments indicate naivety, ignorance, GS stockholding or simplistic desire to see one’s own words on the screen?

    Must be getting cynical? Time for a re-IPL?

  10. I wonder if anyone has filed a FOIA request for the documents that outline the bailout agreements Geithner made with the banks?

  11. Not quite the plum that the Secretary of the Treasury was for Goldman, but a good link nonetheless.

    Glad to see that the “change we need” is more Goldman in the mix! WTG OBAMA!

  12. The appointment of Adam Storch as COO of the SEC Enforcement Division has raised questions for obvious reasons. As a 26+ year veteran of the division, now retired, I have some views on the matter.

    First, people should understand the the commission recruits most of its enforcement employees from “the other side” i.e. from the ranks of law firms that defend subjects of investigations and acounting firms that often end up the subjects of investigations. Analysts usually are hired from brokerage firms and so-called self-regulatory organizations. There are conflict of interest rules in place to prohibit such recruits from working on matters involving their former employers and clients. These procedures, when enforced, prevent the most blatant conflicts but they cannot prevent the “revolving door” problem. That issue is addressed by barring senior employees (I do not know whether the COO is included in that class) from appearing before the agency for one year and bars them from working on any matter they worked on while at the commission. Feeling better yet? Don’t get too comfortable.

    I have absolutely no reason to believe anything sinister is going on here, but the scope of the COO’s duties include oversight of the market surveillance function in the division. Now, Mr. Storch may bring to the division insights gained from several years of performing a similar function at GS, and the division can certainly benefit from such insights. But the division, and the commission, should do all in their power to ensure that the knowledge Mr. Storch obtains during his tenure at the agency stays within the agency not only during his tenure but also during his post-agency employment. It is far from clear that existing conflict of interest rules adequately address the latter concern in the case of the new COO. The knowledge he gains from updatinf and overseeing surveillance system should not fall into the hands of the regulated when Mr. Storch leaves the agency.

    Moreover, the appointment of a former GS employee to such a high-sounding position at this point in time raises the issue of whether the new management of the division is tone-deaf. (I assume this is not the Mr. Storch who worked at Micro Strategies. If he is, that raises another set of optics issues). I recognize the need to recruit the best and brightest available, and I understand the need to update market surveillance given the new complexity of the marketplace, but I find it hard to believe that Goldman is the only or best source of talent. Of course, there are many in this administration who would disagree, unfortunately.

  13. I bet there was a time on Easter Island when they had the world’s most dynamic and innovative Big Stone Head sector. I bet the master builders of big stone heads got many positions of highest honor in the tribal councils. Tribal elders all deferred to the superior wisdom of the builders of the greatest heads, even though the island people endured sacrifice and hardship when the Gods glowered down and the head-builders suffered for the wicked impiety of the tribe. There was probably some clansman, Simonawana Jonsonowana or somebody, who said, Don’t we have enough big heads? And I’m sure they drove him off the island with their war clubs and the rest was history.

  14. The photos of Micro Strategies Storch and the one that seems to have been pulled off of what is labelled as the 2nd version of his now-closed google website appear to be different, but too low resolution to tell.

  15. CertRez,
    I read part of your South Cali real estate blog. I’m no expert but seems like awesome stuff. I think it’s great people provide free info for public consumption, especially on a topic which can sometimes be quite complex (establishing title, zoning etc.) such as real estate. The best part is you have links to Bloomberg and New York Times, but no link to Wall Street Captured Journal. You have excellent taste.

  16. Cricket league? Not with you Uncle B.

    Computerese: IPL = Iniial program load. circa step 1 after blue screen interrupt.

  17. As someone who has worked at the SEC too, allow me to say that every word of this apology is nonsense. The Commission has always been a captive of major Wall Street banks and makes its bones chasing penny ante hoods between four hour lunches. Financial regulation is a joke and its performance during the past twenty years is no accident. It is inevitable. Mr. Coffman makes a good many free hand claims which are superficially persuasive until one understands that the organization rots from the head down. Career staffers know that if they make waves their desks will be moved into the lavatory. So they hunker down, read newspapers, study law at night and clear out at the first opportunity. This has been going on at least since 1968.

