Thursday, March 14, 2013

Crime Does Pay: Scores of FDIC Settlements Go Unannounced (Whom Don't They Want To Know?) and Court Docs Reveal Blackwater's Secret CIA Past

(If throwing a contribution Pottersville2's way won't break your budget in these difficult financial times, I really need it, and would wholeheartedly appreciate it. Anything you can afford will make a huge difference in this blog's lifetime.)

Funny but somehow I'm not feeling that sorry for Eric Prince and the Blackwater thugs right now.

Let alone those poor Wall Street Wizards who were so brazenly outed (and then gently slapped on the hands.)

Thursday, March 14, 2013

"Crime DOES Pay: Scores of FDIC Settlements Go Unannounced"

"Crime DOES Pay:
Scores of FDIC Settlements Go Unannounced"
By E. Scott Reckard

"Three years ago, the Federal Deposit Insurance Corp. collected $54 million from Deutsche Bank in a settlement over unsound loans that contributed to a spectacular California bank failure. The deal might have made big headlines, given that the bad loans contributed to the largest payout in FDIC history, $13 billion. But the government cut a deal with the bank's lawyers to keep it quiet: a "no press release" clause that required the FDIC never to mention the deal "except in response to a specific inquiry." The FDIC has handled scores of settlements the same way since the mortgage meltdown, a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.

The largest U.S. bank failures. Since 2007, 471 U.S. banks have failed, nearly depleting the FDIC deposit-insurance fund with $92.5 billion in losses. Rather than sue, the agency has typically preferred to settle for a fraction of the losses while helping the banks avoid bad press.

Under the Freedom of Information Act, The Times obtained more than 1,600 pages of FDIC settlements, made from 2007 through this year with former bank insiders and others accused of wrongdoing. The agreements constitute a catalog of fraud and negligence: reckless loans to homeowners and builders; falsified documents; inflated appraisals; lender refusals to buy back bad loans. Defendants benefit by settling because they can avoid admitting guilt and limit the damages they might face in court. The FDIC benefits by collecting money without the hassle and expense of litigation. The no-press-release arrangements help close those deals.

Deutsche Bank, now the world's largest, settled to resolve claims that subsidiary MortgageIT sold shaky loans to Pasadena-based IndyMac Bank, which imploded under the weight of risky mortgages and construction loans. The IndyMac failure — considered one of the early events that helped usher in the 2008 financial meltdown — caused a scene reminiscent of the grim bank failures of the 1930s, with panicked depositors lining up outside branches trying to reclaim their money.

Overall, the FDIC collected $787 million in settlements by pressing civil claims related to bank failures from 2007 through 2012 — a fraction of its total losses. FDIC spokesman David Barr said the agency always tries to settle failed-bank cases before filing lawsuits and that it announces settlements only when damage payments are large and media interest intense. He declined to discuss the legal strategy behind the Deutsche Bank deal and other no-press-release agreements. A Deutsche Bank spokeswoman declined to comment.

Critics fault the government for going easy on banks in the aftermath of the financial crisis. At a Feb. 14 hearing, Sen. Elizabeth Warren (D-Mass.), founder of the Consumer Financial Protection Bureau, criticized FDIC Chairman Martin J. Gruenberg along with other bank regulators for their reluctance to make examples of Wall Street firms by taking them to trial.

Seeking to recover deposit-insurance losses, the FDIC has dealt mainly with smaller institutions that failed, unlike the big banks that were bailed out. Attorneys who have represented bank officials and the FDIC said regulators are now far likelier to settle cases before filing lawsuits than after the last spate of failures, when more than 2,300 institutions collapsed in the 1980s and early 1990s, bankrupting a fund that insured savings and loan deposits. That crisis grew out of Reagan-era deregulation, which allowed thrifts already hurting from 1970s inflation to make riskier investments, including commercial real estate deals that soured en masse during the second half of the 1980s.

