Former SEC Attorney Responsible for Diming Out Whistleblower Is Now Running for Congress

Yesterday POGO published an article in Politics Daily which revealed that George Demos, a former Securities and Exchange Commission (SEC) attorney who is now running for Congress, was previously cited in an SEC Inspector General (IG) report for improperly disclosing protected, nonpublic information about a whistleblower from JPMorgan.

Demos, who is touting his experience at the SEC on his campaign website, has repeatedly denied any wrongdoing. But documents obtained by POGO have confirmed that Demos was the focus of the IG’s investigation, which concluded that he violated SEC rules prohibiting the disclosure of confidential information received in the course of an investigation. The IG referred the case to the SEC for disciplinary action up to and including dismissal, but the agency took no action. Shortly after the IG report came out, Demos resigned from the agency and announced that he was running for office.

Unfortunately, Demos’s improper disclosure is just one of many examples of the SEC dropping the ball with whistleblower tips. As described last week by Zachary Goldfarb at The Washington Post, the SEC also failed to heed the warnings of Harry Markopolos, who came to the agency with detailed evidence of Bernie Madoff’s Ponzi scheme, as well as a Moody’s executive who tried to warn the SEC that his credit rating agency was giving high ratings to investments that it knew were dangerous. The SEC has pledged to overhaul its whistleblower intake system, but progress has been painfully slow.

Meanwhile, the SEC has also been regularly ignoring the findings and recommendations of its own IG, and not just in the Demos matter. Last month we sent a letter to SEC Chairman Mary Schapiro criticizing the agency for its sluggish response to hundreds of recommendations made by the OIG over the past two years.

The JPMorgan whistleblower, a compliance officer named Peter Sivere, had come to the SEC in June 2004 with evidence that his employer was failing to provide materials sought in a wide-ranging SEC probe into an investment practice known as market timing, which typically involves trading that favors short-term buyers and sellers to the detriment of long-term investors such as retirees. In his initial email to the SEC, Sivere asked if he would be eligible for a program created by the Securities and Exchange Act that offers rewards to whistleblowers who come forward with information about insider trading. After he was informed that he would not be eligible, Sivere did not raise the issue again, and provided the SEC with the information anyway just a few weeks later.

In July 2004, Sivere filed a complaint with the Occupational Safety and Health Administration (OSHA) under the whistleblower protection provision of the Sarbanes-Oxley Act, alleging that JPMorgan retaliated against him after he expressed his concern that the bank was withholding documents from the SEC. After OSHA issued a preliminary finding in Sivere’s favor, JPMorgan’s counsel responded with an attack on Sivere’s whistleblower credentials, noting that the “SEC has also advised [JPMorgan] that Complainant sought payment from the SEC for providing the SEC with documents.” Once Sivere became aware of this response, he realized that someone at the SEC had improperly informed JPMorgan’s counsel about his initial inquiry into the SEC’s whistleblower bounty program. This revelation led to the IG’s investigation, which eventually identified Demos as the source of the disclosure, and concluded that he “not only gave...JPMorgan permission to use the non-public information about an informant against him, but actually encouraged such use.”

Sivere has also filed a complaint against Demos before the Departmental Disciplinary Committee of the New York State Supreme Court Appellate Division, which reviews ethical complaints against lawyers and can impose penalties ranging from censure to disbarment. Only days after he announced his candidacy, Demos sent a two-page letter to the Disciplinary Committee conceding that information about Sivere “may have been necessarily disclosed by the Commission’s [SEC] staff,” but only in accordance with SEC rules. He also claims that Sivere “was owed no duty of confidentiality or loyalty by the Commission or me.” However, the IG’s report makes clear that the disclosure of this information was anything but necessary, and was in fact a violation of SEC rules requiring that the information be kept confidential.

As we pointed out in our press release, the Demos episode demonstrates why there is such an urgent need for culture change at the SEC. POGO wrote to President Obama earlier this week urging him to instruct Chairman Schapiro to make it a top priority for the SEC to take swift and decisive action on the IG’s outstanding recommendations, many of which would help to address the long-standing systemic problems that have hindered the agency’s effectiveness. In particular, POGO calls on the SEC to send a strong message of support to future whistleblowers by following the IG’s recommendations for improving the agency’s handling of insider tips, and by cracking down on any employee who is responsible for whistleblower retaliation.

