Problems At The FBI And Justice Department Are Serious

What do you do with an FBI agent, sworn to uphold the law, who flagrantly violates the law in a rogue investigation aimed at making a name for himself by bringing down some high-profile targets?

Why . . . you promote him, of course.

At least that is the way the Justice Department answered that question in the case of David Chaves, an FBI agent who serially and lawlessly leaked grand-jury information, wiretap evidence, and other sensitive investigative intelligence to the media in his quest to make an insider-trading case against some celebrities. And when finally called on it, the Justice Department circled the wagons: proceeding with its tainted prosecution, referring the now-retired Chaves for an internal investigation that has gone exactly nowhere after nearly two years, and using legal maneuvers to block the courts and the public from scrutinizing the scope of the misconduct.

The Ethos of Law Enforcement

It has become a refrain among defenders of the FBI and Justice Department that critics are trying to destroy these vital institutions. In point of fact, these agencies are doing yeoman’s work destroying themselves — much to the chagrin of those of us who spent much of our professional lives proudly carrying out their mission.

The problem is not the existence of miscreants; they are an inevitable part of the human condition, from which no institution of any size will ever be immune. The challenge today is the ethos of law-enforcement. You see it in texts expressing disdain for lawmakers; in the above-it-all contempt for legislative oversight; in arrogant flouting of the Gang of Eight disclosure process for sensitive intelligence (because the FBI’s top-tier unilaterally decides when Bureau activities are “too sensitive” to discuss); in rogue threats to turn the government’s law-enforcement powers against Congress; and in the imperious self-perception of a would-be fourth branch of government, insulated from and unaccountable to the others — including its actual executive-branch superiors.

Once law enforcement saw the virtue in self-policing, in a duty to expose and purge itself of rogue actors. Now, it tends toward not just burying bad behavior but — the best defense being a good offense — hiding it behind claims of a job well done, behind claims that its ends are so noble its means are justified no matter how unseemly.

In the years after the “Great Recession,” progressives were frustrated by the incapacity of prosecutors to hold financial institutions responsible for the subprime-mortgage crisis and the housing crash, to which government policies had contributed mightily. One response was a flurry of securities-fraud investigations: If you can’t nail the evil banks, at least nail big-time market players, even if less than compelling evidence needs propping up by extravagant legal theories.

Among those who found themselves on the FBI’s radar were three celebrities: investor Carl Icahn, pro golfer Phil Mickelson, and sports gambler Billy Walters. In early 2011, for example, Icahn made a $10.2 billion bid on Clorox Co., triggering what investigators regarded as suspicious stock trading. In particular, they eyed Walters, who was known to talk stocks with Icahn and give investment advice to Mickelson.

But they had nothing, and the investigation stalled. Two years later, the effort was described as “dormant” by David Chaves, the supervising FBI agent for a squad handling big-time insider-trading investigations in Manhattan (where the Bureau’s headquarters is just a five-minute walk to Wall Street). Working in conjunction with the U.S. attorney’s office for the Southern District of New York (SDNY), agent Chaves and his subordinates had aggressively used a federal grand jury to investigate Walters, and had even obtained court orders enabling agents to monitor phone calls — a burdensome commitment of time and public resources, generally reserved for conspiracy cases involving insulated mega-crooks who orchestrate major felonies. But it was to no avail.

The FBI’s New Strategy: Strategic Leaks to Media

There is more crime than federal law enforcement’s finite resources can handle. So when an investigation yields nothing after a reasonable time — to say nothing of two years— it is usually deemed time to move on to more-fruitful cases. But not for agent Chaves. He doubled down with a new strategy: strategic leaks of grand jury, surveillance, and other sensitive investigative information to select journalists.

In 2013, Chaves began arranging phone calls, meetings in restaurants, and other modes of communication with reporters for the New York Times and Wall Street Journal. Although federal law criminalizes the disclosure of grand-jury and sealed wiretap information, details of the probe were expansively revealed to the press: the targets of the investigation; the stocks in which they traded and specific transactions that were being scrutinized; the investigative techniques that were being used and that were under consideration; and potential prosecution theories of insider trading.

The FBI’s goal was twofold. First came intelligence-gathering: improper quid pro quo arrangements in which Chaves exchanged details from the government’s investigation for information from the journalists — in essence, trying to turn reporters, who are not subject to FBI guidelines and protocols, into sources.

Second, the Bureau hoped that the pressure generated by media coverage would “tickle the wire.” This is a venerable law-enforcement expression for sudden events that panic conspirators into blurting out incriminating statements on tapped phones. Unexpected developments — e.g., the disappearance or arrest of a conspirator, a price spike or crash — can yield valuable evidence of association, pecking order, and consciousness of guilt . . . but investigators are not supposed to bait their targets with lawless leaks to the media. Here, Chaves hoped for a windfall from the press coverage — it would get the phones humming, ratcheting up pressure on accomplices to “flip” and become cooperating witnesses.

