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

From 2004 to 2008, Countrywide mortgage – now owned by Bank of America – discriminated against over 210,000 minority borrowers on account of their race. The Wall Street Journal reports that blacks in Chicago borrowing $2,000 paid an average of $1,235 more than whites. Hispanics paid $1,100 more than their white counterparts. Additionally, fees were $545 higher for Hispanics and $415 for blacks. But wait, there’s more! For three years, Countrywide pushed minority borrowers towards risky subprime loans when they were perfectly qualified for less risky prime loans.

Bank of America will pay $335 million to settle their dispute with DOJ. The settlement will directly benefit those damaged by Countrywide’s actions. Click here for the official settlement announcement.

Is this justice? Hardly.  Blatant, institutionalized racism and greed must be punished with more than a slap on the wrist.

I blogged recently about Judge Rakoff’s bold willingness to take a stand when the SEC failed to reach an acceptable settlement with Citigroup. Will this settlement be subject to the same level of scrutiny?  No doubt stronger sanctions are suggested by the facts. Without stronger penalties, big time lenders simply conduct business as they please, without care or consequence. This settlement is good for the cheated borrowers of the past, but it does nothing to help protect future victims from the unscrupulous and boundless greed of Wall Street. For that reason, it is not just, it is not adequate, and it is not acceptable.

A settlement must be a deterrent to all similarly situated banks and lending institutions.  Change will only come and institutional racism will only be checked if the courts take a stand.  The spirit of Brown v. Board of Education must be rekindled.

Assisted by Zachary A. Kady

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The new darling of tax reformers ranging from Occupy Wall Street’s protesters to Bill Gates is something called the “Robin Hood Tax.”  At its simplest, it is an attempt to place greater monetary burden on the banks and their shareholders.  The beneficiaries would be Main Street (the 99%), either because banks would lessen their trading and thus their size (anything to avoid taxes) or not (and the tax revenues would be used to fund programs that benefit the middle class).  Sounds okay.

But I’m skeptical.  First, I’m confident banks will find ways around any such taxes faster than you can say “Sheriff of Nottingham.”  Second, banks will pass on any additional costs to their depositors (you and me) faster than you can say “Maid Marian.”  It won’t be long before our bank statements look like a cell phone bill, with pages of charges associated with everything we do.  (“Oh Mr. Berk that 33 cents is for your balance inquiry on November 15th.”)  And third, any such tax will divert us from the core problem: Banks are getting bigger and stronger while regulation lags dangerously behind.  This Robin Hood, although dapper in his green tights and equipped with a full quiver of arrows, is no match for the modern arsenal and armies of lobbyists owned by the banks.

Let’s be transparent; banks need to be regulated before they fail, not after.  And regulation must have teeth, not merely words that can be ignored by ambitious CEOs and traders.  (Yes I’m talking to you, Sena-Govenor Corzine.)

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Today, the New York Times' Dealbook featured an article on the federal government's "crackdown" on Ponzi schemes.  The piece uses increasing numbers of FBI Ponzi investigations and CFTC enforcement actions as evidence of the tougher stance.  While the government's strategy appears successful, it targets the wrong folks.  Below is my comment on the piece, also posted at Dealbook's website.

Ho hum.  Nothing new, regulators will go after "low hanging fruit."  The easy targets.  Think about the drug dealer on the corner instead of the kingpin who travels around in a limousine, never soiling his leather-gloved hands in the day-to-day affairs of the criminal enterprise.  The cops can pick up the drug dealer and charge him with possession with intent to distribute the drug du jour, but by the time he appears for arraignment his "replacement" will be on the street -- making sure the "king pin" doesn't lose market share (and a valuable corner).

And so it goes with Ponzi schemes.  The CFTC and the SEC will make a few arrests of the most outrageous of "con men" // "flim flam artists" // "grifters" -- call them what you like.  But it's just a holding action, a finger in the dike.

The efforts of prosecutors instead must be on the "legitimate" financial institutions that assist these schemers.  Madoff didn't deal in cash.  He banked at the eminent JPMorgan Chase.  Sanford had a score of banks at his disposal as he syphoned billions offshore.  Nick Cosmo on Long Island was a Bank of America favorite.  These banks profited by their association with these hoodlums at the expense of the victims.  "Oh Mr. Madoff I see your balance in your account is $35 billion, can we offer you a free toaster?"

These banks knew and if they were held accountable by prosecutors... now that would be a real story.

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Imagine that: when the banks actually disclose a fee to consumers, they have the capacity to vote with their feet—in this case by migrating to competitor banks with a more customer-friendly policy.  This is free market economics at its best.

Facing a hue and cry from consumers, Bank of America announced on Friday that it will drop its planned $5.00 debit fee charge.

At the beginning of October, major banks including JPMorgan, Wells Fargo and Bank of America announced the fee.  But consumers are showing some feistiness.  In the past month, consumers have mobilized against the fee, getting 300,000 signatures on a Change.org petition.  And worse for the banks, they are defecting at large rates from the big banks in favor of smaller, local banks.  In response, Bank of America (last but not least) became the final banking giant to nix the charge.

