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Posted on January 30, 2012 by Steven Berk
$1.2 billion; it sure is a lot to lose. Okay, I could see $20 maybe $50; you leave it in your pants pocket (only to find it with some glee a few days later) or you might go to Vegas for the weekend and lose some money, more than you wish to admit. But over a billion, missing? That’s no easy trick.
Well folks I’m here to tell you it’s not lost. It may be gone, but it was not lost. The money was taken from MF Global’s customer accounts (traders, farmers, individuals, brokers) and used by MF Global to support their mounting trading losses in European debt. I suspect it was a frenzy of activity, but someone stole the money. Perhaps not all at once, but a few hundred million there, a few hundred million here and you are at $1.2 billion.
So stop New York Times, Wall Street Journal and all other media outlets from saying it is “lost.” And start asking the right question: Who stole the money? Who authorized the siphoning of funds from customer accounts to cover the proprietary trading of MF Global? Was it SenaGovernor Corzine? My guess is that he would be too smart to have his fingerprints on any such decision.
Alternatively, if MF Global had the right to monies in its customers accounts, stand up and say so. It seems despicable, but if customers agreed to it, they agreed to it and let’s move on. But surely the money was not “lost.” It was taken and that’s a big difference.
Posted on January 26, 2012 by Steven Berk
Have you ever received mail from your bank or credit card company that includes a long, somewhat friendly letter saying benignly: “The terms of your agreement have been changed.” “Huh, what terms?” You read on looking for some clues but when you’ve determined that you haven’t bounced a check, your credit card was not stolen (as you feared) and your account has not been hijacked to buy a dozen bottles of Cristal at a Moscow nightclub for $25,000, you’re like “whatever” and throw out the letter with a sigh of relief.
But should you be relieved? More often than not, that “change” to the terms means you can no longer sue your bank in court or file a class action. You’re stuck with something called “arbitration.” “Oh, who cares, I don’t plan on suing my bank or filing a class action.” But you never know, and just the threat could keep your credit card company honest. (Click here to read about the Supreme Court’s decisions on Arbitration in Concepcion and CompuCredit.)
So to all the average Joes out there: Arbitration is all they get and the Courts have said it's good enough. But for the folks in the know, it ain’t. That’s exactly what Merrill Lynch was saying when it decided to ignore FINRA’s arbitration regulations and instead file collection suits against its employees in New York State Courts. In response, FINRA slapped the firm with a $1 million dollar fine.
Strangely, I can’t help but empathize with Merrill Lynch and its executives. I want to console them, to reach out and say, “I know, it’s excruciatingly frustrating to have a legitimate claim and be forced to arbitrate instead of pursuing real justice. I know, Doug Preston (Chief of Compliance), you had no choice but to agree to arbitration – it was required by FINRA if you wanted to do business. There, there, no need to sob, but I told you and your pals that this was unfair from the beginning.”
Merrill’s $1m penalty is pittance compared to what American consumers are losing every day as a result of Wall Street’s efforts to keep rightful claims out of court. When Americans are wronged, they deserve the right to seek redress before a competent panel—the courts. To be sure, arbitration has its place in the world—it is a remarkably effective means of resolving disputes between large corporations or equal parties who have both willingly agreed to it. However, as Merrill Lynch’s own actions point out, a denial of access to the courts can be maddening when you didn’t choose arbitration. In these cases (what we call adhesion contracts), the courts are more likely to offer a suitable remedy. And everyone, corporation and consumer alike, should have the opportunity to select the forum for resolving disputes.
Corporate America claims to support arbitration. Yeah, when it’s convenient. In reality, they only support arbitration under their own rules, when the only person bearing the brunt of a systemic injustice is the American consumer.
Well, at least this week, the shoe is on the other foot. If Merrill’s actions are any indicator, it doesn’t feel nice.
Assisted by Zachary Kady
Posted on January 19, 2012 by Steven Berk
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
Posted on January 19, 2012 by Steven Berk
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
Posted on January 17, 2012 by Steven Berk
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.
Posted on January 6, 2012 by Steven Berk
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
Posted on January 4, 2012 by Steven Berk
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
Posted on December 22, 2011 by Steven Berk
From 2004 to 2008, Countrywide mortgage – now owned by Bank of America – discriminated against over 210,000 minority borrowers on account of their race. The Wall Street Journal reports that blacks in Chicago borrowing $2,000 paid an average of $1,235 more than whites. Hispanics paid $1,100 more than their white counterparts. Additionally, fees were $545 higher for Hispanics and $415 for blacks. But wait, there’s more! For three years, Countrywide pushed minority borrowers towards risky subprime loans when they were perfectly qualified for less risky prime loans.
Bank of America will pay $335 million to settle their dispute with DOJ. The settlement will directly benefit those damaged by Countrywide’s actions. Click here for the official settlement announcement.
Is this justice? Hardly. Blatant, institutionalized racism and greed must be punished with more than a slap on the wrist.
I blogged recently about Judge Rakoff’s bold willingness to take a stand when the SEC failed to reach an acceptable settlement with Citigroup. Will this settlement be subject to the same level of scrutiny? No doubt stronger sanctions are suggested by the facts. Without stronger penalties, big time lenders simply conduct business as they please, without care or consequence. This settlement is good for the cheated borrowers of the past, but it does nothing to help protect future victims from the unscrupulous and boundless greed of Wall Street. For that reason, it is not just, it is not adequate, and it is not acceptable.
A settlement must be a deterrent to all similarly situated banks and lending institutions. Change will only come and institutional racism will only be checked if the courts take a stand. The spirit of Brown v. Board of Education must be rekindled.
Assisted by Zachary A. Kady
Posted on December 20, 2011 by Steven Berk
As if things aren’t bad enough in Washington. Over the past weeks, the trading profits of members of congress have been regular news fodder. In recent days, the focus has shifted slightly to the profits of Wall Street firms – particularly hedge funds – that profit off of “insider” information gleaned hours ahead of publication from private meetings with powerful members of congressmen. Click here for the Journal’s take on the story and here for another reaction from The Atlantic.
Leveraging off government action to make money has been around since the days of George Washington. In more recent times, Wall Street banks know that a government announcement on particular policies can drastically and immediately affect stock movement. And when you can trade rapidly through a high speed modem – that spells “ka-ching”, big money. One of the latest games takes the form of lunches, meetings, and panel discussions organized by firms who will earn a commission on trades resulting from the information provided at these soirees.
The leading firm is JNK Securities, which most notably organized a meeting between high powered banks and congressmen known to be influential on the healthcare debates of 2009. In that meeting, the investors were told that a government-run health plan was highly unlikely – an important signal that investments in private insurers like AETNA were good bets. AETNA shares rose 6% in the following days.
Some congressmen defend the meetings as important opportunities to discuss the ramifications of proposed legislation on the business community. They also say the investors point out loopholes or inefficiencies in the laws. (Yeah, right… and is that bridge over in Brooklyn still for sale?)
On the other hand, some law makers like Louise Slaughter, a democrat from New York, are seeking to curb the practice insofar as lawmakers’ information directly results in Wall Street trades. Ms. Slaughter’s bill is supported by a majority of House members as well as Senator Lieberman. Importantly, the bill would treat banks like lobbyists – requiring them to disclose these types of activities.
Thanks to Senator Lieberman, Representative Slaughter, and all other likeminded congressmen for taking a stand.
Assisted by Zachary A. Kady
Posted on December 12, 2011 by Steven Berk
Princeton’s football team is having a miserable season. 1-9, tied for dead last in the Ivy League, tied with the perennial cellar-dwelling squad from Columbia. To improve next season, Coach Surace might just want to recruit some of those gutsy “occupy” Princeton folks who took on the likes of JPMorgan Chase and Goldman Sachs – the banking equivalents of Ray Lewis and Ndamukong Suh.
These “occupiers” dressed in business attire and politely chatted up the recruiters, seeming like no more than innocuous and wide-eyed prospective employees. However, once the sessions began, they performed the now-famous (or infamous) call and answer style protest which has become a trademark of the occupy movement. The message was simple: a career on Wall Street is not the only career path worthy of a Princeton student. Bright young minds should not waste their talents on an industry that gives nothing back to the larger community. The fringers were lockstep with Princeton’s hallowed motto:
Princeton in the nation’s service and in the service of all nations.
Will this confrontation affect next quarter’s profits? Probably not. Will they directly put an end to undesirable, unethical, and – ultimately – unwise lending practices? Again, probably not. But maybe this event, coupled with nagging frustration across the country, will signal a tipping point to the prescient among the Wall Street gang. It is beyond the fringe, it’s soon to be Ivy League graduates – future government leaders and business titans.
In the worst job market in decades they are willing to say “no.” No to a certain six figure salary and a platinum American Express Card. No because they stand for principles. Will JPMorgan Chase and Goldman Sachs find other candidates to work a 20 hours a day looking for some momentary statistical anomaly in the Forex market that when leveraged 100 times will yield a nice return on investment? You bet. But maybe, just maybe, if the courage shown on Princeton’s campus is exported to other leading colleges, attitudes might just change. And the Occupy Wall Street movement will in fact have accomplished something real and lasting.
Posted on December 7, 2011 by Steven Berk
The new darling of tax reformers ranging from Occupy Wall Street’s protesters to Bill Gates is something called the “Robin Hood Tax.” At its simplest, it is an attempt to place greater monetary burden on the banks and their shareholders. The beneficiaries would be Main Street (the 99%), either because banks would lessen their trading and thus their size (anything to avoid taxes) or not (and the tax revenues would be used to fund programs that benefit the middle class). Sounds okay.
But I’m skeptical. First, I’m confident banks will find ways around any such taxes faster than you can say “Sheriff of Nottingham.” Second, banks will pass on any additional costs to their depositors (you and me) faster than you can say “Maid Marian.” It won’t be long before our bank statements look like a cell phone bill, with pages of charges associated with everything we do. (“Oh Mr. Berk that 33 cents is for your balance inquiry on November 15th.”) And third, any such tax will divert us from the core problem: Banks are getting bigger and stronger while regulation lags dangerously behind. This Robin Hood, although dapper in his green tights and equipped with a full quiver of arrows, is no match for the modern arsenal and armies of lobbyists owned by the banks.
Let’s be transparent; banks need to be regulated before they fail, not after. And regulation must have teeth, not merely words that can be ignored by ambitious CEOs and traders. (Yes I’m talking to you, Sena-Govenor Corzine.)
Posted on December 2, 2011 by Steven Berk
This cannot be fun for Sena-Govenor Corzine. The House Agricultural Committee has voted unanimously to subpoena him to testify about the recent debacles at MF Global. As you’ll remember from our earlier post, MF Global somehow misplaced hundreds of millions of customer monies. Ooops.
Corzine does not yet face any charges, but he has hired criminal counsel and as a threshold matter it will be interesting to see if he takes the fifth. The fith amendment that is … Surely he wants to testify, but he's got to be careful. All news reports suggest he was right smack in the middle of MF Global's demise — betting big time on Europe's sovereign debt — and surely leveraging those bets -- while eschewing his own risk management department. Stay tuned.
If he testifies, this promises to be a fascinating hearing.
Posted on December 2, 2011 by Steven Berk
Mr. Rajaratnam, enjoy your last weekend at home. Watch some football, enjoy your favorite foods and make sure to hug your kids. Because come Monday it's federal prison in Massachusetts – ouchhh.
Despite the arguments of your eloquent and powerful attorney, Patricia Millett, the trial judge and a panel of judges from the second circuit court of appeals feared you would opt for your native Sri Lanka (presumably fleeing surreptitiously in the baggage hold of someone’s private jet – since surely your passport has been seized) instead of lovely western Massachusetts.
But fear not Raj fans, I would not be shocked if on appeal his conviction is overturned. As I’ve written before, the prosecution team obtained its evidence using tactics that were aggressive and arguably crossed the line. Raj and his team argue that prosecutors conveniently failed to disclose key facts from prior SEC investigations when applying for wiretap warrants. Judge Howell was surely troubled but decided it was prudent to allow the case to proceed to the jury.
Now on appeal, Raj has put his fate in Patricia Millett, a rising star in the rarified world of Supreme Court Attorneys. As an attorney in the Solicitor General’s Office she argued 25 times before the Supreme Court. She is known as a persuasive oral advocate and strong writer. Unlike Raj’s trial counsel (John Dowd), she is in the prime of her career. Overturning this conviction would catapult her to the highest level of appellate lawyers and who knows, the Attorney General’s Office or maybe even a black robe, driver and a key to the Supreme Court’s basketball court. You can be sure she is motivated to do well in this very high profile matter.
Prosecutors cannot breathe a sigh of relief just yet. They will have their work cut out defending this conviction.
Raj, you won’t be home for Christmas, but maybe next year.
Posted on November 16, 2011 by Steven Berk
Today, the New York Times' Dealbook featured an article on the federal government's "crackdown" on Ponzi schemes. The piece uses increasing numbers of FBI Ponzi investigations and CFTC enforcement actions as evidence of the tougher stance. While the government's strategy appears successful, it targets the wrong folks. Below is my comment on the piece, also posted at Dealbook's website.
Ho hum. Nothing new, regulators will go after "low hanging fruit." The easy targets. Think about the drug dealer on the corner instead of the kingpin who travels around in a limousine, never soiling his leather-gloved hands in the day-to-day affairs of the criminal enterprise. The cops can pick up the drug dealer and charge him with possession with intent to distribute the drug du jour, but by the time he appears for arraignment his "replacement" will be on the street -- making sure the "king pin" doesn't lose market share (and a valuable corner).
And so it goes with Ponzi schemes. The CFTC and the SEC will make a few arrests of the most outrageous of "con men" // "flim flam artists" // "grifters" -- call them what you like. But it's just a holding action, a finger in the dike.
The efforts of prosecutors instead must be on the "legitimate" financial institutions that assist these schemers. Madoff didn't deal in cash. He banked at the eminent JPMorgan Chase. Sanford had a score of banks at his disposal as he syphoned billions offshore. Nick Cosmo on Long Island was a Bank of America favorite. These banks profited by their association with these hoodlums at the expense of the victims. "Oh Mr. Madoff I see your balance in your account is $35 billion, can we offer you a free toaster?"
These banks knew and if they were held accountable by prosecutors... now that would be a real story.
Posted on November 9, 2011 by Steven Berk
Heads: the risks pan out, the executives look like geniuses, and they have “earned” their multimillion dollar bonuses and Cuban cigars. Tails: the uberderivative financial instruments that these “geniuses” have concocted crash, as in the subprime mortgage crisis...
There are simply no negative consequences. Financial institutions, three years since the beginning of the global financial crisis, are still making incredibly risky investments (*cough* MF Global *cough*). Why? Because there’s no disincentive—moral hazard, as it’s called. Bonuses given to these banks allow and encourage risky investments. The penalty if they fail? Oh, a few billion dollars in bailout money, straight from the pockets of taxpayers. But the bonuses, they shrink in the aftermath, right? Right?! Nope.
The combination of bonuses and bailouts creates a “heads I win, tails you lose” scenario for big bank executives. Heads: the risks pan out, the executives look like geniuses, and they have “earned” their multimillion dollar bonuses and Cuban cigars. Tails: the uberderivative financial instruments that these “geniuses” have concocted crash, as in the subprime mortgage crisis; lenders and shareholders, and eventually taxpayers are forced to pay to revive the “too big to fail” institutions. Meanwhile a year after the taxpayer-sponsored recovery, bonuses rise to their highest level in history. Forget a slap on the wrist, Bank Executive Stevie just got caught with his hand in the cookie jar and his “punishment” was a trip to Costco to buy more.
In yesterday’s New York Times, Nassim Taleb’s OpEd piece touched on an important concern. To eliminate the moral hazard, either the bonuses or the bailouts must go. The easier solution for him is the bonuses, which he argues should be eliminated at any institution eligible for a taxpayer bailout. If you’re “too big to fail,” you’re too big for bonuses. At a bare minimum, this would eliminate the positive incentive for risk taking.
