Relevant and even prescient commentary on news, politics and the economy.


By Jeff McCord

March 28, 2013

In the early days of his brilliant career as legal journalist and commentator, Anthony Lewis, who passed at age 85 on March 25, referred to a vision of the Supreme Court that served as his touchstone:

“[W]hen the channels of opinion and of peaceful persuasion are corrupted or clogged, these political correctives can no longer be relied on, and the democratic system is threatened at its most vital point. In that event, the Court, by intervening, restores the processes of democratic government; it does not disrupt them . . .”

These comments by Justice Harlan Fiske Stone in a footnote to his opinion in U.S. v. Carolene Products Co., decided in 1938, profoundly influenced Mr. Lewis. In that case, Stone upheld a federal statute prohibiting the interstate sale of “filled milk” – that is, milk or cream reconstituted with fats or vegetable oils from non-dairy cow sources.
Propublica  Friend of the Court: How Anthony Lewis Influenced the Justices He Covered

“Lost my Faith in the Idea of Progress”

Yet, by the time the famously optimistic Lewis retired from his New York Times op-ed chair in December, 2001, he said this to his exit interviewer:

“I have lost my faith in the idea of progress. I mean that in the sense that it was used at the beginning of the 20th century, that mankind is getting wiser and better and all . . .”

New York Times   After 50 Years of Covering War, Looking for Peace and Honoring Law

Was Mr. Lewis’ journey a classic “coming of age” story of lost optimism after 50 years spent covering and opining on great matters affecting and defining the legal rights of people of color, consumers and all citizens in a free society? True, Mr. Lewis was being interviewed in the fateful months following the Bush v. Gore decision that placed in power an Administration in which fact-based governance had given way to rule by the certainties of religious dogma and class-driven anecdotal evidence. Indeed, Mr. Lewis said as much:

“[C]ertainty is the enemy of decency and humanity in people who are sure they are right, like Osama bin Laden and John Ashcroft [President Bush’s attorney general and a Christian zealot].

Another source of disappointment for Mr. Lewis, who as a student sympathized with the democratic socialist movement in Britain, must have been the outcome of a little noted (by average citizens) battle to preserve legal accountability for Wall Street and Fortune 500 magnates and the accountants and lawyers who work for them. The first battle in a war to hold corporate wrongdoers accountable that continues was fought over one of then House Speaker Newt Gingrich’s “Contract with America” legislative measures. He called it “common sense legal reform.”

This was in the early and mid-nineties when many in Washington were certain that global free trade and freely moving markets, unfettered by regulation, would inevitably lead to progress. Humans acting on behalf of their enlightened self-interest would lift all boats in a rising sea.

And in those days, Congress and President Clinton enacted the free trade agreement with China and tore down the Glass Steagall Act wall between consumer-oriented depository banking and lending and corporate-oriented merchant and investment banking. During this same period, Mr. Lewis witnessed Congress and his beloved Supreme Court act to slash the legal restraints upon regal CEOs and a new class of global financial entrepreneurs.

“Tilting the Scales of Justice”

To Mr. Lewis and other notable voices in the wilderness, including Congressman Ed Markey, them SEC Chair Arthur Levitt and distinguished Harvard Law Professor Arthur Miller (Harvard’s web Site claims he once taught Chief Justice John Roberts), Newt Gingrich’s “common sense” legal reform legislation would tilt the scales of justice away from ordinary consumers and investors. Here is how Mr. Lewis boiled down the issues at stake:

“Prevent victims of securities fraud from suing. Immunize company officials who manipulate the price of stock by false statements. Stop lawsuits against accountants and lawyers who were involved in savings-and-loan scams. Good ideas? Not many Americans would think so. But those are some of the things that would result from passage [of the legislation formerly known as the Private Securities Litigation Reform Act of 1995].”

New York Times  Abroad at Home; Tilting the Scales

In his February 3, 1995 op-ed (“Tilting the Scales”) Mr. Lewis ridiculed the description of “common sense legal reform” as “Orwellian”. “A more accurate title would be the Protect the Wrongdoers Act,” he said.

And, in prophetic words that haunt us to this day, Mr. Lewis added:

“[The bill’s provisions] real purpose, are to insulate the rich and powerful from being called to account at law.”

In the months and years following that op-ed, Mr. Lewis witnessed enactment of that “Orwellian” legislation and, later, the explicit confirmation by the Supreme Court (in Stoneridge Investment Partners v. Scientific-Atlanta, Inc.) that accountants, lawyers and corporate executives who knowingly aid, abet and collude in securities frauds cannot be sued by their victims to recover their losses. Other Congressional measures and Court decisions tilted the legal and political playing fields further away from citizens to favor corporations and wealthy oligarchs.

Mr. Lewis also lived to see the inevitable consequences of liberating the self-interested from legal restraints – the worst financial and economic crisis since the Great Depression. And, the rich and powerful perpetrators of the catastrophe have not been called to account at law.

“It’s Worth Appealing to Reason”

Twelve years ago, Mr. Lewis did conclude his exit interview on a somewhat upbeat note:

“I’m not willing to give up on rationality . . . Look, why have I been writing columns rather than jumping off the George Washington Bridge? I believe it’s worth appealing to reason.”