Could there be a better example of the benefits of transparency?  Imagine that: when the banks actually disclose a fee to consumers, they have the capacity to vote with their feet—in this case by migrating to competitor banks with a more customer-friendly policy.  This is free market economics at its best.

Transparency and disclosure makes it possible for the middle class to see the truth.  More transparency even trumps more regulation.  Let the public vote with their feet... and their mouse clicks.

Assisted by David Martin

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Some links that will get you ready for the coming weekend:

Many of the biggest banks have begun to backtrack on their announced debit card fees.  The banks had planned to charge between $3.00 and $5.00 to use debit cards for purchases.  Wells Fargo continues to test the fee in five states, but JPMorgan and Citigroup have cancelled their plans.  Be sure you know your bank's policy as they yet again try to gouge unsuspecting consumers for whatever they can take.

In related news, Smart Money reports on increased incentives to switch banks.  While Bank of America and Wells Fargo levy debit card fees (really, guys?), and other large banks charge for checking accounts, banks -- especially smaller banks -- are sensing a window of opportunity.  Maybe Adam Smith's invisible hand will lead depositors to the straightforward, honest banks, forcing the larger banks to follow suit.

The United States isn't the only country where executive compensation continues to rise at an absurd rate.  Great Britain has similar national statistics -- executive compensation is growing at a rate three times the growth rate of  companies' share prices -- and their economy is doing no better than the United States'.  (Maybe a hint for the "Occupy" protesters, who have been criticized for "lacking direction"?)

Assisted by David Martin

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These hallway bullies already have our lunch money; now they’re after our caps, shoelaces and bubblegum—anything they can grab.

Okay, Bank of America, I get it.

First, you dig into the pockets of every taxpaying American for billions of dollars in revival money.  It isn’t strong enough to say we begrudgingly obliged.  Taxpayers were pinned down by bully one and bully two while bully three turned their pockets inside out.  We heard the rhetoric about too big to fail, and maybe that’s true; maybe we are better off than if we’d let the giant banks go under.

But then, in spite of the foul stench created by loans going bad, you go buy up companies like Countrywide, the poster boy for mortgage indiscretions.  Any half-decent review of their books would have revealed the woefully inadequate research done in advance of issuing the mortgages—to the point of being fraud.  Now we know why the catchphrase isn’t “too smart to fail.”  If Bank of America was in the real estate business there’d be no price too high to pay for Chernobyl acreage or oceanfront estates on the shores of Arizona.

But now?  Surely now that we’ve bailed out the banks, they throw the lowly depositor a bone, right?  Of course not.  These hallway bullies already have our lunch money; now they’re after our caps, shoelaces and bubblegum—anything they can grab.  Starting in 2012, Bank of America customers who plan to use their debit cards can expect to pay $5.00 per month, every month.  You read that right.  Take out your debit card at Costco, or WalMart, or BP just once, and bang.  Money well spent, huh?

Of course, it doesn’t stop with Bank of America.  ABCNews reports that Wells Fargo and JPMorgan are each testing $3.00 debit fees of their own.  What does this mean?  Most consumers will end up paying the $5.00 fee no matter how hard they try to avoid it.  This isn’t capitalism, this is exploitation.  Months ago TCO predicted the rise of such fees, and this won’t be the last one.  It’s baffling in light of this that congress seeks less regulation, leaving consumers with only one recourse for the time being: remain vigilant.

Assisted by David Martin and Zachary A. Kady

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We often criticize banks for not paying attention to the needs of Main Street.  It is only fair then when Banks do the right thing, we not ignore a good deed done.

Hurricane Irene came and went here in the Washington, DC area without too much of an impact.  But unfortunately, many folks in Vermont, New Jersey, New York, Connecticut, and other states are still dealing with the aftermath of the disastrous storm.  It seems strange to discuss landlocked, northern states like Vermont when talking about Hurricane destruction.  But then again, with a 5.8-magnitude earthquake also occurring on the East Coast this past week, abnormalities abound.  Here’s one more: Banks putting consumers before profits.  That's right, several major banks have enacted special programs to waive certain fees and offer low-interest disaster loans for those affected by the hurricane.

These banks include such giants as:

• JPMorgan Chase
• Wells Fargo
• Bank of America
• Capital One
• Citi
• PNC

The fees waived differ from bank to bank, but include the following:

• Overdraft fees;
• Out of network ATM fees;
• Early withdrawal fees on certificates of deposit; and
• Late fees on credit cards and mortgages.

These banks deserve our commendation and praise for a righteous decision in a time of peril for many Americans.

Although this act of empathy (and good business sense) is appreciated, it is all too rare from America’s major banks.  We may hope this starts a new trend of socially conscious banking.  Perhaps responsible lending, less risky investment products, full disclosure of risk and a preference for long-term investment in local businesses over short-term financial trades will prevail.  Now, wouldn’t that be earth-shaking?