Of course, the second prong of Taleb’s argument—essentially instatement of the Volcker Rule—would be much more powerful. Tell the institutions: “You can bank, or you can invest. But the entities that store taxpayer money cannot also be the biggest gamblers in our financial system. Period.”
Assisted by Rachel Grossbaum
Posted on November 2, 2011 by Steven Berk
Imagine that: when the banks actually disclose a fee to consumers, they have the capacity to vote with their feet—in this case by migrating to competitor banks with a more customer-friendly policy. This is free market economics at its best.
Facing a hue and cry from consumers, Bank of America announced on Friday that it will drop its planned $5.00 debit fee charge.
At the beginning of October, major banks including JPMorgan, Wells Fargo and Bank of America announced the fee. But consumers are showing some feistiness. In the past month, consumers have mobilized against the fee, getting 300,000 signatures on a Change.org petition. And worse for the banks, they are defecting at large rates from the big banks in favor of smaller, local banks. In response, Bank of America (last but not least) became the final banking giant to nix the charge.
Could there be a better example of the benefits of transparency? Imagine that: when the banks actually disclose a fee to consumers, they have the capacity to vote with their feet—in this case by migrating to competitor banks with a more customer-friendly policy. This is free market economics at its best.
Transparency and disclosure makes it possible for the middle class to see the truth. More transparency even trumps more regulation. Let the public vote with their feet... and their mouse clicks.
Assisted by David Martin
Posted on October 20, 2011 by Steven Berk
The SEC’s recent settlement with Citigroup wouldn’t even brush back Alex Rodriguez, so it’s certainly not scaring the world’s fourth-biggest bank into compliance. If the banks’ reaction to recent regulation is any indication, Citigroup will just levy more fees on its unsuspecting customers to pay off the $285 million legal tab in a few days.
Ho hum… Citigroup to pay hundreds of millions in a settlement related to subprime mortgage instruments. The SEC crackdown is finally underway!
Yeah right. Though $285 million is a big number on Main Street, in the executive suite of mighty Citigroup it is a rounding error, less than 8% of the bank’s $3.8 billion profit from Q3 alone. Heck, Citigroup has probably paid CEO Vikram Pandit alone close to that amount over the years.
The lawsuit and settlement relates to Citigroup’s sleazy effort to take advantage of the market conditions resulting from the subprime financial crisis. In a sentence, the banks loaded investment portfolios with risky-at-best instruments, neglected to inform their customers of the risk as they sank billions into the portfolios, then surreptitiously bet against the instruments themselves. The more their investors lost, the more the banks won.
The outrageousness of this plan can be illustrated with an analogy to our favorite sport, baseball. Consider Cardinals skipper Tony La Russa convincing thousands of fans to bet on his team in the World Series, not too difficult. Once he’s holding the cash, he benches sluggers Albert Pujols and Matt Holliday and sneaks to Vegas, placing millions on the Rangers. Got it so far? Here’s the rub. When Major League Baseball finds out, he’s fined a mere $75,000. It's that blatant folks.
Banks like Citigroup have proven time and again that a slap on the wrist like this won’t change the trend towards greed and unimpeded profit-mongering above sound banking principles and just plain ethical conduct. The SEC’s recent settlement with Citigroup wouldn’t even brush back Alex Rodriguez, so it’s certainly not scaring the world’s fourth-biggest bank into compliance. If the banks’ reaction to recent regulation is any indication, Citigroup will just levy more fees on its unsuspecting customers to pay off the $285 million legal tab in a few days. $1.00 to walk in the door of your local branch, $2.00 to use the restroom. Oh, you planned to wash your hands? Please insert an extra quarter.
More concerning than the mere slap on the wrist is that no regulation has been effectively passed and enacted since the crisis to prevent future transgressions. Dodd-Frank has met the immovable object known as partisan obstinacy. Moreover, the Volcker Rule, which would require banks to get back to doing what they do best—perhaps the only thing they can do effectively—which is loan money, is being watered down, bludgeoned and otherwise made an ineffective mess by Gucci-loafered lobbysts from the financial industry. It's time to stand up to these shenanigans. Mr. President, where are you?
Assisted by David Martin
Posted on October 13, 2011 by Steven Berk
Judge Richard H. Howell sentenced Raj to 11 years in prison this morning following his August conviction for securities fraud and conspiracy. According to the New York Times, the 11 year sentence is the longest ever for insider trading, surpassing the 10 year sentence of Zvi Goffer, also a former Galleon trader (and just short of my prediction of a 15 year sentence back in August).
Deterrence matters. As a former Federal Prosecutor, I’ve seen the power that a stiff sentence and a prominent presence on the front pages can have on lowering crime rates. Haynes & Boone white collar defense attorney, David Siegal expressed a similar sentiment: “One legacy of this case that Wall Street will be more careful about what they say on telephones than they used to be.” Good. We should hope that vigilance on the phone will spill over into vigilance when walking the line between aggressive fact gathering and insider trading.
The SEC can celebrate a job well done, but not for too long. We need these investigators – who, for the first time in history, placed wiretaps on suspected insider traders – back out there catching bad guys. Stay on the hunt. Stay on the front pages. Rajaratnam made profits of more than $60M from insider trading…who is making $70M, $100M?
Insider trading affords the well-connected on Wall Street an unfair advantage over the average yet diligent investor on Main Street. That, my friends, is unacceptable. The regulatory agencies must remain on the watch, making sure the game remains fair – for everyone.
Assisted by Zachary Kady
Update (10/14/2011): Please enjoy the Newsy video coverage below.
Posted on October 11, 2011 by Steven Berk
As unemployment continues at an uncomfortable nine-plus percent, you’d think Wall Street would share the pain and bonuses would be down. Nope. They don’t create jobs, they don’t add value. Instead they profit, they leverage, they figure out the spread and increasingly they use more and more risk to accomplish “profits” and bonuses. But don’t listen to me; consider the recent words of Nobel laureate Paul Krugman:
What’s going on here? The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is. They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.
Paul Krugman Op Ed, October 11th.
Finance a new bridge, a factory, a school that teaches engineering and science for a new generation of students entering the work place. No; instead, we see newfangled derivative swaps, “quant trading”, a panoply of something called “synthetic derivatives”, and who knows what else? The derivatives market hit a value of $600 trillion in 2008, and I regret to confirm that “T” in trillion is not a typo. Sadly those newly minted Ivy League graduates want to make “bank” and they want to do it now. No time for long term value investing or pedestrian returns of six to eight percent per year. Heck, for these hot shots 6-8% per month is not enough. Where will it end?
Wall Street: put people to work, and then collect your bonuses with your heads held high. And stop trying to destroy any sensible speed limits and caution signs (such as the Volcker Rule). Regulation keeps cars on the road. Without it we are doomed to repeat the mistakes of the last boom…
Posted on October 7, 2011 by Steven Berk
You’d think banks would have a lot more to worry about than an unemployed octogenarian. Perhaps a portfolio of worthless subprime mortgage securities? Nope. The government will bail us out. How 'bout dwindling revenues in the face of a continued economic downtown? No worries, we’ll just start charging fees for everything our customers do, from debit card transactions to writing checks. Yeah! And we'll add toll booths to the drive through lane at all our branches.
What is it that keeps bankers up at night? The Volcker Rule of course; the simple and elegant solution to excessive risk in the banking industry: no proprietary trading. Make your money the old fashioned way: good loans and fair services to consumers. But taking multi-billion dollar debts each night in derivatives and various esoteric currency swaps? Not anymore. Not since you took us to the brink of depression and cost American consumers (and their children’s children) a boatload of money and in many ways the jobs of millions who remain unemployed.
So what’s the strategy of the banks? Make the simple Volcker Rule as complicated as possible. Leak it through your trade association, the American Banker, and let a phalanx of $1,000/hour lawyers from Davis Polk parse the rules and try to incorporate exception upon exception upon language that must be interpreted with sub-parts to the sub-parts. And once that is accomplished? Yep you guessed it. Throw up your hands and say, “Overregulation. It’s too complicated.”
It’s actually rather simple. Banks want to trade instead of loan money because in the short run trading is more profitable. Those profits result in an increase in the banks’ stock price (thereby increasing the value of options and restricted stock for executives) and in higher bonuses (can you say Porsche Panamera, summers in Nantucket). But with that short run potential comes immense risk; risk the banks have already shown they cannot handle.
And the answer from Paul Volcker, who is feared because he is respected and beholden to no one, was rather simple too: “No.”
Posted on October 5, 2011 by Steven Berk
These hallway bullies already have our lunch money; now they’re after our caps, shoelaces and bubblegum—anything they can grab.
Okay, Bank of America, I get it.
First, you dig into the pockets of every taxpaying American for billions of dollars in revival money. It isn’t strong enough to say we begrudgingly obliged. Taxpayers were pinned down by bully one and bully two while bully three turned their pockets inside out. We heard the rhetoric about too big to fail, and maybe that’s true; maybe we are better off than if we’d let the giant banks go under.
But then, in spite of the foul stench created by loans going bad, you go buy up companies like Countrywide, the poster boy for mortgage indiscretions. Any half-decent review of their books would have revealed the woefully inadequate research done in advance of issuing the mortgages—to the point of being fraud. Now we know why the catchphrase isn’t “too smart to fail.” If Bank of America was in the real estate business there’d be no price too high to pay for Chernobyl acreage or oceanfront estates on the shores of Arizona.
But now? Surely now that we’ve bailed out the banks, they throw the lowly depositor a bone, right? Of course not. These hallway bullies already have our lunch money; now they’re after our caps, shoelaces and bubblegum—anything they can grab. Starting in 2012, Bank of America customers who plan to use their debit cards can expect to pay $5.00 per month, every month. You read that right. Take out your debit card at Costco, or WalMart, or BP just once, and bang. Money well spent, huh?
Of course, it doesn’t stop with Bank of America. ABCNews reports that Wells Fargo and JPMorgan are each testing $3.00 debit fees of their own. What does this mean? Most consumers will end up paying the $5.00 fee no matter how hard they try to avoid it. This isn’t capitalism, this is exploitation. Months ago TCO predicted the rise of such fees, and this won’t be the last one. It’s baffling in light of this that congress seeks less regulation, leaving consumers with only one recourse for the time being: remain vigilant.
Assisted by David Martin and Zachary A. Kady
Posted on September 27, 2011 by Steven Berk
When Standard & Poor’s downgraded U.S. credit, I wrote in these pages that it had done a disservice to the American economy and consumers. Far from providing a true barometer of the risk associated with U.S. debt, S&P was “paying back” for missing the most flagrant foul of the century: Providing Triple A ratings for sub-prime mortgage securities.
Fast forward four years to today and S&P misguided effort to get it “right” by downgrading US debt. S&P was alone and wrong to do so. Its sudden lurch to “overprotective, overcautious rating agency” was a cue followed by no one; yet it led to the worst single-day Dow Jones drop since 2008. (And trust me, with an election year nearly upon us, we haven’t heard the last of this historic downgrade.)
Now comes the SEC, with its whistle and a big yellow flag flying. “Penalty, S&P. Frivolous granting of a AAA rating to a basket of questionable mortgage backed securities issued in 2007. Fifteen yards and an automatic first down.”
Given the timing of the SEC action (on the heels of S&P's decision to downgrade US debt) its motivation may be suspect, but the Commission is surely moving in the right direction. The Credit Rating Agencies must be subject to greater regulation. While the SEC is looking into S&P actions leading up to the financial crisis, they must continue to prosecute where they can and with rigor and purpose.
We can only hope this current probe into S&P will lead to a wider investigation, in which the entire structure and dependence on CRAs is evaluated. Major repair is needed in any system in which an agency is paid by the very company it is rating to issue an “unbiased opinion”. But first the SEC must add some bite to its bark by imposing real penalties on S&P’s. We’ll see.
Consider me among the skeptics.
Posted on September 22, 2011 by Steven Berk
This is a tough one to be sure. The law favors the banks but we applaud the DOJ for trying. It strains credulity that a sophisticated banker wouldn’t know what was going on with the flamboyant Stanford. If banks are held accountable, the Stanfords of the world won’t exist, or at least cannot flourish.
As if a bad case of depression was not enough to delay a trial and no doubt a lengthy prison sentence to follow, billion-dollar Ponzi schemer, cricket player and nobleman (by bribe not birth), Sir Allen Stanford, is now—get this—claiming he has amnesia. Yep. Can’t remember a darn thing, nothing, nada, before his arrest in June of 2009. Not the jets, not the wine, not all those billions. How convenient... I think my kids once tried to claim this once when the kitchen window was mysteriously broken. For this Allen you receive a second Corporate Observer Chutzpah Award.
But what’s even more interesting than Mr. Sanford’s latest tactic is the game being played by his bankers at SG Private Banking (Suisse SA), a subsidiary of the Swiss giant Societe Generale. Turns out, they seem to also have a case of amnesia. “Allen Stanford, hmmm… name sounds very familiar, can’t place him though, do you happen to have a picture?” According to a recent article in the WSJ, SG Private Banking is being investigated by the Department of Justice for the vast assistance it provided Sir Allen. Apparently, he had a secret numbered bank account at SG where he was able to tap directly into a hundred-plus million dollar account to fund his lavish lifestyle (that would be an understatement) and pay bribes to his Antiguan auditors and bank regulators.
You know those Swiss, they never said a peep, even though this stunk all the way to Basel. The US Department of Justice wonders “what they knew and when they knew it.” No doubt the bankers will say, “we were merely providing banking services. How can we be expected to police and guarantee all of our customers?” But it shouldn’t be that easy to avoid liability.
Think back to the 1920s when the likes of John Dillinger and Pretty Boy Floyd roamed the land “hitting” banks with reckless abandon. Historians now surmise that many of these seemingly well-planned and courageous capers were “inside” jobs. Someone (likely mob connected) opened the back door of the bank for these fellas or they were tipped off when money would be arriving and the guards would be on a smoke break. That assistance, despite being subtle and carried out without a mask and gun, was nothing short of substantial given the circumstances.
This is a tough one to be sure. The law favors the banks but we applaud the DOJ for trying. It strains credulity that a sophisticated banker wouldn’t know what was going on with the flamboyant Stanford. If banks are held accountable, the Stanfords of the world won’t exist, or at least cannot flourish.
Stay tuned.
Posted on September 13, 2011 by Steven Berk
After the 2008 financial meltdown, former Federal Reserve Chairman and legend Paul Volcker gave the country simple advice: let banks do what they do best—or at least what the public expects them to do—bank. That is, make loans to support long term growth and prosperity. But what fun is that when you can trade and invest in esoteric financial instruments? And in the process, make millions quickly and earn six, seven and eight-digit salaries, like your buddies at hedge and private equity firms.
The problem is twofold. First, banks may lose big time and again be hat-in-hand looking for a bailout. Have we forgotten that the bailout of behemoths Citigroup and Bank of America cost taxpayers billions and more seriously, almost took us all over the ledge with them? Second, banks may become too distracted by the allure of trading profits and shift resources and their best people to the trading side of the bank.
Nevertheless, the banks are not going quietly into the night. They lust for these potentially lucrative but no doubt volatile revenue streams. In that fight, they are enlisting the highest-paid and most well-connected lobbyists in the land. Their strategy seems to support a muddled patchwork of regulation that will not work and will necessarily enable banks to claim they are overregulated. (Very clever fellas.)
I trust Mr. Volker completely. He is his own man. He is owned by no one; it’s time to heed his warning. Keep it simple. No trading by banks. Period. End of story.
Assisted by Arezu Hadjialiloo
Posted on September 7, 2011 by Steven Berk
We often criticize banks for not paying attention to the needs of Main Street. It is only fair then when Banks do the right thing, we not ignore a good deed done.
Hurricane Irene came and went here in the Washington, DC area without too much of an impact. But unfortunately, many folks in Vermont, New Jersey, New York, Connecticut, and other states are still dealing with the aftermath of the disastrous storm. It seems strange to discuss landlocked, northern states like Vermont when talking about Hurricane destruction. But then again, with a 5.8-magnitude earthquake also occurring on the East Coast this past week, abnormalities abound. Here’s one more: Banks putting consumers before profits. That's right, several major banks have enacted special programs to waive certain fees and offer low-interest disaster loans for those affected by the hurricane.
