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

Paul Volcker – a voice for reasonable regulation on Wall Street

Paul Volcker, for decades a lion in the regulatory community, has had an undeniable impact on the new financial regulations moving across President Obama’s desk. All proponents of Main Street should applaud him. Mr. Volcker, former chairman of the Federal Reserve Board under Jimmy Carter and Ronald Reagan, has recently found his voice as lead Economic Advisor to President Obama. The proof:

The Volcker rule:   A key piece of the financial reform legislation, which President Obama signed into law earlier this week.  The rule will help ensure a dividing line between commercial and investment banks.

Mr. Volcker hoped for a complete separation of traditional banking from investment/hedge fund banking industries. Recall, this was the way of the world before the drastic deregulation of the 80’s and 90’s.  Unfortunately, today’s political reality would not permit such a stark division of commercial banks and investment banks. Instead of a complete separation of functions, the bill that President Obama signed into law limits commercial banks to investing just 3% of their capital in investments that do not benefit their customers. In other words: trading for their own account and perhaps contrary to the interests of their customers and the public. And as we now know getting into enough trouble to need a multi-billion dollar bail out. 

Volcker, always a thoughtful proponent of government regulation, was largely cast aside and silenced during the economic booms spurred by deregulation. In a recent interview with the New York Times, Volcker called the idea of a self-regulating market an illusion which he is happy to see shattered.  

This week, we salute Mr. Volcker for his efforts on behalf of the Main Street and the public. Despite Wall Street’s kicking and screaming, Volcker’s singular gravitas has successfully stood up to those Gucci wearing lobbyists of the financial industry. Although not enough, the Volcker rule is a step in the right direction. It helps Main Street to be sure. Unless banks find a creative way around it, we should be spared – at least for awhile –  the volatility and cost associated with the unbridled greed of banks we all witnessed the last several years.

Assisted by Zachary Kady

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“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.

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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

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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.

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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

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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.

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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

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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.

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“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).

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 “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

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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

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Frustrated by Bank of America’s failure to come clean, Rakoff issued a bitter ruling condemning the bank for its dishonesty and immorality. “It is not fair, first and foremost because it does not comport with the most elementary notions of justice and morality…”

Today we applaud the Honorable Jed Rakoff – our former “Person of the Week” – once again, for standing up against both Wall Street greed and immorality and one of the nation’s most important regulators. Not a bad day’s work.

On Monday, Rakoff stridently refused to approve a $33 million settlement deal between the Securities and Exchange Commission (SEC) and the Bank of America.

Rakoff’s decision protects the rights of Main Street and fulfills the judiciary’s historic role as the conscience of America. As Alexander Hamilton writes in Federalist Paper No. 78,

“The judiciary…has no influence over either the sword or the purse; no direction either of the strength or of the wealth of the society; and can take no active resolution whatever. It may truly be said to have neither FORCE nor WILL, but merely judgment.” Jed Rakoff’s actions demonstrate great judgment in the face of force and will.

The $33 million penalty—which would ultimately be borne by shareholders on Main Street—would have settled an SEC lawsuit filed against Bank of America, following its merger with Merrill Lynch & Co. The lawsuit accused Bank of America of lying to its Main Street shareholders, publicly promising that Merrill executives would not be rewarded year-end bonuses, while privately allotting upwards of $5.8 billion for bonus compensation.

Frustrated by Bank of America’s failure to come clean, Rakoff issued a bitter ruling condemning the bank for its dishonesty and immorality. He argued that the settlement was not only inadequate—$33 million from shareholders for a $5.8 billion lie?—but also unjust and absurd in that it doubly punishes Main Street victims, who would ultimately pay the costs of the $33 million penalty. “It is not fair, first and foremost,” wrote Rakoff, “because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank’s alleged misconduct now pay the penalty for that misconduct.”

Rakoff’s harsh language surely expresses the frustration shared by many Americans and perhaps suggests that business as usual on Wall Street will no longer be tolerated, at least by Jed Rakoff. And for that, we salute him as Main Street’s Player of the Month.

Stay tuned: Rakoff has scheduled the case for trial on February 1, 2010.

Assisted by Jessica Begen.