The public media blitz began in late May 2014, with major stories in the Journal and the Times about how Icahn, Mickelson, and Walters were under the federal microscope for a scheme involving Icahn’s investments in Clorox — a scheme for which there was apparently scant evidence and no coherent insider-trading prosecution theory.

No Clorox case was ever brought. In fact, on June 11, a few days after the initial report, the Times conceded that it had been misled by its (unidentified) law-enforcement source and that the FBI, in fact, had no evidence that Mickelson had traded Clorox stock while Icahn was preparing to bid for the company. One Times reporter actually called the U.S. attorney’s office to complain that his source — whom prosecutors suspected was an agent — had lied to the media. (Who knew there was a Code of Ethics for leaking!)

As the continuing press coverage showed, the investigators’ attention shifted from Clorox to a company called Dean Foods, which had a promising subsidiary called White Wave. Consistent with much market speculation, White Wave was spun off from Dean Foods in 2012. Walters, it turns out, was friendly with Tom Davis, chairman of the Dean Foods board, and traded heavily in the stock.

At one point, after FBI agents approached Walters but he declined to speak with them, an article appeared in the Times the following day, outlining new details about the investigation and Walters’s trading patterns. The FBI sought cooperation from Davis, too, but he repeatedly denied engaging in any wrongdoing with Walters. In August 2015, “people familiar with the investigation” identified Davis to the Journal as a target who had tipped Walters to the White Wave spinoff and other inside information. The humiliating public revelation cost Davis his job and, according to Walters, drove him into the arms of the FBI.

Davis agreed to cooperate and plead guilty. After five years of FBI pursuit, Walters was indicted for insider trading based on allegations that tips from Davis netted him over $40 million (in combined profits and avoided losses). He was eventually tried and convicted. Mickelson, who traded in Dean Foods stock largely based on advice from Walters, was not charged; he paid a nearly $1 million settlement to the SEC and avoided testifying in Walters’s trial by announcing that he would assert his privilege against self-incrimination if called.

Circling the Wagons

There is irrefutable evidence that high-ranking officials in the FBI and SDNY were aware when the leaks began in 2014 that they were coming from law enforcement. Significant efforts were made to persuade the Journal and the Times to delay their initial reports. On the day when they began appearing, George Venizelos, then the agent in charge of the FBI’s New York field office, emailed his underlings that contacts with the Journal must stop “for now”:

Just stop talking to this reporter for now! If we don’t have enough evidence by now its [sic] over. I mean it when I say cease contact with this reporter for now, if I find out someone is still talking to this reporter after today than [sic] there will be reassignments immediately.

They didn’t have enough evidence but, as we’ve seen, it wasn’t over.

When a follow-up Journal report indicated that publicity about the investigation had undermined the use of wiretaps, the SDNY’s then–U.S. attorney Preet Bharara emailed Venizelos to lament that “these leaks are outrageous and harmful,” and to suggest that they jointly take corrective action. An angry Venizelos forwarded Bharara’s email to his underlings, grousing that the “not good” situation was now a “bad” one, and ordered a meeting the following morning.

Subsequently, top SDNY officials discussed the astonishing revelation that, when the Times had to retract its initial accusation against Mickelson, not only did reporter Ben Protess complain about having “to walk back his story”; Protess also described being threatened by the FBI. The reporter told the SDNY that his source “did not like being called out for lying or the story being walked back”; the source had also become “a bit threatening,” warning Protess that he and the Times were now “on the radar.” With the investigation ongoing, the SDNY decided that the time was not right to discuss the situation “generally,” but that “obviously we need to discuss and will need to address this with the FBI.”

Clearly, this level of alarm was appropriate, yet it does not appear to have resulted in any meaningful corrective action. Chaves kept leaking investigative information to his media sources. And there are significant reasons to believe the leaks went well beyond the Walters investigation — when a top government official is an incorrigible leaker, it is virtually never confined to one case. But here’s the kicker: By the end of 2014, Chaves was promoted, becoming the head of all white-collar FBI investigations in New York.

When the government was finally called out for the outrageous leaking, its first reaction was to deny, deny, deny.

In September 2016, after being indicted, Walters filed a motion seeking a hearing to explore a pattern of government misconduct, including “leaking grand jury information to the press, as part of a concerted effort to breathe life into a flagging investigation.” The SDNY indignantly replied that Walters’s allegations were “false” and “baseless”; further, prosecutors insisted that Walters “cannot show that the source of the information contained in the articles was an agent or attorney for the Government,” and that “the natural and logical inferences lead to the conclusion that the source was not a Government official.”

The huffing and puffing proved futile. Federal district judge P. Kevin Castel declined to dismiss Walters’s motion and ordered a hearing.

Control the Damage . . . Or Repair It?

