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

Judge Rakoff agreed with Deutsche Bank and dismissed two investor lawsuits involving the sale of residential mortgage backed securities the bank internally referred to as “crap,” “pigs,” and generally “horrible.”  And “crap” they were, as we all know now (and it appears that Deutsche Bank knew before they sold them to investors). The mortgages were made to folks—did they even have jobs?—who could hardly make monthly payments on homes that were surely well overvalued (as appraisers too were willing to play in the game).

All these lies were then forgotten (or at least swept under the rug) by a AAA investment rating brought to you proudly by Standard & Poor's.  With that investment-grade rating, they were able to attract the money of pension funds, in this case the Teachers Insurance and Annuity Fund.

What is so maddening is Judge Rakoff refused to even let the suit proceed beyond the mere filing of the Complaint.  “Done, over, go home, nothing to see here, thanks for playing the game.”  He wrote that investors had not included allegations of “fraud” specific enough to go forward.  “Ah come on now.”  The Complaint ran over 100 pages long.  At a minimum, the investors demonstrated in detail Deutsche Bank’s knowledge that these securities were questionable by the bank’s decision to short them; after all, the bank bet against them in the market.

What more did they need?  And how can investors obtain more specifics without being allowed discovery?  AAA bonds that Deutsche Bank is shorting and internally calling “crap,” and investors are not even allowed to get to first base?  It’s a travesty.  Allow investors to obtain documents and testimony (under oath) to see if behind the smoke there is fire.  If not, so be it.  But don’t slam the courthouse doors in their faces—and why?  To protect Deutsche Bank?

If Judge Rakoff is so concerned about the burden of this suit on Deutsche Bank, or more generally about investor suits claiming fraud, then significantly limit discovery.  Allow investors just one or two depositions and documents on a narrow issue they have failed to include in their Complaint.  But slamming the door on investors not only denies them a remedy; worse, it allows the Deutsche Banks of the world to avoid scrutiny, and you know where that ends.  They will try it again and again knowing the courts have their back.

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Fred Wilpon

The Madoff trustee, Irving Picard, filed suit some time ago against renowned nice guy and Mets owner Fred Wilpon, seeking what are often called “claw back” profits.  According to Picard and other trustees (who try to unscramble Ponzi schemes) profits “earned” by winners of the scheme must be returned to those who are “losers.”  The problem often is that those “winners” don’t have the money anymore.  For Wilpon and his partner Irving Katz the “profits” were substantial—we are talking big money folks: $386 million big.

Our repeat person of the week, the Honorable Jed Rakoff, presiding over the case, threw much of it out.  But a portion remains and both sides are lining up hired guns (oops: “experts”) to support their positions.

Although I’m a friend of investors and have specifically represented thousands of them in connection with Ponzi schemes, I’ve never liked these “clawback “ cases.  Yes, I see the logic.  At some level, they make perfect sense.  Winners of illegal profits pay back losers and the Trustee tries to “minimize” the gap.  But Fred Wilpon was duped too.

Of course there were whispers on Wall Street for years about Madoff’s legitimacy.  Someone besides Harry Markopolos smelled a rat.  But those rumors were just that and no one, from the SEC or DOJ, was putting together a case.  So why should Wilpon take the hit.  I say no “clawbacks” unless the trustee can establish the net winner (someone like Wilpon) had actual knowledge of the scheme and provided the bad guy (in this case Madoff) with substantial assistance.

Jury Decides Mr. Perelman Is Not Entitled to A Nickel or “That Explains How He got all His Money.”

Five time divorcee Ronald Perelman, is an icon of American Business.  With a net worth in excess of $2 billion he has had some huge successes.  But his decision to sue his deputy Donald Drapkin for $16 million for Mr. Drapkin’s failure to secure some records of the company he had built with Perelman is just plain over the top.  Of course something else might be at play, but the jury wasn’t buying it.  To reach a verdict in less than one hour means they hardly got through their lunch.  In my experience, it takes more than an hour to just pick a foreperson. 

Mr. Perelman needs another $16 million like I need a new caviar spoon.  Just because you can sue someone doesn’t mean you must.  How can people that rich be so stupid?

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

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

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

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

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

Assisted by Setareh Ebrahimian

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

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

For civil settlements: no change.

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

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

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

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As a former SEC attorney myself, I know how difficult it can be to work with limited staff, time, and money to reign in the fraud and deceit that seems to run rampant in Gotham…  Excuse me, I meant Wall Street.  But resources aside, some cases demand a full court press.

The bloggers are a blogging and twitter is atwitter with talk of Judge Rakoff’s refusal to approve a proposed settlement between the SEC and Citigroup for “alleged” fraud.  Specifically, Citigroup is accused of selling junk securities to investors only so it could turn around and short, or bet against, its own customers when the securities tanked.  According to the New York Times, investors lost $700 million while Citigroup made $160 million from the deal.  This is not just aggressive business-as-usual but the kind of fraud you’d expect from some boiler room shop manned by ex-cons.  It’s surely not something you’d expect from one of our nation’s largest banks.  (Who, by the way, survived only after receiving $30 billion from you and me – taxpayers, that is.)

Rakoff’s decision is hailed by some as a triumph of reason over “business as usual,” but derided by others as capricious overreaching by a judge who should defer to an agency’s discretion to settle such matters.  I’m firmly with Judge Rakoff on these facts.  It was the right case to make a statement.

Business as usual has to change.  Companies like Citigroup should not be allowed to simply sweep improper conduct under the rug with no admission of guilt and a penalty that Judge Rakoff appropriately described as pocket change.  As I pointed out in this interview, somebody must be held responsible.  Somewhere on Wall Street sit a couple of bankers who decided it would be a smart idea to bet against their customers and worse, to sabotage their customers’ investments.  Those people must be held accountable and the company they work for should admit wrongdoing.  Who are they?  In this case, taxpayers are entitled to know.

On the other hand, agencies like the SEC do not have unlimited resources.  As a former SEC attorney myself, I know how difficult it can be to work with limited staff, time, and money to reign in the fraud and deceit that seems to run rampant in Gotham…  Excuse me, I meant Wall Street.  But resources aside, some cases demand a full court press.  This is one that shocks the conscience.

Judge Rakoff was correct that Citigroup is a recidivist and repeat offender and I look forward to watching the effects of this potential “new era” trickle out to the rest of Wall Street.  There is a new sheriff in town and his name is Jed Rakoff.  Will he enlist others?

Assisted by Zachary A. Kady

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Right here in Washington, DC, under the radar of regulators and law enforcement, Garfield Taylor and friends stole $30 million over the past five years from 130 hardworking and hardly wealthy local individuals.  To make matters worse, Mr. Taylor foisted his fraud on a charitable foundation focusing on children’s issues and a Baptist Church.

How do these people live with themselves?

The pitch was hardly unique.  “Absolute security and -- oh yes -- a healthy 20% return.  Impossible? Nah, not if it’s all just a scam.”

So as usual the SEC goes after the “lowest-hanging fruit,” in this case Mr. Taylor and his confederates.  But what about those entities and individuals who made it all happen?  The indispensible bankers and brokers who provided Taylor with access to, and trading authority over customer accounts?  I don't see them in the Complaint.

Like those 3 monkeys: “They neither saw, heard, or smelled ANYTHING.”  I don’t buy it.  We encourage the SEC to look hard at the confederates, the aiders and abettors and essentially the facilitators of this fraud that made it all possible.

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As we enter this Thanksgiving Season, I remember Judge Eugene Hamilton, who passed away on Friday.

My first assignment as a young prosecutor was to the Courtroom of Eugene Hamilton.  I handled his misdemeanor docket, which included minor crimes such as shoplifting, possession of drugs and simple assaults.  I was a disaster, overwhelmed with the administration of 20-30 cases per day.  I had witnesses to corral, evidence to locate and even the occasional legal issue to analyze and present.  It was a tough rotation.

Judge Hamilton was a patient and thoughtful role model during that tough assignment.  Despite near chaos in the courtroom, he kept his cool and—most importantly—treated everyone with respect and dignity.  Whether a repeat offender, a victim of a crime, a police officer or yes, an inexperienced prosecutor, we were all treated non-judgmentally and with a quiet sense of kindness that Judge Hamilton seemed to maintain from Monday through Friday, regardless of the circumstances.  It was easy in that courthouse to lose your temper or lash out over frustration for some administrative snafu.  Not Judge Hamilton; for him it was all part of the job and he was very good at it.  The closest he came to losing his temper was in connection with one of my many mistakes.  He called me to the bench (most Judges would have not shown me that courtesy) and said, “Mr. Berk you are wearing my patience today, you haven’t quite worn it out, but you are close.” That was it, no tirade or a berating in front of a crowded courtroom.  (I would get that from other Judges, but not Eugene Hamilton.)

He was not the most severe of sentencing judges, hardly sending anyone to jail, but recall: this was a misdemeanor docket.  He had a clever way of instilling fear and perhaps a not-so-subtle warning.  In announcing his sentences, he would say loud and clear from the bench.  “I sentence you to one year in jail” … then hesitate for what seemed like a full minute, and then say “the jail time to be suspended and a period of probation to be imposed.”  Although I became quite used to this approach I often looked over and saw the fear and distress of defendants who, for that moment, thought they were going to jail.  Judge Hamilton had made his point.

I came to learn that off the bench, Judge Hamilton and his wife, Virginia, housed and cared for over 50 foster children, many with profound special needs.  (They also had nine children of their own.)  He had a lifelong interest and passion for the rights of children, and he did not just talk the talk. 

As we enter this Thanksgiving Season, I remember Judge Eugene Hamilton, who passed away on Friday.  He was a good and noble man.

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Gretchen Morgenson yet again brings attention to a case of Main Street getting the short end of the stick.  She was sanguine in her appraisal.  In case you forgot, this was the case where banks flagrantly failed to comply with the most basic requirements governing mortgage foreclosures:

If you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.

Though no details are official, Morgenson reports that banks will only be on the hook for $5 billion in cash reimbursements.  (The remaining $20 billion would come in the form of credits to existing mortgages, which could end up benefiting the banks in the long run.)  Roughly $1,500 would be paid to each debtor who lost his or her home.

First, I know settlements are the product of tough negotiations, but this is frankly an insult.  The States and feds had far more leverage to achieve a much stronger result.  Significantly and inexplicably, the relief fails to differentiate between rightful and wrongful foreclosures, meaning many of the recipients would get money for nothing—even more insulting to the victimized families.

Moreover, the $5 billion cash settlement represents nothing more than a slap on the wrist to the big banks.  Throwing a $50 parking ticket on the Rolls Royce parked in front of the fire hydrant isn’t exactly going to change its owner's parking habits.  But tow the thing, maybe put a few scrapes on its side, and suspend the driver’s license for 90 days.  You can bet it won’t be parked there again.

$5 billion—split among a dozen institutions—is a mere parking ticket.  Consumers need more than money.  They need a fundamental shift in the way banks do business.  Banning executives from the industry, imposing suspensions on others, taking licenses away from banks themselves and dare I say sending a few people to jail, it should all be considered.

It is popular to repeat Cuba Gooding Jr’s scream in the movie Jerry Maguire: “Show me the money!”  But sometimes—and this is one of those times—it is not about the money.

Assisted by David Martin

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As the old proverb goes, "the fish rots from the head down."  How can we expect mid-level managers and the like to act lawfully and ethically when they see Mr. Gupta walking away with a slap on the wrist?

A product of the finest schools (the Indian Institute of Technology and Harvard Business School); the smarts to reach the pantheon of international business circles (Proctor and Gamble, American Airlines); entrusted to direct perhaps the most powerful financial company in the world (Goldman Sachs); and here he is blatantly passing what he had to know was inside information (to Raj Rajaratnam) from the hallway outside of Goldman's Board Room.  If it was a novel or movie, surely reviewers would say, "well-acted, but an implausible premise."

For a time it looked like the government was going to be satisfied with civil charges.  But U.S. attorney Preet Bharara and his team have made the right decision.  The strength of our financial system is grounded in trust and credibility.  No better way to protect that system than aggressively enforcing the law without fear or favor.  Directors of Goldman Sachs are not—cannot be—exempt.  Captains of industry must be treated no differently than the corner drug dealer.  As the old proverb goes, "the fish rots from the head down."  How can we expect mid-level managers and the like to act lawfully and ethically when they see Mr. Gupta walking away with a slap on the wrist?

We applaud Mr. Bharara for charging Mr. Gupta and look forward to seeing the evidence as it unfolds.

