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

Standard and Poor’s announced it has sacked former CEO Deven Sharma in favor of Doug Peterson, former Citigroup Chief Operating Officer.  (Click here for the WSJ story.)  We can’t say we’re shocked.  Under Mr. Sharma’s watch, S&P recklessly approved a downgrading of the US Debt from AAA to AA+.  Although the bond market professionals have largely ignored (as have China and other major holders of trillions in bonds) the action is sure to infect the political atmosphere beyond repair.  Get ready for months of the following rhetoric:

“President Obama has destroyed the credit rating of the United States through his failed economic policies and his inability to control government spending by raising the debt ceiling,” cried Michelle Bachmann.

“Record debt and the President’s refusal to control spending led to our nation’s credit rating being downgraded for the first time in history,” exclaims Rick Perry’s first political campaign spot.

The downgrade is a result of a “failure of leadership” according to Mitt Romney.

No it’s the arrogance, hypocrisy and negligence of Standard and Poor’s.  The downgrade is brought to you by the same rating agency that gave Lehman brothers a AAA rating just a month before its collapse and sought to make a splash with its downgrading of the US debt.  Timothy Geithner says S&P demonstrated a clear lack of understanding of the US economy.  Given S&P is the only agency to downgrade the US debt, the wisdom of the decision is certainly in question.

If S&P is looking for a new leader to run a profitable business, Doug Peterson, formerly of Citigroup, is surely up to the task.  However, if Standard and Poor’s is looking to restore its tarnished reputation, Sisyphus is more likely the man for the job.

Assisted by Zachary Kady

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Don’t get me wrong, I don’t blame folks for this innovative way to hedge exchange rate dependency, but they are lambs to the slaughter for the bevy of shady dealers out there.

As the economy becomes more global, it’s not just Fortune 500 companies that have a presence or connection with overseas markets and currencies, but it’s businesses as small as a local travel agency specializing in Australian travel or an online retailer selling products made in France that are vulnerable to swings in the value of the U.S. dollar.  These mom and pop shops (and I use that phrase with the utmost respect) have increasingly taken on a dangerous new business venture: Forex trading.

Increasingly, and particularly since 2008, these businesses have been hit hard by the decline in the value of the U.S. dollar. In an attempt to soften the fluctuations in the market and counteract their dependency on the dollar, they have followed the lead of behemoths (such as Google) into the Forex markets.  By buying foreign currency using U.S. dollars, these entities can profit when the dollar’s value drops relative to the other currency.  Sounds simple enough, right?

Hear me please: it is not worth it.

The Wall Street Journal reported this trend among small businesses but they forgot to mention that you can lose every penny.  One small-business-owner-tuned-Forex-trader warns to “make sure you don’t take a bath” when the U.S. dollar drops, not realizing your other option (Forex trading) may be drowning in the ocean.

Don’t get me wrong, I don’t blame folks for this innovative way to hedge exchange rate dependency, but they are lambs to the slaughter for the bevy of shady dealers out there.  Even for an experienced Forex investor it can be difficult to identify the wolves among the sheep.  A company like Google, which has its own department devoted to Forex trading, can afford to take the risk (and has famously made over $700 million in Forex trading since 2008).

Hoping to make a few thousand dollars in the event of a drop in the dollar isn’t worth the risk of running into a shady broker, and trust me there are plenty.

What’s more, if the Journal has caught on, you can bet that the sharks are circling in the Forex pond. I’m no criminal mastermind, but if I’m seeking out naïve investors to scam, there is no more appealing group than small business owners just entering the world of Forex.  They have little time to devote, little experience, and there are millions of them.

Small business owners, especially those dependent on the international value of the U.S. dollar, I can see the allure of Forex trading.  But I assure you, the drastic risks outweigh the modest rewards.

Assisted by David Martin

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If the Rottweiler guarding your property is anything like the SEC, I hope you set your house alarm.

As the WSJ Law Blog pointed out today, the SEC’s deadline to finalize Dodd-Frank Whistleblower rules has come and gone without a peep from the Commission.  So much for its bite being worse than its bark.  If the Rottweiler guarding your property is anything like the SEC, I hope you set your house alarm.

The SEC’s website has subtly shifted its schedule to allow an extra three months for rulemaking—and there is no reason to trust that adjustment either.  Commission defenders will point to the extensive rulemaking required and the tight government budget; I would point to the nine months originally allotted and immense importance of the rule finalization.

