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

The defense will claim—get this—that the SEC's freeze of his assets led to the downfall of Stanford’s empire.

It’s finally showtime for one of the greatest grifters, flim-flam artists and con men of the century.  Yep.  Allen “who wants to play cricket with me” Stanford began his trial yesterday.  After a curious and all-too-convenient case of depression-induced amnesia, this cowboy finally stands trial for running a $7 billion Ponzi scheme.

So, who is to blame for the some 20,000 people who were robbed of their money?  What will be the theory of his defense?  Well, the regulators, of course!  Postponing his trial gave his defense team plenty of time to cook up a doozy of a strategy.  They must have taken a poll or something.  It’s the old claim, it’s all about those evildoers at the Securities Exchange Commission.  You see, after determining Stanford was a fraud (all those jets and private Caribbean Islands were a good clue), the SEC froze Stanford’s assets in 2009 and charged him with fraud.  The defense will claim—get this—that this freeze led to the downfall of Stanford’s empire.

Mr. Stanford, sorry to be the one to break it to you, but you cannot blame the regulators.  In fact, only one group really can—those who lost their money in what they believed were safe investments in certificates of deposit.  They have every right to blame the SEC and other financial regulators for letting you get away with this.  These regulators failed to act promptly and in the face of mounting evidence, turned a blind eye to the activities of Stanford’s firm until it was too late for many investors.

Well sit back and get comfortable, this is not going to be over any time soon.  P.T. Barnum—er, Allen Stanford—may just pull a rabbit out of his hat...

Assisted by Setareh Ebrahimian

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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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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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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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Two years after Bernie Madoff’s arrest, the United States Attorney for the Southern District of New York announced the indictment of two key back-office employees.  The first question is, “What took them so long?”  (A question for another day.)  More interesting to me is who these people are and how the largest Ponzi scheme in recorded history operated for so long undetected?

I should say at the outset, I was surprised by the backgrounds of the indicted employees.  In my representation of Madoff victims, I have seen the elaborate and very detailed statements sent out each month by Madoff’s crew of thieves to thousands of investors, including many “sophisticated” fund managers.  These statements were written under the name Bernard L. Madoff Securities of Wall Street and London.  They identified specific securities owned and explained a complex trading methodology that, like magic, paid returns exceeding 10% every year.

I would have thought this grand multi-billion dollar ruse was the work of some computer programming genius.  Think Mark Zuckerberg of Facebook or his friend Sean Parker, the inventor of Napster.  Or perhaps some super nerdy, M.I.T. Ph.D. student who hacks into the Department of Defense’s operational control system for weekend fun.

Nope, it was two Italian grandmothers from New Jersey (I’m actually guessing they are grandmothers – but they could be): Jo Ann Crupi and Annette Borgiorno.  Both from working class backgrounds hired by Madoff back in the 1980s as key punch operators.  

The indictment explains that to fool regulators, they merely set up a phony (second) set of books.  (How clever!)  Continuing on the low-tech theme, Madoff's crew kept records of investments on handwritten note cards – I’m guessing those three by five cards we used in grade school for our class speeches.

If true, what does this say about the SEC and other regulators – fooled by the oldest trick in the book – two sets of books?  Maybe down the road we’ll find that Madoff had a super-computer and the world’s greatest programmers money (a lot of money) could buy.  But for now, these latest indictments merely throw more mud in the eye of those who should have dug deeper.  Not only the regulators, but those “sophisticated” investors (fund managers) who looked the other way while taking their huge monthly fees.

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