These banks include such giants as:
- JPMorgan Chase
- Wells Fargo
- Bank of America
- Capital One
- Citi
- PNC
The fees waived differ from bank to bank, but include the following:
- Overdraft fees;
- Out of network ATM fees;
- Early withdrawal fees on certificates of deposit; and
- Late fees on credit cards and mortgages.
These banks deserve our commendation and praise for a righteous decision in a time of peril for many Americans.
Although this act of empathy (and good business sense) is appreciated, it is all too rare from America’s major banks. We may hope this starts a new trend of socially conscious banking. Perhaps responsible lending, less risky investment products, full disclosure of risk and a preference for long-term investment in local businesses over short-term financial trades will prevail. Now, wouldn’t that be earth-shaking?
Assisted by Zachary A. Kady
Posted on August 24, 2011 by Steven Berk
Standard and Poor’s announced it has sacked former CEO Deven Sharma in favor of Doug Peterson, former Citigroup Chief Operating Officer. (Click here for the WSJ story.) We can’t say we’re shocked. Under Mr. Sharma’s watch, S&P recklessly approved a downgrading of the US Debt from AAA to AA+. Although the bond market professionals have largely ignored (as have China and other major holders of trillions in bonds) the action is sure to infect the political atmosphere beyond repair. Get ready for months of the following rhetoric:
“President Obama has destroyed the credit rating of the United States through his failed economic policies and his inability to control government spending by raising the debt ceiling,” cried Michelle Bachmann.
“Record debt and the President’s refusal to control spending led to our nation’s credit rating being downgraded for the first time in history,” exclaims Rick Perry’s first political campaign spot.
The downgrade is a result of a “failure of leadership” according to Mitt Romney.
No it’s the arrogance, hypocrisy and negligence of Standard and Poor’s. The downgrade is brought to you by the same rating agency that gave Lehman brothers a AAA rating just a month before its collapse and sought to make a splash with its downgrading of the US debt. Timothy Geithner says S&P demonstrated a clear lack of understanding of the US economy. Given S&P is the only agency to downgrade the US debt, the wisdom of the decision is certainly in question.
If S&P is looking for a new leader to run a profitable business, Doug Peterson, formerly of Citigroup, is surely up to the task. However, if Standard and Poor’s is looking to restore its tarnished reputation, Sisyphus is more likely the man for the job.
Assisted by Zachary Kady
Posted on August 9, 2011 by Steven Berk
Several years back the credit rating agencies became virtually immune from lawsuits as they cleverly maintained—and the courts agreed—they were merely expressing their First Amendment “opinion” on the bona fides of a bond offering. Think consumer reports rating power drills or your local newspaper film critic telling you Caddyshack 2 is better than the original. Forget that billions were invested in the bonds they rated or the huge fees they received from issuers. They could only be successfully sued—like a magazine or newspaper—if you could establish “reckless disregard for the truth.”
Is a mistake of $2 trillion reckless enough? Yes, trillion with a “t”. That’s the amount that S&P was off in its basic budget calculation. Shortly after being advised on Sunday of the mistake by administration officials, they went ahead anyway with their “opinion” to downgrade US debt for the first time in history. That decision was merely emblematic of a string of “reckless” conduct. These are the same guys who fueled the subprime mortgage crisis by not flinching from an “opinion” that mortgage-backed securities—often backed by mortgages with no documents—were investment-grade. AAA-rated. Or Lehman Brothers bonds, which remained A-rated on the verge of bankruptcy as its business rapidly became exposed as a house of cards.
To be sure, Sleazy & Poor Judgment’s “opinions” on the vitality of corporate and government debt offerings have been… well… downgraded by the market. And there is no doubt a crisis in Washington regarding issues of spending and debt, irrespective of the actions of S&P. But regrettably an S&P opinion still holds sway. In the short term it will wreak havoc on the stock and bond markets; yesterday the Dow Jones plunged over 630 points, the worst drop since 2008. Over time it will fester and linger, well into and through November when both parties try to blame the other for this “black eye” to the pride of America.
Back to the lawsuit. S&P should be called to answer for its decision to go full-steam ahead toward the downgrade even though their supporting calculations were $2 trillion off. A lawsuit cannot solve the financial mess we are in, but it can sideline a voice that has done a disservice to the American People.
Posted on July 15, 2011 by Steven Berk
Pop Quiz: Who has the most influence over the world’s financial markets?
Tim Geithner, Ben Bernanke, our beloved Elizabeth Warren, new kid on the block, IMF Chief, Christine Lagarde, or Goldman Sach CEO Lloyd Blankfein?
Answer: None of the above.
The Answer: Raymond McDaniel and Deven Sharma... ... Wait, who?
McDaniel and Sharma, CEO’s respectively of Moody’s and Standard & Poor's. Remember not long after they lost all credibility by time and again pulling those green eye shades over their eyes, holding their noses and giving every subprime, no-document, securitized mortgage bond fund a rating of investment grade. Yep. Brought us to the brink, to the edge; and although there was some talk of “clipping their wings” in the halls of Congress, it is too late now. They are back and even more powerful. But this time they are singing a new tune. Despite cries of foul and fear their now conservative practices will cause another financial apocolypse, they will not stand down. Look at what they are doing in Europe; the credit rating agencies (“CRAs”) face intense international pressure over their “junk” ratings of Greek, Portuguese and Irish debt, yet they steadfastly refuse to back down.
Now they seem to have their sights on the U.S. Debt as they threaten to downgrade trillions of dollars in Treasury bonds to below AAA. Forget Congress, these are the guys to watch. They scare me, they are too powerful, and a little bit sinister. How can we trust their insistence on downgrading debt when just a couple of years ago they would have presumably graded a fistful of discarded “Powerball” tickets AAA. I’m not being paranoid, am I?
I say Congress should move forward with hearings before these CRAs push us once again to the brink, because I fear this time, we are going over the edge.
Posted on July 11, 2011 by Steven Berk
Executive Compensation is an explosive topic. Every time I post on it, I receive … well … “hate mail.” Vitriolic comments in the vein of “how dare I suggest limitations on compensation. It is un-American.” One gentleman wrote me and passionately described how, despite the fact that he was struggling along working two dead-end minimum wage jobs, he vehemently opposed any restrictions on executive compensation.
Let me try to clarify my position. There should be no, and I mean no restrictions on executive compensation. My point is that CEOs, CFOs, COOs and other executives should earn those salaries. And when I say earn, I mean add value (however that is defined) to their enterprise. Value may come in many forms. Profit is certainly a good measure, but developing products for the future, adding employees, navigating through difficult legal and regulatory problems (in effect saving the corporation money and its reputation) are fine as well.
CEOs of large companies are the stewards of an enterprise built over decades, with billions in hard and soft assets. These days, most large corporations often have an international presence to protect and grow, a diverse work force, plants and equipment, and perhaps most valuable, good will. A name, a brand, a reputation in their market that is critical to creating revenue. But they are stewards, and only for a limited time. They do not own the company. The owners are you and me and our parents, grandparents and children, mainly through an amalgam of stock and pension funds.
So my criticism of executive compensation is not the amount CEOs make (one, ten, one hundred million, it’s all good). It is that those amounts do not appear to be linked to performance. And things seem to be getting worse.
The New York Times reported last week that executive pay rose 23 percent from 2009 to 2010. Was there a commensurate increase in profit? How bout dividends? And jobs? Did they create new jobs? Hardly, as unemployment figures continue to tick upward.
According to a study by the AFL-CIO of 299 S&P 500 Index companies, the average CEO made $11,358,445 in 2010 — 343 times the median income of a worker in his or her company. In case the $11 million figure isn’t shocking enough, Executive PayWatch reports that the income made by the average S&P 500 CEO last year could support 28 U.S. presidents, 225 teachers or 753 minimum wage earners. Phillipe Dauman, CEO of Viacom, topped the pay list this year at a cool $84 million. What did he do for Viacom? Hopefully for Viacom shareholders, he made billions. But on his salary alone, one CEO would cover the cost of nearly 1,800 new teachers.
One positive development on this difficult topic is more institutional scrutiny. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies to report the pay disparity between the CEO and the typical worker. With this new information, the AFL-CIO has created Executive PayWatch, a database of executive income, pay disparity ratios and trends in CEO pay. Europe is catching up, but the United States is still the world leader in giant pay gaps between CEO’s and the average worker. The average U.S. CEO earns double his or her non-U.S. counterpart, and the average European CEO-to-median wage earner ratio is less than one-tenth the size of the average U.S. pay gap. Is the U.S. CEO that much better?
I think not. They are simply lucky enough to play in a league that has not “run the numbers.”
Posted on June 28, 2011 by Steven Berk
The New York Times’ Gretchen Morgenson has done it again. Her article, “Findings That May Get Lost in Arbitration,” doesn’t just expose James G. Kelsoe Jr. and the Morgan Keegan Fund for misleading investors (she already did that in 2007).
Morgenson’s reporting also highlights the failure of both the SEC and the FINRA arbitration process.
The SEC enforcement action came almost four years (what in heaven’s name were they doing for four years?) after a settlement between Morgan Keegan and the Indiana Children’s Wish Fund. Kelsoe, the Keegan Fund manager, pushed a bad investment — essentially making up the price — on the non-profit foundation, causing it to lose $48,000 and leaving nine terminally ill children with unfulfilled wishes. Nice guy. Stealing from a charity.
This belated enforcement action finally punished Morgan Keegan’s blatant misrepresentation of investments which cost investors more than $1 billion. A leading firm in what they call Wall Street South (same level of greed, just add Southern accents), Morgan Keegan must pay a substantial fine and Mr. Kelsoe has thankfully agreed to a lifetime ban from the securities industry. Let’s hope, like Pete Rose, the baseball ball player who bet against his own team, Mr. Kelsoe is never reinstated.
End of story? Happy ending? Well… not exactly. Individual defrauded investors must seek a judgment against Morgan Keegan and damages in a FINRA arbitration process to be made whole. Morgan Keegan attorneys blithely say they will try to block use of the SEC enforcement action as evidence in these individual proceedings. How do those guys sleep at night? (“Hi honey, how was your day at work?” “Awesome, I spent my day beating up on investors who in some cases have lost their entire life savings. Yep, I argued evidence of fraud by the very same firm, in the very same case should not be used against them.” “That’s so nice dear, I’m proud of you, now wash up for dinner.”).
First, in those four years, when the SEC was taking its bureaucratic sweet time and dotting every I… crossing every T, they should have required as part of the “settlement” that Morgan Keegan be forbidden from arguing in the context of individual lawsuits against the admissibility of the SEC enforcement action. Slam that door shut.
Second, any arbitrator worth his or her $600-800 hourly wage should act decisively and allow all credible evidence into the record. They are perfectly capable of weighing its importance. Unlike a jury, they are trained and paid handsomely to do just that. We wish each of these investors well and remind them to send Gretchen Morgenson a nice thank you card.
Assisted by Natasha Duarte
Posted on June 1, 2011 by Steven Berk
What bank executive said the following to shareholders at a recent meeting?
The bank’s mission is to “find ways to continue to attract deposits, make sound loans and grow in accordance with our historic credit quality standards.”
A) Jamie Dimon (JPMorgan)
B) Vikram Pandit (CitiGroup)
C) Brian Moynihan (Bank of America)
D) Robert Wilmers (M&T Bank)
What banker increased his bank’s assets from $2 billion to $68 billion in his past thirty years at the head?
A) Jamie Dimon (JPMorgan)
B) Vikram Pandit (CitiGroup)
C) Brian Moynihan (Bank of America)
D) Robert Wilmers (M&T Bank)
If you guessed Robert Wilmers, raise your hand. (If you had previously heard of Mr. Wilmers, take a bow.) M&T CEO Robert Wilmers has managed to remain out of the public eye despite running the most honorable bank in the United States for almost three decades. He received some rare attention in Joe Nocera’s aptly-named column, “The Good Banker”.
There is perhaps no more apt nickname. Wilmers is a good banker with even better morals. He’s old school, valuing bankers’ reputations, which has dropped to “third worst” among the professions, according to Wilmers. Unlike most executives, Wilmers recognizes the moral hazard of major bank bailouts and the incentive to maximize risk—to the benefit of the big shots, and at the cost of Main Street.
It’s a heads-I-win, tails-you-lose arrangement for Main Street, but Mr. Wilmers sets himself apart as the only banking executive honest enough to point to the problem. Kudos to Joe Nocera for drawing attention to Wilmers’ perspective, and to CEO Wilmers for standing tall in an era of slinking away ‘neath the shadows of money stacks.
Assisted by David Martin
Posted on May 27, 2011 by Steven Berk
Even for notoriously money-blinded financial behemoths, preying upon veterans and their families defies even the most cynical observer’s imagination.
In the sea of fraud and manipulation following the financial crisis, Bank of America and Morgan Stanley have hit rock bottom (or at least let us hope so). In today’s New York Times—unfortunately buried within the Business section—lies the story of almost 200 military veterans whose homes were wrongly foreclosed upon by BofA and Morgan Stanley subsidiaries. Really, guys? Even for notoriously money-blinded financial behemoths, preying upon veterans and their families defies even the most cynical observer’s imagination.
The Justice Department achieved a total settlement of over $20 million for the victims; this amount is unlikely to make whole these veterans who had their mortgages foreclosed upon by Countrywide and Saxon, a subsidiary of Morgan Stanley. The settlement leaves just over $120k for each victim, likely a far cry from the value of their mortgage—and that is ignoring the hardship they likely went through as a result. (What’s more, this is not the Countrywide/BofA partnership’s first lapse in judgment—just ask whistleblower Michael G. Winston.)
This case cries out for punitive damages.
Assisted by David Martin
Posted on May 24, 2011 by Steven Berk
I get it. I do. Madigan is a good man, a very smart man (B.A., Economics, St. Joseph's; M.A., Mathematics, George Mason; Ph.D., Economics, Penn State). I have no reason to believe he is not the most ethical man that offices in the Fed’s white marble, post-modern palace on Constitution Avenue -- a stone’s throw from the Lincoln Memorial. He will bring to Barclays his judgment, his experience, his understanding of the process. He will add value. Mr. Madigan will facilitate Barclays' compliance with all those rules and regulations that may be part of Dodd-Frank. (KaChing … millions saved.) He will allow Barclays to have an internal sounding board for those inevitable questions that come up every day for an international money center bank under the general rubric of: “What did the Fed mean by?” (KaChing, millions more saved.) That will surely lead to greater certainty in planning and serving its depositors and investment customers, and all will be right with this very savvy world-leading bank (fourth-largest in the world, with $2.2 trillion in assets).
Mr. Madigan will surely earn every penny of what will easily be a million-dollar-plus pay package consisting of a sizeable salary, a bonus, stock, and options. And grants. And spending allowance. And did I mention life insurance? Heck it's Barclays for crying out loud. (a half a trillion in …). But come on now, what is Barclay’s really buying and what is it Mr. Madigan is selling? Indeed, when that proverbial “revolving door” circles from every major regulator in this town to the entities that are regulated, what is being offered? It’s access.
Pure and simple. Access, and the influence access creates. If Barclays wants approval for some new debt instrument or an interpretation of a rule that will be to their benefit, or finds itself subject to some investigation, someone in upper management will say, “Hey get Madigan on the phone, have him call one of his buddies at the Fed and let’s get this worked out …. What are we paying him for?”
And so it goes. Bryan Madigan will do what he is asked without breaching any legal rules. He will dial the phone or send an email to a colleague of 20 years from the Fed, maybe the father of a kid Madigan coached in baseball or lacrosse. And a conversation will ensue, and Barclays and its shareholders will be better for it, because one day Madigan’s friend at the Fed, facing college tuitions and not-so-robust returns on his 529 accounts, will need a job too in the “private sector”.