The Journal quotes SEC spokesman John Nester, who defends the Commission’s desire to emphasize “getting the rules right.” Thanks, John. “Right” entails “on time”; otherwise even more doubt as to the Commission’s commitment to the rules will arise.  Main Street has seen decades of supposed third-party regulators bow at the feet of well-paid lobbyists and executives.  The SEC was supposed to champion a major step forward this week; instead, they have amplified the doubt many have in their ability to effectively regulate and enforce.

I may be the only one, but I believe the SEC will get things together soon and finalize a robust and clear set of rules for Dodd-Frank’s whistleblower provisions.  However, delays like this undermine the bill and allow the Wall Street-centric status quo to continue.  As each day passes, Americans forget the reasons for the economic catastrophe—some of which were corporate corruption and lack of business oversight.  Dodd-Frank’s whistleblowers have a chance to cheaply and efficiently remedy this problem from the inside.

As is true of too many government regulations, the conclusion is yet to be written on this one. Let’s just hope the humid DC summer doesn’t pass without seeing these rules finalized.

Assisted by David Martin

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This is Part II of the Corporate Observer's Special Reports on Executive Compensation (Part I can be found here).  Please enjoy this second installment, on the gradual but substantial shift of wealth towards the executive class.

Our interest in executive compensation grows out of being hit in the face with the startling data illustrating a massive redistribution of wealth over the past decade away from the middle class and into the pockets of senior executives.  Noted executive pay scholar Albert Meyer had this to say in the WSJ:

Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs…  There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few.  The social consequences of this wealth transfer bear scrutiny.

Such a profound change takes more than a few executives getting a raise here and there.  It takes the efforts of an army.  First, a cottage industry of consultants devoted to devising new and innovative ways to compensate CEOs; second, a willing and too often a greedy executive class; and third, the almost blind consent of the Board of Directors and those “specialists” on the compensation committees.  Where is the army on the other side?  Who devises plans so shareholders (like pension funds and college accounts representing millions of average folks) can benefit from increases in corporate value?

Stock options have become an increasingly important component of executive compensation.  Seems like a good idea on its face.  Executives receive more value for increasing the stock price; it would seem to align the priorities of stockholders and execs.  A higher stock price benefits all, right?

Sadly, in practice corporate gaming and greed take over.  Too many managers have been caught manipulating the short term earnings to get a bump in the stock price.  Or at a higher level, they were managing for the market – being slaves to analysts and making the quarterly numbers.  Often that meant reporting soft earnings or camouflaging toxic liabilities for the next guy or the guy after that to swallow.  “Call in the consultants” stock options alone won’t work.

Next, restrictive stock grants became a popular tool.  “Mr. CEO, we want you to stay and make us a stronger company; long term value is what we are all about.  Here is a million shares of stock, but you’re going to have to wait 5 years to “begin” cashing in.”  This is better—it hedges against some of the short term greed—but still far from perfect.  CEOs have been known to use those restrictive shares as a hedge or collateral for larger cash positions.  In fact, senior management can promote corporate stock repurchase programs that, given the rules of supply and demand, will increase the price of the stock and thereby increase the value of their restrictive stock.

Indeed dividends, a shareholder’s reliable old friend, provide another arrow in the executive’s quiver of pay options; this despite being issued more grudgingly to shareholders over the past quarter century.  Yep.  When the company issues a dividend those top corporate executives are paid just like everyone else.  But unlike most of us they have amassed millions of shares.  A 5% dividend becomes a huge chunk of change and is often heaped on top of a seven- or eight-figure salary, stock options, etc.

Determining the right mix of executive compensation is a tough balance to be sure and it is not black and white.  But the numbers don’t lie.  The pendulum has swung over to the executives and remains there.  Shareholders must devise ways to create some momentum in the other direction.

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The dream job for many would be CEO of mega-entertainment firm Live Nation.  Front row seats at just about any sporting event in the world.  Concerts too – you name it.  From Vegas to Bonnaroo these guys represent just about everyone.  What a life.

And that dream job just got better.  A whole lot better.  In addition to taking the Yankees game in on Monday and a Kings of Leon concert on Tuesday, you can also enjoy the salary of a king for those incidental expenses not covered by your expense account.  As reported by the Wall Street Journal today, Chief Executive Michael Rapino’s compensation was worth $15.9 million in 2010 -- more than double his 2009 level.  (That’s a lot of popcorn.)  It’s even better for Chairman Irving Azoff, whose 2010 salary neared $23 million.  Best of all you don’t even have to make any money for the company.  Nope, not a dime.  Indeed it appears the more you lose, the more you make.  Though stock prices ended up a small amount, Live Nation’s net losses widened to $220 million in 2010 while revenue fell 9%.  Heck next year if losses reach $500 million, who knows how high executive compensation will soar?