-- Michael Smallberg

If You're Looking for Another $80 Billion in Savings...

Key quote from Wednesday's State of the Union address:

"Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected." [Emphasis POGO's]

As Mandy noted the other day on our Twitter feed, there's actually ample opportunity for savings in security-related programs. Back in February, POGO presented five recommendations for increasing revenue and cutting costs and no fewer than three of them relate directly to security matters.

These three reforms — improving weapons acquisition, ensuring resources for and implementing recommendations made by agency auditors, and reducing the number of deployed nuclear warheads — could lead to savings of up to $81.7 billion.

Here's hoping that an exemption from a budget freeze will not necessarily mean an exemption from close budget scrutiny. Find all five recommendations below the jump, or head straight to our report for more details.

Morning Smoke: Post-Confirmation Bernanke May Have Tough Battles Ahead

Bernanke May Have Harder Fight Defending Fed After Confirmation by Scott Lanman [Bloomberg]

Jury Convicts Former SEC Lawyer by Kara Scannell [The Wall Street Journal]

DoD's '11 Budget: $10.7B for F-35, $4B for New Bomber, More for SpecOps by John Bennett [Defense News]

Wartime Contracting Commission Goes Global, by Robert Brodsky [FedBlog]

Acquisition processes might stymie new defense opportunities by Richard W. Walker [Washington Technology]

Our Transparency Tracker Notices New SEC 'Open' Page by Jeff Larson and Jennifer LaFleur [ProPublica]

New Conflict Would Strain Army by Colin Clark [DoD Buzz]

Morning Smoke: Defense Spending Freeze Exemption Under Scrutiny

Defense Analysts Blast Military Exemption to Spending Freeze by Spencer Ackerman [Washington Independent]

Obama's 2010 State of the Union address fact-checked [Washington Post]

Will Sen. Dorgan Disclose His Potential New Employers? by Kate Sheppard [Mother Jones]

QDR Kills Two MTW Strategy; Helos, UAVs Are Stars by Colin Clark [DoD Buzz]

Geithner Bails Himself Out by Allan Dodds Frank [The Daily Beast]

U.S. Senate to vote on Bernanke Thursday, approval seen by Mark Felsenthal [Reuters]

Global financial regulatory reform falls apart by Felix Salmon

IG for Iraq reconstruction investigating $340 million of ‘anomalous' transactions, by Elise Castelli [Federal Times]

Five Areas of Government In Need of Reform

Before you sit down to watch the State of the Union address tonight, make sure to take a look at our latest  recommendations to President Obama.

While the administration has implemented many important reforms in their first year, there's still much work to be done.

Mandy and Ingrid also discuss our recommendations in our latest podcast. 

-- Bryan Rahija

The Sting Part II: Foreign Bribery Investigation Claims Another Contractor Scalp

This is an update to last week’s post about the massive FBI sting operation that led to the arrest of 22 defense contractor employees on charges of violating the Foreign Corrupt Practices Act (FCPA). We noted that the investigation was ongoing, which might explain why the Department of Justice didn’t name the companies for which those individuals worked. Fortunately, with Google and the help of our readers, we were able to identify most of the companies, none of which are among the top federal contractors featured in our Federal Contractor Misconduct Database.

This week, however, we discovered at least one connection to a contractor our database. It turns out that one of the main “actors” who took part in the sting operation and helped the FBI nab the 22 individuals is a former executive at Armor Holdings who is facing FCPA charges in a different matter. Richard Bistrong, a former vice president for international sales at Armor Holdings (acquired by BAE Systems in 2007), is accused of paying bribes from 2001 to 2006 to get contracts to supply law enforcement equipment to United Nations peacekeeping forces and government agencies in the Netherlands and Nigeria. Bistrong’s assistance in the sting operation probably guarantees him a lenient sentence.

Remarkably, one of the 22 individuals arrested in the sting operation, Jonathan Spiller, was Bistrong’s former boss at Armor Holdings. In fact, Spiller’s indictment identifies “Individual 1” (aka Bistrong) as a “business associate” of Spiller.

