The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

The defense will claim—get this—that the SEC's freeze of his assets led to the downfall of Stanford’s empire.

It’s finally showtime for one of the greatest grifters, flim-flam artists and con men of the century.  Yep.  Allen “who wants to play cricket with me” Stanford began his trial yesterday.  After a curious and all-too-convenient case of depression-induced amnesia, this cowboy finally stands trial for running a $7 billion Ponzi scheme.

So, who is to blame for the some 20,000 people who were robbed of their money?  What will be the theory of his defense?  Well, the regulators, of course!  Postponing his trial gave his defense team plenty of time to cook up a doozy of a strategy.  They must have taken a poll or something.  It’s the old claim, it’s all about those evildoers at the Securities Exchange Commission.  You see, after determining Stanford was a fraud (all those jets and private Caribbean Islands were a good clue), the SEC froze Stanford’s assets in 2009 and charged him with fraud.  The defense will claim—get this—that this freeze led to the downfall of Stanford’s empire.

Mr. Stanford, sorry to be the one to break it to you, but you cannot blame the regulators.  In fact, only one group really can—those who lost their money in what they believed were safe investments in certificates of deposit.  They have every right to blame the SEC and other financial regulators for letting you get away with this.  These regulators failed to act promptly and in the face of mounting evidence, turned a blind eye to the activities of Stanford’s firm until it was too late for many investors.

Well sit back and get comfortable, this is not going to be over any time soon.  P.T. Barnum—er, Allen Stanford—may just pull a rabbit out of his hat...

Assisted by Setareh Ebrahimian

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Richard Cordray is wasting no time at the Consumer Financial Protection Bureau.  Forget Senate confirmation, Director Cordray has consumers to protect.  With him at the helm, the CFPB finalized its amendment to the rules governing remittances from the United States.

For years, Americans wishing to send money to relatives living abroad have been victimized by predatory and under-regulated companies that charged an arm and a leg—often without disclosing the true rates.  No more.

The Dodd-Frank Bill allowed for the CFPB to establish renewed rules on remittances, and (a few years later) the rules have arrived.  This is no fledgling industry—over $400 billion dollars in remittances are sent each year.  Following the rule changes, on every remittance of more than $15.00 companies will be required to disclose:

• Exchange Rate;
• Fees Charged; and
• Net Money to be Delivered.

The rules also enhance company liability for remittance errors and mandate a 30 minute window for a customer to cancel their remittance at no charge.  Before the rule changes (which do not go into effect until January 2013), many money senders had no idea how much money truly arrived in their relatives' hands in South America, or Asia.  Banks and other remittance-sending companies charged exorbitant rates and devalued the dollar, shortchanging the oft-unwitting customer.  Talk about the American Dream—emigrate to the United States, make enough of a living to send some money back home to your spouse and parents, and have 40% of it stolen by the greedy banks.  What could be more American?

Though we are disappointed that we have to wait a year until the rule changes go into effect—how long does it take to draft a disclosure and retrain a few employees?—this is the result of no small effort.  Organizations like Appleseed, a group dedicated to seeking social justice, have worked hard in support of this rule and are to be commended for the result.

We look forward to additional efforts by the CFPB in furtherance of consumer protection and fairness.  The Bureau continues to seek comments on the final rules at its website.

Assisted by David T. Martin

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Imagine this: a credit card company advertises its services to low income families and individuals offering a $300 upfront credit line.  Okay, not a pot of gold at the end of the rainbow, but it’s something that may help ends meet at the end of the week.  Ahha!  Gotcha!  But when the consumer accepts the card, smack, “You owe us $257 in fees,” leaving only $43 in available credit.  A scam to be sure, perpetrated on those most vulnerable.  But this is America, we have the best legal system in the world, surely someone can take my case and put an end to this exploitation and evil.  Right?

Nope.  The courthouse doors are locked shut.  Sorry folks but those wealthy guys on the Supreme Court do not feel your pain.  As we’ve blogged before, the Supreme Court held in ATT v. Concepcion that “take it or leave it” contracts mandating arbitration and prohibiting class actions – even where damages are small and only remedied by class actions – are acceptable despite years of contradictory state practice.  As a result, arbitration clauses have been added to innumerable consumer contracts.