Assisted by Zachary A. Kady

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What bank executive said the following to shareholders at a recent meeting?

The bank’s mission is to “find ways to continue to attract deposits, make sound loans and grow in accordance with our historic credit quality standards.”

      A) Jamie Dimon (JPMorgan)
      B) Vikram Pandit (CitiGroup)
      C) Brian Moynihan (Bank of America)
      D) Robert Wilmers (M&T Bank)

What banker increased his bank’s assets from $2 billion to $68 billion in his past thirty years at the head?

      A) Jamie Dimon (JPMorgan)
      B) Vikram Pandit (CitiGroup)
      C) Brian Moynihan (Bank of America)
      D) Robert Wilmers (M&T Bank)

If you guessed Robert Wilmers, raise your hand. (If you had previously heard of Mr. Wilmers, take a bow.)  M&T CEO Robert Wilmers has managed to remain out of the public eye despite running the most honorable bank in the United States for almost three decades. He received some rare attention in Joe Nocera’s aptly-named column, “The Good Banker”.

There is perhaps no more apt nickname.  Wilmers is a good banker with even better morals. He’s old school, valuing bankers’ reputations, which has dropped to “third worst” among the professions, according to Wilmers.  Unlike most executives, Wilmers recognizes the moral hazard of major bank bailouts and the incentive to maximize risk—to the benefit of the big shots, and at the cost of Main Street.

It’s a heads-I-win, tails-you-lose arrangement for Main Street, but Mr. Wilmers sets himself apart as the only banking executive honest enough to point to the problem.  Kudos to Joe Nocera for drawing attention to Wilmers’ perspective, and to CEO Wilmers for standing tall in an era of slinking away ‘neath the shadows of money stacks.

Assisted by David Martin

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Even for notoriously money-blinded financial behemoths, preying upon veterans and their families defies even the most cynical observer’s imagination.

In the sea of fraud and manipulation following the financial crisis, Bank of America and Morgan Stanley have hit rock bottom (or at least let us hope so).  In today’s New York Times—unfortunately buried within the Business section—lies the story of almost 200 military veterans whose homes were wrongly foreclosed upon by BofA and Morgan Stanley subsidiaries.  Really, guys?  Even for notoriously money-blinded financial behemoths, preying upon veterans and their families defies even the most cynical observer’s imagination.

The Justice Department achieved a total settlement of over $20 million for the victims; this amount is unlikely to make whole these veterans who had their mortgages foreclosed upon by Countrywide and Saxon, a subsidiary of Morgan Stanley.  The settlement leaves just over $120k for each victim, likely a far cry from the value of their mortgage—and that is ignoring the hardship they likely went through as a result.  (What’s more, this is not the Countrywide/BofA partnership’s first lapse in judgment—just ask whistleblower Michael G. Winston.)

This case cries out for punitive damages.

Assisted by David Martin

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Pull a Madoff -- in that the Commission will miss the shenanigans that are right underneath their noses, just as they did with Bernie years ago.

Yesterday the SEC announced a proposed set of regulations that would curb some of the abuses of the rating agencies (Moody's Corp. (MCO), Standard & Poor's, a McGraw-Hill Cos. (MHP) subsidiary, and Fitch Ratings).

First, let’s talk about the basic problem.  The issuer of debt pays for the rating.  It’s a naked conflict of interest.  Here’s an oversimplified example.  Bank of America has a bunch of sub-prime mortgages it securitizes in a bond offering it wants to offer for sale to pension funds, university endowments, charitable trusts and the like.  They need an Aaa rating or something close to it; it is called investment grade, since many institutions cannot invest in anything lower.

They go to Moody’s where they’ve had some luck before (wink, nod).  Moody’s, being a bit “moody” after all the bad publicity post-2008 disaster, says: “You know BofA there is a lot of risk in these underlying bonds (“really”).  Sorry, best we can do is Ba1.”

Bank of America, undaunted, and knowing how to play the game, comes back with: “Come on guys, how ‘bout if we sweeten the deal a little and increase your fee... and we’ll throw in some Legend Seats at Yankee stadium.”

“Against the Red Sox?”

“Fine, against the Red Sox.”

“You know those bonds are looking more Aaa every day,” says the Moody analyst, as he pulls his favorite Red Sox cap off the shelf.  It’s a conflict of interest at its simplest.  And guess what, if a BofA bondholder wants to sue the rating agencies after the bonds default, good luck.  The rating agencies have a “get out of jail card” at the ready.  “We were merely exercising our First Amendment right to render an opinion.”  Wins every time in court.

Second major problem: the Revolving Door.  That same Moody’s analyst who loves the Red Sox and will see them up close on BofA’s dime has already sent her resume to Bank of America and hopes to enjoy a 100% salary increase when she takes a job as a newly minted Vice President in the debt securities division.

