Henry Farrell writes: The Hidden Wiki holds the keys to a secret internet. To reach it, you need a special browser that can access ‘Tor Hidden Services’ – websites that have chosen to obscure their physical location. But even this browser isn’t enough. Like the Isla de Muerta in the film Pirates of the Caribbean, the landmarks of this hidden internet can be discovered only by those who already know where they are.
Sites such as the Hidden Wiki provide unreliable treasure maps. They publish lists of the special addresses for sites where you can use Bitcoin to buy drugs or stolen credit card numbers, play strange games, or simply talk, perhaps on subjects too delicate for the open web. The lists are often untrustworthy. Sometimes the addresses are out-of-date. Sometimes they are actively deceptive. One link might lead to a thriving marketplace for buying and selling stolen data; another, to a wrecker’s display of false lights, a cloned site designed to relieve you of your coin and give you nothing in return.
This hidden internet is a product of debates among technology-obsessed libertarians in the 1990s. These radicals hoped to combine cryptography and the internet into a universal solvent that would corrupt the bonds of government tyranny. New currencies, based on recent cryptographic advances, would undermine traditional fiat money, seizing the cash nexus from the grasp of the state. ‘Mix networks’, where everyone’s identity was hidden by multiple layers of encryption, would allow people to talk and engage in economic exchange without the government being able to see.
Plans for cryptographic currencies led to the invention of Bitcoin, while mix networks culminated in Tor. The two technologies manifest different aspects of a common dream – the utopian aspiration to a world where one could talk and do business without worrying about state intervention – and indeed they grew up together. For a long time, the easiest way to spend Bitcoin was at Tor’s archipelago of obfuscated websites.
Like the pirate republics of the 18th century, this virtual underworld mingles liberty and vice. Law enforcement and copyright-protection groups such as the Digital Citizens’ Alliance in Washington, DC, prefer to emphasise the most sordid aspects of Tor’s hidden services – the sellers of drugs, weapons and child pornography. And yet the effort to create a hidden internet was driven by ideology as much as avarice. The network is used by dissidents as well as dope-peddlers. If you live under an authoritarian regime, Tor provides you with a ready-made technology for evading government controls on the internet. Even some of the seedier services trade on a certain idealism. Many libertarians believe that people should be able to buy and sell drugs without government interference, and hoped to build marketplaces to do just that, without violence and gang warfare.
Tor’s anonymity helps criminals by making it harder for the state to identify and detain them. Yet this has an ironic side-effect: it also makes it harder for them to trust each other, because they typically can’t be sure who their interlocutors are. To make money in hidden markets, you need people to trust you, so that they will buy from you and sell to you. Having accomplished this first manoeuvre, the truly successful entrepreneurs go one step further. They become middlemen of trust, guaranteeing relations between others and taking a cut from the proceeds. [Continue reading…]
Jed S. Rakoff writes: So-called “deferred prosecutions” were developed in the 1930s as a way of helping juvenile offenders. A juvenile who had been charged with a crime would agree with the prosecutor to have his prosecution deferred while he entered a program designed to rehabilitate such offenders. If he successfully completed the program and committed no other crime over the course of a year, the charge would then be dropped.
The analogy of a Fortune 500 company to a juvenile delinquent is, perhaps, less than obvious. Nonetheless, beginning in the early 1990s and with increasing frequency thereafter, federal prosecutors began entering into “deferred prosecution” agreements with major corporations and large financial institutions. In the typical arrangement, the government agreed to defer prosecuting the company for various federal felonies if the company, in addition to paying a financial penalty, agreed to introduce various “prophylactic” measures designed to prevent future such crimes and to “rehabilitate” the company’s “culture.” The crimes for which prosecution was thus deferred included felony violations of the securities laws, banking laws, antitrust laws, anti-money-laundering laws, food and drug laws, foreign corrupt practices laws, and numerous provisions of the general federal criminal code.