The Court’s January 10^th opinion in CompuCredit Corp. v. Greenwood reinforced the Court’s deference to the whims of corporate desires.  Eight justices agreed (only Justice Ginsburg dissented) that the Credit Repair Organizations Act, because its clause providing a “right to sue” is silent on arbitration, allows corporations like CompuCredit to mandate arbitration.  This firmly establishes the preference for arbitration even in the face of glaring injustice.

So, ladies and gentlemen, that means the low income families targeted by this venal practice have no right to go to court to seek judicial redress for the fraud foisted on them by CompuCredit.  According to the Supreme Court, the “right to sue” means only the right to submit to binding arbitration (which not only often favors corporations but is just a non-starter for working and poor people alike).  But, as a practical matter, the only way these low income families or just about anyone can move forward and protect their rights is by joining a class and proceeding in court.  And that road is closed until further notice.  For another reading, Michelle Singletary’s piece in WAPO summarizes the current state of affairs quite nicely. 

Simply put, change is needed.  Without congressional or judicial action, consumers will soon find themselves without recourse for a majority of corporate grifting.  Rulings like Concepcion and CompuCredit are unacceptable for the low income family tricked into $257 of fees and just $43 of credit.  It will be nearly impossible to fight a major corporation for just $257 without the help of an attorney or the cost sharing of a class suit.  When class actions are stymied, consumers lose and corporations win – big – or so they think.  Eventually everyone loses when the system is devoid of fairness.

Assisted by Zachary A. Kady

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It must be pretty scary right now to be a retiree of Kodak.  You work with pride for decades for an iconic American company, only to learn late in life (beyond when you can find meaningful employment) that your health and pension benefits may just be gone.  Poof.  Thought you could afford to keep a little house on a lake in the summer for fishing and visits from your grandchildren.  Forget about it.  The $40,000 pension (give or take $5,000) is now at risk, as Kodak spent all its money trying to make printers when most offices were going paperless (hmmmm).  Worse, the health benefits that cover you and your ailing spouse might disappear as well.

Of course—thank goodness—you have social security and medicare (let’s hear it for the New Deal and FDR), and a few pennies of lifesaving remaining (after paying for three college tuitions, two weddings and start-up capital for your son in law’s failed restaurant).  But not much else; you can’t sell your house in Rochester, New York, for any amount because the town’s largest employer—yes, Kodak—is out of business and those U.S. Savings Bonds aren’t going to last too long if you have to pay for a basketful of prescription drugs.

Sadly, Kodak retirees are not alone.  Workers at great smokestack stalwarts like Bethlehem Steel and the huge auto-parts giant Delphi faced the same plight.  It’s a problem that politicians cannot ignore and continue to “kick down the road” much longer.  Maybe the answer lies with the work of a little-known Washington lawyer, Andrew Kramer, who recently passed away (at 67, before he had to face a long retirement without income).  From the Washington Post:

Mr. Kramer represented some of the biggest manufacturing companies in the automotive, steel, shipbuilding, aluminum and tire industries. He was best known for helping his most financially distressed clients reduce or eliminate “legacy costs,” the retiree health-care benefits that could mean billions of dollars of liability in perpetuity.

This became especially important over the past 20 years, when new financial accounting rules forced companies to put retiree health costs on their balance sheets as something other than a footnote. The psychological effect was huge: Company executives and shareholders suddenly had to reckon with the immensity of their obligations.

While private companies could simply eliminate health-care benefits for retirees, unionized industries would never stand for it. Mr. Kramer was among the first to use the trust structure known as a Voluntary Employees’ Beneficiary Association to offload a company’s entire financial obligation to retiree health care...

In recent years, Mr. Kramer was instrumental in crafting VEBAs for clients such as Goodyear Tire & Rubber, the auto-parts maker Dana Corp. and Crown Cork & Seal Co. In 2007, he helped orchestrate the agreement between GM, the country’s largest automaker, and the automotive workers union that resulted in a $35 billion payment by GM into the VEBA. In return, the VEBA would pay the retiree health-care bills.