Critics describe the FDIC's current practice of low-profile deal-making as a major departure from the S&L crisis. "In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures," said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: "to make other bankers scared." Newsom said he couldn't understand the shift, unless the agency doesn't "want people to know how little they are settling for." The FDIC should disclose as much as it can, said Lauren Saunders, managing attorney at the National Consumer Law Center in Washington. "Transparency is always better, and serves as a deterrent to future misconduct."

Barr says attorneys representing the FDIC make clear to the defendants that, although it will not publicize settlements, it also cannot legally keep them secret. The ban on secret settlements was a provision in one of the laws passed after the S&L crisis. Although the measure doesn't require the FDIC to call attention to settlements, nondisclosure agreements like that with Deutsche Bank violate "the spirit of the law," said Sausalito, Calif., attorney Bart Dzivi, a former Senate Banking Committee aide who drafted the provision.

Many of the FDIC settlements reviewed by The Times are small, but others required larger payments from prominent lenders. Quicken Loans and GMAC's Residential Capital unit, for example, separately agreed to pay $6.5 million and $7.5 million, respectively, over soured loans they had sold to IndyMac. A ResCap spokeswoman declined to comment. Quicken Loans spokeswoman Paula Silver expressed surprise that the settlement became public, saying officials at the lender had believed that would not occur. "Quicken Loans and the FDIC entered into a 'confidential' agreement nearly three and a half years ago which clearly states that no party admits liability nor wrongdoing," Silver said in a statement.

At least 10 undisclosed settlements involved officers and directors accused of contributing to the collapse of their own banks. Those include 11 insiders at Downey Savings & Loan in Newport Beach who paid a total of about $32 million, most of it covered by corporate insurance policies. In the Downey case, the FDIC announced last year that four of the insiders had agreed to be banished from banking, including Maurice L. McAlister, Downey's co-founder, who died Feb. 13.

But the announcement mentioned nothing about the payments or sanctions against the seven other former insiders. Out of the $32 million, McAlister was required to pay $1.93 million out of his own pocket, with the other insiders paying a combined $1.75 million. Insurers that provided coverage for civil wrongdoing by officers and directors paid the remaining $28.4 million. The FDIC also has resolved certain claims involving IndyMac, including a $1.4-million settlement in May 2011 with the thrift's former president, Richard Wohl. The agreement, filed as part of a complex corporate bankruptcy case, had gone unreported until December, when the agency provided it to The Times in response to questions.

The FDIC has recently stepped up the number of lawsuits against bank insiders. Century City attorney Jeffrey A. Tisdale, whose firm represents bankers, said the trend reflects insurers pushing back against FDIC demands that they settle claims for the policy maximum. Insurers for bank directors and officers are saying, "We really are not an ATM machine for you, the FDIC," Tisdale said.

The FDIC also may have been emboldened by success in a rare case it took to trial, according to a recent report from consulting firm Cornerstone Research. The trial led to a Dec. 7 federal jury verdict in Los Angeles ordering three former IndyMac executives to pay $168.8 million for what the FDIC said was reckless approval of 23 loans to developers and home builders who never repaid them. It was the highest award possible in the case. Another FDIC lawsuit, seeking $600 million from former IndyMac Chairman and Chief Executive Michael Perry, was resolved for a fraction of the claim Dec. 14. Perry agreed to pay $1 million himself, allowed the FDIC to pursue an additional $11 million from insurers and agreed to be banned from the industry. The news was first announced in emails sent to news organizations — not by the FDIC, but by Perry's defense attorneys, who considered the outcome a victory."

Remember, folks, these are the settlement amounts, not the actual amount of money these swine made off with. So... let's see, I steal $100,000,000, knowing in advance they're not going to prosecute me, then they reluctantly offer a settlement of $1,000,000 to absolve me of my sins... and I get to keep the loot, too. And these are the little guys, not the hundred billion dollar Too Big To Fail/Jail monsters. Sweet deal, huh?