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Source

It's one thing to cheat the securities markets—the "system"—by cajoling and paying friends for inside information.  Getting an edge.  It's done everyday in every walk of life.  In school, it might be taking a glance at your neighbor's test—just a glance—to confirm your multiple choice selections.  In sports, it might be taking steroids to make a long fly ball into a three run homer; with a little juice, next year's salary might just include another zero.  Or for the aging former ace pitcher who after losing his best stuff, hides a small dollop of Vaseline in his mitt so that when applied to his finger, the curve ball he had ten years ago once again confounds batters.  These things are wrong of course, and they should be punished accordingly.  And in the case of Raj Raratanam, the league's leading insider trader, he has been punished severely: 11 years' worth of punishment.

But what Nicholas Cosmo did was evil.  Pure, unadulterated evil.  He preyed on people he knew, people who (for whatever misguided reason) trusted him.  And he stole their money.  Not their extra money, not money they could afford to lose.  No, he stole their life savings.  Every penny in some cases.  These victims were hardworking people of middle income, who invested their entire life savings into Cosmo’s "company."

At an emotional sentencing hearing, some of those victims spoke out:

“I’m going to be working until they put me in the grave.” - Ellen Gabriel, Hairdresser, lost $130,000.

“There are times when we are lucky to be able to eat one meal a day... We were looking at making money, but we thought we were dealing with a legitimate businessman.” - Paul Priore, lost $25,000, currently on disability from a car accident and caring for a hospitalized father.

These folks and the others like them have not only lost their money, but in some sense their dignity and self-esteem.  They will wonder for the rest of their lives why they trusted Cosmo and made such an awful misjudgment.  They will live with the knowledge that they were somehow complicit.  They could have said no.  But that surely does not absolve Cosmo one iota.  His evil scheme was the catalyst.  He destroyed lives and he is being punished accordingly.

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Last night the New York Mets lost their third straight on the diamond, dropping them to 25 games back of rival Philadelphia.  This afternoon their ignominious season comes to a merciful end; it will be the third straight season they’ve failed to win half of their games and the fifth straight in which they’ve missed the playoffs.  Nevertheless, the Mets higher-ups are no doubt rejoicing.

Why?  Yesterday, Judge Jed Rakoff hit a three run homer for the Mets.  Not quite a walk off grand slam, but close.  Mets owners Fred Wilpon and Saul Katz, all-around nice guys, were facing a lawsuit filed by Madoff trustee Irving Picard.  This suit alleges... a string of bad free agent signings.  Okay, not really.  Rather, the suit claimed they willfully ignored the fraudulent source of “dividends” coming from their investments with Bernie Madoff.  Rakoff would have none of it and dismissed nine counts; with the remaining two claims, he imposed a standard of “actual fraud”, making it virtually impossible for Picard to prevail.

“The Bankruptcy Code precludes the Trustee from bringing any action to recover from any of Madoff's customers any of the monies paid by Madoff Securities to those customers except in the case of actual fraud," concluded Judge Rakoff.

Rakoff decided to allow the case to proceed on the two remaining counts of actual fraud.  But instead of being on the hook for almost $300 million, the ruling limits Wilpon and Katz’s potential exposure to $83 million.  That’s a $200 million plus decision.  And that remaining "exposure"?  That's potential exposure.  They haven’t paid a nickel yet and likely will not.  The fraud claims will be nearly impossible to establish absent an insider.  Picard must prove Wilpon and Katz had knowledge of the fraudulent activity, and decided to capitalize on the Ponzi scheme at the expense of other investors.  Good luck.  Judge Rakoff has already called Picard’s evidence “less than convincing in this regard.”  After all, Wilpon invested with Madoff because their sons played baseball together, and because he heard of the lucrative returns Madoff promised and, for all appearances, achieved…

They may not be popping champagne in the Mets’ clubhouse this afternoon, another non-playoff season (five in a row??), but they almost certainly are in the owner’s box.

Assisted by David Martin

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Yes, this is America and everyone is entitled to make a living.  But pushing risky bonds on five Wisconsin school districts while failing to disclose the risk crosses the line.  Even the often silent (and slow to react) SEC agrees and has filed a civil complaint against Mr. Noack and his firm.

That famous phrase (“Have you no sense of decency?*”) was delivered to the infamous Wisconsin Senator Joseph McCarthy by Army General Counsel Joseph Welch, as McCarthy tried to accuse yet another patriotic American of being a Communist.  Historians say the uttering of that phrase and the disdain in Mr. Welch’s demeanor sparked the downfall of the Senator.  He had simply gone too far.

And so too has David Noack and Stifel Financial gone too far.  Yes, this is America and everyone is entitled to make a living.  But pushing risky bonds on five Wisconsin school districts while failing to disclose the risk crosses the line.  Even the often silent (and slow to react) SEC agrees and has filed a civil complaint against Mr. Noack and his firm claiming they committed fraud.  Yes, fraud; directed no less at schools in need of every dollar.

How low can we go Mr. Noack?  Although the schools (and the children they serve) lost tens of millions on the bonds, Mr. Noack and his employer netted commissions totaling a cool $1.6 million.  Let’s say Mr. Noack personally received 15% of that commission, or approximately $250,000.  That’s a lot of money in Wisconsin (or anywhere) but is it enough to justify depriving students and teachers of badly needed resources?

Gretchen Mortensen highlighted this case, where Noack convinced a risk-averse, inexperienced school district to invest $200 million in AA- rated notes.  He did so by assuring them that they were sure-thing investments.  According to the SEC's Complaint he promised that "15 Enrons" would have to occur to put the investment at risk; that, or a default level worse than that during the Great Depression.  Of course, neither occurred, but Mr. Noack collected his commission while the school district's investment collapsed and millions in public funds went with it.

While Noack is no Joseph McCarthy, he is sadly indicative of a generation of bankers that place profits above ethics and ahead of their clients’ interests.  When will see a change in ethics?  It may be a while, and in the interim, Michelle Bachmann, Rick Perry and Sarah Palin be damned, we need more regulation and more regulators to ensure that the Noacks and Stifels of the world at least have some deterrence in place to temper what seems like an insatiable appetite for profit.  And let’s hope long term that those Wisconsin kids whose schools were robbed learn ethics and are mindful of the need to put what is right before what is profitable.  Otherwise my children may be writing this same blog post one day.

*This post originally read, "Have you no shame," misquoting the historic line from Mr. Welch.  It has been corrected with the correct quote.  TCO apologizes for the error.

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It’s a Hail Mary in a wind storm; meaning it rarely works.  And this case was no exception.

Just about anyone who goes to trial and loses seeks to have the Judge review the jury’s decision (especially someone with the Raj’s resources).  The hope – prayer really – is that the judge will find that that “no reasonable juror” could have found the defendant guilty on the evidence presented by the prosecution.

It’s a Hail Mary in a wind storm; meaning it rarely works.  And this case was no exception.  Judge Howell affirmed all 14 counts of the conviction in a carefully worded 28-page opinion.  The Judge made clear there was more than ample evidence for the jury to sink their teeth into and find Raj guilty:

"A reasonable jury could have found Rajaratnam guilty as to Count One [conspiracy] on the basis of Smith's testimony alone."

The manner in which Judge Howell ruled does not bode well for Mr. Rajaratnam regarding the all-important issue of sentencing.  The Judge has no doubt of his guilt.  I predict a prison sentence of at least fifteen years.  We’ll see in late September when sentencing is currently scheduled.

Come sentencing day, the immediate concern for Raj will whether he can stay home while he inevitably appeals his case to the 2nd Circuit Court of Appeals.  The process can take up to 18 months.  That will be up to Judge Howell and, based on the language of yesterday’s ruling, it doesn’t look good for Thanksgiving at the Rajaratnam home.

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What?  After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight?

On the surface, the 2nd Circuit Court of Appeals appears to have made a reasonable decision yesterday in the Madoff case.  By limiting the right to monetary recovery to those that were “net losers”—those whose payout from Bernie Madoff was less than their initial investment—trustee Irving Picard seems to have targeted the true “victims” to receive compensation.  After all, net winners have made money off Madoff’s scheme, so what right should they have to recovery?

It depends.  Say you and your spouse sold your family hardware store for a hard-earned $1 million in 1990.  Hoping to live and retire off that $1 million, you invest in the highly-recommended and reportedly successful Bernard Madoff.  You don’t know Madoff; you have no reason to believe his fund is anything but legitimate.  Over nearly 20 years, you use the interest to pay for your children’s college (and of course, law school), and a house remodel you’ve wanted for years.  Eventually, your total interest earnings eclipse $1 million, so when the $1 million principal unexpectedly evaporates in 2008, you’re considered a “net winner”.

What?  After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight?  Sure, you’ve earned interest, but the funds you’d kept invested were for the future, and you had every reason and right to expect that money to be there.

Tough luck, says Mr. Picard.  His decision seeks to recover less than one-third of the total losses due to the Madoff scheme, ignoring the often massive losses of the so-called “net winners”.  All of these 2,000 or so investors are without recourse, and what’s more: Mr. Picard has filed hundreds of lawsuits seeking to recover funds from those investors.  Sadly, many of these so called “winners” are broke, as most if not all of their money was placed with Madoff.

The 2nd Circuit agrees with Mr. Picard.  I do not.  The division between “net winners” and “net losers” should not be sacrosanct.  Each request should be evaluated on a case-by-case basis.  “Net winners” should be granted the opportunity to prove they had no knowledge of the scheme and implicitly relied on the FBI, SEC and other regulatory entities, who year-in and year-out gave Madoff the seal of approval.  If they can prove they were unwitting victims, the “net” win or gain should only be the amount they received in excess of a standard rate of return.  In other words, their ill-gotten gains (or winnings) are those amounts in excess of the rate they could receive in the market generally.

Assisted by David Martin

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Was this a case where prosecutors improperly rushed to judgment to grab a headline or fend off a political rival or did they act appropriately, deliberately and commendably given the circumstances?

The CO’s unofficial poll:

98.5 % -- Improper Rush to Judgment

1.5% -- Appropriate and Commendable

In that 1.5 percent of “the prosecutors did a fine job” is one of our favorite NYT columnists Joe Nocera.  Joe’s a street-savvy reporter who more often than not gets it right – long ahead of the pack.  But this time, I think his defense of the prosecutors is misplaced.

Although I did not prosecute sex crimes, I do know that the victim’s credibility is paramount, particularly in a case like this where the central issue is “consent”.  All that salacious physical evidence (like semen on the wall and yes even some minor bruising) is consistent with consensual sex.  So as a prosecutor your case begins and completely relies upon establishing a good faith, objective determination that you can prove beyond a reasonable doubt that the victim did not consent.

Now six weeks in, the victim's life story and conduct the day of and after the “alleged rape” allows not one, but several opportunities for the jury to have reasonable doubt and find old DSK innocent – this time at least.

Mr. Nocera says essentially, “hey it happens”, they vetted the victim in a deliberate and timely fashion and the fact it only took six weeks to “get to the bottom” of this caper is perfectly reasonable, if not commendable.  Joe, I am not with you on this one.

Here’s why.

The prosecutor’s power is awesome.  That power must be used judiciously and carefully.  Here it was not.  Before you could say Riker’s Island, DSK was on his way there.  From the Sofitel to Rikers in a blink of an eye.  I’m feeling a hip hop classic in the making.

In a democracy though, there is a ‘’presumption of innocence”.  It stands at the core of our criminal justice system.  Mr. Cyrus Vance (the younger) should never had denied liberty to anyone, anyone, without knowing to a near certainty that a crime had been committed and the victim was telling the truth.  His failure to do so in this case will send shock waves around the world.  And for years to come the American judicial system will be nursing a big fat black eye.

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Folks, you can’t make this up.  After the events of today, the plots of Dick Wolf’s popular "Law And Order" series seem plausible, if not pedestrian by comparison.  What many were saying (and then whispering) before being rounded up by a special unit of the politically correct police seems to have merit.  Prosecutors revealed to the Judge and defense attorneys, in a hastily agreed to bond hearing, several shady details about the alleged victim, as well as overt lies in her account of the alleged sexual assault.  Based on this new evidence, prosecutors agreed and the Judge released DSK on his own recognizance.

If these new details are true, the case is over.  In fact, if any one of the details is true, the case is likely over.  In my mind, most damning is the disclosure by the prosecution that the “alleged victim” met with a man in jail soon after the “alleged assault” and discussed – in a taped conversation – how she could profit from the case.  My second favorite is that our “innocent victim” seems to have laundered approximately $100,000 of cash for convicted criminals.  And no doubt more revelations (and leaks), perhaps even more salacious, will surface in the days ahead.  The feeding frenzy begins.

