A November 25, 2008 report by the Project on Government Oversight (POGO) reported that whistleblowers inside the Air Marshals Service were harassed for speaking out and that the Office of Special Counsel headed by the now fired Scott Bloch (item 153) did little to protect them.

This level of wrongdoing, chaos and mismanagement is pretty much what you would expect from Michael Chertoff’s Department of Homeland Security.

In response to the WSJ article, the authors of the whistleblower protection clause of SOX, Senators Patrick Leahy (D-VT) and Chuck Grassley (R-IA), wrote a letter dated September 9, 2008 to Secretary Chao pointing out that both the language of the statute and their intention were clearly for subsidiaries to be covered under the whistleblower protection and that “there is simply no basis” for the Labor Department’s interpretation. They demanded an explanation of the Department’s actions.

But it is clear what Bush’s Labor Department and its Secretary Elaine Chao were doing. They were running interference for corporate malefactors and hanging out to dry those who would expose their wrongdoing, in other words business as usual.

As it was Southwest flew 46 of its 737s without inspections for up to 9 months representing some 60,000 flights transporting 6 million passengers. On March 14, 2007, Southwest reported its violation to an FAA Principal Maintenance Inspector (PMI). The PMI did not ground the planes as he was obliged to do but advised Southwest to make a formal voluntary disclosure so as to avoid paying a penalty. Southwest did not make its official self-disclosure until March 19 and continued to fly the planes until March 23 when it reported having completed inspections of the planes and finding cracks in the fuselage of 5 of them. As a result, Southwest flew the planes for a further 9 days during which time 145,000 passengers were carried in 1,451 flights. The FAA has proposed a $10.2 million fine against Southwest for its activities.

This was not the first time that Southwest had not followed a safety directive. The Inspector General found that it had violated 4 different directives a total of 8 times since December of 2006, including 5 in 2008. The announcement by the FAA that it would conduct an industry wide audit of compliance with its safety directives quickly caused Delta and American to ground scores of planes because of possible missed inspections. United too grounded seven 747s for possible altimeter problems.

All of this is an outgrowth of the Bush Administration’s push for greater self-regulation of industries. At the same time, it is compounded by cozy relationships that develop between what regulators there are and the industries they regulate. Finally, whistleblowers who speak up about problems like those at Southwest continue to be punished. On April 3, 2008, three FAA inspectors testified before Congress about their efforts to call attention to this case. One was removed from his position as an office manager. Another was told to transfer. The third was temporarily removed from overseeing Southwest. The simple fact is that in most cases self-regulation doesn’t work. There is an incentive to maximize profits by not obeying rules and cutting corners. The downside is a catastrophic accident or the public embarrassment of getting caught, but as the current case shows these possibilities do not cause companies to comply in advance but only after one or the other occurs. And then we are left to ask, for how long?

In a related development, on April 8, 2008, American Airlines canceled 430 flights in order to inspect wire bundles in the wheel wells of 300 of its MD-80s. The next day it canceled 1,000 flights and cancellations spread to other airlines. The FAA review of airline safety begun by the allegations against Southwest caused airlines to scramble to make up for lax voluntary adherence to safety guidelines in the past. The result was predictably chaos.

On June 28, 2006, Aguirre testified to Congress about these events and in August 2007 the Senate Finance and Judiciary Committees issued a 711 page report on it. The report noted that shortly after Aguirre was hired (September 2004) by the SEC and the Pequot investigation began (October/November 2004) in January/February 2005, an attorney for Pequot Audrey Strauss met the then Enforcement Director Stephen Cutler. As a result of that meeting, the investigation into Pequot was narrowed making it more difficult to establish a pattern of illegality. The report also found that the associate director of enforcement Paul Berger who was a supervisor of Aguirre and in his reporting chain of command had not recused himself from the Pequot investigation until early 2006 although an email from a colleague of Berger just days after Aguirre’s firing showed that Berger had already expressed an interest in working at Debevoise at that point. And, in fact, Berger did end up accepting a partnership there in June 2006.

An investigation by the SEC’s lackadaisical Inspector General Walter Stachnik initiated by a complaint from Aguirre was also criticized. According to the Senate report, Stachnik “failed to conduct a serious, credible investigation of Aguirre’s claims. The OIG did not attempt to contact Aguirre. It merely interviewed his supervisors informally on the telephone, accepted their statements at face-value, and closed the case without obtaining key evidence.”

As for John Mack, it came out that Samberg gave him preferential investment opportunities in April and May 2001. Mack at the time of the GE-Heller deal had just left Morgan Stanley and was about to take up the position of CEO of Credit Suisse First Boston. Both companies were involved in setting up the Heller deal. Mack contacted Samberg on June 29, 2001, and on July 2, 2001 Pequot began buying large amounts of Heller stock and shorting GE. On July 30, the GE-Heller deal was announced and Pequot and Samberg made a killing. Mack was eventually called in to testify before the SEC in June 2006, a year after Aguirre’s attempt and just days after the statute of limitations had run out on him. Mark Kreitman, an assistant director of enforcement and Hanson’s immediate superior, assigned a staff attorney with 2 days notice to take Mack’s testimony. Kreitman told the attorney, “You don’t need to prepare that much for it.” On November 30, 2006, the SEC closed the joke that was its investigation into Pequot.

In all this, the SEC proved itself to be not the watchdog of Big Money but its lapdog. Taking this into account, is it really any surprise that they “overlooked” the subprime debacle until it hit?

An October 6, 2008 New York Times story reports that the current SEC Inspector General David Kotz issued a follow up report which substantiated Gary Aguirre’s account of events and recommended disciplinary action against his superiors Linda Thomsen, Robert Hanson and Mark Kreitman. The Pequot investigation remains closed.