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Securitization of life settlements is yet another dangerous development for Main Street. Is this really what we need right now?

It just doesn't stop. Despite repeated lessons and tales from the brink (the collapse and near collapse of Lehman Brothers and Bear Stearns to name just a few), Wall Street is at it again. What now, you ask? Wall Street is securitizing life insurance policies. What the heck is that?

A recent New York Times article details "life settlements"--which have Wall Street executives' mouths watering. The premise is this--elderly people sell their life insurance policies for fractions of what they are worth to banks. Wall Street then repackages these policies into bonds, grabs fees and sells them, netting dealers even more fees--and creating another speculative industry. This time betting on when grandma will die. And what's next derivatives on these bonds.

Securitization of life settlements is yet another dangerous development for Main Street. Industry sources explain that insurance companies are able to maintain premium rates based on the profit they make from policy lapses. If life settlements are securitized and traded, Wall Street will pay the premiums and the insurance companies will be out the easy profits from the millions of policies a year that lapse. Ultimately they will be forced to raise premiums to continue earning profits. Who, then, will suffer the true consequences? Main Street, once again.

Is this really what we need right now? In a time when the economy is inching towards a recovery from a crisis caused by precisely what is presented here: the opportunity for a new overaggressive and under-regulated speculative market? And who is going to be able to regulate these new instruments of greed so that Main Street does not become the victim?

We have a better idea for Wall Street.

Go back to basics. Finance renewable energy products, figure out an innovative way to finance new infrastructure--so sorely needed. Maybe even come up with a new micro-loan product that works for hard working Americans who want to start small businesses.

Let's let the securitization of life insurance policies die a peaceful death.

Assisted by David Martin and Jessica Begen.

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With subpoena power and the threat of jail time (how many hundreds of years did Madoff get?), stepped up enforcement can moderate the rampant speculation and greed to function efficiently as a lubricant to the markets like oil in a car and not sparks in a dry forest.

Well… judges?  The envelope please… (imagine whispers and hushed speaking voices) it’s of course Gretchen Morgenson herself; brilliant, insightful New York Times Columnist and all around contributor to humanity.  She is always honest, informed and on-target (she would have won last year but she was too busy scaling K2 in Nepal).  Ms. Morgenson, who likes to be called Ms. Morgenson, said she was “thrilled” to even be considered and would put this award right up there with her Pulitzer Prize (not).

Why all this *ahem* praise for Ms. Morgenson?  This Sunday she reported on the next impending financial crash, this time involving overinflated bank stocks.  Gosh.  Didn’t we just get off that ledge, abyss?  Or was it a precipice?

(Fill in your word – this blog is interactive).  

Ms. Morgenson’s piece succinctly reports that despite unpromising data coming from the banks, the numbers are just not there: bank stocks are soaring – soaring on air and not cash and profits.  The analysis Ms. Morgenson highlights in her column of smaller, non-money-center banks (which excludes Citigroup, Bank of America, etcetera) illustrates that “the number of financially sound banks is declining.”  Coupling these two facts together, Ms. Morgenson concludes that it is time to

“determine whether fundamentals in the industry support this rocket-fueled surge in bank shares.”

Thanks Gretchen, good column as always – but I sense an undertone of panic and fear; a siren signaling a second crisis in the financial sector.  With all due respect to Ms. Morgenson, it’s not time to panic just yet.  To be sure, it is difficult not to doubt everything financial, from soaring bank stocks to the dollar bill with which I buy my Snickers (yes a Snickers).  But we’re seeing plenty of signs of stability and the markets (all of them) seem to be better patrolled by the Feds.  Greed and profit taking will always be there it just needs to be maintained at a moderate level – and not get silly.  To ensure that doesn’t happen, we have the regulators and enforcers.  With subpoena power and the threat of jail time (how many hundreds of years did Madoff get?), stepped up enforcement can moderate the rampant speculation and greed to function efficiently as a lubricant to the markets like oil in a car and not sparks in a dry forest.  So let those bank stocks soar for awhile on greed and speculation.  They will come back down to earth.  In the meantime, a little speculation is good for the sector.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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There was news earlier this week of Madoff Lieutenant Frank DiPascali’s expansive guilty plea (to 10 felony counts).  This broad plea accompanied by loud hints of expansive cooperation with the federal government raises the question of whether Mr. DiPascali was Madoff’s main man; his aide de camp, his Tonto, his Robin, his Hutch, his Watson or his Sundance Kid. 