I say the case is over because the facts developed about (and lies told by) the victim create reasonable doubt.  They give jurors a “reason” to doubt her testimony at trial.  “If you lied about that, why should this jury believe you are telling the truth now?”  And the state’s case relies exclusively on the victim.  It’s too early to call for District Attorney Vance’s head, but questions will need to be asked.  What doubts did the prosecutors and police have at the time of DSK’s arrest?  And if they had none, why not?

Finally, it's too early to exonerate DSK of the charges.  Who knows what tomorrow’s news will hold, but some imprimatur of the “presumption of innocence” must be maintained in every case, no matter the alleged facts, no matter the celebrity status of the accused, no matter the smarmy reputation of the accused.  The accused is innocent until proven guilty and should be treated that way.  Save the perp walks for post sentencing.  Allow a jury to pronounce (as it did 17 times in Chicago recently) guilty before conclusions are drawn and careers are destroyed.

Assisted by David Martin

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Today the Supreme Court denied the 70 percent of Americans who take generic prescription drugs the right to sue those drug companies for failing to adequately warn of possible side effects. 

The Supreme Court denying consumers a day in court?  Never, never in a million years.  Sadly, it seems to be happening on just about a daily basis.  In yet another anti-consumer 5-to-4 decision, the conservative majority, led by Justice Clarence Thomas, sided with generic drug companies, shielding them from liability for failing to update their labels even in response to overwhelming evidence of side effects.

In this latest installment of “Strip Consumers,” Gladys Mensing’s prescription for heartburn medicine caused her to develop a severe and irreversible neurological disorder that causes uncontrollable physical movements.  If Ms. Mensing had been prescribed brand-name Reglan, she would have had grounds to sue the company for failure to warn.  But because she took a generic version of the drug, manufactured by PLIVA, her case cannot be heard in state court, according the opinion written by Justice Thomas.

Abusing (oops, I mean using) the Supremacy Clause (or “preemption”), the Court decided that Congress meant to create two different sets of laws for the same drug when it passed the Hatch-Waxman Act.  The act requires generic drug labels to be identical to the labels on corresponding brand-name drugs.  So if Reglan doesn’t warn consumers of possible serious side effects, PLIVA doesn’t have to either — and unlike Reglan, PLIVA can’t be sued for ignoring evidence of side effects.

Does Ms. Mensing, along with all other Americans who take generic prescription drugs, deserve less access to the courts simply because she spent less money on her prescriptions? 

Clarence Thomas, once again jettisoning his longstanding principles to reach an expedient result, broadly interpreted federal preemption to cover a wider swath of claims.  By doing so, he turned the statute on its head, transforming a federal law meant to increase the safety of prescription drugs into one that does the opposite.  The same Clarence Thomas who made a career as a darling of the Republican Party, championing the rights of the states over the federal government.

Get used to it folks.  Give this Court another five years and consumers may just take to the streets since the doors to the courthouse will be nailed shut.

Assisted by Natasha Duarte

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Yesterday's decision by America’s highest court, which struck down a gender discrimination lawsuit brought against Walmart by 1.6 million female employees, was sadly no great surprise.  In fact, it’s right out of the big business handbook, where week after week Chief Justice Roberts zealously advocates for the rich against the poor; just as a young freshman Senator from Illinois predicted at Justice Roberts’ confirmation hearings.

“… when I examined Judge Roberts' record and history of public service, it is my personal estimation that he has far more often used his formidable skills on behalf of the strong in opposition to the weak.”

Coming out of TARP and the 2008 financial meltdown, the concept of “too big to fail” became popular.  No matter how reckless Citigroup or JPMorgan Chase behaved, the government would not allow them to fail.  Similarly, it seems, the high court will not allow lawsuits to proceed against the biggest and most powerful market participants.  When given the choice, it is the employee or consumer that is left without redress; meanwhile the more powerful market participants (Walmart, Citigroup, AIG, and General Motors, just to name a few) seem to get the benefit of the doubt.  “Heads I win, tails I win too.”

To be sure, the legal analysis by the Supreme Court in Dukes v. Walmart seems plausible and the case certainly had difficult legal and factual hurdles to surmount.  Significantly, how can there be “common issues” when the class includes thousands of stores throughout the country, each run by a manager with broad discretion?  But time and again the consumer or the employee seems to be handed the short end of the stick.

For the employer, the corporation, the strong—the Roberts Court time and again finds a way to rule in their favor.  The same is not true for consumers and your average Joe.  And the landscape ahead unfortunately remains bleak.  With the recent decision in Concepcion and now the Walmart holding, no doubt a lot of meritorious cases—with real victims—will be lost, and lawyers will think twice about investing millions of dollars in those tough cases just in the gray area of doubt.  But alas, the pendulum will swing back and “in the long run,” as John Maynard Keynes often said, we will find equilibrium.  But with Justices Roberts, Alito and Thomas in their fifties it may take a generation before the tide turns and the  Court again becomes an unbiased arbiter of fairness.

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Sunday’s New York Times ran a front page story entitled the “Justice and the Magnate” about Associate United States Supreme Court Justice Clarence Thomas’ relationship with Harlan Crow, a Dallas-based Real Estate tycoon whose family was once the largest landlord in the United States.  It seems that over the years Mr. Crow has been very generous with Justice Thomas and his family.  Generous to the tune of millions of dollars.  Most notably, Mr. Crow donated:

•  $500,000 to a Tea Party-inspired foundation founded by Justice Thomas’ wife;

•  $175,000 to a Savannah Georgia Library, honoring Justice Thomas; and

• $2 million and counting for a museum in Pin Point, Georgia, honoring the cannery in which Justice Thomas’ mother worked.

Crow also gave Justice Thomas:

•  A $19,000 bible owned by Fredrick Douglass; and

• Free trips on Crow’s 161-foot yacht, private plane and 100-acre Adirondack Estate.

Where is the outrage?  We are talking about a sitting Justice of the highest court in the land, accepting — directly or indirectly — millions of dollars in value from a leading partisan fund raiser.  Mr. Crow (and this is just a snapshot) has given over $5 million to Republican Candidates, is a trustee of the Bush library and was a significant financial supporter of the swift boat campaign that helped elect George Bush.

 We are in the era of 5-to-4 Supreme Court decisions.  Justice Thomas is without question one of the most important members of our government.  And lest you forget, he never needs to face an electorate; he enjoys a lifetime appointment.  Time and again, decision after decision, the rights of millions rest with Justice Thomas.

In three recent 5-to-4 decisions, Justice Thomas sided with the Conservative judges and big business to allow unbridled corporate spending on political campaigns (Citizens United v. Federal Election Commission), to prevent defrauded consumers from filing class-action suits against corporations (AT&T v. Concepcion), and to immunize mutual fund investment advisers from liability for misleading investors (Janus Capital Group v. First Derivative Traders).

All the more reason why he must carefully limit and monitor his own conduct.  Thomas, like every other judge, must be beyond any and all suspicion.  Judges owe it to all Americans to avoid any position in which a vote, or the logic and language of the majority opinion in a case, can be questioned.

 I am not privy to any conversations between Mr. Crow and Justice Thomas.  But  it would not strain credulity — indeed it would only be natural as they enjoy a beautiful Caribbean sunset cruise on Mr. Crow’s yacht or take in drinks before dinner on a cool August evening in the pristine deep woods of the Adirondacks — that those discussions would include issues before the Court.  No matter the result or any actions taken by Justice Thomas, a serious and profound appearance of impropriety has been created that shrouds the very legitimacy of our justice system.

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Nearly one hundred years young, Bunny Mellon, wife of the late Paul Mellon (yes that Mellon: banks, railroads, priceless art collection, inheritor of robber-baron money) took a shine to a handsome senator seeking the presidency: Johnny Reid Edwards.  It was not the first go-around for Ms. Mellon.  She was smitten, 50 years earlier, by another dashing senator seeking the presidency: John Fitzgerald Kennedy.  It is an open secret that she is the individual identified in an indictment issued last week by a North Carolina grand jury charging Mr. Edwards with conspiracy, false claims and violations of Federal Election Law.

The indictment springs from Mr. Edwards' extramarital affair, his fathering of a child in connection with that affair, and most importantly his involvement (according to the indictment) in an expensive (over $700,000) and detailed effort to cover up, quiet down, and just plain sweep under the rug this transgression.  And while this was going on, his wife was battling cancer and he was charging around the country claiming to be a crusader for family values (nice try Johnny Reid), working families, and the poor.

A couple of observations as the newest episode of “What are these guys thinking?” ramps up.

First, “Senator Edwards, meet Congressman Weiner, Congressman meet the Senator.”  I hope Johnny Reid keeps to his Southern manners and thanks the 'Gentleman from New York.'

Edwards: “Andy, can I call you Andy?  Appreciate the timing.  Your lame photos on Twitter took me off the front page.  I became yesterday’s news in more ways than one.”

Weiner: “No worries dude, what were you thinking anyway?

Edwards: "No, what were you thinking?"

This reprehensible behavior is nothing new.  Sadly, it is part of our political culture.  From Alexander Hamilton to Grover Cleveland, to Sumner Wells, Wilbur Mills and Bob Packwood, men in power in Washington all too often forget why they are there. They besmirch the reputation of all in government and my feeling is no punishment is too severe.  No level of deterrence will end this shameful conduct, but knowing jail is in your future may well have a chilling effect similar to a cold shower on these men of Washington.

I met John Edwards briefly on the 2008 campaign trail at a fund raiser.  He was filled with poise and confidence.  It was at a fundraiser where he earnestly and passionately spoke of his desire to be president.  I was falsely convinced he had a chance.  Yet all the while, he knew he was lying to all of us at the fundraiser.  He of course knew of his affair and he knew that the National Enquirer had the story and that it was only a matter of time before the truth would surface, but he stayed silent. It reminds me of Bill Clinton’s big lie: “I did not have sex with that woman.”  Senator Edwards took millions of dollars knowing he was living a lie.  He was no different than a Ponzi scheme operator or a trader who fails to advise the other side of the trade that he has inside information.  Is Edwards any different than Bernie Madoff or Raj Rajarartan?  They all took people’s money based on a lie.  A big lie.

I’m told that the prosecutors have a rough road ahead.  Edwards will have first-rate counsel and the statute he has violated was never applied to this precise context.  Not to mention Bunny Mellon is 100 years old and almost certain not to testify.  But I wish the team from DOJ luck and I humbly believe they made the right decision bringing this case to a grand jury.

Stay tuned, folks.

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I just returned from a legal conference held in Milan, Italy, over the weekend.  Not surprisingly, dinner conversation turned to Dominique Strauss-Kahn (“DSK”).  “What do you think Steve?” Before I could say a word, thank goodness, my European friends bubbled over, needing to share their views with an American.  They could not be more different.

First, we had the apologist conspiracy theorists.  “Of course, if he is guilty, he should be punished, but doesn’t something seem fishy? If he needed sex, he would not stoop to a hotel maid.  This is a man of wealth and power.  He could call some 'service' for that kind of thing.  And what was she doing in his room anyway?  (Um, cleaning?)  And don’t these hotels train the maids to avoid such things, and isn’t there security around dignitaries and VIPs?  This sure looks like a setup.”

Second, we had the “of course he is guilty” folks.  “This is shameful conduct, truly shameful.  And we are paying this guy, DSK.  What an abuse of authority and position.  Did you know he makes more money than your President?  How dare he take advantage of a poor woman merely trying to do her job.”

Despite these diametrically opposed views on the question of DSK’s ultimate guilt or innocence, both groups were critical of the American justice system.  “Your country claims to believe in the presumption of innocence, indeed it is in your Constitution, correct?  How can it be that this innocent man is paraded in hand cuffs on television, and not only is his identity disclosed but every aspect of the crime seems to be leaked to the press and its insatiable appetite for breaking news.  In our country the identity of the accused is strictly protected.”

The best I could say in my jet-lagged state was, “Well, we protect the identity of the victim.”

Although my personal views are in line with the “this is shameful conduct and of course he is guilty” folks, I am troubled by the failure of the courts and press to protect the “presumption of innocence.”  We pay lip service to it, but nothing more.  DSK and most criminal defendants are portrayed as guilty and I’m not sure I’m aware of any systemic protections – at least any that would be consistent with and rise to the level of protecting a Constitutional right.  Why don’t the police and the court system protect the identity of the accused?  Maybe we should have court rules that make it a crime to disclose the identity of the accused.

