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

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

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

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

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

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

Assisted by David T. Martin

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The SEC’s recent settlement with Citigroup wouldn’t even brush back Alex Rodriguez, so it’s certainly not scaring the world’s fourth-biggest bank into compliance.  If the banks’ reaction to recent regulation is any indication, Citigroup will just levy more fees on its unsuspecting customers to pay off the $285 million legal tab in a few days.

Ho hum…  Citigroup to pay hundreds of millions in a settlement related to subprime mortgage instruments.  The SEC crackdown is finally underway!

Yeah right.  Though $285 million is a big number on Main Street, in the executive suite of mighty Citigroup it is a rounding error, less than 8% of the bank’s $3.8 billion profit from Q3 alone.  Heck, Citigroup has probably paid CEO Vikram Pandit alone close to that amount over the years.

The lawsuit and settlement relates to Citigroup’s sleazy effort to take advantage of the market conditions resulting from the subprime financial crisis.  In a sentence, the banks loaded investment portfolios with risky-at-best instruments, neglected to inform their customers of the risk as they sank billions into the portfolios, then surreptitiously bet against the instruments themselves.  The more their investors lost, the more the banks won.

The outrageousness of this plan can be illustrated with an analogy to our favorite sport, baseball.  Consider Cardinals skipper Tony La Russa convincing thousands of fans to bet on his team in the World Series, not too difficult.  Once he’s holding the cash, he benches sluggers Albert Pujols and Matt Holliday and sneaks to Vegas, placing millions on the Rangers.  Got it so far?  Here’s the rub.  When Major League Baseball finds out, he’s fined a mere $75,000.  It's that blatant folks.

Banks like Citigroup have proven time and again that a slap on the wrist like this won’t change the trend towards greed and unimpeded profit-mongering above sound banking principles and just plain ethical conduct.  The SEC’s recent settlement with Citigroup wouldn’t even brush back Alex Rodriguez, so it’s certainly not scaring the world’s fourth-biggest bank into compliance.  If the banks’ reaction to recent regulation is any indication, Citigroup will just levy more fees on its unsuspecting customers to pay off the $285 million legal tab in a few days.  $1.00 to walk in the door of your local branch, $2.00 to use the restroom.  Oh, you planned to wash your hands?  Please insert an extra quarter.

More concerning than the mere slap on the wrist is that no regulation has been effectively passed and enacted since the crisis to prevent future transgressions.  Dodd-Frank has met the immovable object known as partisan obstinacy.  Moreover, the Volcker Rule, which would require banks to get back to doing what they do best—perhaps the only thing they can do effectively—which is loan money, is being watered down, bludgeoned and otherwise made an ineffective mess by Gucci-loafered lobbysts from the financial industry.  It's time to stand up to these shenanigans.  Mr. President, where are you?

Assisted by David Martin

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As unemployment continues at an uncomfortable nine-plus percent, you’d think Wall Street would share the pain and bonuses would be down.  Nope.  They don’t create jobs, they don’t add value. Instead they profit, they leverage, they figure out the spread and increasingly they use more and more risk to accomplish “profits” and bonuses.  But don’t listen to me; consider the recent words of Nobel laureate Paul Krugman:

What’s going on here?  The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is.  They’re not John Galt; they’re not even Steve Jobs.  They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.

Paul Krugman Op Ed, October 11th.

Finance a new bridge, a factory, a school that teaches engineering and science for a new generation of students entering the work place.  No; instead, we see newfangled derivative swaps, “quant trading”, a panoply of something called “synthetic derivatives”, and who knows what else?  The derivatives market hit a value of $600 trillion in 2008, and I regret to confirm that “T” in trillion is not a typo.  Sadly those newly minted Ivy League graduates want to make “bank” and they want to do it now.  No time for long term value investing or pedestrian returns of six to eight percent per year.  Heck, for these hot shots 6-8% per month is not enough.  Where will it end?

Wall Street: put people to work, and then collect your bonuses with your heads held high.  And stop trying to destroy any sensible speed limits and caution signs (such as the Volcker Rule).  Regulation keeps cars on the road. Without it we are doomed to repeat the mistakes of the last boom…

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You’d think banks would have a lot more to worry about than an unemployed octogenarian.  Perhaps a portfolio of worthless subprime mortgage securities?  Nope.  The government will bail us out.  How 'bout dwindling revenues in the face of a continued economic downtown?  No worries, we’ll just start charging fees for everything our customers do, from debit card transactions to writing checks.  Yeah!  And we'll add toll booths to the drive through lane at all our branches.