Kodak did not have a VEBA.  Why not?  Will it take federal legislation to require all companies to do something to protect retirees (a status we all hope to attain because the alternative is, well, likely far less interesting)?  Perhaps.  I leave that to folks with more expertise than me in these matters, but—and here is where the Corporate Observer gets political—is Mitt Romney the guy to tackle this problem?  The same Mitt Romney who was recently quoted as saying that $370,000 of income from speaking engagements was “not very much”?  Ask retirees of Kodak if they could use $370,000 right about now.

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The Wall Street Journal reported today that FINRA has fined Citigroup a whopping $725,000 for failures to disclose investment-banking relationships.  That’s it? $725,000?  We’ve seen slaps on the wrists before (click here and here) but this is hardly a slap (as a slap connotes some level of force). No, when a multi-billion dollar business like Citigroup is fined $725,000, that’s the equivalent of dropping a few pennies out of your pocket while looking for your keys.

Citigroup and other banks are required to submit disclosures of analysts’ stock ownerships and other conflicts in annual reports.  In this instance Citigroup omitted those disclosures in over 8% of reports published between 2007 and 2010 – 9,000 in total. It is generally accepted that most of Citigroup’s failures are a result of a technical error and not intentional deceit.  However, the nominal penalty FINRA imposed on Citigroup hardly encourages compliance in the future. Worse, it invites occasional deceit that analysts and unscrupulous compliance officials know they can later pass off as a simple “oversight”.

Remember, this is the same bank that packaged and sold distressed securities to its clients without disclosing their true value and then had the nerve to short their own position – an inexcusable action directly adverse to the interests of its clients.

Instead of the window dressing we are getting from FINRA, investors deserve strict and swift action. Substantial sanctions send a message that rules are important and that the public takes regulation seriously.  A $725,000 fine hardly sends that message. 

Assisted by Zachary A. Kady

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Yesterday, regulatory heads from the SEC, Federal Reserve, FDIC, and CFTC addressed two congressional subcommittees regarding the Volcker Rule.  They showed spine, commitment and solidarity towards the Rule, which should give heart to Main Street.  It’s about time.

Detractors argue that the Rule, which forces banks to return to their role as basic depositor and lender, limits the banks’ ability to “make markets,” politician-speak for “bet the farm.”  This will negatively impact liquidity, making it harder for investment capital to reach those that seek it, they argue.  Blah blah blah.  And needless to say they find “friends” in Congress (read: recipients of donations) to beat the drum.  Well this time, the administration is not budging. Can you say, “Election year”?

Here’s the bottom line.  Banks have served two distinct functions this millennium, one as deposit holders and lenders, and one as investors.  The deposit-holding and lending function (the actual banking) serves Main Street.  The risky investments—or “market-making” if you listen to bank lobbyists—serve the bank executives at the risk of depositors.  The Volcker Rule allows banks to hedge risk but make no other investments.

Investing—for example, in incomprehensible derivatives that include AAA-rated, subprime mortgages not worth the ink in which they’re written—is not the role of a bank.  It is the role of separate institutions, which will certainly step up to fill the void.  And when they step in, they won’t be risking the deposits of unwitting taxpayers.

Dodd-Frank gives banks two years to comply with the Volcker Rule, and they’d better get changes underway.  The regulators are—knock on wood—finally serious and unified in their efforts.  Bankers beware.  Main Street, rejoice.

Assisted by David T. Martin

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I guess he got sick of eating lunch alone.  I can see it now, he walks into the SEC’s cafeteria (actually I don’t think they have a cafeteria) and says,”You guys mind if I join you?”

“Sure,” says Head of Enforcement Robert Khuzami, hoping not to offend the respected yet independent-minded and powerful Inspector General, H. David Kotz.  “But actually we were—hmmmm—just leaving.”  And so it goes, another lunch alone.