Under Federal Rule 6(e), we protect the secrecy of evidence presented to a grand jury, but once “probable cause” is established, there is no such mandate.  It seems freedom of the press outweighs freedom of the accused.

A democracy must have an open justice system.  The answer is not Stalinistic secret trials, but my friends in Europe make a valid point.  The accused – although seemingly guilty of disgusting and shameful behavior – are entitled to the presumption of innocence until a jury finds otherwise.

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At the CO we appreciate all of our readers' comments, especially those as insightful as one this weekend from Bobby Peters, a Superior Court Judge in Georgia.  I wanted to feature his comment, which was posted regarding my piece on whether Raj Rajaratnam should testify.  Please enjoy, and thank you Judge Peters.

"There are two things in life a person must do alone, die and testify. Once dead, you are dead. Once on the stand, your all alone without a lifeline, and you can't call a friend or stop the proceedings to get legal assistance on how to form your answer. As a Judge I have seen many cases lost with good people making bad attempts to sway jurors to the facts as they see them. There are many factors to consider on whether or not a defendant should testify. A salesman will believe he can sell anything, including his story to jurors; he only needs one sale out of twelve for a hung jury. But you cant under estimate the common sense of those common folks. Thanks for the article, it was interesting. Bobby Peters, Superior Court."

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While hardly a long shot, we predicted this result way back in March:

Mr. Dowd and his cast of subordinates (when you represent a billionaire facing prison you can’t possibly bill enough hours) will try mightily to argue the technicalities of what constitutes criminal insider trading -- but my money is on the government and its young team of prosecutors.

Raj was just a bit too greedy, a bit too brazen, and in the end a bit too careless. While his was a clear case of insider trading (as noted by Juror Lauren, “there was just a lot of evidence”), many who walk the rarified halls of Wall Street are behaving in ways that are not too dissimilar. Where precisely is the line between aggressive fact gathering and illegal insider trading? It’s difficult to determine because in many cases it is a matter of degree not substance. The advent of social networking tools will only complicate matters.

As a former Federal Prosecutor, I can tell you though -- deterrence matters. Long jail sentences have a chilling effect. The threat of jail will change behavior. Prosecutors need to keep at it. Stay on the front pages, bring more cases and demonstrate that while there are shades of gray around corporate conduct -- there is a line that if crossed means you too may be on your way to jail; and when that line is blurry you best stay well to the
legal side.

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AT&T takes to the Hill (that is Capitol Hill) with its phalanx of lobbyists, costing $15.3 million in 2010, to push through its mega-merger with T-Mobile.  The combined company will have an estimated 130 million subscribers in the U.S., approximately the population of Russia.  According to industry watchers, the going will be tough even though the behemoth and biggest kid on the block, "can you hear me know" Verizon, will remain on the sidelines -- a shrewd move to be sure.  Verizon worries that any restrictions it attempts to foist on AT&T will inevitably apply to them too.  So sit in the back of the room and maybe no one will notice this $63.4 billion per year behemoth.  But by all accounts the merger is no done deal.  Indeed, consumer groups may have some leverage.

To win those skeptical consumers, AT&T’s should agree to “voluntarily” forego arbitration provisions banning class actions in all of its consumer contracts.  I know they just won a hard-fought battle in the Supreme Court to win the right to kill most consumer gripes on arrival by forcing an arbitration proceeding that has no chance of ultimate success.  In the scheme of things it’s a throwaway.  They want the lines, they want the customers, they want the infrastructure. Agreeing to arbitrate claims, even on a class-wide basis, is a drop in the ocean.  And it provides competitive advantage over the rest of the industry.

Sometimes when you can’t win on the law, you have to resort to other means.  Here those means are the cold hard realities of politics.

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Attorneys across town and in New York at DOJ have brought suit against Deutsche Bank and its subsidiary, MortgageIT, alleging reckless lending, violations of the false claims act, and various common law claims including breach of fiduciary duty, negligence, and gross negligence.   Finally.

A copy of the complaint can be found here, courtesy of the WSJ law blog.

The DOJ complaint alleges that Deutsche Bank lied to HUD about the ability of its customers to repay loans in order to receive FHA (Federal Housing Authority) insurance. Specifically, the complaint alleges that, although Deutsche Bank knew its mortgages were not eligible for FHA insurance under HUD rules, its underwriters lied by falsely certifying they had conducted the required due diligence. Thus, Deutsche Bank wrongfully obtained insurance from the federal government on thousands of mortgages.

Naturally, Deutsche Bank packaged and resold those loans. The story is all too familiar. Thousands of borrowers defaulted as Deutsche Bank rightfully expected they would. But the bank didn’t care because risk was separated from underwriting. By selling off the insured loans, Deutsche Bank at once guaranteed its profits regardless of investors’ ability to repay, and placed a multi-million dollar burden on the FHA to pay out under its duties as a credible insurer. According to the Complaint, HUD has paid $386 million in FHA insurance claims and costs arising out of Deutsche Bank’s approval of risky mortgages and falsification of documents.

Lying to the government instead of actually doing the proper due diligence, handing out insured loans with no regard to the borrower’s ability to repay ; A Better symbol of the myopic corporate greed that plagued Wall Street for the past decade cannot be found. Imagine the thought process: “Will these borrowers be able to repay the loans?” “Heck, who cares, we’ll just have the government (taxpayers) insure them while we make a few hundred million in a week. “

With this conduct, DOJ was handed a softball. The conduct involved FHA directly and as they say was “ a no brainer”. Criminal yes, but no “perp” walks. No individuals who will bear responsibility. The sanction will be against a faceless corporation. The American public who foot the bill deserve more.

Assisted by Zachary Kady

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[T]he judiciary is beyond comparison the weakest of the three departments of power; that it can never attack with success either of the other two; and [ ] all possible care is requisite to enable it to defend itself against their attacks.

-          Alexander Hamilton, Federalist No. 78

Although referred to as the “weakest branch” by Hamilton (as well as Montesquieu years earlier), the Supreme Court has flexed some muscle over the last decade.  They elected a President (Bush v. Gore), infused corporations with full First Amendment rights akin to every American human being (Citizens United), and earlier this week denied consumers practical redress for corporate misconduct (AT&T v. Concepcion).  And the Roberts Court is just getting started.

At the heart of every conservative jurist's philosophy is the belief that the federal judiciary, based on the Constitution (and specifically the language of Article III), must remain a court of limited jurisdiction.  It is state courts and legislatures that are to be protected from the reach of the federal government and allowed, unfettered for the most part, to make the rules that guide our daily lives.  No jurist has been more articulate, consistent and of late, more successful in making this very point than Antonin Scalia, the author of the Concepcion decision.

But in the Court's latest smack in the face to millions of consumers who—for crying out loud—just bailed out the entire financial industry, the Court abandoned this bedrock philosophy to reach a result that (surprise, surprise) was lobbied for in amicus briefs by one leading corporation after another.  It's a veritable who's who of businesses and pro-business groups: the Chamber of Commerce; DirecTV, Comcast and Dell; the American Bankers Association, American Financial Services Association and Financial Services Roundtable.  Even Verizon wrote in to support their archrival's cause—because they too stood to gain by a ruling favoring AT&T.

To accomplish its work, the Court blithely explained away a recent decision of the California Supreme Court in favor of an 80-year-old law called the Federal Arbitration Act—which has nothing to do with the contract signed by the Concepcions.  Joined by his conservative "running buddies" (Justices Alito, Thomas, Kennedy and Chief Justice Roberts), Justice Scalia made life just a bit tougher on hardworking Americans by finding that a practice deemed "unconscionable" by the California Supreme Court was just fine.

While often claiming to follow the "framers' intent" and railing derisively against so-called "legislating from the bench," the Court is doing just that as they aggressively pursue a political agenda that would make even the U.S. Chamber of Commerce blush.  Led by the "Umpire in Chief" Justice Roberts (who claimed with "a wink and a nod" in his confirmation hearings to be seeking a position where he would merely be "calling balls and strikes"), the Court, no matter the precedent or facts, and with no shame, finds a way to rule in favor of big business.  It was precisely what then-Junior Senator from Illinois Barack Obama feared when he voted against Chief Justice Roberts' nomination, presciently noting:

It is my personal estimation that he has far more often used his formidable skills on behalf of the strong in opposition of the weak.

Although subtle to most, the impact and consequences of Concepcion in particular could grow virally to impact a range of corporate conduct, causing consumers—rich and poor alike—to cry unfair.  The following example is hardly fanciful regarding the magnitude of the decision:

Let’s take an average American family: the Madisons.  They make $45,000 per year and the last two years have been… well… a struggle.  Despite losing a job (Mr. Madison was laid off from his state job as a Deputy Principal of the local high school because of budget cuts) they—like most American families—have a few cell phone accounts.  (How can they not, what with the 24/7 multimedia blitz targeting 12 year olds?)  Their account is coincidentally with AT&T.  Let’s say, for argument’s sake, they pay $150/month.  Last month, Mrs. Madison opens her bill online and the total is $200.  She immediately feels that familiar wave of anxiety rising from her abdomen.  An extra $50 is a lot of money, and what if it’s every month?  Her immediate thought is that Son Madison has downloaded more pricey ringtones or the latest version of “Angry Birds” despite being warned not to.

She doesn’t see any such downloads, but she does notice at the bottom of her bill a notation: “SPC Data SCharge: $50.00”.  Having no idea what that means, she immediately calls AT&T and after spelling her name seven times, listening to several ads and options to pay her bill, she is routed to a “customer care consultant”.  He advises her that the surcharge is based on increased advertising costs associated with sponsorships of hip hop sensation Wale.  “Wait, can you do that?  That’s not in the contract.”  Oh, we sent you something in the mail telling you… well… you have no contract.  We can do whatever we want.  Mrs. Madison, frustrated by the hours she spent to hear this callous explanation, yells: “I’m going to sue you, this is so unfair.  You can’t do this.”

Oh yes they can; in fact Mrs. Madison can’t sue AT&T because “she agreed to arbitration.”  Arbitration, what’s that?

In the weeks that follow, the Madisons learn that proceeding with an arbitration, even by phone, will cost them at least $250 in fees (for filing and administrative costs) and no lawyer will take the case because they cannot bring a “class” claim and will be limited to a judgment of $50 representing the Madisons.  If the Madisons win without an attorney, their victory (+$50) is actually a loss (-$250), so it’s a classic no-win situation for consumers. 

Thanks to Justice Roberts and his crew, AT&T can earn—or steal—$50 from every one of its 100 million customers, and not one of them will have a practical redress.  That’s $5 billion ($50 X 100 million customers) out of the pockets of hardworking Americans.  No wonder AT&T can pay their CEO, Mr. Stephenson, his $20 million salary.  Perhaps the SPC Data SCharge is valid, but there is no recourse to even scrutinize.

And folks, this is not just cell phones.  Beleaguered consumers will be without recourse in connection with the purchase of a range of products: automobiles perhaps, computers and televisions, just to name a few.  And services too: banking, moving, home improvements.  No ability for your day in court.  No ability to have a lawyer.  Good luck and have a nice day.

While on its face the Supreme Court’s decision in Concepcion may look like just another welcome effort to bash lawyers and, better yet, class action lawyers (the sharks to the sharks), it must instead be viewed for what it really means for consumers now and for a generation to come.

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In an effort to illustrate that the “inside information” obtained by Mr. Rajaratnam was largely irrelevant, the defense called to the witness stand University of Rochester Business School Professor, Gregg A. Jarrell, a frequent expert witness (for both prosecutors and the defense).  Professor Jarrell testified in detail on how trades executed by Mr. Rajaratnam could have instead been based on publicly available research.  Developed at great expense, to be sure, the overarching purpose for the testimony was to create for the jury "reasonable doubt".

As we all know from experience or the movies, the prosecution must prove guilt beyond a reasonable doubt.  What that means is one of the most difficult questions in criminal law.  Somewhat illuminating is a standard jury instruction that as I recall states in part that reasonable doubt is "a doubt for which you can supply a reason." In other words, if a juror is faithful to the court's instructions, they cannot say... "Oh I have a doubt, I just do.  I have no reason to support my doubt though. "

In this trial that reason is Professor Jarrell's testimony and his fancy powerpoint -- at least that is the hope of John Dowd and his team.  Although unlikely given the weight of the government's case, a lone juror (it only takes one) could say, my reason for having a reasonable doubt is the testimony of Professor Jarrell.  He told us that there is another explanation and I have a reasonable doubt based on his testimony -- that's all it is.

