Last week Corporate Counsel reported that infamous military security firm Xe (previously Blackwater) has hired Suzanne Folsom as its first chief regulatory/compliance officer and deputy general counsel.

The article quotes Folsom crony and former AIG General Counsel Anastasia "Stasia" Kelly, gushing about her friend's talents:

Stasia Kelly brought in Folsom [to AIG] as deputy GC and chief compliance honcho. "She is a terrific professional and great compliance officer," Kelly said last week. "If I had another job for her, I'd hire her in a second." Kelly, now a partner at DLA Piper, adds: "She is the perfect person to accomplish Xe's goal of a turnaround" from the dark days of Blackwater.

Perfect! Because XE has quite a turnaround to accomplish. Widely known as the State Department's deadliest private security contractor, investigations of the company found that overbilling was potentially widespread in Afghanistan, and that Blackwater's mercenaries used lethal force "recklessly" in Iraq. The habitual misconduct of Blackwater personnel in Iraq, in fact, led Congress to pass legislation making U.S. contractors in combat zones subject to prosecution in U.S. courts.

But Kelly has faith in Folsom because these two have worked on tough assignments before. They supervised compliance functions at AIG in the lead up to the 2008 implosion, and then bailed themselves out with severance packages so generous that Senator Charles Grassley requested the details of them.

On July 2nd, Senator Charles Grassley (R-Iowa) posed written questions to James Cole, the Obama administration’s nominee for the post of Deputy Attorney General. Many of these questions focused on Cole’s role as the Independent Consultant placed at AIG from 2005 through 2009 as part of two deferred prosecution agreements (DPAs). The first of these DPAs resulted from charges of aiding and abetting securities fraud in the AIG Financial Products subsidiary based in London, the AIG appendage that crashed the world economy in 2008 and required a $182 billion bailout courtesy of the US taxpayer. Some of Cole’s responses to Grassley’s questions were both puzzling and contradictory, and others we know to be misleading.

Under the terms of the 2006 DPA, Cole was asked to examine “the adequacy of whistleblower procedures designed to allow employees or others to report confidentially matters that may have a bearing on AIG’s financial reporting obligations.” In written questions Grassley asked Cole to provide a “discussion of the scope of your work under the 2006 DPA.” In response, Cole simply quotes from the DPA, which is, of course, available to Senator Grassley and the rest of the world on the DOJ website. A meaningful written discussion of whistleblower procedures at AIG would have to include an account of the layoff of ten compliance attorneys and officials in the aftermath of the corporation’s financial collapse in September 2008. Several of the ten were whistleblowers who had written to senior management at AIG about deficient compliance procedures. None of them was interviewed confidentially by Cole, who acceded to the demand of Suzanne Folsom, then Chief Compliance Officer, that Cole interview her staff only when she or her designee were present. As a result, the whistleblowers were summarily terminated under guise of a staff reduction.

For the past two months, GAP has criticized the nomination of James Cole to be Deputy Attorney General at the Justice Department (DOJ). We have argued that because Cole, who served as Independent Consultant at AIG during the critical time period from 2005 through 2009, missed clear signals of malfeasance, he is unsuited to serve as the second-in-command at the DOJ.

Last week, after four senators requested Cole’s reports to DOJ about AIG, prior to deciding on his nomination, a DOJ spokeswoman defended Cole’s role at AIG, telling Main Justice that

Critics who suggest that Mr. Cole was somehow too close to AIG misunderstand his relationship with the company,” …. “His presence was imposed on the company by a federal court. In fact, as the [Congressional Research Service] report notes, AIG executives tried to have him removed.

“[Cole] was never a general overseer or monitor of AIG’s entire operation nor was he assigned to examine many of the issues involving AIG’s near collapse, such as credit-default swaps or retention bonuses…”

This statement did more to obscure Cole’s role at AIG than to clarify it. First, although it’s true that in late 2008, Chief Compliance Officer Suzanne Folsom mounted an effort to remove Cole, it was not because he was insisting on a tough compliance regime. Folsom wanted him out because he was pocketing too much AIG money. His costs, as Independent Consultant, included not just the $20 million paid to his law firm, but tens of millions more for the consultants, who, we understand, were both expensive and incompetent.