The intellectual origins of this approach to corporate crime can be traced back at least to the 1980s, when various academics suggested that the best way to deter “crime in the suites” was to foster a culture within companies of acting ethically and responsibly. In practice, this meant encouraging companies not only to provide in-house ethical training but also to enlarge their internal compliance programs, so that responsible behavior would be praised and misconduct policed. The approach found favor not just with some corporations (notably General Electric under the guidance of its then general counsel, Ben Heineman), but also with the US Sentencing Commission, which, in promulgating the Corporate Sentencing Guidelines in 1991, made the overall adequacy of a company’s prior internal compliance programs the most important factor in reducing (by as much as 60 percent) the size of the fine to be imposed on a company found guilty of a federal criminal violation. [Continue reading…]
The New York Times reports: A California man behind the website Silk Road, once a thriving online black market for the sale of heroin, cocaine, LSD and other drugs and illicit goods, was convicted on Wednesday of all seven counts related to the enterprise.
The verdict against the defendant, Ross W. Ulbricht, was delivered swiftly: Jurors began deliberating in the morning, and reported that they had reached a consensus about 3 1/2 hours later.
Prosecutors had portrayed Mr. Ulbricht, 30, as a “digital kingpin” who ran the website on a hidden part of the Internet, where deals could be made anonymously and without the scrutiny of law enforcement.
Evidence showed that Silk Road generated revenues of more than $213 million from January 2011 to October 2013, when Mr. Ulbricht was arrested by the Federal Bureau of Investigation in a library in San Francisco while he was logged on to his laptop as Dread Pirate Roberts, the pseudonym under which prosecutors said he operated the website. Deals were conducted in Bitcoins, and Mr. Ulbricht took millions of dollars in commissions, the government said. [Continue reading…]
Andy Greenberg reports: Silk Road, for its more than two and a half years online, was an unprecedented online narcotics emporium. But according to a journal found on the laptop of its alleged creator Ross Ulbricht, Ulbricht wanted it to be even more: a “brand” that extended from communications tools to banking.
In Ulbricht’s trial Wednesday, prosecutor Timothy Howard read aloud from a journal that was found on the defendant’s Samsung 700z laptop, which was seized at the time of his arrest in a San Francisco library in October, 2013. The journal, which goes back at least as far as 2010, seems to provide the most detailed look yet at Ulbricht’s plans for his libertarian contraband market. And the journal reveals that before his arrest, Ulbricht had allegedly planned to create chat software, a currency exchange, and more, all under the “Silk Road brand.”
The young Texan had allegedly planned to expand the Silk Road into a “brand people can come to trust and rely on,” according to a 2011 passage from the journal. “Silk Road chat, Silk Road exchange, Silk Road credit union, Silk Road market, Silk Road everything!” [Continue reading…]
The Guardian reports: They found the first grave in a thicket of spiny huisache trees clinging to the hillside outside the town of Iguala.
Under a pounding midday sun, about a dozen men and women watched as an older man plunged a pickaxe into the heavy soil. Some offered advice on where and how to dig; mostly they looked on in silence
When he turned up a human femur, Mayra Vergara turned her back and broke into silent tears. She had hoped that today she might find some clue to the fate of her brother Tomás, a taxi driver who was kidnapped in July 2012, never to be seen again. But whoever lay in the shallow grave, she said, they deserved more than this.
“Even if it isn’t my brother in there, it is still a person. A person who deserved a proper burial,” she said, her face contorted in anger and grief. “And the question is when? When are they going to do something for us?”
The disappearance and probable massacre of 43 student teachers after they were attacked and arrested by Iguala’s municipal police two months ago has focused world attention on the horror of Mexico’s drug violence – and the official corruption that allows much of it to happen.
A wave of protests triggered by the massacre put President Enrique Peña Nieto under acute political pressure.
But the incident has also lifted the lid on the open secret of Mexico’s many other disappeared: amid the drug-fuelled violence of recent years, some 20,000 people have simply vanished. [Continue reading…]
Reuters reports: Domestic violence, mainly against women and children, kills far more people than wars and is an often overlooked scourge that costs the world economy more than $8 trillion a year, experts said on Tuesday.
The study, which its authors said was a first attempt to estimate global costs of violence, urged the United Nations to pay more attention to abuse at home that gets less attention than armed conflicts from Syria to Ukraine.