Dodd-Frank provides the SEC with new authority to fix these conflicts.  What is the Commission doing?  A little window-dressing is all, nothing more.  For instance, the SEC has suggested rules that would have rating agencies clearly define and disclose the meaning of any symbols used by the rating agency.  The proposed rules attempt to directly address conflict of interest issues, but half of the section is devoted to exemptions and exceptions.  It is also seeking to set up qualification standards for credit analysts, to make sure they meet new training and experience standards.  Ho hum.  And indeed, the rating agencies are fighting even these minor reforms.

What the SEC must put on the front burner instead is the organization of a government-mandated clearinghouse intermediary through which credit raters would be assigned blindly to work on various bond offerings.  (No more Legend Seats.)  This intermediary was called for in Dodd-Frank and is being pushed for by Senator Franken.  Alas, in the way of Washington, the SEC will study the issue and issue a report, next—yes next—summer.

I can see the headlines a year in advance: SEC Misses Trillion Dollar Losses Caused by Continued Rating Agency Conflicts.

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If we can’t have Elizabeth Warren, we must have Paul Volcker.  At 6’7” he towers physically over just about everyone in the room.   I can just see him summoning the relatively diminutive Jamie Dimon of JPMorgan Chase (5’10" on a good day) to his office and giving him a good tongue lashing about any number of questionable offers and practices that the banking behemoth foists on consumers.  (For good measure, he can bring in Brian Moynihan of Bank of America and grill him on why his bank quietly knew of and supported a score of Ponzi scheme operators popularly known as mini-Madoffs, but who were not so “mini” to the consumers who lost their life savings to a bank culture that put profits ahead of compliance.)

Beyond his physical stature, he has the intellect and experience that places him at a level above the current Warren wannabes.  For starters he can trot out his rule -- the Volker rule (prohibiting banks from speculative and proprietary trading) and impose it by force of will and administrative rule or something.  Heck, just the threat of Volker thinking about imposing that rule will keep the banks and mortgage lenders on the straight and narrow (or at least closer to the straight and narrow).

Finally, at the heart of his wisdom is a moral compass that cannot be bought or compromised.  Eighty three years young, he is not looking for a job in “industry” or to be feted by Wall Street chiefs at black tie dinners.  He will not suffer fools lightly or be bamboozled by high-priced consultants and convoluted explanations about how failures to disclose financial risks to consumers is somehow a good thing.  He will take his position seriously and no doubt be an important thorn in the side of an industry (financial services) that has put profit and gain above all else.  And lastly, he will be quick to remind that industry that it was the consumer (and the government) that saved their behinds.

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Far from being penalized, even slapped on the writs, big banks are saving tremendously to the tune of billions by refusing to service distressed properties and loans.

Big banks rolled up their sleeves from say 2000 to 2008 and made home loans like crazy.  They were motivated not by their love of middle class homeowners, but rather safe and large profits.  They could make loans, securitize them and package them to hungry bond investors.  The ability to securitize these loans separated risk from underwriting.  I’ve heard that before, but what does it mean?  Here is an example.

Banker Zach says: “Mr. Jones, I really don’t care if you pay back this loan on overpriced property in Swampland, Florida that you cannot afford.  Lost your job, not my problem.  Land underwater, not my problem.  I’m packaging that loan with thousands of others and selling it all to Mr. Smith.  He might worry about your ability to repay, I don’t.  Next customer please.”

“Steve, this is old news, what do I need to know now?”  Yes, okay, back to my blog post.  Far from being penalized, even slapped on the writs, big banks—specifically Bank of America, JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs—are enjoying the time of their lives.  They are saving tremendously to the tune of billions by refusing to service distressed properties and loans.  “Walk away fellas and don’t look back."  Instead, they are using some of that money wisely to lobby Congress and it’s working.

As it often does, Congress misses the point.  Based on pressure from the banking industry (read: lobbyists) they are devoting attention and resources to taking wild punches and scrutinizing the nascent Consumer Finance Protection Board, and of course our hero Elizabeth Warren.  I’m reminded of Nero.  While Rome burns, the regulators are running in circles fending off attack after attack on their authority from an industry whose hands are dirty.  And Congress is playing the violin.  No one has time to put out the fire.

Enough is enough.  Congress must deal with substance and not engage in a sideshow that only benefits the perpetrators of the root problem: Bank of America, JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs.

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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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The story has a happy ending.  In a jury trial against Countrywide and Bank of America, Michael Winston prevails and the jury awards him $3.8 million.  For Mr. Winston, surely a man of principle, it likely not just about the money.

We applaud Michael G. Winston for his courage and tenacity; and our old friend Gretchen Morgenson for continuing to shine a light on practices in American business that - while not pretty - must be exposed.  Mr. Winston was hired during Countrywide’s heyday as the king of the no-document, sub-prime mortgage.  They did not create the industry, but through their uber aggressive CEO Angelo R. Mozilo, they took full advantage of a milieu that not only allowed for but incentivized funding mortgages at any cost: worry about the consequences later.

