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

Princeton’s football team is having a miserable season.  1-9, tied for dead last in the Ivy League, tied with the perennial cellar-dwelling squad from Columbia.  To improve next season, Coach Surace might just want to recruit some of those gutsy “occupy” Princeton folks who took on the likes of JPMorgan Chase and Goldman Sachs – the banking equivalents of Ray Lewis and Ndamukong Suh.

These “occupiers” dressed in business attire and politely chatted up the recruiters, seeming like no more than innocuous and wide-eyed prospective employees.  However, once the sessions began, they performed the now-famous (or infamous) call and answer style protest which has become a trademark of the occupy movement.  The message was simple: a career on Wall Street is not the only career path worthy of a Princeton student.  Bright  young minds should not waste their talents on an industry that gives nothing back to the larger community.  The fringers were lockstep with Princeton’s hallowed motto:

Princeton in the nation’s service and in the service of all nations.

Will this confrontation affect next quarter’s profits?  Probably not.  Will they directly put an end to undesirable, unethical, and – ultimately – unwise lending practices?  Again, probably not.  But maybe this event, coupled with nagging frustration across the country, will signal a tipping point to the prescient among the Wall Street gang.  It is beyond the fringe, it’s soon to be Ivy League graduates – future government leaders and business titans. 

In the worst job market in decades they are willing to say “no.” No to a certain six figure salary and a platinum American Express Card.  No because they stand for principles.  Will JPMorgan Chase and Goldman Sachs find other candidates to work a 20 hours a day looking for some momentary statistical anomaly in the Forex market that when leveraged 100 times will yield a nice return on investment?  You bet.  But maybe, just maybe, if the courage shown on Princeton’s campus is exported to other leading colleges, attitudes might just change.  And the Occupy Wall Street movement will in fact have accomplished something real and lasting.

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Groupon’s I.P.O. promises to be one of the biggest Wall Street events of the year.  Initially pegged at a $30 billion valuation, it may float (okay sink) to as low as $10 billion.  A $20 billion swing?  That’s real money.  Was it a simple misreading of the market that led to this error?  What about a typographical or clerical error?

Nope, it was old school accounting shenanigans; namely deceptive and misleading accounting practices.  “Hey cut them some slack, they are new and inexperienced and too busy creating a new market.”  Yeah, well their underwriters, grown-ups you've heard of like Goldman Sachs, Morgan Stanley, and Credit Suisse— they should know better.

Wrong.  They overlooked glaring and large-scale improprieties in Groupon’s methodology.  Specifically, Andrew Sorkin writes that Groupon used a made up accounting gimmick called Consolidated Segment Operating Income that allowed the company to account for income without accounting for several expenses.  Hmmmm….  The underwriters let that one slide too.  Fortunately, however, the SEC (the post-Madoff SEC) picked up on the move and Groupon has since amended its accounting procedures.

What’s really going on here?  “There’s a ton of money to be had,” according to Lynn Turner, a former chief accountant at the S.E.C.  Forget Groupon for a moment; the underwriters, who used to play an important role in only financing companies whose books were in line and whose financial stability was credible, have turned into “just a sales and marketing agent” (to quote Mr. Turner again).  And you can be sure, regardless of Groupon’s final valuation, all of the underwriters stand to add quite a substantial sum to their bottom lines.

Groupon is great.  And they may still revolutionize the interaction between online and brick-and-mortar businesses, but do it the right way.  No need to rely on what are nothing more than cheap carnival tricks.

Assisted by Zachary A. Kady

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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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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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I wonder what the jury was thinking?

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

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

-          Wall Street Journal, March 24, 2011

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

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

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

Assisted by David Martin

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

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

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

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

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

Assisted by David Martin

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

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

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

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

The tippee?  None other than the infamous Raj Rajaratnam.

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

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

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

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

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A light-hearted, but pertinent clip to start this latest entry:

The New York Times reported  earlier this week that scores of high level executives on Wall Street are once again circumventing the spirit of the law in search of a quick buck.

As Mr. Deeds so pointedly asked, “When you were kids, did you dream about becoming a savvy investor one day; who would think with his wallet instead of his heart?”  A central tenet of the financial reform of the past few years was to put executives’ interests closer in line with investor interests to encourage a profitable, but safe, investment climate.

Hedging is a common and financially wise move when betting on the fluctuation of the markets. However, Goldman executives, as reported in the Times, have been hedging against their own company, placing bets on the stock’s stagnation, limiting risk associated with plunges in stock value, and even betting against quick growth.  While this is a wise move for these executives’ personal portfolios, it does not instill confidence in the investor who would like to think those working at an investment bank trust in that bank’s ability to succeed.

For heaven’s sake, Pete Rose received a  lifetime ban for betting for his own team, shouldn’t there be some repercussions for some of the most influential investors in the world betting against – or at least only extremely cautiously for – their own firm?