“For every civil war battlefield death, roughly nine people … are killed in inter-personal disputes,” Anke Hoeffler of Oxford University and James Fearon of Stanford University wrote in the report.
From domestic disputes to wars, they estimated that all violence worldwide cost $9.5 trillion a year, mainly in lost economic output and equivalent to 11.2 percent of world gross domestic product.
In recent years, about 20-25 nations suffered civil wars, devastating many local economies and costing about $170 billion a year. Homicides, mainly of men unrelated to domestic disputes, cost $650 billion.
But those figures were dwarfed by the $8 trillion annual cost of domestic violence, mostly against women and children.
The study said about 290 million children suffer violent discipline at home, according to estimates based on data from the United Nations Children’s Fund, UNICEF. Based on estimated costs, ranging from injuries to child welfare services, the study estimated that non-fatal child abuse sapped 1.9 percent of GDP in high income nations and up to 19 percent of GDP in sub-Saharan Africa where severe discipline was common.
Bjorn Lomborg, head of the Copenhagen Consensus Center which commissioned the report, said household violence was often overlooked, just as car crashes attracted less attention than plane crashes even many more died in road accidents. [Continue reading…]
Michael Bell writes: After police in Kenosha, Wis., shot my 21-year-old son to death outside his house ten years ago — and then immediately cleared themselves of all wrongdoing — an African-American man approached me and said: “If they can shoot a white boy like a dog, imagine what we’ve been going through.”
I could imagine it all too easily, just as the rest of the country has been seeing it all too clearly in the terrible images coming from Ferguson, Mo., in the aftermath of the killing of Michael Brown. On Friday, after a week of angry protests, the police in Ferguson finally identified the officer implicated in Brown’s shooting, although the circumstances still remain unclear.
I have known the name of the policeman who killed my son, Michael, for ten years. And he is still working on the force in Kenosha.
Yes, there is good reason to think that many of these unjustifiable homicides by police across the country are racially motivated. But there is a lot more than that going on here. Our country is simply not paying enough attention to the terrible lack of accountability of police departments and the way it affects all of us—regardless of race or ethnicity. Because if a blond-haired, blue-eyed boy — that was my son, Michael — can be shot in the head under a street light with his hands cuffed behind his back, in front of five eyewitnesses (including his mother and sister), and his father was a retired Air Force lieutenant colonel who flew in three wars for his country — that’s me — and I still couldn’t get anything done about it, then Joe the plumber and Javier the roofer aren’t going to be able to do anything about it either. [Continue reading…]
New York magazine reports: The story of Michael Brown’s death has in no small part been a story of police overreaction. The local force evidently killed an unarmed teenager, and then suited up as if going to war to police the generally peaceful protests that followed. And it’s revealed an irony: Over the past generation or so, we’ve militarized our police to protect a public that has broadly become less and less violent.
It all starts back in 1990, a time when the country found itself with less demand for military equipment abroad and new use for it back home. Within our shores, the drug wars were escalating; gang violence was surging; and sociologists were warning of sociopathic child “superpredators.” At the same time, the military was starting to shrink as the Cold War ended. Put two and two together and you get the 1033 program, which transferred assets from the military to the police. (Here’s a capsule history.)
A bigger flush of money and equipment followed in the wake of the September 11 attacks, the Times reports, when the federal government equipped local police outfits to be the front line of the Global War on Terror:
Department of Homeland Security grant money paid for the $360,000 Bearcat armored truck on patrol in Ferguson, said Nick Gragnani, executive director of St. Louis Area Regional Response System, which administers such grants for the St. Louis area.
Since 2003, the group has spent $9.4 million on equipment for the police in St. Louis County. That includes $3.6 million for two helicopters, plus the Bearcat, other vehicles and night vision equipment. Most of the body armor worn by officers responding to the Ferguson protests was paid for with federal money, Mr. Gragnani said.
“The focus is terrorism, but it’s allowed to do a crossover for other types of responses,” he said. “It’s for any type of civil unrest. We went by the grant guidance. There was no restriction put on that by the federal government.”
