A DC Insider Explains How the Wall Street Lobby Owns DC: Crony Capitalism Prevails at Every Turn

It’s not always readily apparent how Wall Street pulls the strings in DC. Although sometimes it is indeed blatant, most of the financial “too big to fail” control of the capital is a bit more subtle.

Jeff Connaughton started off on Wall Street at Smith Barney. He gravitated to assisting Joe Biden in his ill-fated 1988 quest for the White House, and then onto Biden’s senate staff. After clerking for DC Federal Appellate Judge Abner Mikva, he joined him when Mikva became Clinton’s White House counsel. After that, he remained on the inside of DC power manipulation when he opened a K-Street lobbying firm – another member of the revolving door government.

When Biden was elected vice-president, Ted Kaufman, Biden’s top aide, was appointed to replace him for two years in the Senate for the remainder of Biden’s term. Kaufman, in turn, asked Connaughton to be his chief of staff. Together, they vowed to take on Wall Street. Given that Kaufman was not going to run for a full term, they figured that they had no need to depend on campaign funding that might influence their crusade.

In the end, they stood proud but defeated. Wall Street had prevailed almost entirely across the board.

Eventually, disillusioned and repulsed by the crony capitalism he witnessed and later even facilitated as a lobbyist, he retired from the Wall Street money zone in our nation’s capital and moved to Savannah, Georgia.

Connaughton’s gradual epiphany is our gain, as he reveals detailed accounts of how the Wall Street chess board works at the expense of sound financial law. Although he was not at the epicenter of power, he was close enough to smell the malodorous scents of a city bought and paid for.

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In the following excerpt from “The Payoff,” Connaughton explains how a former Democratic Senator, a Wall Street point man, undercut President Bill Clinton on even a minor amendment to hold corporations accountable for intentional deceptive securities fraud.

It’s revealing in both how a key Democrat at the time was carrying the water for Wall Street – and his loyalties were greater to the financial world than to the president of his party. Furthermore, it reveals that if Wall Street can defeat an amendment that just required honesty to potential stockholders about future company performance, then they were in charge down to the smallest detail.

WALL STREET VETOES THE PRESIDENT

It was past nine o’clock in the evening when President Clinton strode into the room. He was dressed immaculately in a suit and tie, yet he strongly resembled an older version of the Arkansas kid he’d once been, perhaps because of the way his face lit up when he saw Bruce Lindsey, his long-time friend and deputy White House counsel. It was as though [White House Counsel Ab] Mikva and I weren’t even there.

The president asked Bruce whether he remembered an old visitor from northwest Arkansas. “Well he was here last night, and I offered to let him stay in the Lincoln Bedroom, and you know what he said to me?” Clinton affected an even deeper Arkansas accent: “Mr. President, I know you think Lincoln was a great president, but if he was so great, why’d we even have to fight that war?” We all laughed, and Clinton continued, “Can you believe that? Half the country wants to see the Lincoln Bedroom, and he didn’t want to stay in it.”

Clinton turned off the mirth like a faucet. He asked Bruce: “So what have we got?” What we had, as Bruce explained, was the Private Securities Litigation Reform Act of 1995, now before the Senate. A corporate coalition—Wall Street banks and brokers, accountants, insurers, Silicon Valley—wanted the bill, which would make it more difficult to prove securities fraud, passed intact. The bill’s opponents felt it would shield securities fraud by these companies. Particularly troublesome to them were provisions regarding the statements companies make about future performance.

The bill’s opponents felt that its language threatened their ability to sue for securities fraud when a company’s executives talked up the price of its stock by issuing misleading forecasts while simultaneously selling their own shares. Those behind the bill, however, wanted to make it harder to prove wrongdoing in such cases. According to them, whenever a stock’s price dropped, securities class-action lawyers quickly filed suits against companies in the hope that they would settle out of court rather than risk losing at trial. Wall Street and others viewed these suits as extortion. They wanted increased protection in such cases, but the bill’s opponents felt that the proposed legislation gave Wall Street and the others too much leeway. Mikva, Bruce, and I believed some adjustment may have been needed, but the proposed bill set an almost impossibly high bar, giving Wall Street and the others too much protection. The White House was under tremendous pressure.

Just the day before, White House Deputy Chief of Staff Erskine Bowles, after getting an earful from a number of CEOs, had taken the West Wing stairs two at a time on his way to Mikva’s office. From my desk outside the office, I heard Bowles practically yell, “What the hell are y’all doing to make Silicon Valley so upset about this bill?” Wall Street, seeking to hide the blue stock-trader jackets of high finance behind the white lab coats of high tech, had wisely pushed Silicon Valley in the vanguard of lobbying the White House. What we’re doing is standing up for a fair outcome, I thought to myself, as Mikva closed the door behind Bowles.