Court Docs Reveal Blackwater's Secret CIA Past

By Eli Lake, The Daily Beast
14 March 2013

It was the U.S. military's most notorious security contractor - but it may also have been a virtual extension of the CIA. Eli Lake reports.

ast month a three-year-long federal prosecution of Blackwater collapsed. The government's 15-felony indictment - on such charges as conspiring to hide purchases of automatic rifles and other weapons from the Bureau of Alcohol, Tobacco, Firearms, and Explosives - could have led to years of jail time for Blackwater personnel. In the end, however, the government got only misdemeanor guilty pleas by two former executives, each of whom were sentenced to four months of house arrest, three years' probation, and a fine of $5,000. Prosecutors dropped charges against three other executives named in the suit and abandoned the felony charges altogether.

But the most noteworthy thing about the largely failed prosecution wasn't the outcome. It was the tens of thousands of pages of documents - some declassified - that the litigation left in its wake. These documents illuminate Blackwater's defense strategy - and it's a fascinating one: to defeat the charges it was facing, Blackwater built a case not only that it worked with the CIA - which was already widely known - but that it was in many ways an extension of the agency itself.
Founded in 1997 by Erik Prince, heir to an auto-parts family fortune, Blackwater had proved especially useful to the CIA in the early 2000s. "You have to remember where the CIA was after 9/11," says retired Congressman Pete Hoekstra, who served as the Republican chairman of the House Permanent Select Committee on Intelligence from 2004 to 2006 and later as the ranking member of the committee. "They were gutted in the 1990s. They were sending raw recruits into Afghanistan and other dangerous places. They were looking for skills and capabilities, and they had to go to outside contractors like Blackwater to make sure they could accomplish their mission."

But according to the documents Blackwater submitted in its defense - as well as an email exchange I had recently with Prince - the contractor's relationship with the CIA was far deeper than most observers thought. "Blackwater's work with the CIA began when we provided specialized instructors and facilities that the Agency lacked," Prince told me recently, in response to written questions. "In the years that followed, the company became a virtual extension of the CIA because we were asked time and again to carry out dangerous missions, which the Agency either could not or would not do in-house."
A prime example of the close relationship appears to have unfolded on March 19, 2005. On that day, Prince and senior CIA officers joined King Abdullah of Jordan and his brothers on a trip to Blackwater headquarters in Moyock, North Carolina, according to lawyers for the company and former Blackwater officials. After traveling by private jet from Washington to the compound, Abdullah (a former Jordanian special-forces officer) and Prince (a former Navy SEAL) participated in a simulated ambush, drove vehicles on a high-speed racetrack, and raided one of the compound's "shoot houses," a specially built facility used to train warriors in close-quarters combat with live ammo, Prince recalls.

At the end of the day, company executives presented the king with two gifts: a modified Bushmaster AR-15 rifle and a Remington shotgun, both engraved with the Blackwater logo. They also presented three Blackwater-engraved Glock pistols to Abdullah's brothers. According to Prince, the CIA asked Blackwater to give the guns to Abdullah "when people at the agency had forgotten to get gifts for him."
Three years later, the ATF raided the Moyock compound. In itself, this wasn't unusual; the ATF had been conducting routine inspections of the place since 2005, when Blackwater informed the government that two of its employees had stolen guns and sold them on the black market. Typically, agents would show up in street clothes, recalled Prince. "They knew our people and our processes."

But the 2008 visit, according to Prince, was different. "ATF agents had guns drawn and wore tactical jackets festooned with the initials ATF. It was a cartoonish show of force," he said. (Earl Woodham, a spokesman for the Charlotte field division of the ATF, disputes this characterization. "This was the execution of a federal search warrant that requires they be identified with the federal agency," he says. "They had their firearms covered to execute a federal search warrant. To characterize this as anything other than a low-key execution of a federal search warrant is inaccurate.")
During the raid, the ATF seized 17 Romanian AK-47s and 17 Bushmaster AR-13 rifles the bureau claimed were purchased illegally through the sheriff's office in Camden County, North Carolina. It also alleged that Blackwater illegally shortened the barrels of rifles and then exported them to other countries in violation of federal gun laws. Meanwhile, in the process of trying to account for Blackwater's guns, the ATF discovered that the rifles and pistols presented in 2005 to King Abdullah and his brothers were registered to Blackwater employees. Prosecutors would subsequently allege that Gary Jackson - the former president of Blackwater and one of the two people who would eventually plead guilty to a misdemeanor - had instructed employees to falsely claim on ATF forms that the guns were their own personal property and not in the possession of Jordanian royalty.