One wonders what the Board of Directors and specifically the compensation committee is thinking (or not thinking). While the committee is governed by specific values and fancy criteria for determining executive compensation, it’s hard to imagine that verbiage is followed.   Shareholders of Live Nation should demand answers. 

(And if anyone out there needs a job, I’d send a resume to Live Nation.  I heard they pay well.)

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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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$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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All those Ivy League graduates working on trading formulas that yes, will yield some short-term profits, but in the end merely rachet up volatility and risk in the market – that will no doubt find Wall Streeters back in the halls of Congress looking for a handout.

Just when we thought maybe, just maybe, greed would take a back seat to long term value and prudent compensation that incentivizes sound risk taking, the WSJ reports that pay at public companies on Wall Street will reach a new record: $135 billion.  Wow.

What’s up with that?  The same Wall Street that brought us to the brink of a worldwide catastrophic depression; just ask Federal Reserve Board Chairman Ben Bernanke and Former Treasury Secretary Hank “I’m vomiting in public from all the stress” Paulson how close we were.  The same Wall Street that came hat in hand to Uncle Sam and the American Public, seeking oh, “about a trillion dollars” should do it.  

Ok.  So some of that money was paid back.  But from my vantage point, the driver there was Wall Street’s singular desire to be out from under additional regulation imposed on them by the TARP and other federal bailout programs.

I would not be so outraged if the American public were getting something for these record-breaking salaries.  Hey how 'bout the creation of some jobs fellas?  Last time I checked unemployment remained dangerously close to 10%.  What about some innovative financial product to reduce the deficit or some effort to stem the tide of home foreclosures?  Nope.  Instead it’s the same story.  Trading on exotic financial instruments, arbitrage, shorting markets, stocks and commodities.  That’s where the money is and that’s what we’ll get.  All those Ivy League graduates working on trading formulas that yes, will yield some short-term profits, but in the end merely rachet up volatility and risk in the market – that will no doubt find Wall Streeters back in the halls of Congress looking for a handout.

I hope when that happens – and it will – policy makers have the guts to stand up to the Street and impose limitations and sanity to future compensation.

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Recently, we reported on Facebook’s information sharing agreement with Microsoft and the major privacy issues it may cause.  The Wall Street Journal validated our concerns with a study that shows large amounts of personal data being shared by Facebook with third parties; often, this sharing occurs despite an explicit agreement to keep web browsing information private.  Facebook is working to restrict its applications from illegally sharing information but so far the money-hungry profiteers have prevailed.

Banks like JPMorgan have devised a new “heads we win, tails you lose” strategy for profiting at the expense of its investors.  If Times reporters have uncovered it, investigators should not be far behind.  A scheme where banks risk only investor money seeking profit for itself?  Sounds eerily familiar to what caused the financial crisis, doesn’t it?

Lehman Brothers continues to shell out big money to its bankruptcy advisors.  The judge in the case has stated he will cut into some of those fees should he deem them too large, but competition among courts to hear major bankruptcy cases means many judges are reluctant to do so.  The result is unchallenged, exorbitant fees paid to advisors with no alternative for firms needing their help.

Assisted by David Martin

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The personal credit card industry has come under intense government scrutiny for good reason.  Between Visa, MasterCard and American Express, Americans spend (or charge) over one trillion—that’s trillion with a “t”—dollars per year.  For years, merchants were forbidden by Visa, MasterCard and American Express from advocating for alternatives to credit payments.  For example, merchants are forbidden from offering (or advertising) discounts if you pay cash (although many do).

Forbidding such a choice helps to maintain higher credit card fees.  Yesterday’s settlement (see the Wall Street Journal story here or the New York Times story here) takes a big step toward creating a level playing field.  All you can really hope for: Visa (#1) and MasterCard (#2) agreed to eliminate restrictions that foreclosed a merchant’s ability to both forbid and advertise alternatives such as discounts for paying cash.

Conspicuously absent from the agreement was American Express.  Fighting American consumers and American law enforcement, “American” Express vowed to fight the proposed changes.  Why?  Simply put, they have the most to lose (they charge higher fees).  Attorney General Eric Holder, my former boss, was strident in his opposition to the company’s position:

Because American Express has refused to change its rules, consumers are being held hostage from receiving the expanded choices and lower prices that they deserve under our settlement… We cannot allow this to stand.