We call on the SEC today to tighten up these rules.  Close up the loophole allowing financial executives to hedge their deferred compensation.  No doubt they will find another way – but government must stand vigilant in its effort to protect the general investing public and that means proceed by all deliberate measures to ferret out and cease efforts that challenge both the spirit and letter of the law.

Assisted by Zachary Kady

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If they say it’s not about the money, it’s about the money.

Match the profession with the corresponding average salary¹:

Job:                                                                              Salary:

A. Clinical Lab Scientist                                           1. $40,754

B. Firefighter                                                               2. $39,570

C. Paramedic                                                             3. $58,876

D. Average Goldman Sachs employee                 4. $45,638

E. Social Worker (w/ Masters Degree)                  5. $43,564

F. College Professor                                                 6. $498,246

G. High School Teacher                                           7. $55,135

H. Nurse                                                                      8. $56,268

What’s the only match you can be sure of?  Yep.  The Goldman employee.  Over ten times the salary of a social worker, firefighter, and even a college professor.  An average Goldman employee makes more than the seven other cited professions combined.

The magnitude of this disparity is telling and chilling.  It tells us what we value and who holds the power in our society.  And thanks to the hard-working folks on Main Street who bailed out Wall Street including Goldman (ok indirectly – but bailed out nonetheless) to the tune of $700 billion “the beat goes on”.

High School teachers and nurses will never claim top salaries, but they deserve some recompense for funding the current pay scale on Wall Street.  Why not base pay on job creation instead of gambling (oops I mean “trading”).  How ‘bout a little shame fellas?

Eliminate over-complex financial instruments and temper the inherent cronyism that governs its hiring policies.  As long as connections trump merit and massive salaries eliminate accountability, financial institutions will be ruled by greed and greed alone.  Isn’t it time for a little fairness to creep into the equation?

(ANSWERS: A8; B4; C2; D6; E1; F3; G5; H7)

¹ Statistics according to www.payscale.com and this article from Bloomberg.

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Yesterday SEC Inspector General David Kotz called the timing of the SEC’s recent lawsuit against the infamous Goldman Sachs “suspicious,” but this statement should be viewed in context (see WSJ story).  Yes, it coincided with the release of Kotz’s “scathing” report about the Commission’s handling of the Stanford Ponzi scheme.  And yes, I have been critical of my former colleagues at the Commission in the past. From my recent experience they can be plodding and overstaff even the smallest of matters (it’s not hard to see how they missed Madoff and Stanford).  But this most recent claim of “suspicion” is really rather petty and belies the facts.

First, the case against Goldman was bold and creative.  Perhaps it was akin to a makeup call by a sports referee.  (Missing Goldman’s more flagrant fouls over years, they frustratingly called a foul for a rather convoluted deal that touched on Goldman’s often duplicitous conduct that has made it the most powerful player on Wall Street).  But the result was swift and decisive.  Goldman quickly agreed to pay $550 million.  Over a half a billion dollars – even by Goldman standards that is nothing to sneeze at.  So I say: so what that the case was brought on the eve of another “scathing” report by Mr. Kotz?

Second, the new enforcement chief, Robert Khuzami, is a tough former federal prosecutor who needs more time to assemble his team and begin changing the culture of the enforcement staff.

Third, and most importantly, the SEC alone cannot both police and set the ethical tone for the entire financial sector.  Let’s not forget the role of the banks (who provided safe havens and substantial assistance for Ponzi schemes), accountants (signing off on the value of worthless assets to the tune of many, many billions), and the rating agencies (AAA ratings for Subprime Debt – how wrong were they?).

So Mr. Jonathan Kotz, Inspector General, let’s not issue reports merely to conclude conduct was “suspicious,” which simply undermines the progress of the Commission.  If you have something bring it on, otherwise let your colleagues focus on the hard work ahead.

Assisted by David Martin

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We can thank Krugman and Schapiro for directing attention to these practices, and the next step is to intervene.  Main street has borne enough of the burden caused by the me-first, profit-seeking attitudes of these companies.

In Monday’s New York Times, noted economist Paul Krugman’s Op Ed piece draws attention to the proliferation of high-speed trading by the elite on Wall Street, notably Goldman Sachs.  Using high-speed trading, Goldman Sachs has already made millions trading stocks.  Yes, trading stocks.  Not financing infrastructure or lending to startups developing new or better technologies.  Just trading.  In a related story, SEC Chairwoman Mary Schapiro got it right when she recently called for elimination of the practice of ‘flash’ trading.  While the two concepts are subtly different, the net effect is the same for main street: the short end of the stick.  For every dollar made on Wall Street, main street more often than not loses a dollar.

Disturbingly, the same financial institutions we spent billions of dollars to save from bankruptcy mere months ago are victimizing taxpayers yet again.  We can thank Krugman and Schapiro for directing attention to these practices, and the next step is to intervene.  Main street has borne enough of the burden caused by the me-first, profit-seeking attitudes of these companies.  Identifying and eliminating unfair stock market practices is an essential step toward fairness.

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

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