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

File this one under “no good greed goes unpunished.”

Well, at least this greed won’t.  Today, the Department of Justice will file a series of criminal complaints against former Credit Suisse traders.  The traders are accused of exaggerating the value of asset-backed securities in the days leading up to the financial crisis.  (In fact, some are already planning to plead guilty—there must be some smoking-gun evidence.)

I’m not sure which is more revolting, the amount of the traders’ exaggeration (a cool $2,850,000,000) or the motive behind it.  You see, at Credit Suisse and other Wall Street banks, bonuses are calculated based on the investments attracted by a trader—his “portfolio.”  The bank receives commission on the investment; the trader receives a bonus in some proportion to his portfolio.  These brilliant traders realized that by overstating the value of securities, they could dupe investors into sinking money and reap the benefits come annual bonus time.  “It's genius, Freddy.  Here comes Ferrari number three.”

Pessimistic about human nature yet?  Let’s not go that far—these were just a few bad apples—but could there be a clearer rallying cry for regulation of Wall Street bonuses?  Heck, John Dillinger only robbed banks of a few hundred thousand dollars over the course of his “career,” and they created the FBI to catch him.  I’m no economist, but I’m pretty sure $3 billion today is worth a bit more than $300,000 in the ‘20s.

Look, I’m not proposing we create a new bureau.  In fact, we already have.  Elizabeth Warren proposed it, Richard Cordray leads it, you know…  The Consumer Financial Protection Bureau.  That’s right, who is more suited to regulate and oversee corporate bonuses than the bureau founded to protect consumers?  President Obama was adamant about his commitment to consumer protection during his State of the Union, and an example like these Credit Suisse morons—er, traders—shows how negatively the incentive for bonuses can impact Main Street.

Hopefully Cordray and the CFPB will see the writing on the wall here, but in the meantime, kudos to the DOJ for their diligence.

Assisted by David T. Martin

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The press recently reported (click here for the WSJ story) that DOJ is joining the investigation of S&P for its shady practices of rating the very folks who pay its bills. Below is what I imagine to have transpired in an initial conversation between investigators and S&P officials.  

S&P Vice President for Compliance: Come in guys.  Sorry the coffee is cold and the pastries are a bit stale.  We’ve been expecting you for, well, the last few years.  Were the directions we gave you a little tough to follow?  Should have used Google maps?

DOJ Prosecutor: No. It’s all good.  Frankly, we were going to give you a pass (wink nod).  Just too complicated.  We like easier cases.  But then you went ahead and downgraded US Treasury Bonds.  That did not play well at the home office. 

S&P Vice President: Yeah, I guess it was not the time to get righteous.  So how long will your team need to be around?

DOJ Prosecutor: I guess that depends. Now that the press is on to the investigation, we have to make a show of it.  And look, from what we know, you guys made over $2 billion (with a b) dollars rating these CDO; that’s a little too much to ignore.

S&P Vice President: And how bout the SEC?  What about their investigation?

DOJ Investigator: Oh, those guys? Ha! Trust me, they need all the help they can get.

S&P Vice President: Do you think anyone is going to jail?

DOJ Investigator: Nahhhh.  We get it.  You guys bend over backwards for the Wall Street firms so that your friends over there are happy and well fed – and in return when your kids near college you move over to take a lucrative seat on the other side of the table.  And so it goes.  (The old you scratch my back, I’ll scratch yours).  If we were going to prosecute folks for that kind of behavior, Wall Street would be empty.  We’d have to let out all the drug dealers and addicts to make room in the prisons.

S&P Vice President: Hey thanks, we’ll bring in some fresh coffee … and if your daughter needs a summer a job, make sure to use my name.

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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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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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What is the Inspector General of the SEC thinking?  Recommending David Becker be investigated by the DOJ for fraud?

Not only is the recommendation absurd under the publicly disclosed facts, but it sends a deep chilling effect across Washington and among those who might consider pursuing a position in public service.  I don't know David Becker well, but I have friends who have worked closely with him.  I understand him to be a person of the highest integrity.  In this particular situation he seems to have acted in a manner that is exemplary, hardly meriting investigation and the expenditure of limited government resources.

The facts.  David’s parents were Madoff investors, earning $1.5 million.  They were not fund managers or insiders, they made money as unwittingly as the scheme’s victims lost it; there is no allegation they had any idea they were invested in a multi-billion dollar Ponzi scheme.  They did not recruit others to the scheme.  When they recently died, David and his brother stood to inherit the funds.  But as General Counsel to the SEC he was right smack in the middle of the Madoff inquiry.  Immediately aware of the potential conflict and an appearance of impropriety, he did the right thing.  David alerted not one, not five, but seven officials at the SEC, including Chairwoman Shapiro.  They cleared him to continue his work for the Commission, where he worked for no more than 10% of what he received in his work in private practice.

Notwithstanding his decision to immediately come clean, David is being investigated and it will cost him thousands to defend himself, not to mention the significant aggravation he and his family must endure.  Can't Inspector General Kotz find something better to do?  The role of the Inspector General is to ensure compliance and ferret out impropriety, but here something is missing.  Someone is abusing the process.  My concern is not just for David Becker but for the thousands of high quality professionals who may pass on public service because it just ain't worth it.

