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

Richard Cordray is wasting no time at the Consumer Financial Protection Bureau.  Forget Senate confirmation, Director Cordray has consumers to protect.  With him at the helm, the CFPB finalized its amendment to the rules governing remittances from the United States.

For years, Americans wishing to send money to relatives living abroad have been victimized by predatory and under-regulated companies that charged an arm and a leg—often without disclosing the true rates.  No more.

The Dodd-Frank Bill allowed for the CFPB to establish renewed rules on remittances, and (a few years later) the rules have arrived.  This is no fledgling industry—over $400 billion dollars in remittances are sent each year.  Following the rule changes, on every remittance of more than $15.00 companies will be required to disclose:

• Exchange Rate;
• Fees Charged; and
• Net Money to be Delivered.

The rules also enhance company liability for remittance errors and mandate a 30 minute window for a customer to cancel their remittance at no charge.  Before the rule changes (which do not go into effect until January 2013), many money senders had no idea how much money truly arrived in their relatives' hands in South America, or Asia.  Banks and other remittance-sending companies charged exorbitant rates and devalued the dollar, shortchanging the oft-unwitting customer.  Talk about the American Dream—emigrate to the United States, make enough of a living to send some money back home to your spouse and parents, and have 40% of it stolen by the greedy banks.  What could be more American?

Though we are disappointed that we have to wait a year until the rule changes go into effect—how long does it take to draft a disclosure and retrain a few employees?—this is the result of no small effort.  Organizations like Appleseed, a group dedicated to seeking social justice, have worked hard in support of this rule and are to be commended for the result.

We look forward to additional efforts by the CFPB in furtherance of consumer protection and fairness.  The Bureau continues to seek comments on the final rules at its website.

Assisted by David T. Martin

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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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Regulators in bed with the regulated: ho hum, business unfortunately as usual.

This time, the CFTC is investigating the CME Group for their “oversight” of MF Global, which recently lost $1.2 billion in about half the time you can say: “Commodity Futures Trading Commission.”  Head of MF Global and former New Jersey Sena-governor Jon Corzine says he “can’t find” the money.  Folks, we are not talking about the pocket change we have in our pants pockets.  Meanwhile the CME, aka the Chicago Mercantile Exchange—MF Global’s primary regulator—says blithely the books have been cooked.  “Really,” as if that tells us anything.

So a dollar short and a day later, the CFTC is going to investigate the CME and its failure to—well—regulate.  The CFTC is also investigating the dozen-plus largest futures brokers for similar improprieties, yet another example of regulatory bodies swinging the bat with the ball already in the catcher’s mitt.

“Fellas, to hit the ball, you must swing earlier and at pitches you can hit.  Are we asking too much?”  Regulators come out of the industry they regulate.  These guys are in the industry, they should know, or at least be able to find out what’s around the corner.  A regulator is not akin to a prosecutor who comes in like a baseball closer to finish the game; a regulator is the Commissioner.  He or she sets the rules of the game and then lets them “play ball.”

I understand that global financial markets move at hyper speeds.  But regulators, jump out of bed with the regulated and spot the next issue before it surprises us on page A1 of newspapers around the globe.

Assisted by David T. Martin

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As a trial lawyer, my world operates on the adversarial system.  In other words, my job is to clobber my opponent.  I have a duty – yes an ethical duty – to “zealously” advocate for my clients’ interest.  Zealously, with ardent passion and enthusiasm and all the skills I can muster.  But that duty must be exercised within the rules governing my profession.  For example, I have a duty of candor to the court that trumps my role as an advocate.  Put simply, even if it is inconsistent with my client’s interest, I must always be honest with the Court.  Similarly, I am required to act professionally and with civility toward my opponent.  So when the bell rings, no low blows or dirty tricks, and when the round is over it is over.

Seems to me politics is similar (or it ought to be).  Democrats clobber Republicans and Republicans in turn clobber Democrats.  They are adversaries.  Okay, I get it.  It has worked that way for over 200 years.  It may not be perfect, but it’s the best we got.  But like my legal duties, there must be some limitations to the “clobbering” among the parties.  Most importantly, the losing party in an election must allow the winning power to govern.  They must respect and follow the system.  Yes, you have to stand when the President enters your chamber to present his State of the Union address.