In my view, the jurors will not so easily be diverted from the mountain of evidence submitted by the government, much presented by Rajaratnam himself in audiotape recordings.  Although polished and professorial, Professor Jarrell cannot defeat a very strong government case.

But the defense had to do something.

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As the defense begins to present its case to the jury, we must keep in mind Mr. Rajaratnam's best hope for freedom is not in this courtroom but rather a more august forum: the United States Court of Appeals for the Second Circuit. There Raj has a shot -- albeit a long shot (think three point line and move back ten steps) -- to convince the appellate court that the audio tapes that have been so damning should have been disallowed because of prosecutorial misconduct.

But Mr. Rajaratnam has one card to play. Take the witness stand. As a federal prosecutor, I tried many a criminal case and I can tell you that juries are not easy to predict. You might think the evidence is overwhelming. Throughout the weeks of trial you're certain you've seen what appear to be knowing smiles from the jurors as they took their seats only a few feet from your table in the courtroom. And then bam, surprise! They are deadlocked, or worse they have voted for acquittal. And in your cloud of dismay and second thoughts, you talk to them after the trial and learn to find they have constructed the most preposterous theory of the evidence. Usually, one or two jurors have taken a random fact and a throwaway judicial ruling to concoct a theory for a finding of not guilty. In your post trial shame, you wonder if they were even present at the same trial.

Mr. Rajaratnam does not look evil. He is corpulent and seems like a nice fella to share a drink with and discuss the latest ... ummm ... corporate gossip. Yeah. Play that up. It was just a bunch of friends gossiping. Is this the face of a felon? In the end most juries are smart, sober and rational. They will take their responsibilities seriously and follow the court's instructions, but once in a while, when you least expect it, they will surprise you.

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I grew up loving baseball.  My team was the Chicago Cubs.  My favorite player was… well of course… Mr. Cub, Ernie Banks.  I remember his unique style at the plate; he would slowly and deliberately roll his hands and fingers on the bat handle as he awaited the next pitch.  Watching on our family’s black and white television, I tensely waited each at bat for a home run and Jack Brickhouse (yes that was his name) cheer, "it’s back, it’s back, it’s a home run!"  My second favorite player was Ferguson Jenkins, the Cubs' best pitcher, number 31.  He had an amazing curveball and I expected him to win every start, even against our arch-rivals the St. Louis Cardinals and the great Bob Gibson.  Rounding out my favorites among the Cubs was Billy Williams, the most graceful player I have ever seen.  He was pure poetry in everything he did on the field.

My three heroes were black.  I am white.

In his column today, William Rhoden of the New York Times suggests Barry Bonds was prosecuted because he was black and compares that prosecution to the charges brought against heavyweight boxer Jack Johnson for trumped up violations of the Mann Act over one hundred years ago.  I respectfully disagree. 

Barry Bonds was prosecuted because he was the best, the most high profile player in the game.  His indictment would put the use of illegal steroids and their dramatic side effects on the front pages for weeks and months.  Tens of thousands of young athletes, many still in high school would no doubt get a more “clear” picture of the risks and downsides of steroids than from the pusher with the gym bag that lurked underneath the stands. 

Prosecutors are allowed to selectively prosecute.  Leonna Helmsley, a famous hotel owner and celebrity of sorts, was prosecuted for tax evasion and challenged her conviction on just that ground.  The courts denied her challenge.  Why do you think Martha Stewart was targeted? Not because the prosecutors didn’t like her chocolate chip muffin recipe.  No it was because she was famous.  Because if she could go to jail for telling a little fib to an FBI agent, anyone could go to prison. 

In my opinion, that’s why Bonds was prosecuted.  If you are going to take on steroids and the requirement for truthful testimony before a Grand Jury, you want the biggest fish in the pond.  Do you think the prosecution of some random minor leaguer would garner the same or even any attention of the press?   

Sharing the sports page with Mr. Rhoden’s column this morning was another famous black athlete, Tiger Woods.  Despite his dramatic fall from grace, Woods remains beloved by golf and non-golf fans.  Thousands on the course at Augusta and millions watching on television yearned for Tiger to make a charge.  Black or white they hoped he would find the fairway and putts would fall.

As a former federal prosecutor and baseball fan, I think that prosecutors bemoaned the fact that Barry was black.  They knew race would be infused into their efforts to expose the harms of steroids; certainly complicating a “clear” case of lying.  But alas, I come at this issue with my own sensibilities.  I respect Mr. Rhoden’s contrary position.

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The government has rested.  The jury has heard scores of taped conversations and a mountain of documents and other materials have been presented to the jury and introduced into evidence.  Unlike most cases involving fraud and financial misconduct, where juries must piece together varying degrees of circumstantial evidence gleaned from documents alone, here the jury has direct evidence.  Raj’s voice: kidding, cajoling, prodding, and insisting on obtaining inside information from his “friends” on the inside.  All told according to the FBI agent who was the last witness to testify for the government, Raj earned over $60 million from trading on inside information.  That’s a big number.   It doesn’t look good for this … well … corpulent and rather cuddly bad guy.

What does he do?

On Monday, it’s the defense’s turn.  Mr. Dowd, Raj’s lead counsel, can stand and with as much righteous indignation as he can muster, state in a loud clear voice, “the defense calls NO witnesses”.  That’s what Barry Bond’s high-priced team has chosen.  The bet underlying that tactic is that the jury is skeptical of the government’s case, and the defense argues that under the Constitution, yes that Constitution, a citizen ACCUSED of a crime need not prove their innocence.  All they must do is demonstrate that the government failed to meet its burden of proving its case beyond a reasonable doubt. 

Hmmmm.  From what I’ve seen, that’s a non-starter here. The government’s case is just too strong.  “What’s the best strategy then, Mr. Former Federal Prosecutor?”

I’d say you have to put Raj on the stand.  First, he’s hardly a threatening presence.  He’s a big teddy bear.  He is smooth and persuasive.  It only takes one juror to be seduced by his charm to keep him from what will more than likely be a long stay for him at a federal penitentiary.   Second, remember he is the “tippee” not the “tipper”.  What?   Yes.  The tipper is the “insider”.  In this case there were many.  Most notably was the Director of Goldman Sachs who literally called Raj from outside the Board Room with inside information on proposed mergers.  Raj can try to argue that all these “tippers” are the real guilty parties and they are merely trying to save their skin by implicating Mr. Rajaratnam.

Will that work?  Probably not.  And as I’ve written before his best shot is going to be to appeal the court’s decision allowing the taped conversations into evidence despite rather sloppy, if not worse, conduct on behalf of the government in seeking the warrants necessary to wiretap conversations. 

 We’ll know come Monday. 

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Today, I welcome Berk Law's David Martin, Director of The Corporate Observer, with a guest post on attorneys' incentives and the role of Federal prosecutors.

In Berger v. United States (1935), Supreme Court Justice George Sutherland best summed up the responsibility of a Federal prosecutor:

The United States Attorney is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all, and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done. As such, he is in a peculiar and very definite sense the servant of the law, the two-fold aim of which is that guilt shall not escape or innocence suffer. He may prosecute with earnestness and vigor -- indeed, he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones. It is as much his duty to refrain from improper methods calculated to produce a wrongful conviction as it is to use every legitimate means to bring about a just one.

A recent Denver Post story about attorney’s incentives has me extremely concerned. In the 18th District of Colorado, felony prosecutors are awarded bonuses (averaging over $1000) based simply on their annual felony conviction rate. Come on down! Simply try five or more felony cases and win at least seventy percent, and you win!

District Attorney Carol Chambers, who instituted the policy late last year, has pitted monetary incentive directly against Justice Sutherland’s eloquent summary of a prosecutor’s duty. By paying only for trial success and ignoring successful plea bargains (not to mention cases dropped for lack of merit), Ms. Chambers unconditionally encourages her office to take cases to trial; unsurprisingly, in 2010 her district held vastly more felony trials than districts like Colorado’s Second District, which includes Denver.

More troubling than the additional trials—a purely logistical concern—is the unfairness to defendants, who are forced to negotiate with a prosecutor that is eligible to receive a bonus only if a case goes to trial. Once a case is in trial, the District Attorney’s office pays the prosecutor's bonus based on winning, rather than ensuring "justice shall be done" as Justice Sutherland prescribed.

I don’t doubt that Ms. Chambers had good intentions when she enacted this policy. I understand the background reasoning: What better way to determine merit-based bonuses than by tying them to success rate? The problem is, she chose a flawed statistic, which misaligns her prosecutors’ incentives. (Indeed perhaps there is no just statistic.)

I do not blame Ms. Chambers, but now that the true effects of her policy have come to light I hope she does the right thing and returns to the status quo.

Guest post by David Martin

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Behind the scenes at the Raj Rajaratnam trial is the story of the wiretaps.  In a recent thoughtful article on the New York Times' Dealbook, Law Professor Peter Henning highlights the raging battle between prosecutors and the defense team over the admission into evidence of hundreds of hours of wiretaps.  Those fuzzy but telling recordings show Raj himself, in effect testifying about the acts that… well… constitute his guilt.  It is his voice, his demeanor, his personality chiding and prodding along a massive fraud, and all that in the first person.  But as Professor Henning points out, this all-important evidence was challenged and nearly disallowed by Judge Holwell.  He was particularly troubled by the government's omission of facts in its application for the warrant to obtain the wiretaps:

"The court is at a loss to understand how the government could have ever believed that Judge Lynch could determine whether a wiretap was necessary to this investigation without knowing about the most important part of that investigation — the millions of documents, witness interviews, and the actual deposition of Rajaratnam himself, all of which it was receiving on a real time basis and all of which was being acquired through the use of conventional investigative techniques."

Prosecutors may have gotten just a bit too greedy in this one.  They need to be conservative and beyond reproach.  Their job is not to win cases, but it is to a higher calling.  As the Supreme Court famously said over a generation ago, they are empowered to do justice.  In some cases that might mean walking away from even the strongest of evidence.  The Constitution and the system demand no less.

So as the trial plugs along for several more weeks, remember that Raj Rajaratnam’s best hope for freedom may rest with an appellate court, years after the trial has completed.  By then, the hundreds of hours of wiretaps will be silent and stored in some dusty, cavernous government warehouse.

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I wonder what the jury was thinking?

In his testimony, Mr. Blankfein at one point provoked laughter from the gallery when a prosecutor asked him why it was unusual that the company was losing money in the middle of the fourth quarter of 2008.

"We generally make money," he said, with a big grin.

-          Wall Street Journal, March 24, 2011

Here is Lloyd Blankfein on the stand grinning about making money, to the approval of the gallery.  I fear my comments yesterday, doubting the wisdom of using such a high-profile witness unnecessarily, may be proven correct.  Sure, the jury was listening; he’s the CEO of the most successful bank on Wall Street.  He reportedly received a $100 million dollar bonus this past year.  But the prosecutors’ job is to keep the focus on convicting Raj Rajaratnam’s of insider trading, and not divert that attention with celebrity witnesses.

And who could blame the jury?  Sure they have all those “secret tape recordings” to wade through, but in walks an all-star of Wall Street.  One of the most influential—and apparently personable—CEOs of the financial world is mere feet away in the courtroom; it is hard to imagine focusing solely on the issues at hand.  If Cal Ripken Jr. testifies at the Barry Bonds perjury trial, will the jury’s focus really be on what he says, rather than who he is and what he accomplished?

It is only natural for the jury to be distracted.  Mr. Blankfein’s presence overshadows the courtroom dynamic of prosecution versus defense.  Although I was not in the courtroom, it also seems as if the jury could take away the conclusion that this is all about making money and Raj, Lloyd and Mr. Gupta are all just trying to get their piece of the pie.

Assisted by David Martin

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Presumably, the prosecution reasons that it is powerful evidence to hear Goldman’s CEO confirm that the phone call “violate[s] Goldman Sachs’ confidentiality policy.”  Bad decision.

Today federal prosecutors called Goldman Sachs CEO Lloyd Blankfein to the stand to testify against Raj Rajaratnam, in what is being called the insider trading case of the century.  As a former federal prosecutor, I have previously commented on the outlook of the case, the government’s strategy for prosecution, and the first round of testimony.  Today, I express my doubts about the wisdom of calling Goldman’s CEO to the stand.