Where was the NSA? That’s the question former State Department whistleblower Peter Van Buren recently asked at his We Meant Well blog — and it couldn’t be a smarter one. After all, the Isla Vista killer, Elliot Rodgers, made both his own sense of disturbance and his urge for “retribution” against women quite public before he went on his terror spree. Shouldn’t the agency, whose unofficial motto (“collect it all”) seems to be meant quite literally, have noticed his messages to the world?
Given the ridiculous mass of human communications the NSA collects, both domestically and globally, perhaps not. But one reason its employees might not have been paying attention was that Rodgers wasn’t an Islamic jihadist-in-the-making or an al-Qaeda wannabe. He didn’t fall among the few fringe figures since 9/11 who have committed domestic acts of Islamic terror, including Army psychiatrist Nidal Hasan, who slaughtered 13 at Fort Hood, Texas, the Tsarnaev brothers who briefly terrorized Boston, or Faisal Shahzad who managed to get a car bomb into New York’s Times Square. Of course, it’s worth remembering that the agency American taxpayers support to the tune of almost $11 billion a year and that has made surveillance in the name of “safety” part of the American way of life somehow missed them, too! Still, for the NSA one thing is clear enough: the Elliot Rodgers of this world may blow Americans away in numbers that put the casualty counts for what we call “domestic terrorism” to shame, but they aren’t considered “terrorists” and the war they are engaged in — against women — doesn’t qualify for any “war on terror.”
The numbers tell a grim story when it comes to this sort of terror in American life. Among other things, if you’re adding up casualties in this unnamed war, 1,500 women are murdered annually by their husbands or boyfriends. That adds up to a 9/11-sized disaster every two years. On the other side of things, in the wake of the killings in Isla Vista, California, and without the NSA stepping in to botch things up, the response to such terror has been extraordinary, and Rebecca Solnit, whose new Dispatch Book, Men Explain Things to Me, focuses on just what violence against women means in our world, offers her usual highly original look at ways in which women (and some men) are reconceiving our world and the horrors in it. Tom Engelhardt
Our words are our weapons
The feminist battle of the story in the wake of the Isla Vista massacre
By Rebecca Solnit
It was a key match in the World Cup of Ideas. The teams vied furiously for the ball. The all-star feminist team tried repeatedly to kick it through the goalposts marked Widespread Social Problems, while the opposing team, staffed by the mainstream media and mainstream dudes, was intent on getting it into the usual net called Isolated Event. To keep the ball out of his net, the mainstream’s goalie shouted “mental illness” again and again. That “ball,” of course, was the meaning of the massacre of students in Isla Vista, California, by one of their peers.
All weekend the struggle to define his acts raged. Voices in the mainstream insisted he was mentally ill, as though that settled it, as though the world were divided into two countries called Sane and Crazy that share neither border crossings nor a culture. Mental illness is, however, more often a matter of degree, not kind, and a great many people who suffer it are gentle and compassionate. And by many measures, including injustice, insatiable greed, and ecological destruction, madness, like meanness, is central to our society, not simply at its edges.
The Associated Press reports: As head of his village, Prajob Naowa-opas battled to save his community in central Thailand from the illegal dumping of toxic waste by filing petitions and leading villagers to block trucks carrying the stuff — until a gunman in broad daylight fired four shots into him.
A year later, his three alleged killers, including a senior government official, are on trial for murder. The dumping has been halted and villagers are erecting a statue to their slain hero.
But the prosecution of Prajob’s murder is a rare exception. A survey released Tuesday — the first comprehensive one of its kind – says that only 10 killers of 908 environmental activists slain around the world over the past decade have been convicted.
The report by the London-based Global Witness, a group that seeks to shed light on the links between environmental exploitation and human rights abuses, says murders of those protecting land rights and the environment have soared dramatically. It noted that its toll of victims in 35 countries is probably far higher since field investigations in a number of African and Asian nations are difficult or impossible. [Continue reading…]
It’s up a flight of stone steps, past the circulation desk and the Romance stacks, over in Science Fiction, far corner.
On a sunny Tuesday in October, federal officers entered the public library in the Glen Park section of this city and arrested a young man who they say ran a vast Internet black market — an eBay of illegal drugs.