What is it that keeps bankers up at night?  The Volcker Rule of course; the simple and elegant solution to excessive risk in the banking industry: no proprietary trading.  Make your money the old fashioned way: good loans and fair services to consumers.  But taking multi-billion dollar debts each night in derivatives and various esoteric currency swaps?  Not anymore.  Not since you took us to the brink of depression and cost American consumers (and their children’s children) a boatload of money and in many ways the jobs of millions who remain unemployed.

So what’s the strategy of the banks?  Make the simple Volcker Rule as complicated as possible.  Leak it through your trade association, the American Banker, and let a phalanx of $1,000/hour lawyers from Davis Polk parse the rules and try to incorporate exception upon exception upon language that must be interpreted with sub-parts to the sub-parts.  And once that is accomplished?  Yep you guessed it.  Throw up your hands and say, “Overregulation.  It’s too complicated.”

It’s actually rather simple.  Banks want to trade instead of loan money because in the short run trading is more profitable.  Those profits result in an increase in the banks’ stock price (thereby increasing the value of options and restricted stock for executives) and in higher bonuses (can you say Porsche Panamera, summers in Nantucket).  But with that short run potential comes immense risk; risk the banks have already shown they cannot handle.

And the answer from Paul Volcker, who is feared because he is respected and beholden to no one, was rather simple too: “No.”

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Today, TCO brings back Quick Links, which keeps our readers updated in the world of consumers.

UBS, one of the largest banks in the world, had one of its employees arrested for allegedly losing over $2 billion, which would essentially eliminate the company’s quarterly profits.  The New York TImes' DealBook asks the question we all should: Why are standard banks still allowed to double as investment banks?  As TCO has called for, let’s heed the brilliant Paul Volcker and get banks back to doing what they do best—banking.

The New York Times also reports that the British and Swiss crackdowns on the financial and banking industries have been the harshest.  Which is as it should be, since four of the world’s eight largest banks—Royal Bank of Scotland (#1, UK); Barclays (#4, UK); HSBC (#5, UK); and UBC (#8, Switzerland)—are located in one or the other.  Now if only the United States—Citigroup (#7); Bank of America (#10); and JPMorgan (#12)—would follow suit.

Last but not least, Champion of the Consumer, Elizabeth Warren is running for Senate.  She already has the Corporate Observer’s endorsement.  Lest I take anything away from her eloquent message, I’ll leave it to Professor Warren to explain her platform here.

Assisted by David Martin

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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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 A “Private Right of Action” Must Be Added to the TARP Legislation

TARP monies must not become a slush fund for the ethically challenged.

On July 21, Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program, released his office’s quarterly report.  To his credit, he demonstrates the kind of transparency taxpayers who are footing the bill deserve.  Notably on page 5-6 of the report, he identifies and describes in some detail 35 investigations brought by his office.  He also describes in depth two matters that have already been publicly filed.  Good stuff indeed.  But the magnitude of this program (trillions of dollars), the profound seriousness of this endeavor to our economy, and the hopes of future generations demand more. 

A far greater degree of enforcement must be available. 

In just a few months, Mr. Barofsky has received 3,200 tips.  This means trouble is afoot as many feared. It needs to be “nipped in the bud”.  Confidence must be maintained and the TARP monies must not become a slush fund for the ethically challenged.

We recommend Mr. Barofsky seek additional funding for more staff and investigators.  The Administration should also request that Congress amend the TARP to allow a “private right of action."  Private attorneys ferreting out fraud can make a real difference.  We need more than 2 filed cases to serve as a deterrent, protect the essential mission of the TARP, and limit the cost to taxpayers.

We cannot afford to wait.

The More Transparency the Better

We applaud the report as a small step in the right direction.  Much has been made of the $27.3 trillion that the report warns could end up as the overall cost of resolving the economic crisis.  Although this figure represents a worse-case scenario, the magnitude of that amount should alarm taxpayers and regulators alike.  To avoid coming close to that number, the Treasury must heed the recommendations of the report by: (1) enacting realistic mandatory transparency requirements; and (2) opening its own methods and decisions to the glare of public scrutiny.

As Justice Douglas said in framing the Securities Act of 1933, in the midst of the Depression, “Clean Air is the best disinfectant.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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