 DiPascali admitted under oath he fictionalized customer statements for over 20 years.  Using various mechanisms, they together wrote one novel (phony account statements) after another – each more fanciful than the last.   No doubt DiPascali worked closely with Madoff and knows where many of the bodies are buried.

 But was this the guy who repeatedly stumped the SEC, an array of other regulators, scores of investors and the street for all those years. 

 I think not. 

 Nothing in his background suggests the level of genius required in:

finance

math

technology;

politics; and

fiction

DiPascali attended Archbishop Molloy High School in Briarwood Queens.  Everything he learned about Wall Street – he learned from Madoff who took him in as a “research analyst” in 1975.    His genius was his loyalty– but did he have the stuff of a mastermind or even an number 2. 

I don’t think so. 

Not that mastermind criminals need an advanced degree from MIT.  (think Jesse James and John Dillenger).

My gut (and a little experience as a  federal prosecutor) says this isn’t the guy -- this scheme had too many moving parts.  Over 6000 investors and $65 billion just for starters.  Remember, since Madoff was not buying stocks or bonds or any securities for that matter

– they had a lot, a lot of money to move.

So I put DiPascali at VP of Operations -- an inside guy.  He likely knows no more than Peter Madoff, Chief of Compliance or the Madoff sons but likely less than Ruth Madoff and other “friends of Bernie”.  I would keep my eye on Madoff’s banker at JPMorganChase.  In all those years, they had to know – securities were not being purchased and money was just circling from new to old investors. 

 So maybe that explains why Judge Sullivan denied Dipascali his release:

a release that the government had agreed to. 

Maybe Judge Sullivan recognizes Dipascali has every reason to flee – 125 years of reasons to flee – and he has nothing more to give the feds.  But surely someone else does?

Steve Berk, August 12, 2009

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“I wish the average American was making $91,000”

 Judge Rakoff of the Southern District of New York is our person of the week.  Why?  Because he wouldn’t rubber stamp a deal between the SEC and Bank of America, which allowed BofA to sweep under the rug its use of taxpayer money (from “Uncle Sam”) to pay $3.6 billion in bonuses to Merrill employees. 

 Merrill had lost $27 billion!  Are bonuses deserved on losses of that magnitude?  Should that be the norm?  Can the whole thing be swept under the rug for a mere $33 million dollar fine?

 “No” said our person of the week, Judge Jed Rakoff.

 After some harsh questioning and just plain common sense – the Judge called the proposed fine “strangely askew” (to the $3.6 billion dollars in bonuses) and sent the parties packing; giving them 2 weeks to rethink and attempt to support the settlement. 

 Let’s be clear.  I have no issue with ample bonuses and huge salaries.  I’d take one. 

 But they should be a reward for: 

• Creating shareholder value
• Extraordinary service
• Taking risks on new technologies
• Creating new jobs. 

 - They should not be paid by taxpayers.  - They should not be paid for generating losses in a public company and - they should not be made for churning trades and providing no value to folks on “Main Street”.

 In an effort to defend the $3.6 billion in bonuses, BofA’s attorney Lewis Liman (our imbecile of the week); argued it only amounted to on average: bonuses of $91,000.

 Mr. Liman, what planet are you living on?  How many 

• teachers
• nurses
• firefighters
• legal aid attorneys
• operators of homeless shelters; and
• community organizers

even earn $91,000.  Jed Rakoff stood up for “Main Street” this week and for that reason he is our “Person of the week”.

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We can thank Krugman and Schapiro for directing attention to these practices, and the next step is to intervene.  Main street has borne enough of the burden caused by the me-first, profit-seeking attitudes of these companies.