Their mark, Ross William Ulbricht, says he is not the F.B.I.’s Dread Pirate Roberts, the nom de guerre of the mastermind behind the marketplace, Silk Road. And the facts, his lawyer says, will prove that.
However this story plays out, Silk Road already stands as a tabloid monument to old-fashioned vice and new-fashioned technology. Until the website was shut down last month, it was the place to score, say, a brick of cocaine with a few anonymous strokes on a computer keyboard. According to the authorities, it greased $1.2 billion in drug deals and other crimes, including murder for hire.
That this story intruded here, at a public library in a nice little neighborhood, says a lot about the dark corners of the Internet. Glen Park isn’t the gritty Tenderloin over the hills, or Oakland or Richmond out in East Bay. And that is precisely the point. The Dark Web, as it is known, is everywhere and nowhere, and it’s growing fast.
No sooner was the old Silk Road shut down than a new, supposedly improved Silk Road popped up. Other online bazaars for illegal guns and drugs are thriving.
And the Dread Pirate Roberts — the old one, a new one, who knows? — is back, taunting the authorities. (The pseudonym is a reference to a character in the film “The Princess Bride” who turns out to be not one man but rather many men passing down the title.)
“It took the F.B.I. two and a half years to do what they did,” the Dread Pirate Roberts wrote last week on the new Silk Road site. “But four weeks of temporary silence is all they got.”
So catch us if you can, the Dread Pirate is saying. The new Silk Road has overhauled its security and “marks the dawn of a brand new era for hidden services,” he wrote.
The question is, can anyone really stamp out the Dread Pirates? Like the rest of the Internet, the Dark Web is being shaped and reshaped by technological innovation. [Continue reading…]
Kevin Drum writes: When I started research for this story, I worked my way through a pair of thick criminology tomes. One chapter regaled me with the “exciting possibility” that it’s mostly a matter of economics: Crime goes down when the economy is booming and goes up when it’s in a slump. Unfortunately, the theory doesn’t seem to hold water — for example, crime rates have continued to drop recently despite our prolonged downturn.
Another chapter suggested that crime drops in big cities were mostly a reflection of the crack epidemic of the ’80s finally burning itself out. A trio of authors identified three major “drug eras” in New York City, the first dominated by heroin, which produced limited violence, and the second by crack, which generated spectacular levels of it. In the early ’90s, these researchers proposed, the children of CrackGen switched to marijuana, choosing a less violent and more law-abiding lifestyle. As they did, crime rates in New York and other cities went down.
Another chapter told a story of demographics: As the number of young men increases, so does crime. Unfortunately for this theory, the number of young men increased during the ’90s, but crime dropped anyway.
There were chapters in my tomes on the effect of prison expansion. On guns and gun control. On family. On race. On parole and probation. On the raw number of police officers. It seemed as if everyone had a pet theory. In 1999, economist Steven Levitt, later famous as the coauthor of Freakonomics, teamed up with John Donohue to suggest that crime dropped because of Roe v. Wade; legalized abortion, they argued, led to fewer unwanted babies, which meant fewer maladjusted and violent young men two decades later.
But there’s a problem common to all of these theories: It’s hard to tease out actual proof. Maybe the end of the crack epidemic contributed to a decline in inner-city crime, but then again, maybe it was really the effect of increased incarceration, more cops on the beat, broken-windows policing, and a rise in abortion rates 20 years earlier. After all, they all happened at the same time.
To address this problem, the field of econometrics gives researchers an enormous toolbox of sophisticated statistical techniques. But, notes statistician and conservative commentator Jim Manzi in his recent book Uncontrolled, econometrics consistently fails to explain most of the variation in crime rates. After reviewing 122 known field tests, Manzi found that only 20 percent demonstrated positive results for specific crime-fighting strategies, and none of those positive results were replicated in follow-up studies.
So we’re back to square one. More prisons might help control crime, more cops might help, and better policing might help. But the evidence is thin for any of these as the main cause. What are we missing?