A substantial part of the consulting fees apparently went to DLA Piper, the law firm where Anastasia Kelly, AIG General Counsel, parked herself in 2010, after fleeing AIG in order to avoid pay caps imposed by the TARP regulations.

Second, although it’s also true that Cole was not a general overseer of AIG, he failed to object when Folsom dismissed half the team that was working on compliance and oversight just after AIG had to be rescued by taxpayers in 2008. Many of these people had written to the board and to the CEO to expose AIG’s weak compliance program before the meltdown. When Cole did finally interview them, he acceded to Folsom’s demand that she or her designee be present to observe the conversations. This collaboration is simply inconsistent with the responsibility of an independent monitor.

Third, it’s also true that Cole did not monitor many of the issues which sank the AIG balance sheet, most of which were trades arranged in AIG-FP. But as we pointed out earlier, Cole himself made the decision to exempt the problem division from his oversight (p.87).

Fourth, Cole was assigned under the 2004 deferred prosecution agreement to review five years of transactions effected by the problem division, AIG-FP. This assignment would specifically have included credit default swaps as well as other fraudulent maneuvers designed to conceal liabilities.

Finally, no one has suggested that the retention bonuses paid in 2009 were involved in AIG’s near collapse. The bonuses were paid after the collapse, and critics questioned the propriety of paying bonuses to those responsible for the crisis. More cynical critics have instead suggested that the putative ‘retention bonuses’ were, in fact, hush money, since a number of people who received them have left the firm. Critics are also wondering if the second round of retention bonuses was paid in 2010.

In its March 2010 session, the World Bank’s Administrative Tribunal handed down two decisions in cases related to the Albania Integrated Coastal Zone Management and Clean-Up Project (AICZM). Over the course of the past three years, this project has become the source of controversy both at the Bank and in Albania. It is now clear that as the project moved through the preparation pipeline, the Board of Directors was misled about the commitment of the Government of Albania to suspend its displacement plans pending the adoption of measures to mitigate the effects of removal on the village of Jale. The Board of Directors was informed that the Albanian government had agreed to a moratorium on displacement when in fact it had not. In addition, disputes subsequently developed about the application of safeguard policies, the scope of the project’s activities, and the contracting of the Prime Minister’s son-in-law as Project Coordinator.

After the Project began implementation and Albania’s Construction Police demolished dwellings in Jale without any mitigating resettlement plan, a complaint about the Bank’s role reached the Inspection Panel. As the Panel sought answers to the questions raised in the complaint, senior management at the Bank became unresponsive and left the Panel to struggle with delays and misinformation.

In January 2008, the Department of Institutional Integrity (INT) began a preliminary inquiry into the circumstances surrounding the misinformation given the Board about resettlement safeguards. In February ‘08, information about the demolition in Jale, Albania leaked to Fox News, which chronicled the events publicly and brought US Congressional pressure to bear on the Office of World Bank President Robert Zoellick. According to the Tribunal judgments related to project staff published on June 17, 2010:

 

An announcement on the Bank’s Intranet, dated 17 February 2009, stated that

 

[T]he President has asked the World Bank’s Department of Institutional Integrity (INT) to lead an Accountability Review into alleged misrepresentation by Bank staff to the Inspection Panel and internal events surrounding the Project preparation, Board presentation, and Project supervision, and will take appropriate corrective action (AT Decision 430: para. 50).

What followed at INT amounts to a narrative of abusive, intrusive and improper pursuit of staff members for purposes of convenience. The conduct of INT’s investigations of this project is especially objectionable because World Bank staff members have no recourse to national court systems when their due process rights are violated.

The chronology of events leading to the machinations at INT shows that senior management essentially empowered the investigative department to ensure that “heads rolled” regardless of which heads they were. At the same time, senior management did nothing to promote legitimate reforms and ensure that the abuses occasioned by the Albanian project did not recur. The end result is that at least two staff members were arbitrarily mistreated and harassed, those truly responsible escaped sanction, and no structural changes took place to strengthen the safeguards that would prevent future unmitigated demolitions in Bank projects.