Next time, he figures, he’ll just work through lunch.  Since 2007, Kotz has produced some stinging and thoughtful reports on the failure of his agency to do its job.  He will be best known for his thoughtful, take-no-prisoners critique of the Commission’s failure to ferret out the Madoff and Stanford schemes earlier.  He also highlighted problems at Bear Stearns before its collapse and drew attention to insider trading and conflicts of interest among SEC employees.

We should all commend his tireless service.  The role of the Inspector General is a unique one.  The French Army had an IG as early as the mid-17th Century, assigned to report to King Philip (or was it Louis?) regarding the state of the army.  The United States adopted the position during the Revolutionary War: An Army Inspector General was assigned to training the Continental Army (which was really just an assembly of militias) and ensuring uniformity of tactics.  In the three-plus centuries since, the role has expanded in the United States to just about every major governmental department.  Mr. Kotz filled the role admirably at the SEC, and at a difficult time.  We wish him well.

We now look forward to seeing Chair Mary Schapiro’s obvious choice for his replacement.  “Drum roll please...”

Harry Markopolos.

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The press recently reported (click here for the WSJ story) that DOJ is joining the investigation of S&P for its shady practices of rating the very folks who pay its bills. Below is what I imagine to have transpired in an initial conversation between investigators and S&P officials.  

S&P Vice President for Compliance: Come in guys.  Sorry the coffee is cold and the pastries are a bit stale.  We’ve been expecting you for, well, the last few years.  Were the directions we gave you a little tough to follow?  Should have used Google maps?

DOJ Prosecutor: No. It’s all good.  Frankly, we were going to give you a pass (wink nod).  Just too complicated.  We like easier cases.  But then you went ahead and downgraded US Treasury Bonds.  That did not play well at the home office. 

S&P Vice President: Yeah, I guess it was not the time to get righteous.  So how long will your team need to be around?

DOJ Prosecutor: I guess that depends. Now that the press is on to the investigation, we have to make a show of it.  And look, from what we know, you guys made over $2 billion (with a b) dollars rating these CDO; that’s a little too much to ignore.

S&P Vice President: And how bout the SEC?  What about their investigation?

DOJ Investigator: Oh, those guys? Ha! Trust me, they need all the help they can get.

S&P Vice President: Do you think anyone is going to jail?

DOJ Investigator: Nahhhh.  We get it.  You guys bend over backwards for the Wall Street firms so that your friends over there are happy and well fed – and in return when your kids near college you move over to take a lucrative seat on the other side of the table.  And so it goes.  (The old you scratch my back, I’ll scratch yours).  If we were going to prosecute folks for that kind of behavior, Wall Street would be empty.  We’d have to let out all the drug dealers and addicts to make room in the prisons.

S&P Vice President: Hey thanks, we’ll bring in some fresh coffee … and if your daughter needs a summer a job, make sure to use my name.

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To many, the Supreme Court's recent decisions in AT&T vs. Concepcion and Wal-Mart v. Dukes suggest the bell has tolled for the class action mechanism as a tool for consumer protection. This comes at a time when consumers already feel beleaguered by the growing ascent of corporate America and the rise of Wall Street.  My new article takes a hopeful view of the future viability of the consumer class action practice.  To support my confidence I draw from the practice's long and rich history dating back to medieval England, and encourages class action practitioners to learn from the Qui Tam bar, which has enjoyed growing success as an increasing number of statutes provide whistleblowers with legal protections and financial rewards.

Please read the full article here.  Feel free to download and share, and comments are welcomed, as always.

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Let’s say the lowest-paid employee at Apple makes $38,700.  Mr. Cook makes 10,000 times that amount in total compensation.  It is too much to sustain.

Okay, first a disclaimer: I am all Apple, all the time.  I’m currently typing on my MacBook Pro; I will be talking later on my iPhone.  Later still I will be listening to music from my iTunes account on my iPod.  I am now the proud owner of an Apple TV gizmo and if they sold cars, I’d be driving an icar.

