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

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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This is a tough one to be sure.  The law favors the banks but we applaud the DOJ for trying.  It strains credulity that a sophisticated banker wouldn’t know what was going on with the flamboyant Stanford.  If banks are held accountable, the Stanfords of the world won’t exist, or at least cannot flourish.

As if a bad case of depression was not enough to delay a trial and no doubt a lengthy prison sentence to follow, billion-dollar Ponzi schemer, cricket player and nobleman (by bribe not birth), Sir Allen Stanford, is now—get this—claiming he has amnesia.  Yep.  Can’t remember a darn thing, nothing, nada, before his arrest in June of 2009.  Not the jets, not the wine, not all those billions. How convenient...  I think my kids once tried to claim this once when the kitchen window was mysteriously broken.  For this Allen you receive a second Corporate Observer Chutzpah Award.

But what’s even more interesting than Mr. Sanford’s latest tactic is the game being played by his bankers at SG Private Banking (Suisse SA), a subsidiary of the Swiss giant Societe Generale.  Turns out, they seem to also have a case of amnesia.  “Allen Stanford, hmmm… name sounds very familiar, can’t place him though, do you happen to have a picture?”  According to a recent article in the WSJ, SG Private Banking is being investigated by the Department of Justice for the vast assistance it provided Sir Allen.  Apparently, he had a secret numbered bank account at SG where he was able to tap directly into a hundred-plus million dollar account to fund his lavish lifestyle (that would be an understatement) and pay bribes to his Antiguan auditors and bank regulators.

You know those Swiss, they never said a peep, even though this stunk all the way to Basel.  The US Department of Justice wonders “what they knew and when they knew it.”  No doubt the bankers will say, “we were merely providing banking services.  How can we be expected to police and guarantee all of our customers?”  But it shouldn’t be that easy to avoid liability.

Think back to the 1920s when the likes of John Dillinger and Pretty Boy Floyd roamed the land “hitting” banks with reckless abandon.  Historians now surmise that many of these seemingly well-planned and courageous capers were “inside” jobs.  Someone (likely mob connected) opened the back door of the bank for these fellas or they were tipped off when money would be arriving and the guards would be on a smoke break.  That assistance, despite being subtle and carried out without a mask and gun, was nothing short of substantial given the circumstances.

This is a tough one to be sure.  The law favors the banks but we applaud the DOJ for trying.  It strains credulity that a sophisticated banker wouldn’t know what was going on with the flamboyant Stanford.  If banks are held accountable, the Stanfords of the world won’t exist, or at least cannot flourish.

Stay tuned.

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After the 2008 financial meltdown, former Federal Reserve Chairman and legend Paul Volcker gave the country simple advice: let banks do what they do best—or at least what the public expects them to do—bank.  That is, make loans to support long term growth and prosperity.  But what fun is that when you can trade and invest in esoteric financial instruments?  And in the process, make millions quickly and earn six, seven and eight-digit salaries, like your buddies at hedge and private equity firms.

The problem is twofold.  First, banks may lose big time and again be hat-in-hand looking for a bailout.  Have we forgotten that the bailout of behemoths Citigroup and Bank of America cost taxpayers billions and more seriously, almost took us all over the ledge with them?  Second, banks may become too distracted by the allure of trading profits and shift resources and their best people to the trading side of the bank.

Nevertheless, the banks are not going quietly into the night.  They lust for these potentially lucrative but no doubt volatile revenue streams.  In that fight, they are enlisting the highest-paid and most well-connected lobbyists in the land.  Their strategy seems to support a muddled patchwork of regulation that will not work and will necessarily enable banks to claim they are overregulated.  (Very clever fellas.)

I trust Mr. Volker completely.  He is his own man.  He is owned by no one; it’s time to heed his warning.  Keep it simple.  No trading by banks.  Period.  End of story.

Assisted by Arezu Hadjialiloo

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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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Let’s look at some of the details of JPMorgan’s acquisition of Washington Mutual from the FDIC. Warning: these new details may not be safe for children.

JPMorgan’s Purchase and Assumption Agreement dated September 25, 2008, contains a SIX PAGE INDEMNIFICATION SECTION. Indemnification shifts the risk. Guess who the risk was shifted to? Yep, the good old FDIC. They agreed to indemnify JPMorgan against virtually all risk involved with the deal.

Click here to read the entire Purchase and Asset agreement. For example on page 24 the FDIC promises to insure JPMorgan against practically all liabilities resulting from any WAMU misconduct…even costs for attorney’s fees. And don’t think for a moment JP Morgan is ignoring those provisions. As investors clamor for justice, JPMorgan hides behind the FDIC’s FIRREA process  while asking for billions of additional funds under the indemnification agreements (click here for a recent WSJ article on the subject). Is it too much to ask for JPMorgan to take responsibility; to take the good with the bad? Instead they appear to be gaming the system.

Franklin Roosevelt stated,

The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself

While Mr. Hochberg has claimed no “bad faith” he has not claimed “justice”. The WAMU stakeholder deserve justice, not a back alley deal designed to benefit one entity – JP Morgan – to to the detriment of all others.

Assisted by Zach Kady

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

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

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

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

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

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

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

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