What Do Aaron Swartz and Chicago's Magnetar Have In Common?

Unfortunately, not a whole hell of a lot.

You’ve probably heard of Aaron Swartz.  He’s the 26-year-old Internet activist who helped develop the RSS web feed format and the site Reddit.  He committed suicide earlier this month because of an ongoing Justice Department investigation into illegal downloading of JSTOR files from M.I.T.  The Justice Department, in their infinite wisdom, threatened him with 13 felony charges and up to 50 years in prison.

Let me repeat that.  Aaron Swartz faced 50 years in prison for downloading JSTOR files.  Fifty years.

To get that many years, you’d probably assume that this nefarious Aaron Swartz character was out to undermine life as we know it.  He must have been angling to hack into financial systems, planning to drain grandma’s and grandpa’s saving accounts or, at the very least, scheming to compromise our national security.

But Aaron Swartz wasn’t doing any of those things.  JSTOR is a research resource, a digital library if you will, of academic journal back issues.  You subscribe to the JSTOR library (I use it all the time.  It’s the only perk I get as an adjunct professor).  Once in, you can find scholarly journals on just about anything -- astronomy, Asian studies, feminist & women’s studies, philosophy, political science.

I’m not defending what Swartz did.  Swartz planned on allowing folks to access those files for free and that was, well, wrong.  Right?  But 50 years?  Really?

After all, he was an activist.  He believed that the Internet (and these scholarly articles) should be free and accessible to everyone.  I mean, what’s the worst thing that could happen as a result of allowing people free access to scholarly articles?  A poorly cited research paper?  Perhaps a couple months of public service might have been a more fitting sentence.

It’s no surprise that the Justice Department and the Securities and Exchange Commission work closely together in pursuing cases.  In fact, they often file parallel criminal and civil cases on the same day.

So let me ask you this:  if you worked for one of those agencies and had the ability to prosecute a guy for sharing scholarly journals OR prosecute a financial investment firm (or one of the key players in that firm) for gambling against the U.S. mortgage industry, a firm that hauled in $9 billion in 2007 by buying toxic investments, who would you go after?

No brainer, right?  You’d go for the jokers who knew that the U.S. housing bubble would burst (or, maybe even caused it to burst).  You’d go for the big dogs whose financial chemistry set nearly blew our economy to shreds.

Well, a key player – besides JC Morgan Chase and Citibank – was Evanston’s Magnetar Capital, LLC.  Pro Publica reported that, in 2007, Magnetar actually developed mortgage-backed securities, invested in them, and then bet against them.

Here’s an excerpt from the excellent Pro Publica article by Jesse Eisinger and Jake Bernstein.

"According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations -- CDOs. If housing prices kept rising, this would provide a solid return for many years. But that's not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs."

So why hasn’t Magnetar been called to task?  Time is running out.  There’s a five-year statute of limitations within which the Securities and Exchange Commission (or Justice Department) can file charges against firms for their crimes leading up to the 2007-2008 financial crisis.

Will today’s nomination of former New York prosecutor Mary Jo White as chairman of the SEC change things?  Will a new sheriff in town stir things up?

At a New York University forum titled “Did felons get a free pass in the financial crisis?” White explained her philosophy, “You should be aggressive where there is crime, but what you should not do…is fail to distinguish between what is actually criminal and what is just mistaken behavior, what is even reckless risk-taking, and not bow to the frenzy,” she said.

Aaron Swartz, who stood to gain nothing from allowing free access to scholarly journals, faced a 50-year sentence.  Mistaken behavior?  Probably.

On the other hand, Magnetar made $9 billion in one year and very well might have caused the financial avalanche from which we’re still trying to dig out.

In my book, that’s the crime.


Leave a comment
  • He could have plea bargained rather than committed suicide.

    Just because the feds bring a multiplicity of charges doesn't mean that the defendant, if convicted, was going to be sentenced to the maximum term on all consecutively; the sentencing guidelines generally govern. For instance, once Blago was convicted of a couple of charges with a 20 year maximum, it didn't make any difference if it was on 6 or 20 counts; Blago wasn't going to get 110 years.

    But, instead of consulting legal counsel, Swartz consulted some other power.

  • In reply to jack:

    Thank you for your comments.

    I agree, he could have waited it out. He was obviously troubled. He probably would have only gotten a few years.

  • Good post. It doesn't sound like White will go after the Wall Street crooks.

  • In reply to Aquinas wired:

    Thank you. It looks like nothing is going to happen to the banksters. Oh, well. I knew I should have gotten into finance.

  • Really liked the article - nice juxtaposition of ideas. I guess someone that smart, taking his life, when as an activist, he should have been quite adept at manipulating messages and the media, surprises me. He could have made the same case that you did and with the backing of other activists, the media, and his legal staff, planted the seeds of a movement. Instead, he took his life, which will probably not result in much of a fight for the right and against the wrong of your argument. That leaves it up to you and those reading this article.

  • In reply to smatey:

    Thank you so much for the boost of confidence...I really appreciate it. All good points. It takes a lot of time to do what you think is right, doesn't it?

  • Ronald Reagan sucks d!

  • In reply to On Chicago Avenue:

    You are right, 'On CHicago Avenue' (if that's even your real name). He did like Duncan Donuts.

  • Great post!

    Americans regularly mete out disproportionate salaries, as well as punishments - too high / too low.... Salaries are not commensurate with the value that professionals provide society (e.g. teachers???!); and, as you point out, punishments aren't scaled to the gravity of the crime against individuals/society. Heaven help us, though, if Congress tries to pass legislation making disproportionate salaries/jail terms PUNISHABLE CRIMES!

Leave a comment