The hiring of Mr. Winston was a rather strange choice for this culture of high rollers.  He was a grown up.  A veteran of Motorola, Lockheed and McDonnell Douglas, as reported by Ms. Morgenson, he was tasked with “grooming better managers”.  As he became exposed to this culture from the inside, he began asking questions and more questions, and after thoughtful analysis recommended Countrywide “focus on customer satisfaction, on the quality of the loan portfolio and on building leaders who would focus their people on that.”

Well it turns out that Mozilo and his crew wanted a yes man, a cover from critics; not Jimmy Stewart as Mr. Smith goes to Washington.  Mr. Winston rolled up his sleeves and issued a report concluding Countrywide needed to shift its culture away from short term greed and move to a model of measured sustainability.

But Mozilo and his crew ignored him, froze him out of meetings, and may—in a bizarre scene straight out of the movies—have even been behind an effort to poison Mr. Winston’s team.  These Countrywide guys played hard ball.

And then the moment of truth.  Mr. Winston was asked (perhaps told) to rebut a rating agency analysis of Countrywide’s corporate governance practices.  Here he is 50+ years old.  While he has exemplary credentials, he may not have many more opportunities, particularly if he crosses Bank of America.

Good news, honesty and courage defeat intimidation and fear.  Mr. Winston says no!  For that he is almost immediately fired.

But the story has a happy ending.  In a jury trial against Countrywide and Bank of America, Michael Winston prevails and the jury awards him $3.8 million.  For Mr. Winston, surely a man of principle, it likely not just about the money.  He has followed his moral compass and prevailed.

We thank him for his service, courage and the example he creates for others.  (And of course Gretchen Morgenson for highlighting the story.)

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Yesterday we discussed Andrew Cuomo’s investigation into Ernst and Young’s role in approving the fraudulent practices that helped disguise Lehman Brothers financial condition for years before itscollapse. Click here for yesterday’s blog. Today Mr. Cuomo filed a suit for civil fraud against Ernst and Young.Click here for the Wall Street Journal article. This suit may be the tip of the iceberg. 

At least three other Wall Street banks have admitted to using similar tactics known as “window dressing” their books before the end of financial quarters. The Wall Street Journal’s “Deal Journal” claims that Citigroup, Bank of America, and Bank of New York Mellon admitted to similar practices. Like Lehman Brothers, these banks conveniently sold risky investments prior to earnings reports only to repurchase the investment following the company’s report. The banks termed these tactics, “repo purchases”. These tricks are nothing more than sham transactions. They are designed to deceive investors into thinking financial institutions are healthier than they really are. The risky investments remain the responsibility of the cheating bank.

Bank of America admitted to $10.7 billion in repo purchases.  Citigroup admitted on May 7 that its repo transactions alone were as high as $13 billion. That’s right, $10.7 billion and $13 billion in lies respectively. Though this number pales in comparison to Lehman Brothers’ habitually hiding up to $50 billion of its riskier investments using repo transactions, the widespread deception on Wall Street is staggering.

What’s worse? All of this was technically in sync with banking regulations and guidelines. Banks could remove an investment from their balance sheets if they did not repurchase the same investment for 98%-102% of its sale value. So what did they do? Simply buy the investment back for 105% of the value. Wall Street Greed at its finest. Elude a rule and spit in the face of its obvious purpose.

 Fortunately, the rules are changing. Under the new system currently being phased in, a financial institution may only remove an investment from its balance sheet if it truly transfers the risk and reward.  (Duh – what took so long). Will this change the game? It’s hard to say. One thing’s for sure though, when Auditors are handsomely paid by the very companies they’re supposed to audit with independence and objectivity, there’s bound to be trouble afoot sooner or later.

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In 2010, we had plenty of opportunities to come to the keyboard in hopes of shining a light on hypocrisy, pleading for fairness, particularly on behalf of consumers and investors and just plain venting about our corporate culture that has too often lost its way. As 2011 nears, we thought a wish list for the coming year would be fun.

1.       Elizabeth Warren Officially Named Head of the CFPB

There’s no hiding it, we have a crush on Elizabeth Warren (click here and here for past blogs). Her leadership and influence were essential to the creation of what we hope will be an engaged and powerful consumer finance protection agency. While we were delighted when President Obama chose Professor Warren to lead the formation of this new agency, we hope in 2011 he shows the courage to name her the Director. Will there be a battle in the Senate over her nomination? You bet. But we say bring it on; she is uniquely qualified for the post. Professor Warren has the knowledge, intelligence, creativity and passion to get the job done. That scares corporate America. But a tough fight, played out on the evening news and on You Tube will be good for the nation.

2.       The SEC Gets the Money it Was Promised and Opens Its Whistleblower Office

The passage of the Dodd-Frank bill was merely the strategy for restoring confidence in the American financial system. Implementation requires funding. Hard working, honest citizens have the right and deserve an opportunity to report corporate fraud without fear of retaliation. To be meaningful, this right must be backed up by resources ready to investigate and provide a response up or down. Unfortunately, congress’ recently imposed budget freeze has temporarily stalled funding for a new, independent whistleblower office at the SEC. For now, whistleblower claims will be handled by the enforcement division, the same division that missed Madoff. That same enforcement staff is unlikely to effectively handle the many complaints the office is likely to receive. (click here) Hopefully in 2011, congress and the SEC can work together to give whistleblowers an effective means to spot, prosecute, and curtail corporate fraud.