Bistrong’s case also has an interesting political angle. According to the New York Times, Bistrong was married to Nancy Soderberg from 2004 to 2008. Soderberg was the third-ranking official on the National Security Council under President Clinton from 1993 to 1997 and served as U.S. Ambassador to the United Nations from 1997 until January 2001. Bistrong’s alleged illegal conduct began in June 2001.

The Bistrong case shows that the DOJ is casting a wide net in this investigation, going after any and all FCPA violators with a vengeance. There have been several other headline-grabbing FCPA enforcement actions in recent years, such as the punishment of Chevron and Textron over the Iraq Oil-For-Food scandal and last year’s major takedown of  KBR and Halliburton for bribing Nigerian officials.

So keep watching the news. And keep trolling the Internet, too, because you never know what fascinating tidbits will pop up as the DOJ investigation surges onward, such as this first-hand account  from Andrew Bigelow, another of the 22 individuals arrested last week.

-- Neil Gordon

Morning Smoke: Committee to Scrutinize Federal Response to AIG Collapse

Hearing: "The Federal Bailout of AIG" [House Oversight and Government Reform Committee]

Is Bernanke Hiding A Smoking Gun? by Ryan Grim [The Huffington Post]

AIG's new new luxury policy by Michelle Leder [Footnoted]

Timothy Geithner to deny role in AIG decision by Jake Sherman [Politico]

Just in Time for the Discretionary Freeze, New Report Says Defense Spending Is Unsustainable by Spencer Ackerman [Washington Independent]

Pentagon May Deny Pay If Contractor’s Tracking System Flawed by Tony Capaccio [Bloomberg]

Former USAF officer blows whistle on "illegal" anti-airship move? by Stephen Trimble [The DEW Line] 

SEC Official to Join Wilmer by Jenna Greene [Blog of the Legal Times] 

Boeing Lands Counsel From Transportation Department by Jeff Jeffrey [Blog of the Legal Times]

The man who blew the whistle on Jack Abramoff tells the story of how he did it by Susan Crabtree [The Hill]

More than 300 public-records lawsuits filed in Obama's first year by Carol Leonnig [The Washington Post]

Gas Money: Where is it Really Going? by Ian Gary [The Huffington Post]

Morning Smoke: Special IG Launches New Investigations into Possible AIG Misconduct

TARP IG opens new probes of AIG by Jake Sherman [Politico]

The Best Congress Lobbying Can Buy by Marian Wang [Mother Jones]

Ethics Groups Want Changes to Obama Lobbying Ban by Carrie Levine [The Blog of the Legal Times]

US To Appeal Blackwater Ruling. Then What? by Ben Buchwalter [Mother Jones]

Fed Wanted All Communications From AIG Run By Its Law Firm by Ryan Grim [The Huffington Post]

Agencies Unload New Sets of Data onto Data.gov

Marking the first in a series of deadlines outlined in the Open Government Directive (OGD), Friday saw the eleventh-hour (well, 6:50 PM to be precise) release of over 100 data sets from executive branch agencies on data.gov.

Among the data sets are lists of Federal Advisory Committee rosters going back to 1997, Freedom Of Information Act requests made to the Office of the Secretary of Defense, and summaries of Department of Energy R&D projects. The list of data sets is available here.

The OGD required agencies to release three new high value data sets on the 22nd, and in the anticipation leading up to Friday, one question loomed: what exactly is a "high value" data set anyways? Fortunately data.gov allows visitors to rate each set. Readers, what do you think? Do these sets of data have high value?

We're still sifting through the data, but are hoping that the spirit behind the movement towards transparency — that a government that is open, accountable, and communicative will ultimately be more effective — doesn't get lost amid the zeal for technology. The White House and its agencies deserve credit for taking this step in the right direction, but let's not forget that it will take more than Twitter accounts and dashboards to establish a culture of openness.

The OGD also required agencies to designate by the 22nd one senior official to be accountable for the quality of federal spending data, but no sign of a master list of those officials so far. The next deadline in the OGD is February 6. Read the Open Government Directive here.

-- Bryan Rahija

Reiterating the Call for Transparency in Negotiation of Health Care Legislation

Last week, POGO joined a coalition of groups calling once again for transparency in the negotiations of health care legislation. In an open letter to the House of Representatives, we urged House members to sign a discharge petition introduced by Rep. Vern Buchanon (R-FL). 