Afterwards, I begged Mikva to ask to see the president again. I was determined that the White House not undercut Arthur Levitt, the chairman of the Securities and Exchange Commission, who was standing up to the bill’s authors to force modifications. Levitt was trying his best to gain revisions to the bill so it wouldn’t eviscerate private securities-fraud actions, an important supplement to the SEC’s own enforcement efforts.

Mikva asked for time on Clinton’s schedule, and I quickly banged out a briefing memo for him. When Clinton’s scheduler finally called, much later that night, Mikva turned to me and said, “Come on.” This would be the only time I would personally brief the president on an issue.

The meeting, which Bruce Lindsey also attended, was in Clinton’s personal study in the White House mansion rather than in the Oval Office. That was a plus. Few staffers got to see the study, with its famous painting of Lincoln and his Union Generals with a rainbow in the background. The minus was at that late hour no official photographer would be on duty. So there would never be a picture of me seated on the couch, Leaning Forward to Educate the President on a Momentous Issue.

Bruce provided an overview of the standard in the Senate bill, and I filled in the specifics. The standard required a showing of three elements, connected by an “and.” This meant a plaintiff would have to prove all three of the elements to get past a defense motion to dismiss the suit. The president looked at Bruce and me and said “Did y’all say ‘and’? They have to show the first two and the third?”

“Yes, Mr. President.”

“Well that’s just too high.” I recognized the “high” as pronounced by a fellow Southerner, with mouth wide open to give the I its full effect. “I’ve stood out there in Silicon Valley, and I’ve heard them go on and on about how bad some of these class action suits are, but I can’t be in a position where it looks like I’m protecting securities fraud.” Clinton even started to mimic the voice of an imaginary radio ad against him on the issue. I was urging him to take this position, so I didn’t point out that it was highly unlikely any Republican opponent would try to use it against him.

“I can call Chris if you need me to,” the president said, referring to Senator Chris Dodd of Connecticut, the Senate bill’s author and then-current chairman of the Democratic National Committee. Dodd was Corporate America’s point man in the Senate effort to curb class action securities action suits. Bruce said he’d call him and would keep the president informed.

As the meeting broke up, Clinton told Mikva and Bruce to go next door and say hello to Hillary, the First Lady, who was having dinner with Ann Landers, an old friend of Mikva’s from Chicago. We left the president in his study.

While Mikva and Bruce went into the dining area, I stayed in the hallway, amazed that I was standing alone in the White House living quarters. A couple minutes later, President Clinton exited the study and smiled as he approached me. “Go on in there. Don’t be shy,” he said, again prolonging the vowel in “shy” a whole note.

“Thank you, Mr. President. I don’t really need to meet Ann Landers,” I said.

Then, in a moment I’ll never forget, the President of the United States looked me in the eye and said, “You think I’m doing the right thing, don’t you?” My passion apparently had shown during the briefing. Like most who had trod those historic halls, I turned out to be a yes-man: “Absolutely, Mr. President. You can’t undercut the Chairman of the Securities and Exchange Commission on a question of securities fraud.”

President Clinton reflected, “Yeah, that’s right. And Levitt is an Establishment figure, right?” Clinton was trying to reassure himself that the heat he’d take from Corporate America was worth it because even Levitt, one of its own, thought the legislation went too far. If the President has to think very hard before taking on this kind of fight, I thought to myself, imagine how disproportionately unlikely it is for Washington’s lower castes to dare do the same.

“Yes, Mr. President. That’s right.”

That night, I couldn’t sleep. It was intoxicating to have talked to the President. I knew I’d be meeting the next day with a dozen staffers from various White House offices—National Economic Council, Domestic Policy, Legislative Affairs, the Vice President’s office and even the first lady’s staff—who had been weighing in on this issue. I’d been arguing with all of them. Most of them had wanted to appease Silicon Valley because its support had burnished the images of Clinton and Gore as forward-thinking, pro-business Democrats.

When the meeting began the next morning, I said: “We met with the president last night,” and I laid out his decision. For the first and only time in my life, I felt presidential power surge through my body. It was electric. Every staffer who just the day before had been an obstacle now lay down like a forest blown flat by a nuclear blast. There was no further discussion. Mikva, Bruce, and I had the president’s decision. It was time to implement.

I called a staffer in Senator Paul Sarbanes’s office. I briefed him that if Sarbanes would offer an amendment that would preserve the viability of a securities-fraud action against company executives who had “actual knowledge” that a forward-looking statement was fraudulent, the White House would support it. Sarbanes’s staffer didn’t believe me. Just watch, I said. I’ll get you a letter within an hour. Move forward with the amendment.

Sarbanes offered his amendment. As he spoke in the well of the Senate, he held aloft a letter from Mikva stating the White House strongly supported this amendment, which, to be honest, was hardly a radical notion. All it said was that company executives who knowingly lie about future performance won’t be protected from securities-fraud lawsuits.

The vote began, and it looked for a while like we were going to win. Then Dodd started working his fellow senators. It soon became apparent it was going to be a tie. Finally, Dodd voted against the amendment, which failed by one vote.