It is the way it is, but the game remains at a tilt because small community banks and consumer groups don’t have the allure or the money of a Barclays.
Brian Madigan, “good luck in your new position, work hard, make a lot of money and don’t forget your ethical compass at the door.”
Posted on May 23, 2011 by Steven Berk
All those billions in profits, particularly when it comes during a downturn, certainly raises suspicion and, in the case of Goldman Sachs, the indisputable leader on Wall Street, government scrutiny as well. First the threat of regulatory scrutiny came from the SEC. But, as is too often the case, the SEC’s appetite for enforcement can be sated with a mouthful of low hanging fruit. After just a few weeks of brinksmanship, the SEC was satisfied with a fine/judgment of $550 million. Playing the victim, Goldman bemoaned the size of the settlement, but more than likely behind closed doors they were thrilled with the result and happy to pay what is, for a firm of Goldman’s size and profitability, chump change.
But now comes the “Main Event”. The Department of Justice and criminal subpoenas. Ouch. Nothing like the threat of jail to get you focused. The Wall Street Journal reports that DOJ will likely issue subpoenas to Goldman executives in an effort to learn more about the firm’s mortgage-related business.
All of this following a cruel April for Goldman Sachs where The Senate Permanent Subcommittee on Investigations issued a 639-page report that accuses the powerhouse firm of making bets against the housing market, misleading investors, and (here’s the shocker) putting its own interests ahead of those of its clients. The Law Blog reports that Senator Carl Levin has called for the criminal investigation of Goldman Sachs - A refreshing reminder to MainStreet that there are still those willing to hunt the cause of ruin. Expect DOJ to be tougher than the SEC, especially with the power of criminal charges in its arsenal.
A DOJ investigation is a sobering experience for all involved. Lanny Breuer, head of the Criminal Division, and his team are no pushovers. They will not be intimidated by Goldman or its phalanx of white-collar specialists; but I wouldn’t hold my breath for any indictments, Raj Rajaratnam-style. As far as I know, DOJ has no wiretap recordings of Goldman partners scheming illegally and blatantly. These guys are just too damn smart. And the last time I checked, smart, savvy -- and throw in greedy for good measure -- are not crimes.
Assisted by Zachary Kady
Posted on May 19, 2011 by Steven Berk
Pull a Madoff -- in that the Commission will miss the shenanigans that are right underneath their noses, just as they did with Bernie years ago.
Yesterday the SEC announced a proposed set of regulations that would curb some of the abuses of the rating agencies (Moody's Corp. (MCO), Standard & Poor's, a McGraw-Hill Cos. (MHP) subsidiary, and Fitch Ratings).
First, let’s talk about the basic problem. The issuer of debt pays for the rating. It’s a naked conflict of interest. Here’s an oversimplified example. Bank of America has a bunch of sub-prime mortgages it securitizes in a bond offering it wants to offer for sale to pension funds, university endowments, charitable trusts and the like. They need an Aaa rating or something close to it; it is called investment grade, since many institutions cannot invest in anything lower.
They go to Moody’s where they’ve had some luck before (wink, nod). Moody’s, being a bit “moody” after all the bad publicity post-2008 disaster, says: “You know BofA there is a lot of risk in these underlying bonds (“really”). Sorry, best we can do is Ba1.”
Bank of America, undaunted, and knowing how to play the game, comes back with: “Come on guys, how ‘bout if we sweeten the deal a little and increase your fee... and we’ll throw in some Legend Seats at Yankee stadium.”
“Against the Red Sox?”
“Fine, against the Red Sox.”
“You know those bonds are looking more Aaa every day,” says the Moody analyst, as he pulls his favorite Red Sox cap off the shelf. It’s a conflict of interest at its simplest. And guess what, if a BofA bondholder wants to sue the rating agencies after the bonds default, good luck. The rating agencies have a “get out of jail card” at the ready. “We were merely exercising our First Amendment right to render an opinion.” Wins every time in court.
Second major problem: the Revolving Door. That same Moody’s analyst who loves the Red Sox and will see them up close on BofA’s dime has already sent her resume to Bank of America and hopes to enjoy a 100% salary increase when she takes a job as a newly minted Vice President in the debt securities division.
Dodd-Frank provides the SEC with new authority to fix these conflicts. What is the Commission doing? A little window-dressing is all, nothing more. For instance, the SEC has suggested rules that would have rating agencies clearly define and disclose the meaning of any symbols used by the rating agency. The proposed rules attempt to directly address conflict of interest issues, but half of the section is devoted to exemptions and exceptions. It is also seeking to set up qualification standards for credit analysts, to make sure they meet new training and experience standards. Ho hum. And indeed, the rating agencies are fighting even these minor reforms.
What the SEC must put on the front burner instead is the organization of a government-mandated clearinghouse intermediary through which credit raters would be assigned blindly to work on various bond offerings. (No more Legend Seats.) This intermediary was called for in Dodd-Frank and is being pushed for by Senator Franken. Alas, in the way of Washington, the SEC will study the issue and issue a report, next—yes next—summer.
I can see the headlines a year in advance: SEC Misses Trillion Dollar Losses Caused by Continued Rating Agency Conflicts.
Posted on May 12, 2011 by Steven Berk
Just like so-called “amateurism” in college athletics, the “unbiased, mere opinions” bestowed by credit rating agencies are largely a façade.
Often what we say is different from what we do. Day-to-day life provides us plenty of examples: “amateurism” in college athletics, the “reality” of reality shows, and Fox News’ “unbiased” political coverage being just a few that come to mind. Yesterday, Second Circuit U.S. Court of Appeals Judge Reena Raggi fell victim to a lesser-known fallacy: the “mere opinions” of the credit rating agencies (CRAs).
In her decision handed down yesterday, Judge Raggi gave rating agencies such as Moody’s and Standard & Poor’s a huge victory. She did so by agreeing with the agencies that they offer “mere opinions” on the solvency of an institution’s debt. Hmmm... So Moody’s is no different than “Consumer Reports" or Zagat’s? Who knew?
Just like so-called “amateurism” in college athletics, the “unbiased, mere opinions” bestowed by CRAs are largely a façade. Debt-issuers pay these agencies to rate their creditworthiness (yes, you read that right—they are paid by the very same people that they supposedly objectively rate); the interest rate on any debt is intimately tied to this rating. In other words, the securities market could not function without these CRAs.
Do you think Fannie Mae would have enthusiastically paid Moody’s to rate its credit if Moody’s raters had thoroughly investigated the bundles of subprime debt amassed by Fannie? Hey Fannie, thanks for the payment, but we’ve determined that without Federal Government takeover you will be unable to repay your loans… Here’s your D rating. What’s more: the ratings agencies are integral to the proper functionality of the market. Without ratings there would be next-to-nothing on which to assume risk or base interest rates.
Although credit rating agencies serve as de facto underwriters for the debt instruments they rate, Judge Raggi relies upon the 2nd Circuit Decision in SEC v. Kern to distinguish their conduct from “those who take ‘steps necessary to the distribution’ of securities”. That "distinction" is a complete fiction. Of course CRAs are necessary to the markets. Indeed, without them there would be no debt market.
Forget the law? How convenient. Chalk up another one (on an ever-growing chalkboard) for big business and the financial industry. Don't blink, next thing you know “insider trading” may well be regarded as a proper mechanism for distributing risk.
Assisted by David Martin
Posted on March 29, 2011 by Steven Berk
Far from being penalized, even slapped on the writs, big banks are saving tremendously to the tune of billions by refusing to service distressed properties and loans.
Big banks rolled up their sleeves from say 2000 to 2008 and made home loans like crazy. They were motivated not by their love of middle class homeowners, but rather safe and large profits. They could make loans, securitize them and package them to hungry bond investors. The ability to securitize these loans separated risk from underwriting. I’ve heard that before, but what does it mean? Here is an example.
Banker Zach says: “Mr. Jones, I really don’t care if you pay back this loan on overpriced property in Swampland, Florida that you cannot afford. Lost your job, not my problem. Land underwater, not my problem. I’m packaging that loan with thousands of others and selling it all to Mr. Smith. He might worry about your ability to repay, I don’t. Next customer please.”
“Steve, this is old news, what do I need to know now?” Yes, okay, back to my blog post. Far from being penalized, even slapped on the writs, big banks—specifically Bank of America, JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs—are enjoying the time of their lives. They are saving tremendously to the tune of billions by refusing to service distressed properties and loans. “Walk away fellas and don’t look back." Instead, they are using some of that money wisely to lobby Congress and it’s working.
As it often does, Congress misses the point. Based on pressure from the banking industry (read: lobbyists) they are devoting attention and resources to taking wild punches and scrutinizing the nascent Consumer Finance Protection Board, and of course our hero Elizabeth Warren. I’m reminded of Nero. While Rome burns, the regulators are running in circles fending off attack after attack on their authority from an industry whose hands are dirty. And Congress is playing the violin. No one has time to put out the fire.
Enough is enough. Congress must deal with substance and not engage in a sideshow that only benefits the perpetrators of the root problem: Bank of America, JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs.
Posted on March 7, 2011 by Steven Berk
Memories are short in Washington and even shorter on Wall Street. Temporary becomes permanent, and the petulance and arrogance of the rating agencies is soon forgotten.
I was disturbed to read this weekend in another fine piece by Gretchen Morgenson how yet again the rating agencies (Standard and Poor's and Moody's and the like) had obtained another “Get Out of Jail Free Card.” For decades they avoided liability from their negligence (or worse: stark conflicts of interest with issuing banks), by cleverly claiming their grades given to investment securities (AAA and on down) were opinions to be afforded First Amendment—as in the United States Constitution—protection. Well, they got away with it until the financial crisis of 2008, when hundreds of billions in mortgage-backed securities with investment-grade ratings were determined to be just about worthless.
Congress responded to this historic immunity nonsense in Dodd-Frank by explicitly requiring that the ratings agencies be subject to expert liability, opening up for the first time liability from investor lawsuits. How did the ratings agencies respond? Like a petulant child by refusing to rate asset-backed securities.
Rescuing the rating agencies from the “time out” they deserved, the SEC gave them a free pass. First temporary, now permanent; a “no action letter” was granted providing agencies with an absolute defense to investor lawsuits. Last week, Martha Coakely, the Massachusetts Attorney General, in a letter to Mary Shapiro, Chairman of the SEC, wants to know, “Why?”
The party-line, spewed by co-author of the legislation, Barney Frank: this is merely a short-term strategy to wean the markets from reliance altogether from the influence of ratings agencies, we’re just not there yet.
Sadly, this won’t work. Memories are short in Washington and even shorter on Wall Street. Temporary becomes permanent, and the petulance and arrogance of the rating agencies is soon forgotten. I hope General Coakley fights hard for answers and doesn’t back down—this no action response of the SEC is unacceptable.
Posted on February 28, 2011 by Steven Berk
If Mr. Kroll and his son can remain free from conflicts his venture has a shot at adding value to this deservedly beleaguered market. We wish him luck.
As reported by Janet Morrissey in the New York Times yesterday, Jules Kroll hopes to create another seismic shift in the business world. First it was bringing “cloak and dagger” style investigative tools to businesses in an upfront and relatively transparent manner. No easy trick. But he pulled it off and spawned a multi-billion dollar industry. No Fortune 500 company today makes a major move without gathering “business intelligence”. Now, he wants to add this same methodology to the “green eye shade” accounting world of credit rating agencies, i.e. Moody’s and Standard & Poor's.
The old school approach was to look at the numbers. Dispassionately, objectively and without fear or favor. A trillion dollars in losses later, and that model seems inextribably broken. Indeed, Warren Buffet and other major investors have been proclaiming the death of the “rating agency model”. And who could blame them – these supposed paragons of analysis and near divine insight rated trillions of dollars of sub-prime bonds – in the end worthless bonds – investment grade; a stamp of approval required before pension funds and other institutional investors. Heck these guys rated Lehman’s paper investment grade, days before its bankruptcy.
Mr. Kroll, as always part showman, part genius, says he “will be looking under the covers” in addition to the numbers. That should be interesting (think Mark Hurd of HP and other corporate titans brought down by sex scandals). But the key will not be what happens under the covers. No, the key is independence. If Mr. Kroll and his son can remain free from conflicts his venture has a shot at adding value to this deservedly beleaguered market.
We wish him luck.
Posted on February 17, 2011 by Steven Berk
Despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this subject - fraud - must be given some weight.
I’ve been mulling what Bernard Madoff said the other day in a prison interview with the New York Times. He has been mostly silent for over two years since his incarceration, so at a certain level it’s interesting to just hear what is important to the world’s most notorious thief. Would his first utterances be devoted to sympathy for his son Mark who tragically committed suicide earlier this year; surely a desperate act linked to the legal and emotional turmoil resulting from the crimes of the father? Or would his short time on the bully pulpit be devoted to an apology to his many victims, including all those charitable foundations that are now either penniless or (at best) have been forced to cut back dramatically on the services they provided to the poor, disabled and others in need? Nope. Instead his words, as reported in the Times, focused on JPMorgan Chase, and his contention that “they had to know” about his fraud and Ponzi scheme.
In some ways, I want to shake his hand and buy him a carton of cigarettes (or whatever the currency de jour is of the North Carolina Federal Prison where he will spend the rest of his life). But this is Bernie Madoff, the Hanibal Lecter of financial criminals. Turn your eyes for a second, and he has stolen your wallet; turn your back and he has control over your IRA; try to walk away and he’s now gotten your kids' college fund and the proceeds of your life insurance policy.
Nevertheless, despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this issue - fraud - must be given some weight. He is by any estimation an expert on the subject. Wouldn’t it be wonderful to see Mr. Madoff put on the stand by Mr. Picard at a trial of JPMorgan Chase? Both the direct and cross examination would be fascinating. I’m confident though that in the end, Madoff’s testimony would be credible. There is no way he could have been moving billions in cash without raising some suspicions. But he was a “good” customer and no questions were asked.
Sadly for Madoff’s victims, JPMorgan Chase’s phalanx of high-powered lawyers will likely keep Madoff off the stand and the case will never reach a jury. (But that, friends, is a story for another day.)
(Full Disclosure and Disclaimer: My firm is counsel to victims of several Ponzi schemes where it is being alleged that a bank, including JPMorgan Chase, is liable for all or some of their losses).
Posted on February 15, 2011 by Steven Berk
Neil Barofsky, Special Inspector General for the controversial Troubled Asset Relief Program (TARP) officially resigned his post yesterday. In 2008 Barofsky accepted what he calls “a dream job”, but what most others would call a nightmare. Barofsky’s job was to monitor the TARP program and to ensure that federal dollars were spent responsibly and on worthy programs. Curtailing and prosecuting corporate greed was Barofsky’s greatest challenge – one he met with an impressive degree of ability and resourcefulness.
The Washington Post reports that Barofsky’s supporters saw him as a much needed cop monitoring for waste and fraud within TARP. His detractors, on the other hand, couldn’t stand how often he was in the way and how tough he seemed to act on the job. But in the end, Barofsky’s work is nearly unanimously praised and his positive effect on the nation, though largely unnoticed by the public, has been profound. Barofsky opened offices in New York, Atlanta, San Francisco, and Washington to investigate, audit, and prosecute fraud and misconduct related to the TARP program. Though Barofsky is leaving the post he has held since its inception, his legacy as a tough overseer will endure as the quasi-agency he built from the ground up monitors the final stages of TARP’s implementation.
Barofsky took on a job that few would have had the courage to accept and at which fewer still had the ability to succeed. Even the Wall Street Journal, a champion of deregulation, gave Barofsky his due in a short interview-styled article today. (click here) A tough warrior against corporate greed, Barofsky maintained his resolve and took on the industry at every turn. For this we congratulate him on a job well done and wish him well.
He serves as a model for the kind of person needed when the government gets in the business of giving away taxpayer money and lots of it: someone who has the character and credibility to be taken seriously and who will work doggedly to protect our money.
