Corporate Governance

Communicating with the Division of Enforcement (Part 2)

By J. Robert Brown

Berger's comments (whatever they were) were, apparently, not comforting enough.  Mary Jo White opted to reach out to the Director of the Division of Enforcement, Linda Thomsen. The call came after Berger and Dinallo had spoken. According to White:

• I told [Thomsen] that what my assignment was [and] who I was representing. I also told her that I had the consent of both Morgan Stanley and Mr. Mack and his counsel to be making this call, and I told her that the board was on the verge of -- was certainly considering appointing him as the chairman and the CEO. The subpoenas had come in, and needless to say, the board didn't want to step into this if he had a problem. And that I was calling to see what, if anything, the SEC could say about whether indeed the judgment was that he had exposure in the insider trading investigation.

White asked if it was possible to accelerate the production of the emails that "we had identified as potentially of interest" and, according to the Report, Thomsen said to send them down. White arranged to have the emails delivered within 24 hours.  The delivery included a fax to Thomsen that contained 26 pages of emails.

Here is what the report had to say about Thomsen's reaction:

• Thomsen said that what was running through her mind was "how am I going to handle this if we have something negative on Mr. Mack."  Thomsen said she had a concern that "a corporation who's trying very hard to do the right thing, hire somebody pristine to run their corporation," and if "I was sitting on information that we were confident that we had, whether there was any way to communicate that to them so they didn't do something that they would be sorry about it later."  Thomsen said she was concerned that "the effect on the markets could be quite dramatic particularly for an institution like Morgan Stanley," if the SEC was confident that they had a case against Mack and could not find some way to communicate it.  Thomsen explained that "if Morgan Stanley were to hire as its CEO someone who engaged in insider trading shortly after he became CEO that could be potentially quite disruptive" to the capital markets.  She said "it could have  ripple effects that makes the markets go haywire."  Thomsen added that since Morgan Stanley is a financial institution, the Commission's failure to provide information about Mack's exposure, could be disruptive and she was worried about the SEC "contribut[int] to that in some way that could have been avoided."  Thomsen said the disruption could affect, in addition to Morgan Stanley, "other companies' ability to raise capital," noting that Morgan Stanley's previous CEO had just left, she thought their General Counsel may have just left or was about to leave, and they had several lawsuits with the SEC.  Thomsen said "on the other side, I similarly worried that the fact that we had an investigation that [Morgan Stanley] obviously knew about . . . might cause the Board to act so cautiously that "[Morgan Stanley] would not hire a candidate they deemed to be qualified because somehow, by our communication, we had signaled that he was in violation of the federal securities laws."

The next day, June 28, White talked again with Thomsen.  According to the presentation prepared by White for the Morgan Stanley board:

• Thomsen called me late on Tuesday after she and her staff had reviewed those emails and confirmed that the emails did not change their view of Mr. Mack, it was still "too early" in the investigation to tell her whether Mr. Mack had any issues.  She added that there is "smoke there" -- but that there was "surely not fire."  She said they are weeks away from knowing more and could give us no more comfort.  She commented that the "Board will have to trust him." 

White's notes went further.  In them she noted that based on the conversation, "it does seem clear that the SEC will continue to pursue the Pequot investigation aggressively, including making sure that there is no misconduct by Mr. Mack."  Further, her notes opined that "it also seems likely that Mr. Mack will be asked to testify in the SEC's investigation at some point." 

Thomsen more or less confirmed the smoke/fire comment.  According to the Report:

• Thomsen acknowledged that the section in White's notes about her saying "there is smoke there but that there was surely not fire," was "accurate," although she could not recall if that was exactly what she said, but stated that she "was trying to convey to Ms. White the notion that we have information that puts Mr. Mack as an actor in the events we're looking at, but we don't have anything at this point that says we're going to sue him tomorrow.  She also said White got the point she was trying to convey that they did not know one way or the other, and there was noting she could provide to help her weigh the balance.

We'll have more comments on this interaction later.  For now, it is enough to note that Linda Thomsen has some discretion in revealing non-public information. She did so in a carefully calibrated way.  Moreover, she did not disclose the existence of an investigation (White already knew about it) or the identity of possible defendants.  Instead, she essentially sought to prevent the existence of an SEC investigation from causing collateral damage to someone who, at the time of the conversation, was not a serious target.

A redacted version of the Report is posted. 

Full post as published by The Race to the Bottom on November 03, 2008 (boomark / email).