  18. My comments were not meant as apology, simply statements of fact. Your comments, on the other hand, are opinion and hyperbole unsupported by citation to fact.

    The “penny ante hoods” I successfully chased with my staff included Michael Milken: fund managers at Fidelity; Tyco, Kozlowski and Schwartz; Waste Management and nearly all its senior management; Cendant and it officials including Forbes and Shelton; Arthur Andersen LLP and several of its top partners in connection with the Waste Management; Gruntal & Co. Inc. and Ed Bao, one of its senior executives; enough CPAs to start a decent sized accounting firm; and upwards to 200 other enforcement actions. My experience is that most staffers in enforcement leave only because of financial pressure and many consider their time with the agency the most rewarding of their professional careers.

    Jake Chase obviously had a different experience, hanging out with those who spent their time reading newspapers and taking four lunches a day, but that is not the norm.

    Is financial regulation in the US inadequate? You bet it is. But that is not the result of rank and file regulatory employees slacking off, for the most part. It is the result of conscious, deliberate policies and practices advanced by 3 decades of political appointees and their ilk who believed in and implemented deregulation. It happened for the most part because moneyed industry captured the political process. But we will not turn things around by belittling rank and file regulators, most of whom want effective financial regulation.

  19. @Jim Coffman
    please do not vanish again – the stories you tell sound entirely plausible to me – much more down to earth than a lot of “ideal world proposals” posted here
    I for one have missed your voice and am missing others similar to yours very much i.e. people who actually have pushed paper even though you were probably several steps above my rang you still sound like somebody real

  20. Jim, do you see the Milkens and the Kozlowki’s and the Waste Management crew as the big fish? Definitely not penny-ante, but what about the people these people were making money for? Or do you view them as the ultimate end to the investigations?

  21. Plausible maybe but not quite the whole story. Please enlighten us about the SEC role in monitoring derivative transactions on behalf of witless money managers in Duluth, who have been blowing up since 1994 while supposedly investing in short term money market instruments on behalf of municipalities, retirement and mutual funds.

    What the SEC has done for forty years is sit around and wait for a Dennis Levine to get caught with a shopping bag full of money. It scares him $hitless, snags a Boesky who rats out a Siegel and four other saps trying to survive in the arbitrage snake pit. A Guliani who otherwise would have cnontinued snoozing behind his green metal desk instead becomes a folk hero before sailing off to do security consulting for Mexico and become a billionaire. Anybody who believes our securities laws interfere with big time corporate crime is a good candidate for inverse floaters tied to a bank’s choice of Asian currencies. I haven’t time to educate the world on this. Just ask yourself: how could this disaster have happened if ANY of the people in charge was doing a competent honest job? The idea in government is to pretend to work while avoiding stepping on powerful toes. This explains Barney Frank and everyone else who has made a sap out of the entire Nation while pretending to be on the side of the little man. Why does Barney insist upon exempting corporate risk management transactions from his toothless derivatives legislation? Because EVERY derivatives transaction can be justified as risk management, although the major risk of corporate derivatives deals is that a company whose balance sheet and income statement look pristine to a nation of CNBC watchers is really an accident waiting to happen if interest or currency rates go in an unexpected direction. Why do corporations do this? To manufacture and smooth earning because their CEOs have one way options which benefit them on the way up and are conveniently repriced if the stock tanks. In general, these executives hardly own any stock themselves.

    Case in point: Bob Rubin. Between 2000 and 2007 Rubin acquired options on 5 million shares of Citigroup. His total compensation over that eight year period was $270 million dollars, one dollar for every citizen of our Republic. Too bad for poor Bob. Citigroup opened into a black hole before he could cash out much stock. He may in fact be stuck with all of it. Why do you think he is not Secretary of the Treasury? All Obama can do for him is keep him behind a curtain like the Wizard of Oz.