If the petition is signed by a majority of House members, it would force a vote on a bipartisan "Sunshine Resolution," formally calling on lawmakers to conduct negotiations on health care reform in public view.

From the letter:

The last few months of deliberation on health care have exposed myriad issues on which the left and right sides of our political spectrum are deeply divided. However, robust transparency in the drafting of legislation is one of the few matters that bind all of the signatories together. Simply stated, Americans of all political stripes are united in their demand for an end to the cloistered discussions that mar our legislative process.

You may read the letter here.

-- Bryan Rahija

Morning Smoke: SIGIR Finds $2.5 Billion Vulnerable to Waste and Fraud

Iraq IG Slams Training Contract Oversight by Daniel Schulman [Mother Jones]

More on N.Y. Fed’s Actions on A.I.G. Details [Dealbook]

Budget agency launches review of alleged threat against OPM official by Robert Brodsky [Government Executive]

Are Contractors Undermining US War Efforts? by Daniel Schulman [Mother Jones]

Comic: The Supreme Court Just Ruled for Windmills by Tom Toles [Tom Toles]

Grayson Gets Busy in the New Year

It’s only been a few weeks since the Christmas recess, but Congressman Alan Grayson (D-FL) is already rattling cages. For starters, he has introduced two contractor accountability bills that will likely generate plenty of attention.

Anticipating Thursday’s landmark U.S. Supreme Court ruling which drastically rolled back restrictions on corporate spending in federal elections, Grayson last week introduced the “Save Our Democracy” Reform Package. One of the bills in that five-bill package, the “End Political Kickbacks Act of 2009” (H.R. 4434), is of particular interest to POGO because it applies to federal contractors. The bill would restrict the ability of any “for-profit recipient of Federal funds” to make contributions to political parties, committees or candidates or to solicit such contributions from their employees. Those employees, in turn, would be held to a $1,000 annual limit on their campaign contributions. 

POGO’s 2004 report “The Politics of Contracting” highlighted the dangers corporate money posed to the fairness and integrity of the federal contracting system. We found that the largest contractors spent an average of 8 cents on campaign contributions and lobbying expenditures for every $100 in contracts they received. Not a bad return on investment. (For what it’s worth, the amount spent by the top federal contractor, Lockheed Martin, was 4 cents.)

The bills in the “Save Our Democracy” package might be in jeopardy in light of this week’s Supreme Court decision, but Grayson may soon have some pretty powerful allies ready to join his fight. President Obama, for one, displayed a passion not seen since the 2008 campaign when he issued this statement condemning the ruling as “a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.” He promised to get to work “immediately” with Congress to “develop a forceful response.” It’s going to be a tough fight. Now that a vast new spigot of campaign cash has been opened, how many members of Congress would be willing to close it?

The second contractor bill Grayson introduced last week, the “Defund the Crooks Act” (H.R. 4444), responds to last year’s infamous “Defund ACORN Act”. As you might recall, that bill mandated that “any organization” charged with certain misbehavior must be stripped of all federal grants and contracts, but it was obviously targeted at the community advocacy group ACORN (Association of Community Organizations for Reform Now).

Grayson’s bill is patterned on the ACORN bill but with several important differences that broaden the scope of the bill while avoiding the same legal pitfalls. The most noticeable difference is that Grayson’s bill really does apply to “any organization” and does not single out just one particular organization. The bill would also require defunding for a wider variety of misconduct, but only if there is a conviction rather than just an indictment.

Of course, the broadness of the bill may prove problematic. For instance, what happens if the conviction is later overturned? Another major sticking point could be the provision that requires defunding organizations that knowingly employ individuals who have been convicted of violating a federal or state law. Again, the provision is silent on overturned convictions, but a more fundamental problem is the burden this will impose on contractors – and on pretty much anyone with a conviction on their record. Could a major contractor like Lockheed Martin lose billions of dollars in contracts just for knowingly hiring someone with a petty conviction in their distant past? Would such individuals ever be able to find work again given the sheer number of entities that receive some sort of federal funding?

POGO supports the underlying spirit of both bills, but as the saying goes, the devil is in the details.

-- Neil Gordon