Importantly and here is my point (finally): If the winning party seeks to have a nominee confirmed, the losing party can’t just say no.  Their review should be limited to a searching and complete review of a nominee's credentials.  But the confirmation process cannot be a partisan free-for-all – where the goal is to amend or overturn legislation – which disrespects the will of the people and effectively overturns the election results.  The winning party is entitled to govern.

That leads us to the case of Mr. Cordray.  In every way, he is qualified to head the CFPB.  Former law clerk for Supreme Court Justices White and Kennedy; former Attorney General for the state of Ohio; heck, he even won Jeopardy five times.  Indeed, Republicans do not disagree about his background.  But they have stated they will vote against any nominee unless the Dodd-Frank legislation is rewritten.  In essence, they are holding his confirmation ransom.  That is just not the way it is supposed to work.

A party wins the election and they must be allowed to govern.  If they fail to do so, vote them out of office in two years or four years, but allow them to fulfill the mandate of the electorate.

As President Obama recently said:

Does anyone here think the problem that led to our financial crisis was too much oversight of mortgage lenders or debt collectors?

We need to give Dodd-Frank and Richard Cordray a chance to govern.

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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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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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Today the Corporate Observer welcomes guest co-author David Martin, Office Manager at Berk Law and Director of TCO. Please enjoy.

"Insanity: doing the same thing over and over again and expecting different results."
                                                                           - Albert Einstein

You reap what you sow.  Lazy farming yields poor crops.  Lax practices train an undisciplined basketball team.  A poor diet leads to health issues.  The failure to regulate will inevitably lead to even more dangerous market disruptions and crises.

That’s “crises,” plural, because we’re headed for another one if the Commodity Futures Trading Commission continues to delay regulations on over-the-counter derivatives trading.  Though the Commission’s ability to meet the July 16th Dodd-Frank rules deadline has long been doubted, yesterday the CFTC officially announced it will not meet the statutory deadline.  Merely a year after the passage of Dodd-Frank, the lobbyists have retaken the highest hill on the battlefield and the regulators are pinned down, unable to protect Main Street.  Main Street is left with nothing in its collective cookie jars to save a financial sector wired on greed and designed to maximize risk and profit over long term growth and stability.

Michael Lewis’ The Big Short superbly chronicles the role played by unregulated credit default swaps in fueling risk to a degree never contemplated by the regulators or markets and spurring a financial crisis that brought our economy to its knees.  Investor faith collapsed, financial institutions went from unassailable to insoluble in weeks; in some cases overnight.  Some of the most venerable names on Wall Street disappeared, others became irrelevant, and we saw exactly how quickly in the age of the Internet and instantaneous trading that not just a market, but an entire economy could be crippled.

As devastating as the crisis was—nationwide unemployment is still at 9.1 percent—we survived, barely, and had the opportunity to return from the brink stronger and smarter.  The proverbial “fool me once, shame on you” situation; instead, we are headed towards “fool me twice, shame on me” territory.  The lobbyists and future private-sector employers of the regulators have efficiently forced the CFTC to push back its estimated date of rule finalization.  Meanwhile, if I’m heading up a bank or financial institution today, my takeaway is, “Don’t take the regulators seriously.”

A year ago, the regulators had all the momentum and political capital in the world.  On the heels of a financial crisis that pitted every average American against the financial institutions that created the mess, rules were necessary and urgent.  Sadly, that momentum has evaporated quicker than the Miami Heat’s, and it continues to dissipate—pun intended.  Those creators of “synthetic derivatives” and other newfangled instruments that leverage the level of risk to extraordinary heights are back, and with this delay they will surely lap the field, leaving regulators in the dust.

The mission of the regulator is not to please the industry it regulates (that’s called a trade association).  It is to regulate, to be an irritant, to ask tough questions, to be obstinate at times, to trust in some cases, but to always verify. 

It may already be too late, but the CFTC must tighten their chin straps and take the field.