    A reasoned well modulated response to this criminal negligence is exactly what the banksters and their stooges in the government are hoping for.

  22. let’s say we were talking about the corporation I worked for
    – would I have been at any time in a position to say something about the goings on in another department or on the top floor – definitely not. All I could talk about would be my perception of the general climate, some of the doings in my department and anecdotes from colleagues I had happened to meet. Not the whole story? definitely! interesting and telling for people who are familiar with such an environment? very likely yes!

    and no matter how depraved a big outfit is there still will be large and small pockets/departments/areas where decency and professionalism is the norm.

    If we stop listening to people like Jim because taking him for the whole is so much more satisfying then we’ll never figure out how it went wrong in the rank and file.

  23. Milken made money for himself. He got to keep upwards to 50% of what he made for Drexel. He created the junk bond market and then used it to abuse individual investors, issuers, mutual fund investors, S&L and the taxpayers who picked up the bill, future retirees, institutional investors and others. Yup, he was a big fish.

    Are the others big fish? That’s for others to decide, but the world is better off with these frauds exposed and some of the miscreants spending time as guests of the government. That is not to say that there are not bad folks in finance. I know because I’ve been involved in some of those cases. But cracking that world is all the more difficult because there is honor among thieves: no matter how bad the conduct, folks in finance rarely report their own kind. That was true with Milken despite the widespread dislike for him on the Street, and it is even more true today.

    All of this is simply to say that regulation takes place every day and good people are doing the work under less than ideal circumstances. The public can’t rely solely on regulators to keep the markets clean, although there are many regulators who wish that it could. Those who use the markets have an obligation to help police those markets by insuring that bad practices are reported. Will that result in every bad actor getting whacked? Of course it won’t (e.g. Madoff). But regulators depend on information flows just like the police in your neighborhood. For our markets to thrive, investors must believe in market integrity. If regulators can’t do their jobs because of lack of information, investors will lose faith and markets cannot exist without investors.

    Investors should also vote in their own self interest and oust the deregulators and those in our government who are bought and paid for by big business and finance. Even the best regulators cannot help when the laws and regulations are against them.

    Silke, thanks for the kind words.

  24. Everyone on Wall Street including interns working there for more than 72 hours know it’s completely corrupt. To describe the various forms of corruption is to detail the entire workings of Wall Street.
    Even the public knows it’s corrupt and the only reason why I think some of them still “invest” is to gamble, they are too new, or they think that they might somehow benefit from the corruption (and they are almost always wrong).
    One of the most publicized cases in recent history was Martha Stewart. That case taught us that only the pettiest most insignificant conduct by women that some felt were too powerful, could be punished.

  25. @Silke
    There are to be sure rank-and-file people who pretend to be deliberately clueless in order to continue to go to work everyday. Perhaps there are even whole departments whose purpose is to support the fraudsters in the other departments who are perfectly decent. Then there are the people who look the other way because they understand their job is contingent on the continued profitability of the criminal arm of their enterprise. In short, it may require only a “rogue” office or two of bad guys to make billions. Likewise with regulators. I have great respect for Jim Coffman and his career, but looking at the whole picture, you can’t exactly say that the SEC has done its job. In fact, when you look at the outcomes, even a casual observer would have to agree that something had gone very very wrong.

  26. Also, I challenge the notion that the usual presuppositions about office politics apply to Wall Street. In my opinion, unless you’ve worked extensively with the most corrupt third-world local and regional governments, you have no idea how corrupt an institution can become. This, I think, is Simon’s point about how the U.S. is behaving like a third-world dictatorship. Whatever corruption exists in D.C., it’s an order of magnitude worse on Wall Street.

