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.
As a result of her decreased oversight capabilities, brought on by her own reduction of staff in October 2008, Folsom demanded that Cole scale back his compliance recommendations, which he did (See Cole’s November 2008 report). When Grassley inquired about this, Cole responded: “I scaled back my recommendations while AIG went through its sell-off. It did not make sense to spend money and resources developing extensive compliance structures and controls for a company that was not intended to continue in existence” (p. 7). This response is misleading.
While it did not make sense to develop new structures for a company slated for liquidation, the fact is that a period of reorganization, restructuring and/or divestiture, such as the one in which AIG found itself, required more intensive compliance monitoring not less. As Cole himself wrote in his November 2008 report to the SEC and DOJ:
After discussion with the Audit Committee of AIG’s Board of Directors (“Audit Committee”) and AIG’s General Counsel, we determined that, in light of the heightened demands being placed on key employees in the management, regulatory/compliance, and financial reporting areas, it was appropriate for us to review and scale back our recommendations until the Company determined what its future course would be.
So, as Cole looked on, Folsom “laid off” ten compliance officials, whom he did not interview privately. Then, claiming “heightened demands” in the Compliance Office, she asked that he scale back his compliance recommendations and he agreed.
Of course, it is still unclear what the future of AIG will be. Cole himself recognized, in the November ’08 report, however, that a volatile period in the corporation’s activities did not exempt it from compliance, although his own actions contradicted his statement:
We have to keep in mind that AIG is still an operational business, conducting transactions in complex areas and markets. It still needs to comply with applicable legal requirements; it still needs to have an accurate and timely financial reporting processes; it still needs to manage its records properly; and it still needs to engage in proper corporate governance. While the nature and scope of much of this may change significantly as the new nature and scope of AIG emerges, there is still a need to have controls in place in the mean time.
And, of course, we now know, AIG lives on, still suffering from a crippled compliance function.
Cole’s entire response set to Grassley’s questions about his role at AIG before, during and after the financial collapse that nearly took out the international economic system is reminiscent of NPR’s “Not My Job” segment (also known as “Someone Else’s Problem”). It would seem, in 2010, when financial markets are still struggling under the weight of risk and debt assumed by the likes of AIG-FP, that the US Justice Department requires a Deputy Attorney General whose conception of his own responsibilities is a little more expansive than James Cole’s.
Bea Edwards is the International Reform Director for the Government Accountability Project, the nation’s leading whistleblower advocacy organization.