Post co-authored by David Martin and Steve Berk

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Professor Warren is straightforward, persuasive and charming. And this was no friendly audience.

I had the good fortune of hearing Elizabeth Warren speak this morning in Washington, DC at the US Chamber of Commerce’s Center for Capital Markets Competitiveness.  The Center’s byline is “Ensuring Competiveness in a Post-Regulatory Reform Environment”.  I had never seen Professor Warren before in person.  First impression: She was smaller than I thought.  Heck, with all that publicity that has been swirling around her for the past two years, I thought she’d be ten feet tall -- or at least as tall as six foot, eight inch Baylor basketball star Brittney Griner.  Nope, she’s rather slight and academic.  Second impression: She is really good; straightforward, persuasive and... well… charming.

And this was no friendly audience.  Professor Warren followed Congressman Spencer Bachus of Alabama to the lectern.  He is the Chairman of the House Financial Services Committee.  The Congressman rather derisively referred to Professor Warren as “a nice lady”.  He then went on to suggest she and her agency -- the CFPB -- were omnipotent and would destroy competitive markets, while imposing a Maoist (that’s no typo) style of “total regulation” on the capital markets.

Professor Warren did not take the bait.  Instead she decided to stake out a place on the high road, a place she seemed both familiar and comfortable traveling.  To that end, she simply ignored Congressman Bachus’s efforts to mischaracterize her position and attack her character and gender.  She emphasized instead that her decision to reach out to the Chamber and speak at this particular conference was in furtherance of finding “common ground”.  Nice.

That common ground began with the notion that all sides favored one thing: Competition.  Everything is done to promote competition.  To make sure competition is robust and fair, Professor Warren explained that a strong, consistent set of rules were essential.  No one benefits from market chaos where some participants are able to break the law.  As an example, she said, “let’s take the perspective of a baseball player who chooses not to take steroids.”  Regulation is simply that -- a set of rules that all market participants must follow.

Professor Warren’s remarks were grounded in common sense and we wish her luck.  Her main objective for the CFPB, which we applaud, is achieving some level of fairness and transparency for consumers in the purchase of financial products, from credit cards to home mortgages.  But the room was filled with skeptics who wanted none of it.  They believe all regulation is evil and only harms business.

My attendance at today’s event at the Chamber reminded me of the harsh reality that we have two teams in Washington.  Two sides, Democrat and Republican; left and right; conservative and liberal.  Call it what you like.  Despite her best efforts at finding common ground, between those two sides even the mighty Elizabeth Warren will not so easily succeed.

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For the smartest kid on the playground, it has been a tough few months.  First news swirled of Goldman’s clever idea to essentially bet against both the market it created and the investors it had enlisted.  All in the name of bringing “liquidity” to the market (so they said) and mega profits to the Street’s richest firm for yet another “financial innovation”.  However, the new, “we’re tougher than ever” SEC would have none of it and a settlement was reached costing Goldman $550 million (nothing that will rock this giant, but a half a billion dollars is still a lot of money).  On the heels of the settlement, ACA, a private Wall Street insurer, initiated a lawsuit over the same issue.

Perhaps related, perhaps not, Goldman made serious concessions to its critics by divulging the source of some of its revenue.  Specifically, Goldman has implemented new procedures to: (1) disclose the source of its profits; (2) increase transparency; (3) separate and clearly define the responsibilities of traders and investment bankers; and (4) publish a simplified balance sheet in addition to the balance sheet required under minimum accounting standards.  As part of the change Goldman will distinguish profits it earns investing on its own behalf from those earned for investors on investor accounts.  The hope is that this will dispel theories that the firm is making improper trades (or less gently “betting against it’s own customers”).

While the smart kid who seemed to run the schoolyard took a punch on the nose, he may have just learned his lesson.  The extent to which Goldman truly works towards transparency remains to be seen, but this initial good faith offering is a step in the right direction.  We can only hope that in addition to being a market leader in profits, they also want to be a market leader in the area of reform.  If so, others firms on the playground, large and small might just follow.