3.       A Stronger, More Active CFTC Enforcement Division

Dodd-Frank greatly expanded the powers of the CFTC enforcement division. The change turned what was once a poor man’s SEC, into a regulatory power house. Several trillion dollars are under management and supervision of this agency. As a threshold matter they must write thousand of rules and regulations. We hope that process steams along at a good pace. We also hope that the hiring of David Meister as new head of the enforcement division (click here) will help continue this trend through 2011.

4.       Banks like JP Morgan Chase and Bank of America are Held Accountable for their Roles in Massive Ponzi Schemes and Other Fraud

We’ve mentioned it time and again, some of the largest banks have played surprisingly important roles in support of massive Ponzi schemes. Investors lost billions. (Click here,  here, here for our blogs). Our firm, Berk Law (www.berklawdc.com) is currently litigating four cases against both Bank of America and JP Morgan Chase for their roles in fraudulent investment schemes across the country. (Click here, here, here, and here for blogs on JP Morgan Chase) We hope 2011 will bring justice for thousands of investors who have lost much of their life’s savings.

5.       A Favorable Ruling for Consumers in AT&T v. Concepcion

Just a few weeks ago, the Supreme Court heard oral arguments to determine the enforceability of mandatory arbitration clauses, which ban class actions completely (“whether brought in court or before the arbitrator”). This ban is not only unfair to a consumer holding a valid claim but it also a fast one on consumers. We hope for a ruling upholding the California court’s decision invalidating such contracts under the doctrine of unconscionability. Click here for our blog on the case and here for the scotusblog entry.

6.       Wall Street Makes Billions of Dollars

Seriously. Prosperity on Wall Street should be encouraged. What should be discouraged are the risky, unfair, and myopic practices of the past decade. Investing in sound businesses and long-term plans will help lift the American economy, stabilize the investment world, and restore confidence to investors who will invest more comfortably in sustainable portfolios. Click here for a blog about responsible investing.

7.       An Active SEC Enforcement Unit to Stomp Out Fraud Before It Hurts Investors

The SEC must bring more cases. While the new whistleblower office (if it ever gets funding) will be critical, a hungry first rate staff must be priority one.

     8.       The Risks of Indoor Tanning Get the Attention They Deserve

Enough is enough. Teens, mostly girls, should not continue to tan and essentially fry themselves with reckless abandon. They dramatically increase their risk of cancer. Tanning, like cigarettes and alcohol, is a personal choice, but at present the risks are largely ignored or downplayed by the industry. We’ve said it before and we’ll say it again, indoor tanning causes cancer (click here and here). In moderation, maybe, but we ask simply that the risks are published so that consumers can make an informed decision. Click here for our series on indoor tanning.

9.       Foreclosure Proceedings Gain an Air of Legitimacy and Homeowners are Treated Fairly

The gap between risk and lending simply grew too large. In many cases it just didn’t exist.   What incentive did a bank have to ensure the reliability of its loan if it was simply going to sell the loan the next day as part of a massive securitization? Click here. The still-ongoing mortgage crisis is a microcosm of the irresponsibility, greed, disorganization, and shoddy oversight pervasive in the banking world. Hopefully 2011 will put back the link between risk and lending. (because if we don’t, I fear more bad paper and a huge risk.)

    10.   A Political Climate that Puts the True Needs of Main Street First

With a decidedly angry republican opposition taking power in the House in January, the potential for political stagnation is as high as ever. Sure, deliberation and substantive arguments are what the founders intended for Congress. We simply hope that the interests of Main Street don’t take a backseat to partisan rivalries and that we can continue to move towards respectable reform.

11.   Last, But Certainly Not Least, a Washington Capitals Stanley Cup Victory 

Hey, we’ve got to have some local pride. Life’s good inside the beltway, unless of course you’re a sports fan. McNabb and the ‘skins just didn’t pan out, John Wall’s not going to win a title alone, and it’s not looking like anyone in the NL East has a shot besides Philly. So, put on your Ovechkin jersey because DC’s going to have to be a hockey town. We’re in first place as of today – let’s keep it that way. Maybe you’ll catch me downtown at the Verizon center for a game. I’ll be the guy making sure the refs, the owners, and the league play by the rules – after all, this is The Corporate Observer.

Assisted by Zachary Kady

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I don’t know where I stand on investors bankrolling lawsuits.  On one hand, it provides a path to justice for those without the means to use our court system, which can be very expensive.  On the other hand, they frequently exploit those very people by taking advantage of their situation to charge exorbitant interest.  One thing is for sure: it is an industry that begs for regulation to ensure fair play.