What you want the jury focused on is the substance and atmosphere of the taped conversation between Gupta and Rajaratnam.  The chronology is right out of the movies.  Gupta, a respected Goldman Board member, immediately upon leaving the Board Room, passes along highly confidential knowledge of Goldman’s acquisition plans to Raj.  Federal prosecutors use Blankfein’s testimony to confirm that the information in the call was confidential, and thus was illegally communicated and obtained by Rajaratnam.  Presumably, the prosecution reasons that it is powerful evidence to hear Goldman’s CEO confirm that the phone call “violate[s] Goldman Sachs’ confidentiality policy.”

Bad decision.  The glare of the jury’s scrutiny and hopefully its wrath must remain on Raj.  A high-profile witness, however, has the potential to distract and confuse the jury.  Never underestimate the imagination of a jury, particularly one involved in a long trial.  They will ponder the littlest of details and conjure up all kinds of theories.  You don’t want that, particularly in a case this important.  Sure, it looks powerful to call the CEO of Goldman to the stand, but isn’t that using a sledgehammer to crack a nut?  Any senior executive or compliance officer could have made the same point.  Drawing attention to the content of the illegal conversation rather than the person giving the testimony should have been priority one.

Put it this way: if Goldman Internal Compliance Officer John Doe had testified instead of CEO Blankfein, the New York Times’ headline could have been: Secret Tape Records Gupta’s Guilty Call; instead it was: Blankfein: Gupta Broke Confidentiality.  Doesn’t the first suggestion focus a bit more on the point?  Yet with the company CEO testifying you can bet the jury’s mind was in the same place as the Times’. Who knows what they will make of it, and if the defense is smart they will try to exploit the Blankfein appearance with seeds of conspiracy and anything that may divert the jury from the acts of Raj.

Assisted by David Martin

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Although talking tough, in the end the rant by the Court is just that: a rant.

Last year it was Judge Rakoff's refusal to accept a proposed settlement between Merrill Lynch, soon to be Bank of America and the SEC.  He almost made the parties go to trial but in the end accepted some modest changes to the settlement and let the parties move forward with a deal that was dubious at best and arguably contrary to the best interests of shareholders.  The Judge was hardly throwing real punches, just shadow boxing.  Well he's at it again.

He's in the ring once again with the SEC.  And yet again, he is being asked to approve a settlement between the Commission and this time, three executives of a semiconductor company, who according to the SEC had been cooking the books of the company for "a decade".  Although spiced with cutting rhetoric aimed at the Commission's practice of allowing bad guys to get off the hook "without admitting or denying wrongdoing," he approves the settlement.

The Judge's feigned opprobrium is merely dicta.  Every lawyer learns the concept in the first days of law school.  It's Latin, generally meaning a discussion or language in a judicial opinion that may hint at the court's reasoning, but in the end is unrelated to the court's holding or decision.  Judge Rakoff's pronouncements in the case are just that—dicta.  Eloquent to be sure, worldly and learned, you bet.  Check this sentence out:

"The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C."

But in the end, all those words don't amount to a "hill of beans" because the "holding" in the case—the headline—is, "Federal Judge Approves Settlement" despite the Commission allowing the bad guys to get away without admitting any wrongful conduct.  Although talking tough, in the end the rant by the Court is just that: a rant.

Could it be argued that the next settlement brought before the Judge by the SEC using the language "without admitting or denying wrongdoing" will be rejected?  Perhaps, but don't count on it.

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Mr. Rajaratnam and his legal team sure have their work cut out for them. These audio tapes are devastating. They have, as we prosecutors and former prosecutors have often said, "the ring of truth to them". Of course people are going to be nervous about trading on insider information. Remember, for the most part this gang of co-conspirators were law abiding citizens. Indeed, they were highly successful members of the business community. They saw what happened to Martha Stewart. You trade stock around a merger or other material event and those boys from the SEC or worse yet the FBI will come knocking and you better have a good story to tell.

Raj understood that anxiety so he was there with advice and comfort. Coaxing his contacts along, making sure everyone stayed on the reservation. Mr. Dowd, Raj's defense attorney and his large team of partners and associates and paralegals will have to pull a rabbit out of their hats to rebut this testimony. I sure hope for their sake they received a large retainer, Because in Federal Prison, Mr. Rajaratnam will be making far less than minimum wage.

But it ain't over till the fat lady sings -- plenty more tapes -- witnesses and then the defense. Stay tuned, although highly unlikely, I think Raj takes the stand. He'll have no other choice.

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Win over the jury early.

The government is off to a fast start.  No need to wait or to call a bunch of technical witnesses to lay a foundation for your claims.  The time to win over a jury is early; the sooner the better.  If you wait until week 8, for example, many of the jurors will have already tuned out or made up their mind (right or wrong) and they are unlikely to consider new testimony.  Their heels are dug in.  They figure that if the government waited two months to present the evidence, it can’t be that important.

Following that strategy, batting lead-off, instead of at number three or four, is Raj’s friend from the Wharton School of business, Mr. Anul Kumar.  (Technically, the government’s first witness was a Special Agent for the FBI who authenticated the audio tapes that lay at the heart of this case).  Mr. Kumar dispassionately explained how the defendant offered him $500,000 per year for inside information.  Moreover, Mr. Kumar explained how the defendant advised him to open a Swiss Bank account so those funds could be hidden from regulatory scrutiny and his employer.

Cross examination of Mr. Kumar by the defense will begin next week, but don’t expect some television-like reversal of his testimony.  He is no doubt a very smart man who has been well prepared by the prosecutors.  And worse for Mr. Rajaratnam, the jury has the weekend to let the testimony of this important witness sink in.

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Forget the theatrics of the opening statement.  Most cases are won or lost before trial.

As trial lawyers (I was an Assistant United States Attorney in Washington, DC from 1990-1994), we like to think its going to turn on our ability to charm the jury; command with the eloquence of Daniel Webster and folksiness of a young Abraham Lincoln (sans beard) appearing in a small-town courthouse somewhere in rural Illinois with a quote or two from the Bible and a story at the ready.  Nope.  Most cases turn on a legal ruling pre-trial.  This case is no different.

Over the strenuous objections of Mr. Rajaratnam’s attorney John Dowd, Judge Howell allowed the prosecution to introduce 2700 taped conversations.  Those conversations will put Mr. Rajaratnam in the center of a web of corporate corruption and arrogance that the jurors will not be able to wash from their minds.  He will more than likely be found guilty of something.

Mr. Dowd and his cast of subordinates (when you represent a billionaire facing prison you can’t possibly bill enough hours) will try mightily to argue the technicalities of what constitutes criminal insider trading -- but my money is on the government and its young team of prosecutors.

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$990,000.  Are you kidding me?  Why is this even in the paper?

1) That’s the amount involved in the latest insider trading story coming out of Wall Street – the Journal’s front page – above the fold – headline Feds Accuse P&G Director (The New York Times had it at Former Goldman Director Charged With Insider Trading).

2) The illegal conduct emanated from outside a conference room of Goldman Sachs. Yes, that Goldman Sachs.  As if they didn’t have enough illegal conduct inside the conference room (but more on that later).

3) In the parlance of the securities world Mr. Rajat Gupta was the "tipper".  And get this: a Director of Goldman and Proctor and Gamble.  Yes, a company that actually makes something.  And former Chairman of McKinsey and Co., the Porsche of management consultants.  A top brand of very smart people; not the usual M.O. of an inside trader.  Hmmmm.

The tippee?  None other than the infamous Raj Rajaratnam.

Wow.  This is exciting stuff.  But why?  Why would someone at the pantheon of American business (Gupta) trade a few secrets to a “friend” (Rajaratnam) for peanuts, for tip money?  Something else is going on here.  I don’t know what it is; maybe it's as simple as it sounds, but maybe not.  I’m no conspiracy theorist, but when they ever so stridently tell you to look to the left, you owe it to yourself to at least peek right.

I think the prominence given this tiny transaction, although intriguing, must not let us lose sight of the big picture (in June 2008 the outstanding value of Over the Counter derivatives alone topped $650 trillion – that's TRillion with a T-R – roughly 650,000 times the amount of the alleged violation).  These characters are not the real culprits of Wall Street’s trillion dollar pecidillo.  They must not become the faces of the profoundly selfish conduct of many.  They almost succeeded in destroying the economy.  And for once I am not overstating things.

The politicians, the press and I suppose the people need someone to blame.  Well here they are folks: Rajat Gupta and Raj Rajaratnam.  They did it.  Front page.  And look, we got Goldman too – well sort of.  “Chew on this story for awhile America.  Damn that Ferguson and those liberals in LA who granted him that silly Oscar statue for defaming us.  All the publicity must be refuted with a screenplay of our own.  We can even go international.”

But folks hold your ire.  These are not the guys.  Trust me, they are not the one’s.  They may be interesting and you can bet the media will make them even more so but they are not the guys.

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And if you think that the SEC can be influenced by a $1.5 million dollar investment, you might want to check your backyard for Martian tracks.

Mr. Picard’s latest effort at headline grabbing is a lawsuit against David Becker, the SEC’s General Counsel (yes that SEC) for “profits” Mr. Becker’s parents made in connection with investments from Madoff funds.  According to various news reports, Mr. Becker made approximately $1.5 million as an executor of his parents' estate with his brother.  First, it is hokum, complete nonsense, to believe the SEC was somehow diverted from the Madoff trail because Mr. Becker influenced the process to protect his family’s investments.  Mr. Becker is a longstanding public servant who has served his country with great distinction and honesty.  And if you think that the SEC can be influenced by a $1.5 million dollar investment, you might want to check your backyard for Martian tracks.

Second, the importance of this story is Mr. Picard’s continued assault on what I would characterize as innocent investors.  These are folks who were not in the Madoff inner circle and had no basis to believe there was a fraud.  In my humble opinion they should be able to keep their money.  To claw back funds years later, Mr. Picard must show some level of fraudulent conduct or knowledge.  I applaud Mr. Picard’s suit against JPMorgan Chase because if he is right, they “knew” of the fraud and drove the getaway car; or in this case, a fleet of armored cars.  A predicate to every suit brought by the trustee must be knowledge and fraudulent intent.

Indeed, if we adopt Mr. Picard’s definition of profit (taking out more than you put in), we might as well try to clawback his firm’s fee, which now stands at a cool $128 million.  Hasn’t he “profited” from the Madoff fraud?  You bet; maybe its time for Mr. Picard to look in the mirror.

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Public Citizen's Consumer Law and Policy Blog recently featured a post of mine on their blog (click here to read).  In the post, I compare the role of plaintiffs' attorneys to that of Batman in Gotham City --  a comparison that is not as farfetched as it may sound on the surface.  I think readers of the Corporate Observer will find similarly thoughtful opinions at Public Citizen, and I thank them for the chance to appear on their blog.  You can see the entirety of their CLP Blog by clicking here.

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Allen Stanford, accused perpetrator of a $7 billion Ponzi scheme has convinced a federal judge to postpone his criminal trial for reason of incompetence. Why is this man incompetent to withstand trial? Depression.

Depression is a serious disease affecting millions around the world. In many cases the disease can make simple tasks like making breakfast or tying one’s shoes nearly impossible. The unfortunate reality is that more than a few of Stanford’s victims are feeling this way.  They have lost their life savings; retirement has become impossible, and for many the pure shame of being a victim is a badge of dishonor that will follow them for the rest of their lives.  For these victims, and any other individual suffering from depression, the world doesn’t wait – it simply continues turning, often worsening the condition.

But Mr. Stanford, who swindled thousands with bravado and reckless abandon (private jets and polo ponies for everyone) and robbed the public of its ability to trust the financial system gets a break, some time to recuperate.  Did Stanford pause his fraud when his victims became depressed?

The constitutional protections afforded criminals are at the heart of any democracy ("innocent till proven guilty") and should remain sacrosanct.  But when "depression"  brought on by the fact that you stole $7 billion from innocent investors, is your excuse, I have to draw the line and side with the prosecutor and aggrieved investors.   "Mr. Stanford it's time to admit your guilt (which is obvious to all) or go to trial today to clear your "good name".

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Taking on Ernst and Young sends a message to the rest of the auditing firms they best beware.

The Wall Street Journal reported today that Andrew Cuomo, New York’s Attorney General and Governor-elect is preparing to file suit against Ernst and Young for its role in the Lehman Brothers collapse of 2008.

In the years leading up to the financial crisis, Lehman Brothers, Bank of America, and others made a habit of systematically lowering stakes in risky, short-term debt investments known as repurchase agreements or “repos” just before the end of fiscal quarters. This allowed the financial institution to appear healthier than it actually was. If you speak Wall Street, the practice is better known as “window dressing”. This deceptive reporting tactic masks bad debt for earnings reports, but does nothing to cure the ills of a riskily managed portfolio on the brink of collapse.