In Monday’s New York Times, noted economist Paul Krugman’s Op Ed piece draws attention to the proliferation of high-speed trading by the elite on Wall Street, notably Goldman Sachs.  Using high-speed trading, Goldman Sachs has already made millions trading stocks.  Yes, trading stocks.  Not financing infrastructure or lending to startups developing new or better technologies.  Just trading.  In a related story, SEC Chairwoman Mary Schapiro got it right when she recently called for elimination of the practice of ‘flash’ trading.  While the two concepts are subtly different, the net effect is the same for main street: the short end of the stick.  For every dollar made on Wall Street, main street more often than not loses a dollar.

Disturbingly, the same financial institutions we spent billions of dollars to save from bankruptcy mere months ago are victimizing taxpayers yet again.  We can thank Krugman and Schapiro for directing attention to these practices, and the next step is to intervene.  Main street has borne enough of the burden caused by the me-first, profit-seeking attitudes of these companies.  Identifying and eliminating unfair stock market practices is an essential step toward fairness.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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At best, I fear a muddled effort—this after main street spent trillions to bail out those interests.  At worst, we may see reforms that actually subtly favor these industries.

I was taught not to write using clichés.  But I couldn’t resist.  As the July 29, 2009 New York Times editorial, entitled The Financial Truth Commission cautioned: the important Financial Crisis Inquiry Commission set up by Congress to investigate last year’s near-complete meltdown of the financial system is being led by two veteran politicians who have received significant campaign contributions and have longstanding ties with – you guessed it – the “financial, insurance and real estate interests”.

Those are the interests that main street had to bail out in the first place.  They will now have considerable influence on everything the Commission decides.  At best, I fear a muddled effort—this after main street spent trillions to bail out those interests.  At worst, we may see reforms that actually subtly favor these industries.  There is definitely cause for concern and like the NYT, we will be watching.

Let’s hope that as with the Watergate Commission and the Church committee hearings of the 1970’s, this Commission can rise above politics and act professionally and diligently to create reforms that put our financial and banking system on firm ground.  Only then can folks on main street thrive again.

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 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) and 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)

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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.

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As harsh as it was, the Madoff sentence does virtually nothing to protect investors on Main Street.  What will?  Cleaning up the banks is a good start.

By now it’s old news: Bernard Madoff sentenced to 150 years in jail.  While news agencies and pundits debate ad nausea the deterrent effect and importance of this “symbolic sentence” (with good behavior Mr. Madoff will be released when he is 221 years old), a critical issue remains out of the public glare.  What about the bank Madoff and company used to support the largest and longest-running Ponzi scheme in history?  Remember that Madoff’s scheme relied upon him not buying any securities for his money management clients for over two decades.  Let me say it again, Madoff did not buy any securities for his clients since 1986.

So what did he do with the billions flowing in from feeder funds and a worldwide network of well-heeled promoters from around the world?  The simple answer is he put the money in the bank.  Not just any bank, but one of the world’s largest and most respected financial institutions: JPMorgan Chase.  Month after month, year after year, Madoff deposited billions.  Surely if he was running a legitimate money management firm those deposits would have been a mere fraction of that amount.  Why?  Because the money would be needed to buy securities and stocks for investors.  But he never bought those securities or stocks.  Statements given to his clients were no more real than a romance novel.  The stocks and bonds listed were never purchased, held or traded.  It was all a big lie.

Did JPMorgan Chase ever hush a word of this to the SEC or other regulators?  Did anyone say “this ain’t right”?  Probably not—the bank had huge accounts to service and there was plenty of money to be made.  Despite strict regulations placed on JPMorgan Chase by the Patriot Act, Anti-Money Laundering Act and Bank Secrecy requirements to be on the lookout for suspicious activity, the beat went on until the music finally stopped.

As harsh as it was, the Madoff sentence does virtually nothing to protect investors on Main Street.  What will?  Cleaning up the banks is a good start.  Empowering regulators, prosecutors and private attorneys to go after the banks is a good start.  Because without the banks' complicity, Madoff would have had no ability to take in billions every year.  Even he could not have gotten away with accepting cash or banking at anything less than a large money center bank.  Unless we clean up the banks, the chances are good, indeed certain, that we will see many more Ponzi schemes blossom before Mr. Madoff hobbles out of jail at the ripe old age of 221.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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"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.

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"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 a 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 rate 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.

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