Well said, General.  AmEx, already notorious for charging 25% more in merchant fees than Visa or Mastercard, puts its greed on display.  CEO Kenneth Chenault of AmEx hypocritically calls the government’s case “anticompetitive,” omitting the glaring and obvious truth: AmEx’s standard agreement forbids its merchant clients from soliciting non-credit forms of payment.  Now that’s anticompetitive behavior.

The financial crisis we are still paying for taught us that enhanced corporate disclosure, transparency and consumer protection are more curative if served for breakfast and not for dessert.  Pushing Visa and MasterCard to provide more disclosure and fewer restrictions on merchants is surely a step in the right direction.  As to American Express, let’s hope they do the right thing instead of using our court system to delay justice hoping merely to enhance their own profits.

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Updating Wednesday’s post, the Wall Street Journal reports that Elizabeth Warren has been named “assistant to the president and special advisor to Treasury Secretary Timothy Geithner.”  This does not make her head of the Consumer Financial Protection Bureau – that position is still unfilled – but it gives her authority to appoint officials and direct some of the operations of the Bureau.  Consumers can celebrate this moment, when the CFPB can finally move towards strategic enforcement.  Eventually, Congress will confirm a director, but in the meantime Ms. Warren will give the Bureau much-needed and immediate direction.

Assisted by David Martin

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The time is now.  [Warren's] immediate appointment would allow the CFPB to begin planning and doing its important job of policing on behalf of consumers, while also serving as a referendum on Warren’s ability to lead the bureau.  What is lost in that scenario?

Let Elizabeth Warren do her (future) job now.

It has been widely reported that Harvard law professor Elizabeth Warren is considered the frontrunner to head the important new Consumer Financial Protection Bureau.  Given the climate of hyper-partisanship in our nation’s capitol, hearings on her confirmation are, as they say, “likely to be bitter and drawn out.”  That's exactly what the White House may fear.  The American Banker reported yesterday that the White House is considering naming Elizabeth Warren interim head of the Consumer Financial Protection Bureau.  Giving her the ‘interim’ title would eliminate the requirement for a nomination/confirmation process, which could then be performed at a later date.

Naming Warren the interim head is a no-lose scenario.  The time is now.  Her immediate appointment would allow the CFPB to begin planning and doing its important job of policing on behalf of consumers, while also serving as a referendum on Warren’s ability to lead the bureau.  What is lost in that scenario?

The Wall Street Journal reports the White House’s decision could be as soon as the end of the week.  The sooner the better.  Consumers need Elizabeth Warren.

Assisted by David Martin

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Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices.

Yesterday I responded to Gretchen Morgenson’s New York Times piece, which calls for scrutiny of soaring banking stocks; because the banks’ actual performance (lackluster) hardly match the robust share value manufactured on Wall Street.  Differing a bit from Ms. Morgenson, I am not ready to panic ; I believe heightened enforcement and regulation will hold greed and rampant speculation to a minimum.  In the 8/22 Wall Street Journal, Brian Baskin calls attention to such an instance.

Mr. Baskin describes the effort by the Commodity Futures Trading Commission (CFTC) to curb a new $50 - $100 billion dollar market for paper: derivatives again, this time on commodities.  These securities are called exchange-traded funds (ETFs) and they are all the rage.  The promoters of this newfangled investment vehicle (read Wall Street fees, broker fees, and no actual product being produced) claim these funds are the only way for small investors to access commodities futures markets.  Please.  The market is for professional speculators, who don’t need to hedge the price of a commodity like natural gas, but rather see an opportunity to make some serious money taking positions contrary to the market. 

Not so fast, says the CFTC’s enforcement staff.  They have been placing new and formidable regulatory curbs on ETFs – enough so that operators of ETFs are getting in trouble with their own investors.  Lawsuits have been filed alleging the ETF operators are failing to abide by the disclosures they made to their investors.  (But that’s a subject for another day). 

As Mr. Baskin details, the CFTC is concerned that rampant speculation causes price inflation.  That means higher prices for end consumers.  The CFTC’s goal is not to eliminate ETFs.  Its goal is to protect main street consumers, and for that reason it is to be applauded.  Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices and another bubble that when it bursts—and it will burst—main street pays the freight.

About time.

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

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