Now forced to take the motion seriously, the government abruptly changed course. The SDNY admitted that agent Chaves had, in fact, disclosed to the media a “significant amount of confidential information relating to the investigation.” Taken aback, Judge Castel could not help but note the irony: “Mr. Walters is charged with . . . tipping material nonpublic information to another. And to help support that case, the special agent apparently tipped material nonpublic information improperly to another.”

Still, despite the gamesmanship piled atop the indefensible misconduct, the court withdrew its grant of a hearing. Judge Castel reasoned that the government’s concession made it unnecessary to air out the dirty laundry; the only question was whether Walters could demonstrate that he had been prejudiced by the years of leaking, and the judge remarkably found that he had failed to do so.

In appealing his conviction, Walters has vigorously disputed this conclusion and mocked the Justice Department’s efforts to contain the damage. The effort to portray Chaves as the lone bad actor is belied, his lawyers point out, by the media stories that describe multiple sources. While the government vowed to the court that it would conduct a zealous investigation of Chaves, he has never been charged — notwithstanding that a year and a half has gone by and Judge Castel has threatened to appoint a private attorney to pursue a criminal contempt case. Walters further contends that, although the leaking went on for nearly two years, the SDNY’s investigation covered only three months (around the time of the first press stories in May 2014); and while prosecutors represented that they had reviewed “thousands of emails and text messages” relevant to the dispute, they disclosed a grand total of just six.

Walters further argued to the Second Circuit appellate court:

Nor did the government dispute that the misconduct here was part of an extensive pattern spanning numerous other insider trading investigations in which information was leaked to the same Journal and Times reporters. Walters has identified at least five such investigations overseen by Chaves. The resulting articles span an eight-year period from 2009 to 2016, and cover some of [U.S. attorney] Bharara’s most-touted insider trading prosecutions. They reveal vast quantities of “inside information from the government,” including “the names of unindicted co-conspirators,” their “statements to investigators” which “hadn’t previously been reported,” nonpublic “subpoenas,” “meetings with defense lawyers,” whether a “probe” was “at an advanced stage,” how the government was “preparing to present evidence to the grand jury,” and the nature and expected timing of the “charges” the government was “preparing.” The government has not disclosed what, if anything, it has done to investigate the leaks in these cases or identify other cases in which leaking occurred.

A little over a year ago, I wrote about another of these cases. It involved David Ganek and his hedge fund, Level Global. The government obtained a search warrant for the firm and alerted the media before the raid. Predictably, the reputational damage caused by publicity about Ganek’s status as a suspect destroyed the business. Yet, Ganek was never charged, and it appears that the government falsely represented in its search-warrant application that an informant had implicated him in insider trading.

At the time, I opined that investigative excesses and lawlessness are a serious problem best addressed by Congress and Justice Department leadership. The courts are limited to weighing the legal claims raised by parties to a litigation; they are simply not equipped to investigate official misconduct, nor is it their responsibility. And indeed, since I posited that argument, Ganek’s lawsuit against the government has been dismissed on a finding that law-enforcement officials have immunity, and it is an open question whether the Second Circuit (which dismissed Ganek’s claims) will take action on the misconduct in Walters’s case.

Regrettably, the ensuing year has also exhibited Justice Department leadership more inclined to conceal and soft-pedal evidence of official wrongdoing than deal with it forthrightly and accountably. And no wonder. Just this week, the report on the Clinton emails investigation filed by the Justice Department’s inspector general included this stunning passage (on page 430, footnotes are omitted):

Although FBI policy strictly limits the employees who are authorized to speak to the media, we found that this policy appeared to be widely ignored during the period we reviewed. We identified numerous FBI employees, at all levels of the organization and with no official reason to be in contact with the media, who were nevertheless in frequent contact with reporters. The large number of FBI employees who were in contact with journalists during this time period impacted our ability to identify the sources of leaks. For example, during the periods we reviewed, we identified dozens of FBI employees that had contact with members of the media. . . . [We also] identified social interactions between FBI employees and journalists that were, at a minimum, inconsistent with FBI policy and Department ethics rules. For example, we identified instances where FBI employees received tickets to sporting events from journalists, went on golfing outings with media representatives, were treated to drinks and meals after work by reporters, and were the guests of journalists at nonpublic social events.

As in the Justice Department’s stonewalling of the congressional committees pressing for answers about investigative tactics in the Russia probe, if the president does not take remedial action and demand transparency, the disreputable behavior will continue, and public faith will continue to plummet.

For their part, if the FBI and Justice Department wish to maintain their standing as rule-of-law pillars in a free society, they need to stop whining about their critics — They need to start looking within.

One Comment:

  1. Pingback: How many bodirs need to pile up behind the Clintons before it's not a conspiracy theory anymore? - BitsBlog

Leave a Reply

Your email address will not be published. Required fields are marked *