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Revolving Door at SEC Is Hurdle to Crisis Cleanup

A senior lawyer for the Securities and Exchange Commission recently took center stage in a major case involving a controversial mortgage security sold by Goldman Sachs.

There was just one slight twist in the legal proceedings. The S.E.C. lawyer was not the prosecutor taking the deposition. He was the witness.

This summer, Adam Glass — who joined the agency two years ago and is now co-chief counsel in charge of helping write the rules for the complex financial instruments known as derivatives — testified in a deposition about Goldman’s Abacus, a mortgage investment that the government argues was designed to fail.

It turns out that Mr. Glass has a unique perspective on Wall Street exotica. Before working on the financial crisis cleanup, he helped create the opaque securities that contributed to the mess.

For many years, Mr. Glass served as the outside counsel to Paulson & Company, the giant New York hedge fund firm run by John Paulson, who made billions betting against the housing market. And yes, Mr. Glass, in that role, signed off on Abacus, which was created specifically for the hedge fund to short subprime mortgages. Mr. Paulson handpicked some of the underlying investments in the derivative.

The government, in its complaint, claimed that Goldman had “misstated and omitted key facts regarding” Abacus, including disclosing Mr. Paulson’s role in its creation. The firm paid $550 million to settle the case, without admitting or denying guilt. Mr. Paulson was never accused of any wrongdoing.

Mr. Glass’s recent deposition was for a separate S.E.C. case against Fabrice Tourre, the young Goldman trader who had developed and marketed Abacus to investors. Mr. Tourre, 31, has denied the accusations.

The revelation of Mr. Glass’s involvement in the Abacus deal could undermine the S.E.C.’s case — or at least prove to be a distracting embarrassment.

Perhaps more important, his role once again raises questions about the revolving door between Washington and Wall Street at a time when public distrust about the agency and its lack of enforcement action against the culprits of the crisis is running high.

“There are a lot of talented people out there you could hire who weren’t necessarily part of the problem,” said Mary Kreiner Ramirez, a professor at Washburn University School of Law. “If he was involved in Abacus, how is he supposed to police it?”

"“You need to set a thief to catch a thief.”" -, Franklin Delano Roosevelt

It is a common question as the government increasingly looks to fill its ranks with regulatory officials proficient in the language of Wall Street. Robert S. Khuzami, the S.E.C.’s director of enforcement, was previously the general counsel of Deutsche Bank. The agency tapped Eileen Rominger, the former global chief investment officer at Goldman Sachs Asset Management, as its director of investment management.

“The revolving door is such a dominant fact about the S.E.C.’s culture,” said John C. Coffee Jr., a Columbia Law School professor. “You get people who go to Washington for one to three years and then go back to Wall Street.”

The pattern has been well documented. According to the Project on Government Oversight, 219 former S.E.C. staff members filed 789 “postemployment statements indicating their intent to represent an outside client before the commission” from 2006 to 2010. In other words, the one-time government officials are representing Wall Street clients with matters before the agency.

While clearly there are questions about whether the public wants someone in government who just came from industry, the opposite argument can be made, too: It may be better to have the fox in the henhouse.

President Franklin D. Roosevelt “justified appointing Joe Kennedy as chairman of the S.E.C. with the line: ‘You need to set a thief to catch a thief,’ ” said Professor Coffee. “That is the case for bringing in an industry expert.”

After all, the best way for the government to stay ahead of financial innovations — or at least not fall too far behind — is to employ people who know them best.

After the government’s bailout of A.I.G. , some said the insurer should keep paying bonuses to employees, as they were among the few who understood how to unwind some of the company’s complex trades.

Mr. Glass, who has long advocated more regulation of derivatives in certain instances, came to the S.E.C. with a strong finance pedigree. A graduate of Harvard and of Stanford Law School, Mr. Glass was a partner at Linklaters, where he founded the firm’s structured finance and derivatives practice.

In addition to Paulson & Company, he counted Deutsche Bank and Lehman Brothers among his top clients. Mr. Glass was not involved in the controversial opinion that Linklaters issued to Lehman about a practice known as Repo 105 that has come under scrutiny. The tactic allowed Lehman to conceal billions of dollars on its balance sheet.

Mr. Glass took a big pay cut to become a civil servant. The average Linklaters partner made about $2.3 million in 2008, the year before he left, according to Legal Week, an industry publication. The most Mr. Glass could make at the S.E.C. is $233,000.

When I asked Mr. Glass about his deposition in the Tourre case and his role as the lawyer for Mr. Paulson in the Abacus transaction, he said, “Yes, that would be true.” He then directed me to the S.E.C.’s spokesman, who quickly issued a “no comment.” Spokesmen for Mr. Tourre and Mr. Paulson also declined to comment.

Mr. Glass was involved in reviewing the Abacus deal. He reviewed and commented on an “engagement letter” between Goldman and ACA, the firm that insured the deal, said three people with knowledge of his testimony and e-mails. He also received a draft copy of the “offering circular” and term sheet provided to outside investors, but those documents did not include disclosures about how Mr. Paulson’s firm had selected certain mortgage-backed securities for the investment vehicle that he was betting against. The offering circular stated that ACA would select the initial portfolio.

The potential obfuscation of Mr. Paulson’s role is at the center of the case against Mr. Tourre. Mr. Glass, who testified that he did not recall seeing the offering document, did not ask for additional disclosure about Mr. Paulson’s role or comment on the disclosure language, said the people briefed on his deposition. But Mr. Glass had no legal duty to Goldman’s clients.

Mr. Glass worked with Mr. Paulson’s firm to help structure similar mortgage deals, and in one instance he pushed for additional disclosures. On a Deutsche Bank derivatives deal, Mr. Glass suggested that the bank might want to include more explicit disclosure language for its clients, according to a person briefed on the deal. Deutsche Bank did not take Mr. Glass’s advice.

In the end, Mr. Glass is tangential to the S.E.C.’s case against Mr. Tourre. But he is a central example in the age-old debate about the benefits and costs of Washington’s revolving door.

“I don’t think Mr. Glass has done anything unethical in helping Mr. Paulson structure this product,” Professor Coffee said.

“But it is a case that will raise further questions about the S.E.C.”

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