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Sufficiently confused?  Decidedly undecided?  You are not alone.  TCO opined a few months ago—tentatively—that the merger is a good thing for consumers, but the Justice Department disagrees.

Every coin has two sides, though in Washington we often see one side simply screaming “Headsheadsheads!” while the other side screams “Tailstailstails!”  The louder voice prevails; meanwhile the true value of the coin is left ignored.  The fight over the AT&T and T-Mobile merger, which would give AT&T over 40% of the wireless communications market share, is no exception.

I mean, of course the merger will benefit consumers by consolidating companies, making production more efficient and therefore driving down costs.  But of course it will decrease competition, effectively creating a duopoly of AT&T and Verizon, which will drive up prices.

And of course it will hurt the job market, eliminating the inefficient overlaps between the two companies.  But of course it will help the job market; otherwise why would the majority of labor groups support the merger?

Customer service, at least, will improve as AT&T is able to operate on a larger scale and allocate a more efficient group to assistance.  But of course customer service will suffer; after all, what incentive is there for AT&T to provide higher-quality customer service if there is only one viable wireless alternative?  (And have you ever tried calling Verizon for assistance? Not exactly a friendly substitute.)

Sufficiently confused?  Decidedly undecided?  You are not alone.  TCO opined a few months ago—tentatively—that the merger is a good thing for consumers, but the Justice Department disagrees.  Yesterday the Department filed an antitrust suit against AT&T, the United States’ second-leading wireless company (for a copy of the United States’ Complaint click here).

The reality is the DOJ will use the legal action as leverage in merger negotiations.  “If you agree to terms X, Y and Z, we will drop our suit and allow the merge to proceed.”  But until that day, we’re left guessing and arguing as to the true pros and cons of the merger.

Left guessing.  Of course.

Assisted by David Martin

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All those billions in profits, particularly when it comes during a downturn, certainly raises suspicion and, in the case of Goldman Sachs, the indisputable leader on Wall Street, government scrutiny as well. First the threat of regulatory scrutiny came from the SEC. But, as is too often the case, the SEC’s appetite for enforcement can be sated with a mouthful of low hanging fruit. After just a few weeks of brinksmanship, the SEC was satisfied with a fine/judgment of $550 million. Playing the victim, Goldman bemoaned the size of the settlement, but more than likely behind closed doors they were thrilled with the result and happy to pay what is, for a firm of Goldman’s size and profitability, chump change.

But now comes the “Main Event”. The Department of Justice and criminal subpoenas. Ouch. Nothing like the threat of jail to get you focused. The Wall Street Journal reports that DOJ will likely issue subpoenas to Goldman executives in an effort to learn more about the firm’s mortgage-related business.

All of this following a cruel April for Goldman Sachs where The Senate Permanent Subcommittee on Investigations issued a 639-page report that accuses the powerhouse firm of making bets against the housing market, misleading investors, and (here’s the shocker) putting its own interests ahead of those of its clients. The Law Blog reports that Senator Carl Levin has called for the criminal investigation of Goldman Sachs - A refreshing reminder to MainStreet that there are still those willing to hunt the cause of ruin. Expect DOJ to be tougher than the SEC, especially with the power of criminal charges in its arsenal.

A DOJ investigation is a sobering experience for all involved. Lanny Breuer, head of the Criminal Division, and his team are no pushovers. They will not be intimidated by Goldman or its phalanx of white-collar specialists; but I wouldn’t hold my breath for any indictments, Raj Rajaratnam-style. As far as I know, DOJ has no wiretap recordings of Goldman partners scheming illegally and blatantly. These guys are just too damn smart. And the last time I checked, smart, savvy -- and throw in greedy for good measure -- are not crimes.
 

Assisted by Zachary Kady

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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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An important securities law story went underreported last week: The SEC ordered the State of New Jersey to cease and desist fraudulent activities related to the funding of its state pension plans. This marked the first time the SEC had initiated a securities-fraud case against a state.   The New York Times reported that from 2001 to 2007 New Jersey claimed in filings with the SEC to have set aside funds in a “benefit enhancement fund” in order to pay for new benefits for teachers and general state employees.

 In reality, the fund was a simple accounting trick – there was no money and no fund. The SEC did not impose monetary damages or penalties on the New Jersey government or any of the officials associated with the fraud.   Moreover, the SEC failed to act at all against the investment bankers who underwrote and managed the fund.   Hmmmmm?  While the SEC’s effort to protect the pension funds of state employees is surely admirable, why give the underwriters and bankers a free pass?  Enforcement efforts must have some teeth to them.  Name names and impose penalties that will hurt.  If not, pension assets will remain at risk.

Assisted by Zach Kady

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Last Thursday I posted an entry discussing DOJ’s investigation of Big Pharma and the possibility that this probe is the result of a whistleblower.  Since posting, we have been contacted by Mike Koehler at the FCPA Professor Blog who advised that parts of the Big Pharma investigation have been ongoing for years and are likely not the result of a Dodd-Frank whistleblower. Mr. Koehler’s blog offers considerable insight on the FCPA and his opinions are greatly appreciated.

 Despite the fact that DOJ’s current Big Pharma investigation was not spurred by whistleblowers, it may very well receive help along the way from informed citizens. We at the Corporate Observer remain vigilant in our watch for new Dodd-Frank era whistleblowers. Be sure to check in for more whistleblower updates as they occur.

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