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At long last, the SEC has taken measures to electronically streamline the tips and complaints it receives.  Information, no matter how it is received by the SEC, will now enter a searchable and cross-referenced database that is to be ready for use by the end of the year.  Sadly, this constitutes a major change from standard operating procedure.  Notably, the SEC received multiple tips regarding Bernard Madoff’s scheme.  The commission launched two different investigations at separate SEC offices which were mutually unaware of each others’ efforts—the NEXT Madoff will not be so lucky.

Enforcement director Robert Khuzami has taken his title seriously, although as with every bureaucratic process it has taken some time.  Streamlining the SEC complaint process and the Dodd-Frank Bill’s whistleblower incentives allow for effective self-policing, which is essential in a field where (as previous experience shows) the SEC can’t possibly oversee every company and transaction effectively.

This shift in focus to efficiency and incentivizing self-regulation are a major step forward.  But the Commission must continue to vigilently maintain its commitment to a more practical, nimble and effective form of regulation.

Assisted by David Martin

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You ask: how can a firm provide unbiased audits to a professional client?  They can’t.  For any independence to be achieved there must be tight and narrow restrictions on the type of consulting services an auditor can provide a company.

The Wall Street Journal reports that the European Commission has launched consultations on proposals to regulate audit firms.  European regulators are rightly leery of the influence the “big four” hold in the financial world.  They are exploring programs that will prevent the possibility of overreliance on these firms.  Such reliance can result in more fragility in the market.  The strong Anglo-American presence in the auditing world is certainly not helping the Auditors’ case.

To put the significance of this discussion in perspective, the big four (Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG) provide 85% of auditing services to top companies in Europe.  What’s more, they also provide financial consulting services to the same companies they audit.  You ask: how can a firm provide unbiased audits to a professional client?  They can’t.  For any independence to be achieved there must be tight and narrow restrictions on the type of consulting services an auditor can provide a company.

If the financial disaster has taught us anything, it is that unbiased regulation—for example, audits—of the financial sector is integral to long-term stability.  The European Commission deserves our praise for tackling the issues surrounding these behemoth companies and endeavoring to loosen their grip on big business in Europe.

Here’s the tricky part:

The EU must avoid the potential dangers of loosening regulation in countries where it is already strong (France and the UK) in its attempt to codify rules across state lines. This is no easy task, but thankfully key ministers are already on board to help restore order to European business.

Will the EU pave the way towards greater accountability and transparency? It sure looks to be on the right track. Stay tuned for updates and please post your opinions on this important change in global business practices.

Assisted by Zach Kady

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Rumors abound (click here for WaPo, click here for BostonGlobe, here for Politico)  concerning the possibility of Elizabeth Warren’s appointment to head the new Consumer Financial Protection Bureau. Warren, a professor of law at Harvard University, was a major proponent of the most recent financial reform bill and is particularly popular with supporters of financial reform.

Warren has made a career studying and advocating for the common consumer. She has published multiple books and scores of scholarly articles on the topic of middle class economics and is widely regarded as a leading voice in the field. Time magazine named Warren to its top 100 most influential people in the world list in both 2009 and 2010.

Why All the Hullabaloo?

Last Thursday, first year students in section 3 at Harvard Law were informed that Warren would not be teaching their contracts course. Though the Harvard Crimson reports that Warren will still be co-teaching a seminar on the empirical analysis of law, the freedom from a post as contracts professor could be a strong sign that Warren is headed to Washington.

Here at the Corporate Observer we think it’s clear that Warren is an excellent choice for the first head of the new consumer watchdog bureau created under the Dodd-Frank financial reform bill. A champion of the consumer, and influential policy adviser, and an educated decision maker – Warren seems perfectly fit for the job. We commend Warren for her commitment to change and oversight. We agree with her statements in an interview with Tom Ashbrook that "it’s about reining in an incredibly powerful industry. It’s about reining in a group that gives money and knows how to exercise power in Washington."
 

Elizabeth Warren is not related to Chief Justice Earl Warren. Nevertheless, should Warren head up the new agency, her potential to effect change in America could rival that of the celebrated Chief Justice.  Though today’s post is merely speculation – the formulation of the leadership of this new important watchdog bureau is important news and we will keep you informed on updates as they come.

Assisted by 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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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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