On June 2, 2010, Ryan Reilly, writing for Main Justice about James Cole's nomination to be Deputy Attorney General (DAG) at the US Department of Justice (DOJ), addressed the issue of Cole's role as the Independent Consultant at AIG from 2005 until 2009. For five years, Cole was assigned by the DOJ and the Securities Exchange Commission (SEC) to monitor accounting-driven investment practices at AIG. (See GAP’s AIG blog series).

Reilly quoted Cole's defenders’ claim that “his work did not specifically include the major issue that nearly led to the company’s demise – namely credit default swaps.”

This explanation for Cole’s myopia and his astonishing ability to miss the unmanageable risk that brought on the meltdown at AIG is superficial and disingenuous. The key word is “specifically.” According to our sources, the problem was not simply credit default swaps (CDSs), but rather the way in which AIG-Financial Products (AIG-FP), the division that primarily generated and traded them, was exempted from compliance obligations and oversight. On May 26, 2010, Elizabeth Warren, Chairwoman of the Congressional Oversight Panel on TARP, said in her opening statement chairing the hearing:

“The company [AIG] was a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight."

In contrast to Warren’s opinion, Cole did not seem to perceive structural problems with regulatory oversight and legal compliance at AIG. On the contrary, when writing about AIG compliance in August 2008, he reported to DOJ and the SEC,

“Each compliance plan will be submitted to the OC (Office of Compliance) for review and approval to ensure that the plan has adequately provided controls for addressing all identified compliance risks.”

This, according to Cole, was a reasonable and achievable goal. Next to this text in his table of goals, Cole placed a green dot, meaning progress toward the goal was advancing without problems.

Suzanne Folsom, former World Bank Golden Parachuter who has now departed AIG with a second parachute worth $1 million in severance, has been replaced by Karen Nelson. Nelson was Folsom's hatchet-man at AIG from 2008-2009 and is now the interim acting Chief Compliance Officer reporting to the CEO. Under Folsom, Karen Nelson was the deputy who helped bury the bodies when a majority of senior compliance personnel were terminated in October 2008 at the AIG corporate compliance oversight group.

New sources tell GAP that the massacre befell the compliance people barely one month after the September 2008 financial services collapse, in retaliation for their complaints to superiors about lax regulation in the reckless run-up to the AIG meltdown.

We’re still trying to sort out what happened at AIG in the prelude to, and the aftermath of the federal bailout in 2008. Sources report to us that in the run up to the meltdown, Kathleen Chagnon, then-AIG Deputy General Counsel and Chief Compliance Officer, was in charge. Chagnon was reportedly a close friend of General Counsel Anastasia Kelly before arriving, and she was on good terms with the Independent Monitor, James Cole, after she settled in. Cole, of course, was in place at AIG to report to the SEC as part of a settlement of a lawsuit against the former AIG CEO for fraud. A major part of his job was to keep Kelly, Chagnon and later Folsom, honest.

Before turning up at AIG, Chagnon had enjoyed a jumpy career. At 49, she’s a veteran of Hogan & Hartson, The Saint Paul Companies, Constellation Energy, Saul Ewing, LLP., DLA Piper, AIG, and now Remedi Senior Care. She resigned under a cloud from AIG after a series of complaints in July 2008, just as the Financial Products debacle began to unravel.

In the wake of the Chagnon regime, Suzanne Folsom, on the lam from the World Bank, took over and terminated about half of the AIG Compliance Office staff in October 2008 for reasons we do not fully understand. With Kelly’s blessing, and unimpeded by Independent Monitor Cole, Folsom blithely dismissed AIG’s anti-money laundering officer, risk management officer, foreign-corrupt practices officer, global compliance trainer and shared services officer. In their place, consultants who were well-connected to Kelly and Folsom arrived. One salient example is Sarah Brown Meeham, who took up residence in an AIG office on a regular basis. Meeham was a consultant working for Levick Communications, where Kelly has served on the Advisory Board. She didn’t actually deal with compliance; she’s a PR specialist, according to Levick.

That may be what’s ailing AIG with these people running the show. They think that good PR is an adequate substitute for real compliance with regulation. And as it turned out, once Kelly and Folsom collected their ample severance packages, even the best corporate hack/flack in the world couldn’t have made AIG look good.