No surprise here, but Bank of America is once again involved in shady dealings, this time surrounding the Lehman Brothers bankruptcy.  The Bank seized $500 million just after Lehman filed for Chapter 11, but Judge James Peck ruled that seizure was unauthorized and impermissible.  Creditors to the failed institution can thank Judge Peck for adding $500 million to the pot of attainable funds after the collapse.

Assisted by David Martin

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“Bank of America” implies a bank that reflects the American spirit; a spirit based on cooperation and unity. America is a nation of citizens who lean on each other, lend a hand, and particularly in hard times, work together toward a common good.

Sadly, the real Bank of America fails to reflect these core values. Without remorse, it casts out loyal customers and strands Americans who suffer its exorbitant fees. How dare such an organization call itself the Bank of America.

Bank of America has repeatedly lied to its shareholders, embraced the worst practices of subprime lending, and supported Ponzi schemes that victimize innocent investors. And now this…

Bank of America fired Customer Advocate Jackie Ramos. Why was Ramos fired? She was doing her best to help others in a time of need. She was being an American.

Specifically, Ramos was fired for approving modification programs or lowering interest rates for customers who could not afford their charges. In short, for helping customers.

Bank of America must shed its name. Until it changes its mission and works for—rather than against—the American ideal, it does not deserve to tout itself as America’s bank.

Please visit our blog to select what name you think best suits Bank of America. Here are some suggestions that readers have submitted:

• Bank of Shame
• Bank of the Few
• Bank of Greed

Assisted by Jessica Begen.

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Bank of America’s chief executive, Kenneth D. Lewis, announced his sudden resignation last week. Lewis has been under a cloud of suspicion following allegations that Bank of America misinformed shareholders of details related to its merger with Merrill Lynch.

Lewis’ personal career at Bank of America is a classic American rags-to-riches tale. He began working as a low-level loan officer, eventually moving up to become the bank’s President as the bank grew to be one of the world’s largest.

As President, Lewis’ agenda: growth and profits. From Fleet to Countrywide to the venerable Merrill Lynch, he surely was successful on expanding upon the nationwide platform created when upstart Nation’s Bank purchased Bank of America. But what about compliance? What about nurturing a culture of measured risk and thorough analysis? Looking back on Lewis’ reign, after a $40 billion government bail out, and the debacle surrounding Bank of America’s failure to disclose (or perhaps worse) billions of bonuses to Merrill executives, he leaves despite expansion with a mixed record to be sure.

Main Street hopes that Ken Lewis enjoys retirement and the $100 million he is expected to receive in stock and compensation – money that cannot be touched by payment czar Kenneth Feinberg. 

Perhaps he can use that money and business acumen to start a foundation –that trains bankers in compliance and business ethics … might be a nice start.

Assisted by Jess Begen and Zach Kady

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The New York Times reported yesterday yet another fraudulent investment scheme. Ho hum. This time it is a group of investors suing an entity called Lancer Offshore and a few other hedge funds run by Michael Lauer. Lauer’s gains from the scheme total around $62 million, and overall losses for investors total over $550 million. Nothing new, right?  

Wrong. This time Bank of America is up to its ears (if a bank had ears) in this fraud. BAS (an investment subsidiary of Bank of America) allegedly aided and abetted Lancer Funds in deceiving its investors. BAS acted as the prime broker for Lancer. Their role was to clear and settle trades, and act as the custodian for some of the securities held by Lancer. Bank of America’s biggest blunder was allowing Lancer funds to report the value of their investments in a manner that has been banned for almost 50 years. Yes 50 years; think pre-Beatles, pre-color TV.

The investors allege that by reporting the value of certain restricted stocks at the same price as freely traded shares, Bank of America allowed Lancer to dramatically inflate its earnings. During the period when Lauer was making his trades, Lancer’s account was overseen by three different executives, all of which called Bank of America’s actions standard procedure. Perhaps Bank of America should revise its “standard procedure”.

Bank of America moved to dismiss those allegations. But that effort was summarily rejected by Judge Shira A. Scheindlin – click here to read the ruling. Not surprisingly, Bank of America acted irresponsibly in the face of a duty to protect investors. The investors claim that Bank of America knowingly posted reports and account statements based on fraudulent data. Bank of America seems to be at the head of the line when it comes to high profile cases of bad judgment and investor protection. Stay tuned to A Voice For Main Street for more news on Bank of America’s culpability in this case and other related stories.

Assisted by: Zach Kady

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

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

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

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

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

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

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

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

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

Assisted by Jessica Begen.

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I wish the average American was making $91,000.

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

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

“No,” said our Person of the Week, Judge Jed Rakoff.

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

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

But they should be a reward for:

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

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

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

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

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

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

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It is time to return the term 'Ponzi scheme' to the microfiche headlines of the 1920s where it belongs.  To do so, regulators must start regulating and courts must start finding banks liable.