Experts often suggest that crime resembles an epidemic. But what kind? Karl Smith, a professor of public economics and government at the University of North Carolina-Chapel Hill, has a good rule of thumb for categorizing epidemics: If it spreads along lines of communication, he says, the cause is information. Think Bieber Fever. If it travels along major transportation routes, the cause is microbial. Think influenza. If it spreads out like a fan, the cause is an insect. Think malaria. But if it’s everywhere, all at once — as both the rise of crime in the ’60s and ’70s and the fall of crime in the ’90s seemed to be — the cause is a molecule.
A molecule? That sounds crazy. What molecule could be responsible for a steep and sudden decline in violent crime?
Well, here’s one possibility: Pb(CH2CH3)4. [Continue reading…]
James Kilgore writes: Private corrections company The GEO Group celebrated the holiday season by opening a new 1,500 bed prison in Milledgeville, Georgia on December 12th. The $80 million facility is expected to generate approximately $28.0 million in annual revenues.
Though GEO (formerly Wackenhut) is hardly a household name, they are a major player in the private corrections sector, combining a self righteous amorality in profiting from human misery with a ruthless sense of just how to make a buck in this business. The GEO Group is so notorious that they were the target of an Occupy Washington D.C. action in early December. In addition, the United Methodist Church sold off more than $200,000 in stock in GEO Group over the holiday season, judging that holding these shares was “incompatible with Bible teaching.”
While such actions may irritate a few within the company’s rank, the GEO Group is thick-skinned. Over the years journalists have exposed a long history of violence, abuse and corruption in the company’s facilities. Such scandals would have driven most firms out of business, but GEO has always managed to find the way back to prosperity. While the U.S. economy has plummeted in the past eighteen months, GEO has been positioning itself for the future.
The Los Angeles Times reports: Armed with a search warrant, Nelson County Sheriff Kelly Janke went looking for six missing cows on the Brossart family farm in the early evening of June 23. Three men brandishing rifles chased him off, he said.
Janke knew the gunmen could be anywhere on the 3,000-acre spread in eastern North Dakota. Fearful of an armed standoff, he called in reinforcements from the state Highway Patrol, a regional SWAT team, a bomb squad, ambulances and deputy sheriffs from three other counties.
He also called in a Predator B drone.
As the unmanned aircraft circled 2 miles overhead the next morning, sophisticated sensors under the nose helped pinpoint the three suspects and showed they were unarmed. Police rushed in and made the first known arrests of U.S. citizens with help from a Predator, the spy drone that has helped revolutionize modern warfare.
But that was just the start. Local police say they have used two unarmed Predators based at Grand Forks Air Force Base to fly at least two dozen surveillance flights since June. The FBI and Drug Enforcement Administration have used Predators for other domestic investigations, officials said.
“We don’t use [drones] on every call out,” said Bill Macki, head of the police SWAT team in Grand Forks. “If we have something in town like an apartment complex, we don’t call them.”
The drones belong to U.S. Customs and Border Protection, which operates eight Predators on the country’s northern and southwestern borders to search for illegal immigrants and smugglers. The previously unreported use of its drones to assist local, state and federal law enforcement has occurred without any public acknowledgment or debate.
Matt Taibbi writes: Last week, a federal judge in Mississippi sentenced a mother of two named Anita McLemore to three years in federal prison for lying on a government application in order to obtain food stamps.
Apparently in this country you become ineligible to eat if you have a record of criminal drug offenses. States have the option of opting out of that federal ban, but Mississippi is not one of those states. Since McLemore had four drug convictions in her past, she was ineligible to receive food stamps, so she lied about her past in order to feed her two children.
The total “cost” of her fraud was $4,367. She has paid the money back. But paying the money back was not enough for federal Judge Henry Wingate.
Wingate had the option of sentencing McLemore according to federal guidelines, which would have left her with a term of two months to eight months, followed by probation. Not good enough! Wingate was so outraged by McLemore’s fraud that he decided to serve her up the deluxe vacation, using another federal statute that permitted him to give her up to five years.
He ultimately gave her three years, saying, “The defendant’s criminal record is simply abominable …. She has been the beneficiary of government generosity in state court.”
Compare this court decision to the fraud settlements on Wall Street. Like McLemore, fraud defendants like Citigroup, Goldman Sachs, and Deutsche Bank have “been the beneficiary of government generosity.” Goldman got $12.9 billion just through the AIG bailout. Citigroup got $45 billion, plus hundreds of billions in government guarantees.