  27. Jim Coffman says:

    For our markets to thrive, investors must believe in market integrity. If regulators can’t do their jobs because of lack of information, investors will lose faith and markets cannot exist without investors.

    True or false, Mr. Coffman: Today, there is no way any investor can make an informed decision about whether or not to buy stock or securities of any company which books off balance sheet derivative bets, because any change in interest or currency rates can generate a huge loss without any prior disclosure that the company was even at risk.

  28. I’m not here to defend Barney Frank or anyone else who appears to be failing at getting us out of this mess. And I sure won’t defend those who got us into it. But the private sector drove the bus over the cliff, not government. Regulators were traffic cops who could have prevented it if the top officialls had had any interest in regulation, but they didn’t, so here we are.

    You can berate government and regulators until the cows come home, it won’t change anything or move us an inch toward a better system.

    Should anyone invest with any company that carries off-book positions in any financial instrument? Hell no they shouldn’t. But don’t blame government for that situation. The accounting profession blessed the practice despite Enron, etc. and then ran to Congress whenever regulators tried to crack down on accounting practices. I remember when Congress threatened the SEC’s budget over something as fundamental as auditor independence.

    Look, the institutions are far from perfect, but their policies and regulations merely reflect the larger society and to political context in which laws are passed by folks dependent on the moneyed interests. But folks have to wake up and do something about the larger political situation to change the finance industry. While I won’t go so far as to say it is all corrupt, corruption and avarice are widespread and control the game. But attacking career regulators, many of whom are fighting the good fight, ain’t gonna change a thing, Jake.

    By the way, the SEC doesn’t regulate derivatives and never did. If money managers in Duluth are a problem, pass it along. I can’t help. I’m retired.

  29. Jim,

    Sorry if you feel attacked. My point is that to suggest the regulatory system works only helps those who continue manipulating it. Putting Milken in prison for ‘parking’ violations, imprisoning Kosloski for buying a $6000 shower curtain, sending Jeff Skilling to jail for 25 years while allowing Ken Lay to fake a heart attack on presentencing furlough and escape to a new face overseas. The whole cops and robbers charade makes good evening television but has no effect upon the debt peonage scam run through the Federal Reserve and the derivative scams run on Duluth money managers. If the SEC isn’t going to regulate derivatives it isn’t going to regulate anything that matters in the 21st century. Do you realize that equity swaps now make it unnecessary for corporate insiders to ever pay capital gains taxes on their stock option swindles? Being retired, you might enjoy Frank Portnoy’s book, FIASCO, which lays the whole game out. It was written in 1997. Too bad Barney Frank didn’t read it. I am retired too.

  30. Via the Financial Times: King calls for break-up of banks
    By Chris Giles, Economics Editor

    Published: October 20 2009 20:15 | Last updated: October 20 2009 20:15

    Mervyn King, governor of the Bank of England, called on Tuesday night for banks to be split into separate utility companies and risky ventures, saying it was “a delusion” to think tougher regulation would prevent future financial crises.

    Mr King’s call for a break-up of banks to prevent them becoming “too important to fail” puts him sharply at odds with the direction of domestic and international banking reform.


    The Bank governor wants to see the utility aspects of banking – payment systems and deposit taking – hived off from more speculative ventures such as proprietary trading. “There are those who claim that such proposals are impractical. It is hard to see why,” he said.


    See story:

    Hail the King!!!

  31. I don’t feel attacked. But I’m sorry you feel so impotent. We’re both retired and should meet for a beer sometime. We have more in common than you think.

    But the only way things are going to change is through responsible action. Attacking government employees– as distinguished from appointees and their ilk–isn’t going to feed the bulldog. We need to find practical solutions to this mess and use all the resources available, including smart and well meaning government employees, to implement the next steps. Howling at the moon isn’t going to change the galaxy.