So $378 million for the CEO.  What’s the big deal?  A-Rod makes $250 million and he just plays for a baseball team (oh, that's over ten years, you say?).  Worse yet, 7 out of 10 times at bat he’s unsuccessful.  And there are lunch bucket executives aplenty making… gulp… tens of millions or more.  UnitedHealth Group CEO Stephen Hemsley took in a nice $102 million in 2011; Robert Iger of Walt Disney only made $53 million.  Poor guy.  So why fuss about Tim Cook?  He should be on top of the heap.

First, is it really $378 million?  Indeed it is.  Not salary (which is a cool $900k), but mostly in the form of a package of restricted stock.  He receives half of the stock in 2016; the other $188 million vests in 2021.  But believe me, if he went over to the local branch of any bank and said, “I’d like a loan against my Apple compensation,” he could certainly borrow $378 million.  More likely he could borrow a billion and buy the bank.

Yep, he’s made bank.  The pursuit of bank.  The oil that lubricates the capitalist system.  I’m all in, but—and here it comes, from the protector of consumers and the 99%—we need to recalibrate.

No, not socialism.  But we need a system where the CEO makes 100 times the lowest-paid employee, or maybe close to 1,000 times.  But not 10,000 times.  Let’s say the lowest-paid employee at Apple makes $38,700.  Mr. Cook makes 10,000 times that amount in total compensation.  It is too much to sustain.  It creates the disparity of the robber baron era; we need to move on to a society that values all contributors.

My love for Apple products goes beyond Mr. Cook’s leadership in the boardroom.  It involves the great designers, software engineers, and the guy in the warehouse shipping the product to my door.  Don’t pay them all the same, but incentivize them all and save some for a rainy day.

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Come on fellas, you gotta be kidding.  Here’s the big change we’ve all been waiting for from the protector of the nation’s securities markets:

For those who plead guilty to fraud and other criminal offenses, the option of settling civil charges brought by the SEC will not be able to proceed with a mere “neither admit or deny liability” settlement.  Nope, the new “get tough” sheriff in town (the SEC) says no more “denying liability.”  Convicted criminals can instead remain silent and will not be forced to admit liability; that’s it.

For civil settlements: no change.

For a complete explanation of the SEC’s new policy see David Hilzenrath’s article in the Washington Post.

Okay, let’s see if I get this right.  In 90% of cases (that is, civil cases)—no change.  In the approximately 10% of criminal cases—a defendant need not admit civil liability.  This is “less than meaningless” because to be convicted of a crime, prosecutors must establish guilt at a higher standard (beyond a reasonable doubt) where in a civil case the evidence must only be established by “a preponderance of evidence.”  So if someone has already accepted (or been found guilty) beyond a reasonable doubt—what does it matter?—they have for all intents and purposes admitted civil liability (the lower standard).

Got it?  I sure don’t.  I respect the SEC.  I know they have a cadre of hardworking, smart people.  So what beyond window dressing is this latest effort?  Surely Judge Rakoff, the provocateur in this effort will not be satisfied.

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Regulators in bed with the regulated: ho hum, business unfortunately as usual.

This time, the CFTC is investigating the CME Group for their “oversight” of MF Global, which recently lost $1.2 billion in about half the time you can say: “Commodity Futures Trading Commission.”  Head of MF Global and former New Jersey Sena-governor Jon Corzine says he “can’t find” the money.  Folks, we are not talking about the pocket change we have in our pants pockets.  Meanwhile the CME, aka the Chicago Mercantile Exchange—MF Global’s primary regulator—says blithely the books have been cooked.  “Really,” as if that tells us anything.

So a dollar short and a day later, the CFTC is going to investigate the CME and its failure to—well—regulate.  The CFTC is also investigating the dozen-plus largest futures brokers for similar improprieties, yet another example of regulatory bodies swinging the bat with the ball already in the catcher’s mitt.

“Fellas, to hit the ball, you must swing earlier and at pitches you can hit.  Are we asking too much?”  Regulators come out of the industry they regulate.  These guys are in the industry, they should know, or at least be able to find out what’s around the corner.  A regulator is not akin to a prosecutor who comes in like a baseball closer to finish the game; a regulator is the Commissioner.  He or she sets the rules of the game and then lets them “play ball.”