The bankruptcy examiner for Lehman Brothers has found that the failed firm routinely window dressed its earnings from 2001 to 2008. In addition, Mr. Cuomo’s investigation has uncovered Ernst and Young’s approval of Lehman’s window dressing from at least 2001 to 2007.

Taking on Ernst and Young sends a message to the rest of the auditing firms they best beware. A bad judgment call or two and the lawyers will be circling like Buzzards. This growing trend of looking to facilitators of fraud comes on the heels Irving of Picard’s pursuit of JP Morgan for aiding and abetting the Madoff fraud. This trend should spark fear across Wall Street. No doubt accountants, bankers, and even lawyers must take on a more vigilant role when advising their clients. They must make sure the Board is aware of material risks and that the entire financial picture of the company is disclosed and transparent.

 Mathew Lee; Another Man Worthy of Praise

The Lehman bankruptcy examiner also showed that Mathew Lee, a whistleblower at Lehman Brothers raised red flags about the repo trades in the years leading up to the collapse. Unfortunately, Mr. Lee was ignored and quickly dismissed from the firm for his rabble rousing. Mr. Lee was a Lehman Brothers vice president who complained to his direct boss and wrote letters to other Lehman executives warning of ethics code violations related to window dressing. Though he was ignored in this instance, whistleblowers like Lee are essential to properly police Wall Street and help avoid major crises like the one experienced in 2008. The whistleblower protection provisions under Dodd-Frank and the new whistleblower office to be established at the SEC will give whistleblowers like Mr. Lee an essential outlet to express concern and help regulate Wall Street.

Assisted by Zachary Kady

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Berk Law reporting from the Supreme Court.

A major case involving the rights of consumers was argued in the Supreme Court this morning.  Consumers were represented by Deepak Gupta of Public Citizen.  You would never have known it was his first dance with the justices.  Despite his youth and rookie status, he was no less than brilliant—brilliant in a clear, plainspoken manner.  Winning by his thorough preparation and fearless yet respectful demeanor, he faced a cavalcade of hostile questions, particularly from Justice Alito, whose sneer shifted between disdain and anger, and did not crumble; instead like pitching ace Cliff Lee, he only got stronger as the argument progressed.  AT&T was represented by Andrew Pincus, an old hand at the Supreme Court.  We expected more from someone who appears before the Court on a regular basis.  Not only was he not smooth or flashy, that’s fine, but his arguments were largely convoluted and hardly persuasive; time and again he returned to “his example” – which was in a word: indecipherable.

What is this case (AT&T v. Concepcion) all about?  Specifically speaking it is about arbitration provisions in contracts between consumers and large institutions like your bank or cable company.  Did you know that most contracts with telephone and credit card companies include an arbitration provision, which in effect shields the company from liability for fraud, product defects and a host of wrongful conduct.  They force the consumer to forego any rights they have to file their grievance in court and instead relegate them to proceed before an arbitrator.  (OK no big deal – so what? An arbitrator, a judge—isn’t it all the same?).  No; in fact, in this and many other contracts a provision within the arbitration clause bans you from filing a class action either in court or before an arbitrator.  And the big deal about that is?

The problem is best illuminated with an example: let’s say AT&T has 10 million customers.  One day last summer, in an effort to beef up profits before earnings are announced, an AT&T team started adding a bogus “surcharge” to all bills.  It amounted to $10/customer X 10 million customers, or 100,000,000 bucks.  One hundred million dollars.  Nice work.  Well let’s say Nancy Jones, who is a very careful and diligent AT&T customer, reads the fifth updated AT&T agreement before recycling it and discovers the $100 million is an illegitimate charge.

What can she do?  If AT&T has its way in the Supreme Court she would be limited to filing a claim for her loss and her loss alone.  So let’s say she wins – and let’s say she tells her friends and they win.  Perhaps a couple hundred subscribers find out.  What about the millions of other consumers who for whatever reason are not so smart or diligent?  Bottom line: the company gains $99.9 million; consumers get next-to-none of their rightful money back.

But if there is no arbitration provision in place – and class actions are not banned – Nancy can file a case on behalf of all subscribers for the entire $100 million.

Which way is preferable?  Under California State law, a ban on class arbitration in a contract (as AT&T seeks) is deemed unconscionable and unenforceable.

The United Supreme Court will decide in this case what law applies.  Do they side with the consumers and allow states to prohibit class action bans within arbitration provisions?  Or do they once again subjugate consumer fairness to the interests of big business by overturning the lower courts’ judgments and allowing the bans?  My sense tells me that the anti-consumer, anti-class action bias will win this one.  Not so much on the merits, but because of the politics. 

We’ll know by spring time.

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Rahm Emanuel is retiring to run for Mayor of Chicago. Who will fill his Shoes? Pete Rouse. Click here to read the Washington Post’s primer on President Obama’s new chief of staff, Pete “the fixer” Rouse.

Hey, we can’t all agree all the time, right? Here’s an interesting op-ed in today’s New York Times expressing concern over Elizabeth Warren and the new Consumer Financial Protection Bureau. We’re inclined to disagree with the author, but if the practice of law has taught us anything, it’s always a good exercise to look at both sides of an argument.

More on the Consumer Financial Protection Bureau:

Overhauling the most complex financial system in the history of man is no easy task. Today’s New York Times outlines some of the difficulties that lie ahead and the patience that is required in the effort for true, effective reform. Click Here for the article.

Two brothers are walking across America to express their discontent with SCOTUS’ landmark Citizens United ruling last year. The ruling allows companies to contribute to political campaigns as if they were private individuals. The ruling is grounded in first amendment freedom of speech protections, but does it go a bit too far? The Monahan brothers certainly think so:

Click Here

Assisted by Zach Kady

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With the US Treasury into the Chinese for $850 billion in debt alone—an amount about which the Chinese have expressed understandable concern—do we really want our Supreme Court sending a message of isolationism?

In Morrison v. National Australia Bank, decided in June, the Supreme Court ruled that owners of shares in a foreign bank cannot bring suit related to those shares in U.S. court.  “Legislation of Congress… is meant to apply only within the territorial jurisdiction of the United States,” Justice Scalia reasoned on behalf of the Court.

Really?  What stocks are we talking about?  How 'bout household names like Toyota and BP?  Yes BP.  These multinationals have no borders.  Why should they be insulated from exposure if they choose to trade on the Singapore Stock Exchange.  To corporations, at least, the US Court system is a beacon of justice, governed by hundreds of years of precedent, fairness and the rule of law.  It is time to become the Hague for an array of securities claims occurring across physical borders.

With the US Treasury into the Chinese for $850 billion in debt alone—an amount about which the Chinese have expressed understandable concern—do we really want our Supreme Court sending a message of isolationism?  Why in an economy that grows more global every day should the law favor investment in securities only listed on homegrown exchanges?   Shouldn’t our citizens have the advantage and choice of a wider array of investments?  This “buy American” approach is shortsighted and hardly allows for liquidity to flow to the most desirable investments or for American investors to obtain the highest returns.  At a minimum the Supreme Court should have found a middle ground—something that reflects today’s reality—and as with any jurisprudential shift: move slowly to reflect the changes in the marketplace.

Congress holds the ultimate power in this area, and they can expand the securities laws but the courts must be more enlightened.  This is yet another example of the Supreme Court’s inability to come to terms with the practical imperatives of today’s world.  I wrote previously about their refusal to consider alternatives to the hourly billing method of determining attorney fees; we can see here another example of the same antiquated thinking.  When will members of the Court actually join the era in which we live?

Assisted by David Martin

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But it’s a fool’s errand to sue the SEC, a federal agency rightly immune from private lawsuits.  What’s next, suing President Johnson posthumously for not ending the war in Vietnam sooner?  Or how about Alan Greenspan for looking the other way (or tacitly supporting) the explosion of sub-prime debt in the 1990s?  Where would it end?

The Litwin Foundation recently sued the SEC for negligence in failing to detect Bernie Madoff’s Ponzi scheme earlier than it did.  The Foundation, which supports important medical research into Crohn’s disease and Alzheimer’s, alleges the negligence cost it $19 million.  Unfortunately, this is not the first time that investors in Madoff’s scheme have seen fit to sue the SEC for lack of oversight.  But if they really want to know who to blame, these groups need only look in the mirror.  In the first instance, it was their lack of diligence, not the SEC’s, which allowed years of Ponzi fraud to occur.

The blame-the-other-guy-in-the-room attitude will only lead us down the very same road we are trying to escape, especially if the “other guy in the room” is the government agency in charge of oversight.  Should the SEC have done a better job?  Absolutely.  Could Madoff have been caught earlier, saving investors millions of dollars that they will never recover?  Likely.  But it’s a fool’s errand to sue the SEC, a federal agency rightly immune from private lawsuits.  What’s next, suing President Johnson posthumously for not ending the war in Vietnam sooner?  Or how about Alan Greenspan for looking the other way (or tacitly supporting) the explosion of sub-prime debt in the 1990s?  Where would it end?

If the Litwin Foundation is spending charitable assets in the form of attorney’s fees they should be investigated by their State Attorney General and fined.  Filing frivolous lawsuits is not a proper use of charitable funds.  Enhanced diligence must come from us as individuals and from groups like the Litwin Foundation that are supposed to invest money wisely so it has more to provide to its noble causes.

The lesson from Madoff’s scheme should be twofold.

Lesson One: Investors need to realize that a substantial amount of individual diligence must go into every decision.  Just like free lunches, there is no such thing as a “risk-free investment.”  It is the duty of every investor to investigate her own financial opportunities and if necessary, bring any suspect behavior to the attention of the authorities.

Lesson Two: The SEC and other financial regulators cannot operate successfully under the system and attitudes that we had five years ago.  Elizabeth Warren’s Consumer Financial Protection Bureau is a major step forward, but we must continue to empower overseers and encourage enforcement from outside Wall Street and from those working within.

Until we complete the alteration to our rules and our attitudes, the blame game will continue while investors pay the price.

Assisted by David Martin

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The SEC’s insider trading case against Mark Cuban has been reversed in Federal Appeals Court after originally being dismissed. The SEC’s perseverance against such a high-profile character shows their renewed commitment to stemming corporate fraud.

Driven under by new-age companies like Netflix, news is that Blockbuster is preparing to file for bankruptcy later this week. Barring a turnaround, the trend looks to continue as booksellers Barnes and Noble and Borders find themselves in technology-caused dire straits as well.

“Flash Cookies” – similar to the html cookies stored on your web browser – are tracking your actions when you watch video online. A major privacy issue has arisen because flash cookies are difficult to block and unknown to most web users.

Assisted by David Martin

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Compensation based on results aligns the interests of the lawyer with those of the client.

We’ve been living in the 21^st century for nearly eleven years.  When will the Supreme Court get here?

In a decision right out of the Gladstone era, the Supreme Court refused to even consider alternatives to the status quo, hourly (“lodestar”) billing method used by attorneys.  Why not, particularly when even the most white shoe of law firms (charging by the ever-growing billable hour) are laying off associates and dumping partners left and right?  Change should be considered from anybody’s perspective.  But I suppose the decision is not altogether surprising for a group of nine who have limited experience in the “real” legal world.  Sure, the Chief Justice had a stint as an $895/hour at Covington & Burling in Washington, DC.  But most of the Court’s experience was decades ago.

The simple fact is billing flexibility benefits the clients and attorneys.  Lawyers should be paid for the value they provide their clients; clients should only have to pay for the value they receive from their lawyers.  And sometimes that demands an adaptation of the hourly billing method.

Most importantly:

Compensation based on results aligns the interests of the lawyer with those of the client.

Traditional hourly rates don’t do so.  In fact, hourly billing does precisely the opposite — it creates an incentive for lawyers to overbill and for clients to minimize billing to save money.  That friction serves nobody’s purpose and creates an obvious impairment to a lawyer’s independence and objectivity.

I don’t mean to suggest that there is no place for the billable hour.  Courts can and should continue to look to hourly billing as a starting point to determining appropriate fees.  But lawyers and clients should have some flexibility to tailor the compensation structure.  The Supreme Court did us all a disservice with this narrow-minded ruling.

Assisted by David Martin

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Yesterday, I sat down with Steve Berk and had a short discussion about class action lawsuits. In this interview, Steve describes the nature of class action cases, the role of class representatives, and debunks some common rumors about class action attorneys.