    The post following this one raises a point I’ve advocated for years: split investment banking from commercial banking. It will alleviate the TBTF syndrome, reduce the power and incomes (and thus, the influence) of the corrupting agents and likely end the practice of oversized compensation and unreasonable risk. To enhance the cure, inhabitants of these two institutions should have their own money at risk, not primarily other peoples’. Will this weaken the county’s competitiveness on the stage of global finance? Despite what are sure to be outcries to the contrary, I seriously doubt it. But will it help neuter those who believe the world is their sex object? You bet.

    Look, we all agree the system is corrupt. Are we going to use the blogosphere to vent or are we going to do something about it? Attacking government employees (easy targets to be sure) will only undermine the confidence of the public in the ability of government to solve problems. And if the government doesn’t do it, it’ll be up to you and your mobs with pitchforks at midnight. Good luck.

  32. Thanks Coffman. At least now the truth of who deep-sixed the prior investigations into Drexel including a full blown exam with 15c4 violation is now on display. The SEC knew for years what was up; but the DC hacks just delayed until it overwhelmed and then took the case. Always wondered who squashed the prior inquiries. Hope you enjoyed the kudos.

  33. Man, are you chasing something up the wrong tree (or maybe just relieving yourself at the base of it). Too cryptic for me. But I’ll tell you this: people who can remember every characteristic of an arcane bond issued 15 years ago suddenly can’t remember a thing when placed under oath. It wasn’t always a fun job, but somebody had to do it (between four hour lunches, of course).

    We tried and the industry closed ranks. Knowing and proving are very different things. We had the unfortunate obligation of presenting evidence when we tried to shut down one of the most financially powerful gigs on the street. We brought the case when we had the evidence necessary to prove the case despite the fact that the industry and many of his victims/clients circled the wagons to prevent the SEC from doing so. If you only knew and if I had the freedom to tell you! I’m a lot of things but I’m no hack and I am aware of no evidence that anyone quashed prior inquiries.

    Do you folks check under your beds at night for goblins before you go to sleep? “Paranoia strikes deep….”

  34. Jim
    if the system is conducive to corruption are there small seemingly insignificant holes that can closed without the big TBTF law?

  35. Anyone who believes there is no connection between the grand theft of Taxpayer money and all of the Goldman employees planted in the Obama Government also probably believes in the tooth fairy.

    The best way to understand what is going on is to think like a criminal. Paulson, Summers, Emanuel are very bright criminals. Geithner is their dull-witted whipping post.

    I also have to say that Mr. Chase’s accounting of what goes on at the SEC sounds much more realistic than the Disney-esque fairy tale presented by Mr. Coffman…

    Having been a player in the junk bond market during the 1990’s, I know how simple and easy it is to conjure up absurd OTC derivatives deals in order to hide crappy positions from the people in charge internally of risk management, and therefore to hide them from the dullards at the SEC. We did this all the time with Harvard Asset Management. It’s no coincident that Harvard Asset is in such bad shape – it was looted by the likes of Larry Summers and his cronies.

    Back then the fraud was for 10’s of millions and saved bonus pools on the desk. Now, the fraud is in the trillions and ensures the huge rewards being paid to the larcenous scumbags like Blankfein and Dimon.

    While Obama fiddles with his pecker, USA burns…

  36. Anyone doing any basic analysis of the junk bond market back in 1985 understood that first and foremost there were section 5 violations and that registration was required for many of the issues. Second, the “market” itself violated the Exchange Act provisions. Third, Drexel was under-capitalized due the 15c4 provision requiring public exchange quotes for securities (stocks and bonds) and if there were no such quotes then the securities were valued at zero; hence much of the Drexel’s capital was nonexistent for net capital computational purposes. Then there was the holding company tax depreciation angle.
    You don’t have to tell me anything. I was there.

  37. One amendment; the bond quotes had to publicly quoted and not privately maintained, as say on scraps of paper or in someone’s head..

  38. And not it’s not about quashing evidence. It never is; it was about doing nothing or deciding that “innovation” took priority over the regulations.
    That simple.

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