All of these companies have been repeatedly dragged into court for fraud, and not one individual defendant has ever been forced to give back anything like a significant portion of his ill-gotten gains. The closest we’ve come is in a fraud case involving Citi, in which a pair of executives, Gary Crittenden and Arthur Tildesley, were fined the token amounts of $100,000 and $80,000, respectively, for lying to shareholders about the extent of Citi’s debt.
Neither man was forced to admit to intentional fraud. Both got to keep their jobs.
Anita McLemore, meanwhile, lied to feed her children, gave back every penny of her “fraud” when she got caught, and is now going to do three years in prison. Explain that, Eric Holder!
Matt Taibbi writes: Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug.
The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.
This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.
This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million.
Goldman, in the Abacus case, got fined $550 million. In this worse case, the SEC was trying to settle with Citi for just $285 million. Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.
“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”
Rakoff of course is right – the settlement is nuts. If you take Citi’s $160 million profit on the deal into consideration, what we’re talking about then is a $125 million fine for causing $700 million in damages. That, and no admission of wrongdoing.
Just imagine a mugger who steals $70 from some lady’s wallet being sentenced to walk free after paying back twelve bucks. Magritte himself could not devise a more surreal take on criminal justice.
The secretive business havens of Cyprus and the Cayman Islands face a potent rival: Cheyenne, Wyoming.
At a single address in this sleepy city of 60,000 people, more than 2,000 companies are registered. The building, 2710 Thomes Avenue, isn’t a shimmering skyscraper filled with A-list corporations. It’s a 1,700-square-foot brick house with a manicured lawn, a few blocks from the State Capitol.
Neighbors say they see little activity there besides regular mail deliveries and a woman who steps outside for smoke breaks. Inside, however, the walls of the main room are covered floor to ceiling with numbered mailboxes labeled as corporate “suites.” A bulky copy machine sits in the kitchen. In the living room, a woman in a headset answers calls and sorts bushels of mail.
A Reuters investigation has found the house at 2710 Thomes Avenue serves as a little Cayman Island on the Great Plains. It is the headquarters for Wyoming Corporate Services, a business-incorporation specialist that establishes firms which can be used as “shell” companies, paper entities able to hide assets.
Wyoming Corporate Services will help clients create a company, and more: set up a bank account for it; add a lawyer as a corporate director to invoke attorney-client privilege; even appoint stand-in directors and officers as high as CEO. Among its offerings is a variety of shell known as a “shelf” company, which comes with years of regulatory filings behind it, lending a greater feeling of solidity.
“A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy,” the company’s website boasts. “A person you control… yet cannot be held accountable for its actions. Imagine the possibilities!”
Among the entities registered at 2710 Thomes, Reuters found, is a shelf company sheltering real-estate assets controlled by a jailed former prime minister of Ukraine, according to allegations made by a political rival in a federal court in California.
The owner of another shelf company at the address was indicted in April for allegedly helping online-poker operators evade a U.S. ban on Internet gambling. The owner of two other firms there was banned from government contracting in January for selling counterfeit truck parts to the Pentagon.
All the activity at 2710 Thomes is part of a little-noticed industry in the U.S.: the mass production of paper businesses. Scores of mass incorporators like Wyoming Corporate Services have set up shop. The hotbeds of the industry are three states with a light regulatory touch-Delaware, Wyoming and Nevada.
The pervasiveness of corporate secrecy on America’s shores stands in stark contrast to Washington’s message to the rest of the world. Since the September 11 attacks in 2001, the U.S. has been calling forcefully for greater transparency in global transactions, to lift the veil on shadowy money flows. During a debate in 2008, presidential candidate Barack Obama singled out Ugland House in the Cayman Islands, reportedly home to some 12,000 offshore corporations, as “either the biggest building or the biggest tax scam on record.”
Yet on U.S. soil, similar activity is perfectly legal. The incorporation industry, overseen by officials in the 50 states, has few rules. Convicted felons can operate firms which create companies, and buy them with no background checks.