Over the past year or so, the term “Ponzi scheme” has sadly become as common as “Let’s have lunch” or “Text me.”  Yes, these schemes are emblematic of good old greed and the over-exuberance and blind optimism seen in all markets, but they also illustrate a serious failure in our banking system.  With leading reputable banks at their side, Ponzi schemes have the means to grow, metastasize, and take hard-earned (often retirement) monies from hundreds of thousands of victims.  Change needs to come in the form of enhanced regulation and the courts’ willingness to hold banks accountable.

One notable example is the case of an online Ponzi scheme called ADSURF.  Participants in this scheme were told in compelling YouTube videos, religious-type rallies, and internet ads that they could earn money by simply surfing the web.  When it sounds too good to be true, it is too good to be true.  All ADSURF was doing was recruiting new participants to pay into the scheme; this allowed the organizers to profit wildly while the unlucky newcomers got left holding the bag—just like all good Ponzi schemes.  

Contrary to core compliance requirements recently expanded and tightened in response to funding made available to the 9/11 terrorists, Bank of America placed itself at the heart of the ADSURF Ponzi scheme.  With the help of Bank of America, the ADSURF scheme went on to victimize over 100,000 participants who lost hundreds of millions of dollars.  Bank of America was privy to a slew of information that inexorably led to the conclusion that ADSURF was one big scam:

*         ADSURF was the brainchild of Thomas Bowdoin, a convicted felon with a history of securities fraud violations and failed business ventures.

*          ADSURF sold no products or services, held no intellectual property rights, and had no successful business professionals in management or on its Board.

*          ADSURF had no colorable, legitimate means to produce the massive profits (365% per year) Bowdoin and his co-conspirators promised investors.

*          ADSURF also lacked the means to legally generate the tens of millions of dollars a month flooding its tiny office—a former floral shop—in the small town of Quincy, Florida.

While unthinkable just a few years ago that one of the nation’s largest and most respected financial institutions could act so irresponsibly, their conduct is sadly consistent with a range of lax business practices.  A corporate culture that placed increased profits, seven-figure bonuses, and a higher stock price above sound banking judgment—this is the same culture that caused the Bank’s near-failure last fall (requiring a $45 billion dollar federal bailout because they were deemed “too big to fail”).

It is time to return the term “Ponzi scheme” to the microfiche headlines of the 1920s where it belongs.  To do so, regulators must start regulating and courts must start finding banks liable for knowingly assisting Ponzi schemes and other obvious fraudulent schemes.

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"It’s time to stop protecting the banks”

Ponzi schemes seem to be everywhere these days. Yes of course, there is Bernie Madoff and upwards of $50 billion he stole from the rich, the famous, and scores of charities and philanthropic foundations. But Madoff was hardly alone. There are plenty of lunch bucket schemes robbing hard working middle class people around the country.

On Long Island, convicted felon Nicholas Cosmos (no not Kramer from Seinfeld) fleeced firemen, municipal employees, and blue collar workers of likely $400 million claiming he was putting their money in high interest bridge loans for construction projects. Nope. He was instead lavishly spending those hard earned dollars and speculating on high risk commodities trading.

Where did he deposit all that money? Bank of America.

In another scheme operated from Quincy, Florida, another convicted felon, Andy Bowdoin, had the clever idea to pay people to “surf” the Internet. But what they were really doing was operating a multi-level marketing scheme, which had no actual investments and paid participants for not “surfing the web” but signing up new participants. ADSURF fooled over 100,000 people hoping to earn a little extra money from home in an economy where jobs are often hard to come by.

Where did he bank: Yep. Bank of America.

All these schemes need a bank to thrive: a financial institution accepting deposits and funneling monies to the schemers and their confederates. Victims think the scheme is legitimate when they can wire transfer their “investment” to Bank of America.

But the law and Judges almost without exception shield banks from liability in connection with a Ponzi scheme. In most cases the perpetrator of the scheme is gone (sipping rum drinks on some distant island) or in jail awaiting sentencing. Victims look to the bank. However, even if they can establish the bank had actual knowledge of the Ponzi scheme and had “violated its own internal policies and repeatedly violated the anti-money laundering provisions of the Patriot Act”, the bank will not be held liable.   Mazzaro De Abreu, et al. v. Bank of America 525 F.3d 381 (S.D.N.Y 2007).

The legal hurdles victims of a Ponzi scheme must surmount make it nearly impossible to hold the bank liable regardless of their assistance to the fraud.

To be sure, the banks should certainly not be responsible for every bit of illegal conduct flowing from monies held in deposit. But when the bank takes affirmative steps to help the scammers they must be held liable. They cannot gain fees and other income by sponsoring the scheme – without the risk of liability.

If the courts get tough on the banks they will be more vigilant and Ponzi schemes will be shunned to the back alleys of the financial, system where they belong.

There – they are less likely to grow and ruin the financial lives of so many thousands.

*Steven Berk is currently counsel to victims of Ponzi schemes who have filed cases against Bank of America for their alleged substantial assistance to perpetrators of these schemes.

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