I understand that global financial markets move at hyper speeds.  But regulators, jump out of bed with the regulated and spot the next issue before it surprises us on page A1 of newspapers around the globe.

Assisted by David T. Martin

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The American consumer could not have asked for a better holiday gift to begin the New Year.

As the election nears, President Obama is flexing his muscles.

The campaign slogan way back when of “hope and bipartisanship” could not have been more inspiring—or more idealistic, but governing has been tough, particularly given a Republican attitude of “no compromises, no backing down, no deals.”  While the President has not fared well at hardball—a game he was not born to play—he has signaled a renewed and reinvigorated willingness—fueled by the upcoming election no doubt—to step up from his game of compromise and conciliation.  Knowing Republicans would block the nomination, the President has named named Richard Cordray, a 2011 Corporate Observer All-American, head of the Consumer Financial Protection Board during Congress’ recess.

Thank goodness.  The CFPB has been crippled without a head.  It is a centerpiece of the much-needed Dodd-Frank legislation.  Appointing Mr. Cordray will allow the CFPB to begin the work of regulating a fast moving and dynamic sector that to date has remained one step ahead of regulators.  Mr. Cordray is surely qualified—he clerked for Supreme Court Justices White and Kennedy, served as Attorney General of Ohio, and even won Jeopardy five times.  One of his main initiatives will be to deploy the Volcker Rule, in spirit if not name.  Mr. Cordray has promised to expand the Board’s regulatory activities to the non-bank realm.  Many of these under- or unregulated firms are the root of the greedy risk-taking that helped cause the financial crisis.

There is a long checklist waiting on Mr. Cordray’s desk, but for now, it's about time Mr. President and good luck Director Cordray.  The American consumer could not have asked for a better holiday gift to begin the New Year.

Assisted by David T. Martin

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 This blog is belongs in the category of: “You can’t make this stuff up.”

Life Partners Holdings’ business plan is simple: pay people a small sum up front in exchange for that person’s life insurance policy.  Life Partners then sells shares in those life insurance policies as securities to average independent investors.  Essentially, Life Partners and its investors make money by betting that people will die sooner rather than later.  The sooner the death, the quicker (and larger) the payout on the life insurance policy.  Yuck.  Isn’t there a better way to make a living; say build a house, clean the streets, heck, run for President?

To boot, Life Partners is not alone.  There are plenty of players in this “bet on death” space.  Life Partners is different though; they are financed by average investors as opposed to institutional investors.

What happens if the policyholders outlive their insurance policies?  Well, in that case, Life Partners and its investors take a hit.  You must be thinking, “Wow, they better have some good actuaries over there to minimize risk.”  Nope.  Turns out Life Partners Holdings hired an unqualified doctor to make unreasonable and incorrect estimates on life expectancy.  Why?  Hard to say, but it suggests that all along the business might have been about making money for the owners and to heck with the investors.  According to the SEC, the doctor estimated on average that policy holders would live 4.6 years, but, in actuality, sound actuarial practices would’ve revealed an average life expectancy of 9 more years – 13.6 in total.  Thus, investors were tricked into thinking securities were far more valuable than they actually were.

Can you say snake oil!

Life Partners was recklessly selling securities whose value was far below the advertised price, leaving little chance for positive return for investors.

The SEC, undeterred by the slap down it received from Judge Rakoff, has filed charges alleging disclosure and accounting fraud as well as insider trading by the company’s CEO, Brian Pardo and General Counsel, R. Scott Pelden who each sold millions of dollars of stock based on insider knowledge of Life Partners’ weak financial state.

As if the business of betting on death wasn’t already sleazy enough, the folks over at Life Partners have taken it to a whole new level.  “Have you no shame, Mr. Pardo and Mr. Pelden?”  It's one thing to be in the business of profiting on the early death of others but to do that and cheat is just beyond reprehensible.  I can’t see this pair being invited to the elementary school on “what my father does for a living day.”

Assisted by Zachary A. Kady

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