Assisted by Zachary Kady
Posted on February 14, 2011 by Steven Berk
As stated in these pages weeks ago, Madoff’s scheme, like all Ponzi Schemes, depended on the creation of an artifice of legitimacy and success.
This past Sunday Frank Rich wrote - in his elegant and insightful manner - about the lawsuit brought by Madoff receiver Irving Picard against JPMorgan Chase for its role as Madoff’s central banker. He highlighted that Chase bankers way back in 2007, eighteen months before Madoff’s arrest, were discussing “a well-known cloud” over Madoff, including speculation that he was “part of a Ponzi scheme.” Despite these concerns, Madoff continued to funnel billions of dollars of his clients’ money through Chase accounts while the bank carefully divested itself of $241 million of its $276 million in Madoff investments. Nice guys.
As stated in these pages weeks ago, Madoff’s scheme, like all Ponzi Schemes, depended on the creation of an artifice of legitimacy and success. Hence, the fancy Wall Street and London addresses, and key to the creation of that fiction, the participation of a first rate bank. JPMorgan Chase was happy to play that role. Without asking questions and despite the growing risk to investors, large and small, Madoff’s accounts remained open and under little to no scrutiny.
And it’s just going to happen again. We need stronger self regulation (“Excuse me Mr. Madoff, wondering if you could answer a few questions from Larry in our compliance department. Ok. Why haven’t you bought a security, a stock, a bond, nothing in, oh, 12 years and instead just pass the new cash received to an older investor”). Alternatively, we need more and tougher financial cops. That ain’t happening. The JPMorgan Chases of the world, with their phalanx of lawyers, will continue to be untouched by their often reckless conduct (or at a minimum turning a blind eye) in connection with the shenanigans of one future Ponzi scheme after another. And with Congress under the spell of the Tea Party and its "cut government spending" mantra blaring from K Street and supported by the latest polling data, money for enforcement will not be forthcoming no matter the risks. I can hear Fed Chairman Bernanke somewhere in the future, like a déjà vu moment, saying “we need a trillion dollars to save the financial system and I can’t tell you if that will even be enough.”
Who then is left to protect the small investors? Well there is Mr. Markopolos, of course, and Mr. Picard is doing his share, to be sure, but they merely represent fingers in the dike. Sadly, we are not better prepared for the next inevitable run up of greed and manipulation of say: “sub-prime mortgage backed securities 2.0” or some new “synthetic derivative” that is being concocted at some white shoe Wall Street law firm charging $900/hour that will become the latest rage for hedge fund managers from coast to coast.
Posted on February 4, 2011 by Steven Berk
Let’s take a short ride back in time, not to the renaissance in Europe or even our own civil war. No, just 5 years ago, February of 2006 in New York City. All you need to bring is your common sense.
February 2006
Chase (later to become part of JPMorgan Chase) does its first risk analysis on Bernard Madoff’s account. The report expresses concern because returns were recorded as much higher than those of the actual contents of the portfolio.
June 15, 2007
A high-ranking Chase officer emails numerous colleagues stating his distress over client Bernard Madoff. In it, he refers to the “cloud” over Madoff’s head and speculation that the account is “part of a Ponzi scheme.”
December 11, 2008
Mr. Madoff is arrested for allegedly operating a $50 billion Ponzi scheme.
March 12, 2009
Bernard Madoff admits in court that he ran a decades-long Ponzi scheme stretching back to the early 1990s.
June 30, 2009
At the age of 71, Bernie Madoff is sentenced to 150 years in prison for his crimes.
--------------------------------------
Folks, we just gave you the highlights. You merely need to apply your common sense. Big Bank has huge customer (with credentials, friends and lots of money). They smell something is fishy in early 2006. Do you think they just forgot about this multi-billion dollar customer? Hardly, they became more worried in 2007; worried enough to utter the words “Ponzi scheme”. But did they do anything? Nope. It was a huge account and at the end of the day, no one was going to rock the boat.
Claims against banks like JPMorgan Chase for aiding and abetting are difficult to be sure. Irving Picard, the Madoff trustee, is pursuing such a claim against JPMorgan Chase; a recent New York Times article on his case is the source of much of the information above. My firm is involved in several similar cases. We seek only to hold banks accountable for their willful ignorance.
No these banks did not receive billions in fees, but they played an integral role in the scheme’s success. Remember your common sense. How many fancy and sophisticated investors would willingly invest with Mr. Madoff if he stored their earnings in a padlocked trunk under his bed? A reputable bank makes all the difference in the world.
Assisted by David Martin
Posted on January 26, 2011 by Steven Berk
Then many months later [the Commission] issued another report for the bookshelves, destined only to gather dust next to hundreds of other reports of one catastrophe or another.
Remember that little financial meltdown we had just a few years ago? You know the one. Stock portfolio of American households lost a collective $XXX billion. Poof, gone. It was widely believed by knowledgeable insiders that we were on the precipice of a worldwide depression. Even the mighty Hank Paulsen was scared.
The government’s immediate response (which I supported) was TARP and the near-trillion dollar bailout. But according to the crisis playbook, Congress authorized (with much bluster and pomp) the formation of a Commission to get to the bottom of this threat so it doesn’t happen again. The usual suspects were rounded up—the Commission’s leaders are former California Treasurer Phil Angelides and 28-year congressman Bill Thomas—and they had a few hearings. Then many months later they issued another report for the bookshelves, destined only to gather dust next to hundreds of other reports of one catastrophe or another.
To be sure these well-meaning public servants did their best. I am not for a second suggesting they were somehow unduly influenced, biased or corrupt in any way. Rather they fell victim to the pasteurization of the bi-partisan political commission.
So, no surprise, the report is a yawn. Nothing particularly insightful. Heck if you want to understand the meltdown while enjoying a good read I recommend Joe Nocera and Bethany McLean’s All the Devils Are Here or Michael Lewis’ The Big Short.
Unfortunately the guys at the FCIC were not just writing a book. They had some enforcement authority. They had the power to root out the bad guys and send referrals to the Department of Justice. It has been widely reported that they may refer a few individuals for civil prosecution, but even that seems unlikely and who knows what DOJ will do.
Ok smart alec, who should be drawn and quartered, who should be sent up the river? The simple answer is someone, everyone, entire Departments, anyone. Criminal prosecutions have a way of getting people’s attention and changing behavior for a wide swath of people around the accused.
Specifics, give us specifics: okay how ‘bout those guys at Countrywide, all of whom knowingly engaged in a mortgage-backed orgy, day in and day out allowing anyone with a pen to sign for a no-doc mortgage. What of those Wall Street warriors who kept selling mortgage-backed securities long after they knew they had questionable value? And do you mean to tell me that no one at Fannie Mae or Freddie Mac had the facts but kept playing the game? That they weren't hoping beyond hope that by the time the music stopped they would be long gone, enjoying a multimillion dollar pension.
Sadly, history will repeat itself. In the end financial meltdowns can be good business for many. Commissions are window dressing and just part of the playbook.
Posted on January 12, 2011 by Steven Berk
For the smartest kid on the playground, it has been a tough few months. First news swirled of Goldman’s clever idea to essentially bet against both the market it created and the investors it had enlisted. All in the name of bringing “liquidity” to the market (so they said) and mega profits to the Street’s richest firm for yet another “financial innovation”. However, the new, “we’re tougher than ever” SEC would have none of it and a settlement was reached costing Goldman $550 million (nothing that will rock this giant, but a half a billion dollars is still a lot of money). On the heels of the settlement, ACA, a private Wall Street insurer, initiated a lawsuit over the same issue.
Perhaps related, perhaps not, Goldman made serious concessions to its critics by divulging the source of some of its revenue. Specifically, Goldman has implemented new procedures to: (1) disclose the source of its profits; (2) increase transparency; (3) separate and clearly define the responsibilities of traders and investment bankers; and (4) publish a simplified balance sheet in addition to the balance sheet required under minimum accounting standards. As part of the change Goldman will distinguish profits it earns investing on its own behalf from those earned for investors on investor accounts. The hope is that this will dispel theories that the firm is making improper trades (or less gently “betting against it’s own customers”).
While the smart kid who seemed to run the schoolyard took a punch on the nose, he may have just learned his lesson. The extent to which Goldman truly works towards transparency remains to be seen, but this initial good faith offering is a step in the right direction. We can only hope that in addition to being a market leader in profits, they also want to be a market leader in the area of reform. If so, others firms on the playground, large and small might just follow.
Posted on January 6, 2011 by Steven Berk
Senior bank officials have had to dream up new fees to replace those trimmed by law
The title says it all: new year, new laws, new fees. Wednesday’s Wall Street Journal reports that big banks, fearing a loss in revenue following the enactment of key provisions of the Dodd-Frank financial reform bill, are brainstorming new schemes to extract fees from average consumers.
Dodd-Frank gave new powers to the Fed to regulate bank activity. Fortunately, the Fed has not failed to act. The latest proposals call for limits on charges to merchants for accepting credit cards – a move from a purely percentage based scheme to a fixed monetary range. In addition, banks expect to lose millions in revenue from curtailment in overdraft fee charges now that consumers have an easy opt-out option.
The banks aren’t taking the changes lying down. The Journal article claims that senior bank officials “have had to dream up new fees to replace those now trimmed by law.” The fees run the gamut from relatively benign to patently absurd. Here’s a taste of the negative changes we might see in 2011:
- Annual fees of $25 or $30 on debit cards
- Limits on the amount of debit card transactions allowed in a month
- Limits on the size and amount allowable in debit card transactions
- The end of debit card rewards
- Increased ATM fees for non-customers
- The end of free checking
- Inactivity fees
- Minimum deposits
To be sure, this is not an exhaustive list of the creative fees that Wall Street is sure to dole out – the list is merely a sampling from Wednesday’s Wall Street Journal article on the topic. What’s worse; many of these fees or other proposed fees can be avoided with high minimum balances. That’s right, if you’ve got a Wall Street banker’s salary there’s not much to worry about. On Main Street, however, we’d best beware: the fees are coming.
Wall Street Just Doesn’t Get It
Has something changed in the last 1,000 years to render the system of deposits and loans so grossly insufficient that no bank could possibly survive without complicated fee schemes? No. Main Street isn’t looking for some revolutionary service at no cost – all the people want is a bank where they can deposit money, spend that money as they please, and take out loans for reasonable expenses or investments. Fees for simply owning a debit card, maintaining a balance less than that of a New York banker, and inactivity are ludicrous. Unfortunately, Wall Street is unlikely to see the light. For now, hopefully the Fed and big banks can work out a plan that won’t add mountains of fees to the average consumer.
So, as the year progresses and regulations change, keep an eye out for new fees at your bank. Be sure to read any updated terms sent in the mail and monitor your account. If you feel that you’ve been charged any unreasonable fees, particularly fees to which you have not consented please contact Zach Kady or David Martin at info@berklawdc.com or 202-232-7550. Also visit us at www.berklawdc.com.
Assisted by Zachary Kady
Posted on December 13, 2010 by Steven Berk
This past week, Attorney General Eric Holder announced hundreds of criminal indictments of perpetrators of Ponzi schemes. A rouge's gallery of con-men, grifters, lawyers turned bad, greedy securities brokers, and money “managers”. But guess what? They are not the problem. Sadly these folks will always be around, making money the easy way: lifting it from the pockets of those who actually earned it. Though Charles Ponzi dates back less than one hundred years to the roaring 1920s, there have been snake oil salesman and bogus land deals and the like dating to the roots of Capitalism.
It was Irving Picard, the Bankruptcy Trustee for the Madoff firm that struck closer to the heart of the matter with his civil lawsuit against JPMorgan Chase, Madoff’s banker. As alleged in a still sealed lawsuit (where many details remain shrouded from public scrutiny), the bank – one of the largest and most powerful in the land – “turned a blind eye” and “ignored obvious red flags” as billions flowed in and out of the Madoff accounts. They were happy to take their fees and use those multi-billion dollar deposits for lending reserves, but never asked a question. Never a whisper: “what’s this guy up to?” Instead of buying securities for his clients, which we now know included hundreds of charitable foundations, Mr. Madoff and company simply laundered money: in one day, gone the next. Not to buy securities, but to pay that magical return of 10-12% no matter what the markets were doing.
No doubt JPMorgan Chase helped Madoff flourish. While his accountant was located in a strip mall, Madoff needed a reputable money center bank to handle the cash. He had a willing ally in JPMorgan Chase. And surely other banks sought his business.
So Attorney General Holder, focus the great talents of your department on those banks and financial institutions that were home to so many Ponzi Schemes. They provided aid and comfort to the fraudsters, at a minimum looking the other way and in some cases actively assisting in the operations of the fraud. In either case, the banks willingly took fees and paid bonuses from the very profits they earned housing these thieves. If the banks were out of the picture, Madoff and his colleagues would be forced to use some offshore facility (The Royal Bank of Trinidad and Tobago) which should give investors pause.
Some may be skeptical of my conclusion, but recall that these are the same banks that lost billions gambling on nearly worthless subprime debt, only to be bailed out by tax-payers.
(Berk Law, my firm, is currently counsel to investors of several Ponzi Schemes who have filed claims against Bank of America and JPMorgan Chase).
Posted on November 8, 2010 by Steven Berk
Let’s look at some of the details of JPMorgan’s acquisition of Washington Mutual from the FDIC. Warning: these new details may not be safe for children.
JPMorgan’s Purchase and Assumption Agreement dated September 25, 2008, contains a SIX PAGE INDEMNIFICATION SECTION. Indemnification shifts the risk. Guess who the risk was shifted to? Yep, the good old FDIC. They agreed to indemnify JPMorgan against virtually all risk involved with the deal.
Click here to read the entire Purchase and Asset agreement. For example on page 24 the FDIC promises to insure JPMorgan against practically all liabilities resulting from any WAMU misconduct…even costs for attorney’s fees. And don’t think for a moment JP Morgan is ignoring those provisions. As investors clamor for justice, JPMorgan hides behind the FDIC’s FIRREA process while asking for billions of additional funds under the indemnification agreements (click here for a recent WSJ article on the subject). Is it too much to ask for JPMorgan to take responsibility; to take the good with the bad? Instead they appear to be gaming the system.
Franklin Roosevelt stated,
The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself
While Mr. Hochberg has claimed no “bad faith” he has not claimed “justice”. The WAMU stakeholder deserve justice, not a back alley deal designed to benefit one entity – JP Morgan – to to the detriment of all others.
Assisted by Zach Kady
Posted on November 5, 2010 by Steven Berk
JPMorgan’s purchase of WAMU must be seen through the lens of the financial crisis of September, 2008. That’s the conclusion of official examiner, Joshua Hochberg.
The Deal
Dan Fitzpatrick at the Wall Street Journal (click here for the article) reports that the FDIC called JP Morgan with an offer to sell WAMU six days before it even received the failed bank. That’s a problem, did they call Wells Fargo or a small but robust regional bank, or what about a … a European giant (get the bidding going)? No JPMorgan’s Chief Executive, James Dimon, got himself an exclusive. And what does he say: I’ll think about it; we “might be willing” to purchase WAMU. Wouldn’t want to play poker with this guy; no doubt he is brutal – beware the check raise. Three days later, JP Morgan – perhaps knowing it has an exclusive drives a hard bargain: it won’t buy WAMU whole, but would certainly purchase the bank out of receivership.
Now here’s the really outrageous part: over the following days, JPMorgan and the FDIC negotiated the terms of the WAMU purchase despite the FDIC’s claims to other banks that terms were non-negotiable. On September 26, 2008, JPMorgan purchased Washington Mutual’s $188 billion in deposits and a coast-to-coast presence from the FDIC for $1.8 billion AND SIX PAGES OF INDEMNIFICATION RIGHTS AGAINST FUTURE LIABILITIES AND LOSSES.
Official Examiner Joshua Hochberg has found no signs of dealing in bad faith. Come on Josh.
Instead of handing WAMU over to JPMorgan on a silver platter, the FDIC should have run a real auction and forced JPMorgan to compete. Yes compete; against other banks in good faith.
Tough to understand the FDIC’s decision – particularly from an agency with a good reputation and a cadre of very experienced and sophisticated staffers.