Bruce had called Dodd and told him that President Clinton had personally requested this change. Yet Dodd still opposed the amendment. He sided with Republicans against a vast majority of Democratic senators. Dodd, for years one of the biggest recipient’s of financial services industry campaign contributions, was too deeply in the pocket of Wall Street and the accountants to go against them. Admittedly, many of the Democratic senators who supported the amendment had long received campaign contributions from securities class-action lawyers.

Dodd’s excuse was that the issue could be worked out when the slightly different versions of the bill passed by the House and the Senate were reconciled in conference before being sent to the president. Bruce was deeply disappointed that Dodd had voted against the president. I was outraged. It was my first experience of how Wall Street, accountants, and insurance companies could combine to bend Washington to its will. I knew the accounting industry—because it had activated its professional members in virtually every state—had been a particularly effective fundraising machine. Partners at the big accounting firms had spoken about the bill with hundreds of members of Congress and dozens of senators at campaign donor events across the country. Accountants were often the deep pockets targeted by class-action lawyers after the fraudulent company those same accountants had audited each year had turned feet upwards.

My role at this stage became to negotiate a compromise provision while reporting to Bruce. I never met with a senator or representative or their staff; all of my negotiations were directly with the corporate coalition. Because I wasn’t an experienced attorney (I’d graduated from law school only a year earlier), I relied on input from two respected academics: John Coffee of Columbia Law School and Donald Langevoort, then at Vanderbilt Law School. I called them frequently for objective advice on how judges would apply the various drafts of the provision.

During the negotiations, I was invited to hold a video conference call with the general counsels of Apple, Hewlett Packard, and five other Silicon Valley firms. At one point, one of the general counsels said, “Jeff, where is all this fraud you’re so worried about?” I’m not claiming to have been clairvoyant. But Enron, WorldCom, Arthur Andersen, and other prominent cases of systematic fraud would soon prove that questioner’s confidence in corporate rectitude to be ill-founded.

After weeks of discussion, I offered a compromise. The White House would agree to a two-pronged approach. The standard would be “actual knowledge” that a forward-looking statement was false, or a higher “willfulness” standard if the statement had been accompanied by “bespeaks caution” language: in other words, if the statement was followed by a description of risk factors and a warning to investors not to rely on the prediction’s accuracy.

The coalition never accepted or rejected my proposal and the impasse dragged on for months. Mikva, who just a year before had hired me as one of his judicial clerks, even joked at one of the Counsel’s office staff meetings, “Who knew that Jeff would become a household name on Wall Street?”

By this point, Mikva, Bruce, and I had also established that the White House was opposed to the product liability reform bill—which targeted the standards governing private suits for negligence against manufacturers of faulty products—making its way through Congress. Mikva was fielding phone calls from a handful of Democratic senators, including Jay Rockefeller, who were furious that White House lawyers were placing roadblocks in front of that bill, too.

Meanwhile, Arthur Levitt at the SEC had been under siege to soften his position on the securities-fraud bill. During a visit to meet with Mikva, Levitt told me how personally offended he was by the insulting language and the threat of SEC budget cuts that Dodd and other senators had used when they berated him by telephone. These were important issues; the SEC should’ve played a leading role in crafting the standards in the bill. Instead, Congress was bullying the SEC chairman to support legislation slanted toward the interests of a corporate coalition that had raised millions of dollars for members of the House and Senate.

The bill emerged from conference. Now the question became would Clinton sign it? Mikva, Bruce, and I lobbied hard for a veto. We encouraged independent legal scholars—who didn’t have a dog in the fight—to write letters to Clinton. As it turned out, Clinton was very close to John Sexton, the president of New York University and a securities law expert. Sexton spoke to the President and urged him to veto, which Clinton did. Some have speculated that Clinton wanted to have it both ways: he vetoed the bill, but also signaled to Dodd that he wouldn’t be overly displeased if two-thirds of Congress voted to override it. I don’t know whether that’s true or false.

Regardless, that’s exactly what happened. Even Ted Kennedy, the great champion of civil rights and liberties, who had assured plaintiffs’ groups that he was with them, flipped and went along with the corporate coalition and voted to override Clinton’s veto. For Bruce, Mikva, and me, the defeat was devastating. The next morning, Dodd was quoted on the front page of the Washington Post as saying that Clinton’s veto had been the result of “poor staff work.” For unrelated reasons, Mikva left the White House a short time later. Because he’d brought me with him, I followed him out the door.

In his second term, President Clinton made mistakes—deregulating the financial services industry, supporting the repeal of the Glass-Steagall Act, and leaving derivatives transactions unregulated—that would, within a decade, have devastating consequences. Once upon a time, though, in 1995, we had a president who—with the support of his advisors—was willing to do the right thing and stand up to Wall Street, which even then had already taken over most of Washington.

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Copyright by Jeff Connaughton. Not to be reproduced without permission of the author or Anderson Literary Management, LLC.