In all of these instances - the purchase of the rifles through the Camden County sheriff, the shipment of the guns to other countries, and the gifts to Abdullah - Blackwater argued that it was acting on behalf of the U.S. government and the CIA. All of these arguments, obviously, were very much in Blackwater's legal interest. That said, it provided the court with classified emails, memoranda, contracts, and photos. It also obtained sealed depositions from top CIA executives from the Directorate of Operations, testifying that Blackwater provided training and weapons for agency operations. (A CIA spokesman declined to comment for this story.)
One document submitted by the defense names Jose Rodriguez, the former CIA chief of the Directorate of Operations, and Buzzy Krongard, the agency's former executive director, as among those CIA officers who had direct knowledge of Blackwater's activities, in a section that is still partially redacted. This document is the closest Blackwater has come to acknowledging that Prince himself was a CIA asset, something first reported in 2010 by Vanity Fair. One of the names on the list of CIA officers with knowledge of Blackwater's work in the document is "Erik P" - with the remaining letters whited out.
This document made Blackwater's defense clear: "the CIA routinely used Blackwater in missions throughout the world," it said. "These efforts were made under written and unwritten contracts and through informal requests. On many occasions the CIA paid Blackwater nothing for its assistance. Blackwater also employed CIA officers and agents, and provided cover to CIA agents and officers operating in covert and clandestine assignments. In many respects, Blackwater, or at least portions of Blackwater, was an extension of the CIA."
When I asked Prince why Blackwater would often work for free, he responded, "I agreed to provide some services gratis because, in the wake of 9/11, I felt it my patriotic duty. I knew that I had the tools and resources to help my country."
Moreover, according to still-sealed testimony described to The Daily Beast, the agency had its own secure telephone line and a facility for handling classified information within Blackwater's North Carolina headquarters. CIA officers trained there and used an area - fully shielded from view inside the rest of the Blackwater compound by 20-foot berms - to coordinate operations.
In the wake of the major charges being dropped, the U.S. attorney who prosecuted the case against Blackwater, Thomas Walker, told me that it would be wrong to dismiss the prosecution as a waste of time. "The company looks completely different now than before the investigation," he said. "For example, in 2009, Erik Prince was the sole owner. This company now has a governing board that is accountable."
In 2010 Prince sold Blackwater, which is now known as Academi, for an estimated $200 million. Prince retains control of numerous companies affiliated with Academi, but he told me that he had "ceased providing any services" to the U.S. government.
Walker would not discuss Blackwater's relationship with the CIA. But he did say the defense that the company was acting for the government did not excuse any violations of federal law. "Our evidence showed there was a mentality at the company that they considered themselves above the law,"
Walker said. "That is a slippery slope. There came a time when there had to be accountability at Blackwater."
David Boies, the lawyer who represented Al Gore in Bush v. Gore, took up Gary Jackson's case last fall. Boies told me he did so because he saw the prosecution as an abuse of power. "These people were functioning really as an arm of the CIA at a time when the CIA's resources were strained," he said. "I think that Erik Prince and Mr. Jackson and other people at Blackwater thought they were being patriots."

Reflecting on the prosecution and the scrutiny of the company he founded, Prince said the charges against Blackwater executives left him "perplexed and angry." "Blackwater carried out countless life-threatening missions for the CIA," he said. "And, in return, the government chose to prosecute my people for doing exactly what was asked of them."

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