Enjoy:

Assisted by Zach Kady

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A high degree of integrity must go into every decision we make.  Our conduct must be beyond reproach.  We must all think and behave like private attorney generals.

The Corporate Observer spends a great deal of time assessing accountability. The tanning industry, Wall Street, corporate America, government regulators, banks—nobody is immune. That includes lawyers. And that is why - despite what appear to be noble motives - I must chastise attorney James B. Gottstein for his recent actions. Let me explain.

On August 12 a federal appeals court ruled that Gottstein knowingly used “sham subpoenas”in order to circumvent a protective order. Protective orders are typically filed in sophisticated commercial litigation cases to protect confidential and/or sensitive business documents from competitors (that’s the theory at least; often they are used instead to burden the process and make it more difficult to obtain the truth). 

In this particular case, plaintiffs had brought suit against Eli Lilly, the manufacturer of the anti-schizophrenic drug Zyprexa for marketing the drug “off label” to minors (for more on the Big Pharma probe, click here and here).  Serving as an expert witness in the case, Doctor David Egilman reviewed documents designated as confidential that were subject to a protective order.  Egilman saw “much to dislike” in the documents about the effects of Zyprexa—enough to ignore his vow of confidentiality and seek to expose the information.

Egilman approached Gottstein, an attorney, in hopes that Gottstein would be willing to acquire access to the documents outside the protective order (through some legal chicanery).  Egilman trusted that Gottstein’s personal beliefs as a “mental health advocate” would outweigh his feeling of professional responsibility. He was right.  The contents of the documents alarmed Gottstein; enough so that his conscience trumped his sense of duty. He improperly subpoenaed the documents in association with a different, unrelated case. Immediately upon receipt he and Egilman released the documents to the New York Times; the next day Eli Lilly and Zyprexa were on the front page.

The court immediately issued an injunction forbidding further dissemination of the information. Much of the bad light intended for Eli Lilly quickly shifted to Gottstein and his rogue attorney work. To be sure, Gottstein’s goal was to reveal the ugly truth about Zyprexa and Eli Lilly’s aggressive marketing tactics. But to do so Gottstein completely ignored his professional and legal responsibilities. And significantly, failed to anticipate the lasting effect of his actions.

In its spring edition, the American Association for Justice’s Class Action Litigation Newsletter published an article of mine which comments on the declining reputation of class action attorneys in today’s world. Despite the admirable job that most attorneys do as crucial cogs in the American justice system, it only takes a few bad apples to sour the public. James Gottstein is not a bad apple, but it takes a contemplative eye to see that; many will view his actions as reprehensible and outside his power. The rules exist for a reason and apply to everyone. If one day Mr. Gottstein cries foul and a judge ignores him he’ll have no one to blame but himself.

To whom much is given, much is required. We’ve all heard the line, but when is it more poignant? Few professions are given as much responsibility and authority as those in the legal realm.  Just bringing a lawsuit can change lives. For that reason a high degree of integrity must go into every decision we make. Our conduct must be beyond reproach. We must all think and behave like private attorney generals. And for that reason I find Mr. Gottstein’s actions understandable, but far from commendable.

Assisted by David Martin

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Below you will find an excerpt from Steven Berk's recently published article in The Class Action Newsletter of the American Association for Justice. For the full article, please click here

Introduction

Why are class action lawyers are held in such low regard by the public, fellow attorneys and too many courts? How do we change the paradigm from the prevailing view that we are greedy and opportunistic, to one where we are seen as respected private attorney generals and resourceful consumer advocates?  

My perspective is informed by over twenty years of litigation experience in government and private practice, the majority outside the class action bar.

My professional journey through the past two decades in law has taken me from Illinois, where I was an associate at the law firm formed by Abraham Lincoln’s son to the United States Attorney’s Office for the District of Columbia where I was a federal prosecutor to a stint at the Securities and Exchange Commission’s General Counsel’s Office, then to a Top 100 Firm, where I was elected to the partnership and finally to my own practice where I represent thousands, indeed millions, of individuals in class action litigation.

I’ve had the good fortune to represent an array of consumers seeking redress for a range of corporate misconduct: owners of outboard marine engines; purchasers of inkjet printers; millions of owners of camcorders who for too many after using their camera a half a dozen times

                Most recently, I’ve been representing investors who have lost their life savings in a Ponzi scheme that operated under the noses of the nation’s largest, and for a long time, most respected banks.

I’ve won some and lost some of these cases. I’ve found lifelong friends as we together fight a formidable foe, with superior resources. I like to think that more often than not I’ve earned the respect of my colleagues, adversaries, the court, and most importantly, my clients.

But there is a disconnect between how I view my work and how most people view my work

Plaintiffs’ Class Action Lawyer. You might as well call it, “swine flu.”

Why all the disdain and distaste for a group that typically represents the poor against the rich, the little guy paying out hard earned dollars for the latest corporate scheme to increase quarterly earnings and guarantee bonuses?

                Two reasons … First, greed.[1] The words Plaintiffs Class Action Lawyer and greed seem to be joined at the hip. Second, dishonesty. (a first cousin to greed). No matter how you explain it, the public is convinced the lawyers get all the money. The clients and class, regardless of its size (and actual benefit) gets nothing. How did we get to this place? Good people, all over the country, view us with deep disdain and suspicion?

Changing Popular Misperceptions

We can at least make it harder for them to ridicule us. We can collectively clean our own houses; set standards, and agree on where the line is. Without self- regulation, though we only have ourselves to blame. To be sure the answers are not easy and more often than not the correct decision is a shade of gray. Consider the following situation many of us may have faced in some degree.

You are approaching year five of a case that started with great promise and fanfare (and a spirited fight for leadership). You want to be paid – you need to be paid. But married to that need, is an adverse ruling by the Court limiting discovery, narrowing the size of your class, or precluding you from seeking damages. Class certification and a victory on the merits become unlikely to downright impossible.   What do you do? Gulp. Five years of costs: travel, experts, and deposition transcripts (wow those transcripts can be expensive). So, we try to get out of the case, with something for the class and our dignity. Would we like it to be different? Of course. For the class, treble damages, eight figure cy pres awards, injunctive relief with teeth – no big sharp fangs. And, what the heck, a written apology and handshake from the CEO. And for the lawyers, a nice multiplier on our hourly rate to compensate us for all that time we sank into the matter.

Alas, “Only in the movies,” as they say. Instead, we are discussing with opposing counsel the “e-credit” (a new term for the much maligned coupon) the company is offering. The negotiation centers on the transferability of that credit (would anyone outside “the immediate family” actually want this near worthless electronic discount?). Counsel for defendants feigning a seriousness of purpose earnestly explains the concern over the potential creation of a “secondary market” in these credits. We sit patiently -- knowing the war has been lost and we’re merely discussing the terms of surrender -- wanting to scream: “You know and I know that only 5% of the class will take advantage of these e-credits – a secondary market. what planet are you on?”

So we soldier on and settle, knowing we will be challenged. Knowing that the settlement may not look great. But we did the best we could, certain that without our efforts, there would be no benefits whatsoever. We live to fight another day. But it’s these settlements that give us all a collective “bad name”. Inevitably the fee –based on five years of work -- will be compared to the relief: a $5 e-credit and some mysterious, amorphous thing called “injunctive relief”, which really never makes it above the fold. The headline is “Greedy Class Action Lawyers Receive Millions And Clients A Worthless Electronic Credit.”[2]

We can say in reply. “Don’t look at us – it was approved by the Court.” But we have to realize that such settlements must become the exception. Not the rule. 

They say in baseball, that if a hitter goes 2 for 10 over the course of his career, he’ll be destined to long bus rides over the dusty roads of the minor leagues -- improving to 3 for 10 translates into a long stay in the majors: team jets, five star hotels, big free agent contracts, and possible enshrinement in the Hall of Fame.

We’re never going to go 10 for 10 on our cases. There are too many unknowns. The facts unfold differently than we expected and hoped. The law is interpreted differently than we had predicted, and yes – the elephant in the room – many judges will never grant class certification, no matter the facts or law. But if we can improve the value of our collective portfolios just 10% (that translates to 100 points for an aspiring major leaguer), our reputation and standing among the public and the courts will be enhanced dramatically. 

Five Suggestions for Change

1)    Case Selection: Real Harm and Sharp Practices

      Consider only taking on cases where there is real harm resulting from a sharp practice. First, as to harm: It should be something you can explain to your ten year old. Or if you’re talking to a college friend, they should understand in three sentences what you are seeking to accomplish. Harm doesn’t translate exactly to dollars. The value of money is relative. An alleged defective windshield wiper blade on a Mercedes might be $250, but it is hardly as harmful as a $25 surcharge by banks on any checks cashed by folks without a permanent address. Harm or injury must be evaluated in context. If you need an expert to determine the harm, or your ten year old says: “Huh?” or your college friend says: “Geez, that doesn’t seem like a big deal,” you’ve got a problem.

2)    Put an End to Copycat Suits and Feeding Frenzy Litigation  

       Too often there is a feeding frenzy sparked by media coverage. The next big thing. “Let’s get retained and put something on file quickly.”   Well, how do you file quickly?   You copy someone else’s complaint. This practice needs to stop. Pure and simple. If your name is on a pleading that is identical or substantially similar to an earlier filed complaint, there should be a presumption it is a copycat suit. 

3)    Treat Your Class Representatives Like Clients

       You have a client. Don’t ever forget it. You should be required to communicate with your client once per month, even if it’s just by email. Why? Consider the following: the night before your class certification hearing, the Judge contacts your class reps to discuss the issue of adequacy. What would you want your client to say? You’ve never spoken since the day she was sent the retainer? She couldn’t pick you out of a line up? Some attorney who she never met flew in for her deposition and she can’t recall his name? We must do better. We should all strive for the day when our clients routinely say: “Your Honor, my lawyer contacts me every month. What would you like to know about the case?”

      This type of care and feeding is not only ethically required, but good business. And good for the standing of our bar.

4)    Commit to Pro Bono Work[3]

     Class Actions, as we know, can be positive forces for social change. We should all commit to cases where the beneficiaries are some disenfranchised group: the poor, those with special needs or the exploited.e disabled, or children. Let’s use our expertise and skills on their behalf. For bigger firms, it’s a way to train associates. For the rest of us, it’s good exposure.   But for all of us, it’s an opportunity to do the right thing and take a small chip out of the moniker “greedy” that we have been branded with, and can’t shake.

     For big pro bono projects, why not co-counsel with a defense firm? Make it a bi-partisan effort. Cross the aisle in support of the public good. We must be bold and creative to change the paradigm we find ourselves in.

5)    Object to Bad Settlements

     The conventional wisdom is: “Don’t object to even the worst settlement because you will put yourself at risk of objection and scrutiny on your good cases.   It’s not worth the risk.” That kind of cowardly thinking must change. We are all risk takers. Objecting to bad settlements is a risk we must have the courage to accept. Sure, there are many marginal settlements that may be improved – but no need to second-guess those. Save your powder for the clear, egregious cases – those that give us all heartburn.    Commit to objecting every three years. Objecting doesn’t have to be a regular part of your practice to be an effective deterrent. 

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It is not acceptable for public law to remain in the private domain. Access to public law should always be a public right for all…

Transparency, the mantra of this decade, must extend to the judicial system. Some of the most important decisions affecting all Americans, rich and poor alike, come from the courts. But for the most part, these decisions remain in the exclusive domain of lawyers and law firms, rather than the American people. It shouldn’t have to be that way—particularly in the age of the Internet.

What happens when average citizens want to stay up-to-date with court decisions? For the most part, they have to pay expensive fees to access the legal documents. Popular services like LexisNexis and Westlaw—though excellent and effective resources—are out of reach for the average American.

An informed citizenry is critical. Access to legal decisions can educate and ennoble all Americans. Citizens should also simply have access as taxpayers. After all, it is taxpayers’ money that helps fund the public court system. It seems ironic—and problematic—to limit access to case decisions that truly do belong to all.

Although the Internet has made strides toward democratizing public access, it has not created equal access for everyone. The Free Access to Law Movement, an umbrella group of institutions that are working to provide free online access to legal information, has taken up this cause. Still, more needs to be done to ensure that every American can access legal documents, regardless of their financial stature.

Public law should not remain in the private domain. Access to public law should always be a public right for all, rather than a private privilege reserved to the few who can afford it. The latter is a system based on elitism and law as a private entity—certainly not principles our government should strive for.

Main Street says hats off to the institutions that are already working to provide free public access to legal documents—and encourages those who aren’t to follow suit.

Assisted by Jess Begen

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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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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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