This should not be swept under the rug. Investors, consumers and competitive banks deserve better.
Assisted by Zach Kady
Posted on October 13, 2010 by Steven Berk
You ask: how can a firm provide unbiased audits to a professional client? They can’t. For any independence to be achieved there must be tight and narrow restrictions on the type of consulting services an auditor can provide a company.
The Wall Street Journal reports that the European Commission has launched consultations on proposals to regulate audit firms. European regulators are rightly leery of the influence the “big four” hold in the financial world. They are exploring programs that will prevent the possibility of overreliance on these firms. Such reliance can result in more fragility in the market. The strong Anglo-American presence in the auditing world is certainly not helping the Auditors’ case.
To put the significance of this discussion in perspective, the big four (Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG) provide 85% of auditing services to top companies in Europe. What’s more, they also provide financial consulting services to the same companies they audit. You ask: how can a firm provide unbiased audits to a professional client? They can’t. For any independence to be achieved there must be tight and narrow restrictions on the type of consulting services an auditor can provide a company.
If the financial disaster has taught us anything, it is that unbiased regulation—for example, audits—of the financial sector is integral to long-term stability. The European Commission deserves our praise for tackling the issues surrounding these behemoth companies and endeavoring to loosen their grip on big business in Europe.
Here’s the tricky part:
The EU must avoid the potential dangers of loosening regulation in countries where it is already strong (France and the UK) in its attempt to codify rules across state lines. This is no easy task, but thankfully key ministers are already on board to help restore order to European business.
Will the EU pave the way towards greater accountability and transparency? It sure looks to be on the right track. Stay tuned for updates and please post your opinions on this important change in global business practices.
Assisted by Zach Kady
Posted on October 5, 2010 by Steven Berk
The personal credit card industry has come under intense government scrutiny for good reason. Between Visa, MasterCard and American Express, Americans spend (or charge) over one trillion—that’s trillion with a “t”—dollars per year. For years, merchants were forbidden by Visa, MasterCard and American Express from advocating for alternatives to credit payments. For example, merchants are forbidden from offering (or advertising) discounts if you pay cash (although many do).
Forbidding such a choice helps to maintain higher credit card fees. Yesterday’s settlement (see the Wall Street Journal story here or the New York Times story here) takes a big step toward creating a level playing field. All you can really hope for: Visa (#1) and MasterCard (#2) agreed to eliminate restrictions that foreclosed a merchant’s ability to both forbid and advertise alternatives such as discounts for paying cash.
Conspicuously absent from the agreement was American Express. Fighting American consumers and American law enforcement, “American” Express vowed to fight the proposed changes. Why? Simply put, they have the most to lose (they charge higher fees). Attorney General Eric Holder, my former boss, was strident in his opposition to the company’s position:
Because American Express has refused to change its rules, consumers are being held hostage from receiving the expanded choices and lower prices that they deserve under our settlement… We cannot allow this to stand.
Well said, General. AmEx, already notorious for charging 25% more in merchant fees than Visa or Mastercard, puts its greed on display. CEO Kenneth Chenault of AmEx hypocritically calls the government’s case “anticompetitive,” omitting the glaring and obvious truth: AmEx’s standard agreement forbids its merchant clients from soliciting non-credit forms of payment. Now that’s anticompetitive behavior.
The financial crisis we are still paying for taught us that enhanced corporate disclosure, transparency and consumer protection are more curative if served for breakfast and not for dessert. Pushing Visa and MasterCard to provide more disclosure and fewer restrictions on merchants is surely a step in the right direction. As to American Express, let’s hope they do the right thing instead of using our court system to delay justice hoping merely to enhance their own profits.
Posted on September 27, 2010 by Steven Berk
Last Tuesday, we linked to Elizabeth Warren’s White House Blog post regarding her new position and the Consumer Financial Protection Bureau. The New York Times has set up a forum for user comments, which are always welcome here at the Corporate Observer as well.
Stanley Chais passed away on Sunday. The SEC had accused Chais of feeding roughly $1 billion of investor funds into Bernie Madoff’s Ponzi scheme, according to the Wall Street Journal’s Law Blog.
Len Blavatnik, a Russian-born billionaire who lost tens of millions because of JPMorgan’s investment in mortgage-backed securities, has sued the bank. As the New York Times reports, he is not “someone for whom one’s heart instinctively bleeds.” However, his goal – paving the way for banks to be held accountable for such criminally negligent behavior – is inspiring. If only the courts would see it the same way.
Assisted by David Martin
Posted on September 20, 2010 by Steven Berk
Does the local drug dealer take Visa? Well the one online does.
Visa, MasterCard, American Express, and Discover; payment for that Harry Potter DVD from Amazon.com or tickets to a Redskins game from StubHub and many more legal products and services. But lucky you: The reach of “plastic” can also be used to purchase counterfeit and illegal products. Yep.
Notably, credit cards can be used to purchase online “prescription” drugs without so much as a phone call to a doctor. No exam, no consultation, no discussion of risk factors, heck no need for a prescription. Just type in a credit card number and you are good to go. Try it now: Google “online drugs no prescription” and you’ll find dozens of ways to purchase Percocet, Klonipin, Zoloft, Hydrocodone, Vicodin and just about any other prescription drug imaginable.
This should be no surprise to anyone with an email account. Online pharmacies seem to be the biggest “spammers” on the Internet. Their ads seem to defy the best of spy filters. Are these drugs real? Are they safe? Too strong, watered down? Who knows, most people just click delete, but too many people take the risk and buy their medication online. Sometimes their motives are pure: convenience, they cannot afford a doctor, and without insurance the drugs they need are too expensive. But in the main this is a dangerous, illegal endeavor that should be stopped. There is a reason prescription drugs are restricted and can only be legally purchased with a doctor’s prescription and dispensed by a licensed pharmacy.
Sure law enforcement can go after the “pharmacies” directly but what are they: a warehouse or an apartment somewhere in the world with a few people filling bottles. They can be found and shut down. But the next day they will just have a new location.
What about the banks that allow them to have merchant accounts so they can accept all those credit card payments. Easy access to money; a cheap and reputable partner to the most illegal of enterprises. Does the local drug dealer take Visa? Well the one online does. That’s right, they turn a blind eye to the source of the money. And who is harmed? Sure the users of the drugs risk their health and lives buying illegally online. But what about community pharmacists? These largely family-owned businesses with a reputation for honesty are under assault by not only the big chains, but also these online gangsters. And the merchant banks are complicit in that effort.
Without the legitimacy accorded the words and symbols saying “we accept Visa and Mastercard,” these online drug dealers might just suffer a mortal wound. And we’d take a small but important step in the right direction and give the community pharmacist a fighting chance at survival.
Too often we ignore the banks’ role in transgressions such as this. During the ongoing wave of Ponzi scheme prosecution, banks have largely been let off the hook for their similar role in aiding and abetting the defrauding of investors. The same cannot be true of the banks that facilitate the operation of websites such as Pillsgate – and the time to hold them accountable has come.
Posted on August 27, 2010 by Steven Berk
An important securities law story went underreported last week: The SEC ordered the State of New Jersey to cease and desist fraudulent activities related to the funding of its state pension plans. This marked the first time the SEC had initiated a securities-fraud case against a state. The New York Times reported that from 2001 to 2007 New Jersey claimed in filings with the SEC to have set aside funds in a “benefit enhancement fund” in order to pay for new benefits for teachers and general state employees.
In reality, the fund was a simple accounting trick – there was no money and no fund. The SEC did not impose monetary damages or penalties on the New Jersey government or any of the officials associated with the fraud. Moreover, the SEC failed to act at all against the investment bankers who underwrote and managed the fund. Hmmmmm? While the SEC’s effort to protect the pension funds of state employees is surely admirable, why give the underwriters and bankers a free pass? Enforcement efforts must have some teeth to them. Name names and impose penalties that will hurt. If not, pension assets will remain at risk.
Assisted by Zach Kady
Posted on June 22, 2010 by Steven Berk
In many ways, the days of Tammany Hall and Boss Tweed are deep in the rear view mirror. Politics is surely more transparent these days. There are many more stakeholders to be reckoned with: unions, non-profits, civil rights organizations and foundations just to name a few. But thanks in part to the Supreme Court, large corporations will dominate the game. And oh are they good at playing the game. They know where to focus and can contribute directly to the campaigns of congressional members whose job it is to regulate them and their industry. A conflict of interest to be sure; but it’s legal and just part of the game.
In last Sunday’s editorial, the New York Times detailed the dubious fundraising ethics of certain members of congress. Chief among these ethical offenders are those esteemed members of the Financial Services Committee. These powerful congressmen, just days before votes on a seismic regulation overhaul, continue to plan and throw together fundraising events for officials of the very corporations they will regulate. Representatives of the financial industries come from all over the country to meet with elected officials, to dine, and to share their two cents – more like millions of cents. Why now? Because money is flowing and campaigns are ever more expensive.
The banks and their lobbyists sure know how to play the game. Public outcry may be loud for now, but memories are short. Behind the scenes – the lobbyists are getting face time and putting in all those provisions and loop holes that water down high profile legislation. In the end, we are right back where we started before a financial collapse (of our own making) was days away from igniting a worldwide economic catastrophe.
Private interests regularly flood congress with money, biased information, and campaign contributions – this is nothing new. But we should have learned something from being on the brink. Congressional leaders must decline dinner dates with financial heavy-hitters. It’s time instead to soberly contemplate real reform, Indeed, what we really need is a sea change in the way we value risk and reward our executives. Those hard issues cannot be contemplated over gourmet dinners with lobbyists and their clients sipping $250 bottles of wine. Left unfettered, the banks are winning and Main Street is destined to lose again.
Assisted by Zachary Kady
Posted on December 7, 2009 by Steven Berk
“Bank of America” implies a bank that reflects the American spirit; a spirit based on cooperation and unity. America is a nation of citizens who lean on each other, lend a hand, and particularly in hard times, work together toward a common good.
Sadly, the real Bank of America fails to reflect these core values. Without remorse, it casts out loyal customers and strands Americans who suffer its exorbitant fees. How dare such an organization call itself the Bank of America.
Bank of America has repeatedly lied to its shareholders, embraced the worst practices of subprime lending, and supported Ponzi schemes that victimize innocent investors. And now this…
Bank of America fired Customer Advocate Jackie Ramos. Why was Ramos fired? She was doing her best to help others in a time of need. She was being an American.
Specifically, Ramos was fired for approving modification programs or lowering interest rates for customers who could not afford their charges. In short, for helping customers.
Bank of America must shed its name. Until it changes its mission and works for—rather than against—the American ideal, it does not deserve to tout itself as America’s bank.
Please visit our blog to select what name you think best suits Bank of America. Here are some suggestions that readers have submitted:
- Bank of Shame
- Bank of the Few
- Bank of Greed
Assisted by Jessica Begen.
Posted on November 23, 2009 by Steven Berk
Shareholders of Goldman Sachs are flexing their muscle in response to management’s approval of record bonuses and executive compensation. The Wall Street Journal reported on Friday that investors in Goldman Sachs are expressing frustration in analyst meetings and in personal conversations with the Goldman board. Investors’ main concern is that per share earnings are down while executive compensation is up, way up! 2009 per share earnings are projected to be 22% lower than those in 2007, while employee compensation and bonuses will set a new record of at least $717,000 per employee in 2009.
Goldman attempted to allay investors’ frustration with statistics citing its strong, long-term growth. Goldman has generated a return of 159% over the past 10 years compared with negative returns for the S&P 500 average over the same time period. However, Goldman Sachs’ board members seem to forget that the company is owned by its shareholders. The decline in per share returns in the same year as record employee compensation is unacceptable. The investors ought to have proportional rewards for the company’s success.
As Nell Minow, a leading advocate for shareholders’ rights, wrote in a recent CNN op-ed, “It is time for America as investors and as citizens to be ruthless in forcing Wall Street to prove that the return on investment for every dollar spent on executive compensation provides competitive returns”
The lesson: Shareholders expect more. Plenty of Wall Street banks continue to carry out overly risky investment schemes and engage in business with shady and criminal characters (just see many of the posts on this blog). Following the precedent of disgruntled shareholders speaking up and engaging in discussion with Goldman Sachs, we hope that other investors will heed the call to question the practices of every major financial institution. The general masses can cry foul until the cows come home, but only investors have a vote on change and the protection of sound business practices. A stable, thriving economy will only be achieved with the solid voice of investors reining in the excessive practices of Wall Street. In today’s economy, investors must demand transparency, responsibility, and respect for the shareholders.
Assisted by Zach Kady
Posted on November 16, 2009 by Steven Berk
WAMU’s complicity in the scheme resulted in the defrauding of millions of dollars from thousands of investors.
Berk Law, the Law Offices of Keith L. Miller, in tandem with Cotchett Pitre & McCarthy filed an action in the United States District Court for the Northern District of California on behalf of victims of a $150 million Ponzi scheme involving thousands of defrauded investors and the promise of safe, high yield CDs. The scheme, centered in Napa, California, was the brainchild of William Wise, who has a long a record of securities violations. The defendant in the case is Washington Mutual Bank, which Wise used to facilitate the operation of his scheme[1].
Specifically, Wise used two branches of WAMU located in Napa California to deposit, transfer and wire throughout the world the money earned from his illicit activities. Eventually, as Wise’s account grew, WAMU’s branch manager in Napa suggested he obtain a remote deposit facility (often referred to as a reverse ATM). Before that device was provided, WAMU was required to audit Wise. WAMU also suggested Wise obtain software offered to the bank’s larger clients to direct and manage a high volume of wire transfers. This tool again required a WAMU audit. This second audit was run from WAMU’s treasury department in Seattle, Washington. By providing these special services, WAMU knowingly provided Wise with his own private “bank within a bank”.
As the complaint alleges, WAMU learned of Wise’s illicit scheme thorough two audits by two different managing departments, but nevertheless allowed Wise’s activities to remain unchecked. WAMU’s complicity in the scheme resulted in the defrauding of millions of dollars from thousands of investors.
During this time period, WAMU had been operating under a Consent Decree issued by the US Office of Thrift Supervision in 2007. The decree was in direct response to WAMU’s previous failures to comply with numerous federal anti-money laundering statutes including the International Money Laundering Abatement and financial Anti-Terrorism Act of 2001, the Money Laundering Control Act of 1986, and the Bank Secrecy Act of 1970. The Consent Decree, among other things, ordered strict compliance with bank secrecy and money laundering requirements, and called for new and improved policies for maintaining compliance with federal banks secrecy and money laundering laws.
Steven N. Berk, Counsel for the plaintiffs remarked, “WAMU’s history of putting profits above compliance to capitalize on the mortgage bubble is well documented, but only now are we seeing that same corporate culture spilling over into taking risks in other areas such as the support of illegal and shady investment schemes.”
[1] The suit names JPMorganChase as the successor in interest to WAMU and seeks damages from JPMorganChase for the thousands of defrauded investors.
Assisted by Zach Kady
Posted on October 23, 2009 by Steven Berk
The culture of Bank of America appears to place profits over compliance
October 23, 2009
A Complaint filed yesterday in Federal District Court in Tampa, Florida alleges that Bank of America was at the center of yet another Ponzi scheme. The operator of this scheme, 27 year-old Beau Diamond, defrauded hundreds of investors from Florida and around the country of at least $37 million. He claimed to be an experienced trader in off exchange foreign currencies. In truth, he had no such experience and was not registered to sell securities or trade foreign currencies for others.
Nevertheless, Bank of America, as alleged in the Complaint, accepted Mr. Diamond into its Premier Banking and Investment Division. According to the Bank’s promotional materials, as a Premier customer, young Mr. Diamond received “close personal attention,” “priority customer service” and “expertise in banking and investment services.” Providing these services over a 32 month stretch surely alerted the bank to the scope and nature of Diamond’s illegal activities.
Steven N. Berk, Co-lead Counsel for the investors, explained that “the lifeblood of a Ponzi scheme is the ability of the scheme’s operator to claim legitimacy and have a banking facility that can accept and distribute large sums of money from a significant number of individuals. Bank of America was critical in providing both. Without the active support and backing of, in this case, one of the nation’s largest banks, Ponzi schemers like Mr. Diamond would be relegated to using off shore banks and other dubious financial arrangements. Many investors would no doubt be scared away. But with a Bank of America on their side, these schemes can too easily metastasize.”
This matter is strikingly similar to at least 3 other cases filed around the country where Bank of America has been alleged to have had actual knowledge of, and provided substantial support to, a Ponzi scheme.[1] In all of these cases, the schemes originated and operated out of tiny Bank of America branches.
This case originated in a branch with only 5 employees located in Siesta Key Florida. “It defies common sense to believe that those employees would not have known Diamond was engaged in some type of illegal enterprise. He was under 30, had no business experience, no securities licenses, and no employees. Yet he amassed nearly forty million dollars from hundreds of individuals and in many cases quickly wired that money off shore, or spent the money on luxury items and gambling.”
Berk also noted that “Bank of America’s support of several Ponzi Schemes (where innocent investors lost hundreds of millions) appears unfortunately consistent with other questionable conduct such as the Bank’s failure to advise its shareholders of $6.5 billion dollars paid in bonuses to Merrill Lynch executives (a case being prosecuted by the SEC) and investing heavily in the sub-prime mortgage market racking up tens of billions in losses. The culture of Bank of America appears to place profits over compliance.”
Berk Law is working on this matter with the Florida firms of Randall Smith of Lakin & Smith and Andre Perron of Ozark, Perron & Nelson, P.A.
[1] These similar cases include: In re Agape Litigation, 2:09-cv-01606-ADS, United States District Court for the Eastern District of New York; Collins vs. AdSurf Daily, Bank of America, et al, 1:09-cv-00100-RMC, United States District Court for the District of Columbia; and Zeese et al vs. Wady, Bank of America, et al, CV2007-00831 (Superior Court of Arizona Maricopa County).
Posted on October 19, 2009 by Steven Berk
For too long, Wall Street insiders have made fortunes based on who they know. Perhaps that’s just the way business works, but it is critical for financial markets to be better...Expand this investigation. Push it to the limit.
Federal prosecutors accused hedge fund manager Raj Rajaratnam and five others of using insider information to accumulate more than $20 million in profits.
Sadly, this latest news comes as no surprise. For too long, Wall Street insiders have made fortunes based on who they know. Perhaps that’s just the way business works, but it is critical for financial markets to be better. To increase stability and fund growth, they must operate with the utmost integrity. The arrest of Raj Rajaratnam, particularly with his A list of confederates (from Intel, McKenzie and former Bear Stearns employees) make us question that integrity. Indeed, many on Wall Street have had a few sleepless nights since Mr. Rajaratnam’s arrest. And that’s a good thing.
Our financial markets to a large degree operate on faith and trust. Without that trust, Main Street investors (and worse yet, the Chinese) would likely flee for the exits. Why would you want to put your money in a market rigged to profit the rich and connected at the expense of the average investor? The US markets are still the safest in the world and they must stay that way. Everyone needs to play by the same rules. Surely we are not naïve. Insiders of one kind or another will always have an advantage—but that advantage must be constantly challenged.
Let’s applaud the SEC and law enforcement officials. But their hard work must continue. Expand this investigation, push it to the limit. Federal prosecution and the potential threat of jail time make for powerful deterrents. If the SEC and other government officials can keep up the pressure, Main Street should sleep easier.
Assisted by Jess Begen
Posted on October 12, 2009 by Steven Berk
What happens when a consumer needs to pay bills, but doesn’t have a credit or debit card? A new and increasingly popular answer is prepaid debit cards. This new business is booming. The New York Times reported on October 5th that over $8.7 billion was loaded onto prepaid cards in 2008 alone. These cards offer the convenience of a debit/credit card without the credit check or bank account fees. Unfortunately, this is not the whole story. There is, quite often, a long list of fees including:
· Activation fees
· Convenience fees
· ATM withdrawal fees
· Balance Inquiry Fees
· Purchasing Fees
Keep in mind; this is by no means an exhaustive list of fees connected with most prepaid cards. I am not the first to raise the issue that some large companies may be taking advantage of their target markets: college students, and the uncreditworthy.
Of course the companies issuing the cards (small upstarts like Green Dot, Net Spend, and Account Now) have the right to a reasonable profit. We should also remember that without charging interest, fees will certainly be included in any of their schemes. My problem with the current system is that consumers are generally unaware of these fees which often end up considerably devaluing the money put on a card. This is a growing problem in the financial world and I think it’s time we found a solution.
Let’s look at an example:
This is a short sample of the fees that a consumer would incur with normal use of the MiCash prepaid MasterCard.
A deposit of $500
- $9.95 activation fee
- $17.50 (10 ATM withdrawals)
- $5 (5 ATM balance inquiries)
- $10 (20 purchases)
-$8 ($4 per month for “monthly maintenance”)
_________________________________________
Net Value: $449.50
A consumer using this card would have lost 10% of his or her initial payment just in fees by using this card normally for a two month period. Is this fair? Well, there certainly is precedent in the check cashing and pay-day loan industries for charging outrageous fees just for people to access their own money. However, even these questionable industries seem more willing to disclose fees than prepaid credit card companies.
Though prepaid cards may still be a better option than high interest credit cards or certain bank fees, many consumers rightfully feel that they are being charged fees without being made explicitly aware of them. The MiCash program in particular discloses the fees in the “terms and conditions” which are not directly posted on the application page – rather a user would have to follow a small link at the bottom of the application. This method of disclosing fees is perfectly legal, but is still deceiving. Nowhere on the application page does MasterCard mention any fees. In fact the only mention of fees is in reference to a lack of outrageous overdraft fees. However, it is clear in the fine print of the “terms and conditions” that overdraft or “negative balance” fees do indeed exist with the MiCash program.
We are not seeking an end to prepaid debit cards, nor are we seeking an end to all fees. All the common person is seeking is a fair representation of products, a clear warning that fees will be deducted from a prepaid card. Federal oversight should be the next step towards ensuring full and fair disclosure of fees. The industry is relatively new and has not been subject to a substantial amount of governmental review. Perhaps legislation will be the best way to guarantee disclosure. The card should warn customers that any initial deposit will actually have a lower net value. Hopefully, this clear warning will help assure that consumers are not tricked into allowing big banks and credit card companies to take their hard-earned money.
Assisted by: Zach Kady
Posted on October 7, 2009 by Steven Berk
We’ve all heard about overdraft protection, but most people probably don’t understand exactly what it is and how it works... As several recent news articles have highlighted, this service:
1) Offers No Protection. Standard interpretations of protection would lead a consumer to believe that he or she is protected from over drafting their account – i.e. a consumer will not be able to spend more than they have.
2) Is instead an automated loan with a high fixed interest rate.
According to Moebs Services, most Wall Street banks charge $35 dollars per check or debit paid without sufficient funds. In essence, that $1.50 Snickers bar you bought at the convenience store will end up costing $36.50. This may seem like an exaggeration or oversimplification of the process, but it is not. The Center for Responsible Lending reports that most point-of-sale overdrafts (like buying that Snickers bar) are for an amount less than half of the $35 dollar fee charged by big banks. That’s right; Main Street is paying an average of at least 50% interest on these small loans. Normally, when an individual takes out a loan from a bank, he or she consults with a loan advisor and is made aware of interest rates ahead of time. In the case of overdrafts, the system is marketed as a protective measure and most consumers are completely unaware of impending charges that cardholders will incur if they spend more than they have. In this regard, overdraft protection acts like a loan forced upon the consumer with no express consent.
The trouble does not end here. The banks have been fighting Congress and public sentiment for years on the issue of allowing customers to opt out of overdraft protection. Until recently, this has not been an option and still only a few large banks have made the switch to allowing customers to opt-out.
The worst is still yet to come: Bank of America has recently been shown to reorganize payments at the end of each business day so that larger payments are paid first. According to the bank, this is done with the intention of paying more important bills first. However, the actual effect is that larger payments deplete a cardholder’s funds so that numerous small charges can rack up the maximum amount in fees. Any reasonable person can realize that thanks to overdraft protection all bills will be paid regardless of their order of entry and that this scheme of reorganization serves only to create more fees and more gains for the big banks.
In addition, this is by no means a minor practice in the banking industry. The Center for Responsible Lending reported that banks made over $24 billion in overdraft fees in 2008 alone. Moebs Services reported that about half of all banks make more money from these fees than from actual profits. The same firm estimates that banks will make another $27 billion from overdraft fees in 2009. Banks appear to not only be content to profit off of Main Street’s money when times were good; it is now their prerogative to profit off of the lack of money in people’s checking accounts during this recession.
News of outrageous gains from loans disguised as “over draft protection” is both disturbing and upsetting, but it is not surprising. As we have discussed previously, big banks have been practicing risky, deceptive and even illegal deceptive practices for years. The irony, even after Main Street has given hundreds of billions of dollars in bail out money to the banks with the goal of “saving the economy,” they continue to swindle those hit hardest by the recession. It is time Congress stands up to the big banks and that the average person demand oversight on all lending practices, even those disguised as aid to consumers.
Proposed solutions forthcoming…
Assisted by Zach Kady
Posted on October 7, 2009 by Steven Berk
We have become dependent on the accuracy of the ratings, and yet the agencies that issue them are unregulated and are far from objective… Clearly we cannot continue at status quo.
Three cheers: to James Surowiecki of the New Yorker
In protecting Main Street, it is rare that I give banks and regulators a break. However, given the lack of attention to another guilty branch of the financial sector, they are going to get a brief (if undeserved) reprieve from me. The other blameworthy party that I speak of is the credit ratings agencies. Let me explain.
Credit rating agencies assess and label the riskiness of financial instruments (AAA being the best). As this recent New Yorker piece by James Surowiecki details, a problem arises because the rating agencies are privately owned and yet the S.E.C. anointed three of them as official ratings agencies—thus instilling a special trust in them by investors. And that was forty years ago. Today everything—from rules and regulations on financial instruments to interest rates—depends on these ratings.
So what happens when these agencies drastically overestimate the soundness of mortgage-backed securities? In part, that is what caused our current economic situation. The article explains the problem: we have become dependent on the accuracy of the ratings, and yet the agencies that issue them are unregulated and are far from objective. I must commend Mr. Surowiecki for this insight. When the agencies gave mortgage-backed securities a rating of AAA, investment flooded to them, creating the all-too-famous housing bubble. When, in light of the housing crash, the agencies harshly downgraded the securities, it drastically accelerated the bursting of the bubble.
Clearly we cannot continue at status quo. As in other under-regulated fields, Main Street became the victim of overzealous and unchecked standards. What can we do about these agencies? The New Yorker suggests scrapping the ratings agencies altogether, reasoning that no faith is better than false faith. I don’t know if that is the answer—it would be preferable to merely disconnect the ratings agencies from governmental endorsement—but clearly Main Street must be spoken for here as well. Hopefully my voice on this issue will couple with the Mr. Surowiecki of the New Yorker to be the first of many to advocate sweeping reform.
Assisted by David Martin.
Posted on October 5, 2009 by Steven Berk
Bank of America’s chief executive, Kenneth D. Lewis, announced his sudden resignation last week. Lewis has been under a cloud of suspicion following allegations that Bank of America misinformed shareholders of details related to its merger with Merrill Lynch.
Lewis’ personal career at Bank of America is a classic American rags-to-riches tale. He began working as a low-level loan officer, eventually moving up to become the bank’s President as the bank grew to be one of the world’s largest.
As President, Lewis’ agenda: growth and profits. From Fleet to Countrywide to the venerable Merrill Lynch, he surely was successful on expanding upon the nationwide platform created when upstart Nation’s Bank purchased Bank of America. But what about compliance? What about nurturing a culture of measured risk and thorough analysis? Looking back on Lewis’ reign, after a $40 billion government bail out, and the debacle surrounding Bank of America’s failure to disclose (or perhaps worse) billions of bonuses to Merrill executives, he leaves despite expansion with a mixed record to be sure.
Main Street hopes that Ken Lewis enjoys retirement and the $100 million he is expected to receive in stock and compensation – money that cannot be touched by payment czar Kenneth Feinberg.
Perhaps he can use that money and business acumen to start a foundation –that trains bankers in compliance and business ethics … might be a nice start.
Assisted by Jess Begen and Zach Kady
Posted on September 30, 2009 by Steven Berk
Sheila Blair and the FDIC are right. The banking industry must step up and take part in finding a solution to a problem that they were responsible for creating in the first place.
Struggling to stay afloat as the federal deposit insurance fund dwindles, The Federal Deposit Insurance Corporation (FDIC) issued a proposal yesterday requiring banks to prepay $45 billion in insurance premiums. FDIC Chairman Sheila Blair said it was time for the banking industry “to step up” and get involved in industry solutions.
The problem facing the FDIC is money; there simply is not enough of it. The FDIC has already closed 95 banks this year (compared to 25 total in 2008) and 416 more are classified at high risk of failure. The solution to increase reserves proposed yesterday would require banks to prepay their premiums for 2010-2012. This would generate money upfront and prevent FDIC funds from drying up.
Critics of this pre-pay solution (largely led by the banks themselves) have offered two perilous alternatives:
The first alternative proposed by critics is to use taxpayer dollars by dipping into the FDIC’s credit line with the Treasury and borrowing from the government. Use taxpayer dollars??? Haven’t Main Street taxpayers’ bank accounts been damaged enough by Wall Street’s blunders? A solution that “fixes” the problem by penalizing Main Street is shameful and inexcusable.
The second alternative proposes that the FDIC borrow from the banks themselves. In effect, the FDIC would regulate the very banks that it is borrowing from. That scenario creates a dangerous conflict of interest. Banks will have one up on the regulators that owe them money. (Surely, you would take it easy on your lender.)
Sheila Blair and the FDIC are right. The banking industry must step up and take part in finding a solution to a problem that they were responsible for creating in the first place.
Assisted by Jess Begen and Zach Kady.
Posted on September 23, 2009 by Steven Berk
“It seemed inconceivable that bankers would, just a few months later, be going right back to the practices that brought the world’s financial system to the edge of collapse.”
- Paul Krugman
I think I speak for most Americans when I say I have a visceral distaste for the government dictating salaries. Come on; some faceless bureaucrat in Washington deciding how much money I make? It takes the “free” out of “free enterprise” system. This country has thrived on a dream—perhaps it is just that—but even if it’s a myth—it is in our fiber as a nation: anyone can rise from a new and nearly penniless immigrant to a millionaire, heck even a billionaire. So regulating salaries for me takes a big leap of faith and a gulp.
But we need to do something about the financial sector. That sector is different. Indeed, it is profoundly different after Main Street stepped up to mortgage its future (and that of its children and children’s children) to bail it out just a year ago. And the thanks Main Street gets is a new round of skyrocketing bonuses earned on pure speculation.
I have written about my extreme concern that Wall Street is returning to standard practice circa 2007. If my voice is insufficient, Monday’s New York Times features the opinion of an economist who has been by-and-large dead-on about every aspect of the crisis we find ourselves in. Yes, Nobel Laureate Paul Krugman.
Mr. Krugman does not have a blog dedicated to protecting Main Street. However, his recent article should make evident the urgency of regulating bonuses paid to the financial sector. At the risk of sounding like a broken—and apocalyptic—record, the current crisis will not be the last of its kind if it does not lead to reform.
This is why it is of crucial importance to heed Mr. Krugman. While the political clout of the financial industry and its gaggle of lobbyists are surely powerful, they must be challenged. The simple fact is that Main Street needs—and moreover, deserves—the assurance that executive pay is fair. At any political cost.
Rewards must be tied to long-term value and growth in the economy—not simply the successful invention and guileless trading of financial instruments. Those efforts merely increase turbulence and risk—something those of us struggling to pay our mortgages, fund college for our kids and have a little extra to put away for retirement hardly need.
I second Mr. Krugman’s demand for regulation of this industry. Anything else would be a severe injustice to Main Street.
Let’s just hope a few more people with greater influence than me are on board.
Assisted by David Martin (North Carolina 2010) and Jessica Begen (Georgetown 2010).
Posted on September 21, 2009 by Steven Berk
“Instead of writing Secretary Geithner, what Congressman Sestak really needs to do is use his good offices to propose legislation creating a private right of action to curb TARP abuses.”
Recently, Representative Joe Sestak (D-Pa) opined on The Hill’s Congress Blog that we need more oversight and transparency for TARP funds. You think??? Of course we do. It is the largest federal spending program in a generation.
Back in July, I called attention to this issue, seeking to protect Main Street from being victimized once again. I want to congratulate Congressman Sestak for seeing the light on this issue. In a time when it’s easy to doubt Capitol Hill, it is refreshing to see Mr. Sestak focused on protecting Main Street.
Surely one method of protecting Main Street, as Mr. Sestak points out, is enhanced transparency regarding the use of TARP funds. But transparency – perhaps the most popular word in politics – is hardly going to be enough.
We have a brewing crisis, complaint numbers (each of which requires investigation) are off the charts and incentives are still strong for companies to misuse TARP funds. As commendable as it is that Mr. Sestak calls attention to this critical issue, his effort will fall short of helping Main Street. Put bluntly, a single letter to Treasury Secretary Geithner may help with your constituents but it won’t hinder the fraud and abuse lurking in the TARP program.
Back in July, already thousands of tips were received concerning possible fraud. The government can’t investigate everyone, but private attorneys can and need the right and incentive to do so.
Instead of writing Secretary Geithner, what Congressman Sestak really needs to do is use his good offices to propose legislation creating a private right of action to curb TARP abuses. Give the thousands of hungry, young, talented and committed attorneys in this country a chance to help both themselves and Main Street by zealously pursuing abuses of TARP funds.
Congressman, we stand ready to help you draft that legislation. It is time. You would be doing a great service to the millions of Americans who were forced to shoulder the financial consequences of Wall Street abuse.
Assisted by David Martin and Jessica Begen
Posted on September 18, 2009 by Steven Berk
The New York Times reported yesterday yet another fraudulent investment scheme. Ho hum. This time it is a group of investors suing an entity called Lancer Offshore and a few other hedge funds run by Michael Lauer. Lauer’s gains from the scheme total around $62 million, and overall losses for investors total over $550 million. Nothing new, right?
Wrong. This time Bank of America is up to its ears (if a bank had ears) in this fraud. BAS (an investment subsidiary of Bank of America) allegedly aided and abetted Lancer Funds in deceiving its investors. BAS acted as the prime broker for Lancer. Their role was to clear and settle trades, and act as the custodian for some of the securities held by Lancer. Bank of America’s biggest blunder was allowing Lancer funds to report the value of their investments in a manner that has been banned for almost 50 years. Yes 50 years; think pre-Beatles, pre-color TV.
The investors allege that by reporting the value of certain restricted stocks at the same price as freely traded shares, Bank of America allowed Lancer to dramatically inflate its earnings. During the period when Lauer was making his trades, Lancer’s account was overseen by three different executives, all of which called Bank of America’s actions standard procedure. Perhaps Bank of America should revise its “standard procedure”.
Bank of America moved to dismiss those allegations. But that effort was summarily rejected by Judge Shira A. Scheindlin – click here to read the ruling. Not surprisingly, Bank of America acted irresponsibly in the face of a duty to protect investors. The investors claim that Bank of America knowingly posted reports and account statements based on fraudulent data. Bank of America seems to be at the head of the line when it comes to high profile cases of bad judgment and investor protection. Stay tuned to A Voice For Main Street for more news on Bank of America’s culpability in this case and other related stories.
Assisted by: Zach Kady
Posted on September 6, 2009 by Steven Berk
The SEC is getting aggressive on Ponzi and Prime Bank schemes.
Here we go again. The SEC has shut down another Ponzi scheme. When will it end? It will only end when big banks stop sponsoring, assisting, and ignoring schemes that are operating within their banks.
From October 2006 until the summer of 2009, William Graulich IV of Henryville, PA was operating a fraudulent “Prime Bank” scheme under the nose of the SEC and through JP Morgan Chase bank accounts. Graulich and his firm, iVest Inc., allegedly convinced at least 5 investors to deposit more than 13 million dollars into his accounts, mostly with JP Morgan Chase. Graulich promised weekly returns from 22%-140%. Graulich never made any of the investments that he had claimed, and was brazen enough to use a substantial portion of the funds for personal expenses, payment of back taxes, repayment of creditors, and other miscellaneous expenses.
Schemes like Graulich’s, which promise exorbitant returns with little or no risk to the investor, are exactly what we need to be watching for in today’s financial market. The SEC refers to these schemes as “Prime Bank” schemes, or “High Yield Investment Schemes”. The SEC warns that these programs often promise high returns with no risk, purport trading in sound financial instruments such as standby letters of credit and medium term bank notes, and murky language to disguise the source of financial gain.
It is nice to see that the SEC is getting aggressive and proactive in fulfilling its duties. We hope this aggressive behavior continues, but for now ask a lot of questions. To read the full SEC complaint, click here.
Assisted by: Zach Kady
Posted on July 22, 2009 by Steven Berk
A “Private Right of Action” Must Be Added to the TARP Legislation
TARP monies must not become a slush fund for the ethically challenged.
On July 21, Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program, released his office’s quarterly report. To his credit, he demonstrates the kind of transparency taxpayers who are footing the bill deserve. Notably on page 5-6 of the report, he identifies and describes in some detail 35 investigations brought by his office. He also describes in depth two matters that have already been publicly filed. Good stuff indeed. But the magnitude of this program (trillions of dollars), the profound seriousness of this endeavor to our economy, and the hopes of future generations demand more.
A far greater degree of enforcement must be available.
In just a few months, Mr. Barofsky has received 3,200 tips. This means trouble is afoot as many feared. It needs to be “nipped in the bud”. Confidence must be maintained and the TARP monies must not become a slush fund for the ethically challenged.
We recommend Mr. Barofsky seek additional funding for more staff and investigators. The Administration should also request that Congress amend the TARP to allow a “private right of action." Private attorneys ferreting out fraud can make a real difference. We need more than 2 filed cases to serve as a deterrent, protect the essential mission of the TARP, and limit the cost to taxpayers.
We cannot afford to wait.
The More Transparency the Better
We applaud the report as a small step in the right direction. Much has been made of the $27.3 trillion that the report warns could end up as the overall cost of resolving the economic crisis. Although this figure represents a worse-case scenario, the magnitude of that amount should alarm taxpayers and regulators alike. To avoid coming close to that number, the Treasury must heed the recommendations of the report by: (1) enacting realistic mandatory transparency requirements; and (2) opening its own methods and decisions to the glare of public scrutiny.
As Justice Douglas said in framing the Securities Act of 1933, in the midst of the Depression, “Clean Air is the best disinfectant.”
(Post was prepared with the assistance of David Martin, University of North Carolina 2010)
Posted on July 14, 2009 by Steven Berk
It is time to return the term 'Ponzi scheme' to the microfiche headlines of the 1920s where it belongs. To do so, regulators must start regulating and courts must start finding banks liable.
Over the past year or so, the term “Ponzi scheme” has sadly become as common as “Let’s have lunch” or “Text me.” Yes, these schemes are emblematic of good old greed and the over-exuberance and blind optimism seen in all markets, but they also illustrate a serious failure in our banking system. With leading reputable banks at their side, Ponzi schemes have the means to grow, metastasize, and take hard-earned (often retirement) monies from hundreds of thousands of victims. Change needs to come in the form of enhanced regulation and the courts’ willingness to hold banks accountable.
One notable example is the case of an online Ponzi scheme called ADSURF. Participants in this scheme were told in compelling YouTube videos, religious-type rallies, and internet ads that they could earn money by simply surfing the web. When it sounds too good to be true, it is too good to be true. All ADSURF was doing was recruiting new participants to pay into the scheme; this allowed the organizers to profit wildly while the unlucky newcomers got left holding the bag—just like all good Ponzi schemes.
Contrary to core compliance requirements recently expanded and tightened in response to funding made available to the 9/11 terrorists, Bank of America placed itself at the heart of the ADSURF Ponzi scheme. With the help of Bank of America, the ADSURF scheme went on to victimize over 100,000 participants who lost hundreds of millions of dollars. Bank of America was privy to a slew of information that inexorably led to the conclusion that ADSURF was one big scam:
* ADSURF was the brainchild of Thomas Bowdoin, a convicted felon with a history of securities fraud violations and failed business ventures.
* ADSURF sold no products or services, held no intellectual property rights, and had no successful business professionals in management or on its Board.
* ADSURF had no colorable, legitimate means to produce the massive profits (365% per year) Bowdoin and his co-conspirators promised investors.
* ADSURF also lacked the means to legally generate the tens of millions of dollars a month flooding its tiny office—a former floral shop—in the small town of Quincy, Florida.
While unthinkable just a few years ago that one of the nation’s largest and most respected financial institutions could act so irresponsibly, their conduct is sadly consistent with a range of lax business practices. A corporate culture that placed increased profits, seven-figure bonuses, and a higher stock price above sound banking judgment—this is the same culture that caused the Bank’s near-failure last fall (requiring a $45 billion dollar federal bailout because they were deemed “too big to fail”).
It is time to return the term “Ponzi scheme” to the microfiche headlines of the 1920s where it belongs. To do so, regulators must start regulating and courts must start finding banks liable for knowingly assisting Ponzi schemes and other obvious fraudulent schemes.
Posted on April 1, 2009 by Steven Berk
"A novel in quarterly installments"
I recently had the opportunity to review one of the quarterly statements Madoff sent regularly to victims of his odious crime. They are rather chilling:
- You begin from the top with those addresses: very legitimate. Just off Wall Street and London’s exclusive Mayfair neighborhood; but as you go down the page it gets even more interesting.
- Exact stocks are listed, good blue chip companies: Coca Cola, Hewlett Packard, ExxonMobil (household names) with precise shares and values.
- You then see those Treasury Bills and a purported transfer (transfer numbers included) between long and short positions in stocks to bonds. Truing up at the end of the month in some elegant cosmic unified theory (he touted as a “split strike or conversion strategy used no less to “reduce risk”).
- No penny stocks, middle market unknowns, or exotic derivatives or futures on Manchurian sawdust.
- All the numbers add up – or so they seem.
But it was all a fiction, “a novel in quarterly installments." According to the court-appointed receiver, Madoff hadn’t purchased a security since 1992. These statements were written, devised and distributed to deceive. They did so masterfully; month after month, year after year. In many cases they were sent to sophisticated investors. But when you are winning it's only natural to congratulate yourself and not look too hard for problems (“I’m invested with Madoff and I’m making money”). It’s like a poker player who wins three or four hands in a row; it’s not luck or someone feeding him the cards – no it's skill, experience and pure gravitas.
My first reaction to seeing these statements was this could hardly be the work of one man. Surely not a 70 year old man without computer training who likely couldn’t program his cell phone; maybe a computer geek-extraordinaire (think Napster in Italian Job), but that’s only possible in the movies (poor Steven Spielberg, prominent Madoff investor).
No it had to have taken the work of a small – very loyal – cadre of confederates at many levels (heck Danny Ocean needed 11 to steal $150 million). These detailed quarterly statements, tell me it was the work of an IT department and many more generating these lies of a comfortable retirement and money enough for generations. You’d think years ago someone would have cracked and spilled the beans.
But my overriding reaction to seeing those statements (besides empathy for my client) was how true – how accurate – is my own brokerage or IRA statement? Do the stocks listed really exist somewhere and what if I need the cash one day – that day. In fact, how many statements are true?
You’d think the SEC, with its expertise and subpoena power could have asked to see a few of those “transfers” or verify all those purchases detailed in Madoff’s quarterly novellas. And what about the third party custodians controlling at least 1000 IRA accounts invested with Madoff? They surely never checked the basics: custody. Where were these t-bills and stock certificates listed on those statements? Who had custody? One simple audit would have unraveled this house of cards.
We have long been in an electronic age with trillions of securities transactions daily. Investment houses and banks don’t have to have stock certificates in a big old vault (like the one visited by Harry Potter before heading off to Hogwarts) – but we have the technology to check, to verify, to audit, to ask the right questions, to design the right software to ferret out fraud. We need to use it.
Why not use some of those stimulus dollars to improve technology, coupled with stricter compliance regulations at the state and federal level. Private rights of action that hold banks, custodians and anyone allowed who is entrusted with someone else’s assets accountable are also key. Finally, courts must judge these entities as fiduciaries – requiring them to exercise the highest duty recognized by law.
Creating those protections will not eliminate the next Madoff, but it might just reduce the number and size of future schemes. We will always have swindlers but we must do everything possible to reduce the sheer volume of these schemes, making less likely the enormity of pain and ruined lives Madoff and his confederates left in their wake.
Finally, more protection for all investors will create a higher level of confidence: critical to getting Main Street back into the markets and the financial system back on its feet.
* Steven Berk is currently co-lead counsel against FiServ and other entities that served as the exclusive third party IRA custodian for Madoff Securities.
Posted on March 17, 2009 by Steven Berk
"It’s time to stop protecting the banks”
Ponzi schemes seem to be everywhere these days. Yes of course, there is Bernie Madoff and upwards of $50 billion he stole from the rich, the famous, and scores of charities and philanthropic foundations. But Madoff was hardly alone. There are plenty of lunch bucket schemes robbing hard working middle class people around the country.
On Long Island, convicted felon Nicholas Cosmos (no not Kramer from Seinfeld) fleeced firemen, municipal employees, and blue collar workers of likely $400 million claiming he was putting their money in high interest bridge loans for construction projects. Nope. He was instead lavishly spending those hard earned dollars and speculating on high risk commodities trading.
Where did he deposit all that money? Bank of America.
In another scheme operated from Quincy, Florida, another convicted felon, Andy Bowdoin, had the clever idea to pay people to “surf” the Internet. But what they were really doing was operating a multi-level marketing scheme, which had no actual investments and paid participants for not “surfing the web” but signing up new participants. ADSURF fooled over 100,000 people hoping to earn a little extra money from home in an economy where jobs are often hard to come by.
Where did he bank: Yep. Bank of America.
All these schemes need a bank to thrive: a financial institution accepting deposits and funneling monies to the schemers and their confederates. Victims think the scheme is legitimate when they can wire transfer their “investment” to Bank of America.
But the law and Judges almost without exception shield banks from liability in connection with a Ponzi scheme. In most cases the perpetrator of the scheme is gone (sipping rum drinks on some distant island) or in jail awaiting sentencing. Victims look to the bank. However, even if they can establish the bank had actual knowledge of the Ponzi scheme and had “violated its own internal policies and repeatedly violated the anti-money laundering provisions of the Patriot Act”, the bank will not be held liable. Mazzaro De Abreu, et al. v. Bank of America 525 F.3d 381 (S.D.N.Y 2007).
The legal hurdles victims of a Ponzi scheme must surmount make it nearly impossible to hold the bank liable regardless of their assistance to the fraud.
To be sure, the banks should certainly not be responsible for every bit of illegal conduct flowing from monies held in deposit. But when the bank takes affirmative steps to help the scammers they must be held liable. They cannot gain fees and other income by sponsoring the scheme – without the risk of liability.
If the courts get tough on the banks they will be more vigilant and Ponzi schemes will be shunned to the back alleys of the financial, system where they belong.
There – they are less likely to grow and ruin the financial lives of so many thousands.
*Steven Berk is currently counsel to victims of Ponzi schemes who have filed cases against Bank of America for their alleged substantial assistance to perpetrators of these schemes.
Steven N. Berk has over twenty years of litigation experience spanning both the private and public sectors. His practice ranges from representing Fortune 500 Companies, to consumers. Steven is based in Washington, D.C. and founded Berk Law in May 2009....