Like Mr. Lewis, most of us excluded from the ranks of the one-percent choose not to jump off bridges. Rather, we cling to the belief that rationality and fact-based decision-making will again hold sway within the halls of Congress and high precincts of the Judiciary; that, despite Bush v. Gore and Citizens United, the Supreme Court can and may again “intervene to restore the processes of democratic government” that are “clogged and corrupted” by the rich and powerful.
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… to Hold “Untouchable” Fraudsters Accountable

By Jeff McCord, The Investor Advocate

Take Lincoln’s Approach to Hold “Untouchable” Fraudsters Accountable

Within recent months, two media events captured the attention of many Americans: the premier of the Spielberg movie “Lincoln” showcasing the 19th century federal government’s ability to end our nation’s crime against humanity; and, the airing of the PBS Frontline series (“The Untouchables”) showcasing the inability of the twenty-first century federal government to prosecute those responsible for our nation’s largest financial crime spree.

Now, the public watches mindless budgetary slashing of federal regulatory agencies – already underfunded and understaffed – charged with enforcing civil and voting rights and financial laws. And this “sequestration” proceeds at a time of widespread attempts to suppress people of color’s ability to cast ballots in federal elections, and financial fraud and abuse robbing and cutting the savings and assets of tens of millions of Americans.

Half Billion Dollars to be Cut from Fed Investor Protection, Law Enforcement

Aside from federal civil and voting rights programs, investment law enforcement agencies and commissions on the chopping block include the Securities and Exchange Commission (a possible $115 million reduction), Commodity Futures Trading Commission ($17 million), federal courts ($384 million at risk), Public Accounting Oversight Board ($18 million) and the Securities Investor Protection Corporation ($23 million). In sum, $557 million could be cut from investor protection programs, barring Congressional intervention. For more, see Appendix A of the Office of Management and Budget report issued September 15, as required by The Sequestration Transparency Act of 2012

In this environment of federal inaction and cut-backs, it has never been more important for private citizens and investors to be given the legal tools and authority to protect themselves.

Lincoln Knew How to Deter Fraud: Hit Wrongdoers in their Pocket Books

During the Civil War, Lincoln adroitly dealt with rampant fraud by Union Army contractors by empowering ordinary citizens with knowledge of the crimes to take civil action against wrongdoers on behalf of the government and themselves. Often called the “Lincoln Law,” the federal False Claims Act was modernized in 1987, with Republican Senator Charles Grassley leading the effort. Since then, whistleblowers acting under its authority and protection have recovered more than $40 billion of taxpayer money otherwise lost to fraud and abuse against federal and state governments.

Nine billion dollars was recovered by citizens blowing the whistle during just one year (2012). Compare that with the Securities and Exchange Commission’s total of only $2.6 billion in funds recovered for investors from financial wrongdoers during the past three years during which people on “Main Street” have become painfully aware of their being fleeced by Wall Street.

What’s good for the taxpaying public would also be good for the investing public whose own personal funds are on the line. Although the withering federal government portion of the nation’s GDP (7 percent in 2012) is surprisingly close to the financial services industry’s contribution (5 percent), citizens can take very effective action against thieving federal contractors, but remain vulnerable against those who rob them of their homes, savings and investments.

Private Class Actions Recovered Three Times More for Investors than SEC
True, citizens can and do band together into class action lawsuits to take action against financial robber barons and such civil actions have won $7.9 billion from wrongdoers in the past three years – three times the amount the SEC recovered during the same period. (See: here)

But, the class action remedy has been under an unremitting attack by corporate and financial lobbyists for almost two decades and has been trimmed and nearly hobbled by Congress and the Courts, with some notable exceptions, during the very period that may best fit Lincoln’s prophesied “era of corruption”:

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country….corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”

Corporations and Lincoln

So, where are we to turn to recover some of the wealth wrongfully “aggregated” from the many by the hands of the few?

Restore Private Accountability for Aiders and Abettors of Investment Fraud

Certainly, securities class action lawsuits filed by pension funds, retirement plans and individuals against corporate and financial wrongdoers will continue to recover investor losses and nip at the heels of Lincoln’s “money power.” Private class actions could accomplish more to deter fraud and recover investor losses if Congress would overturn a misguided Supreme Court decision by restoring private liability for those who knowingly aid and abet securities fraud.

One early version of the Dodd Frank legislation would have done just that. Banking and accounting industry lobbying, however, killed that provision. Restoring accountability for aiders and abettors is a no-brainer that Congress can still accomplish.
Fortunately, the final Dodd Frank Act did provide an opening for authorizing a “Lincoln Law” providing financial whistleblowers with the policing power to help hold Wall Street accountable and recover ill-gotten gains.

SEC Takes “No Further Action” on Majority of Whistleblower Leads

Congress provided for a “whistleblower” program within the Securities and Exchange Commission enabling people with inside information to contact the Commission. Those providing leads retain anonymity and can win monetary rewards. Despite receiving more than 3,000 leads in 2012, however, only one whistleblower has won an award ($50,000, an amount only equal to an annual bonus for a relatively low level Wall Street employee).

In any event, the SEC takes “no further action” on 69 percent of whistleblower complaints, according to a recent report by the SEC’s Inspector General. The most common leads reported to the SEC relate to fraud and abuse in areas of systemic wrongdoing largely responsible for the financial meltdown: corporate disclosures and financial statements (18.2%); public offerings (15.5%); and, market manipulation (15.2%).

Powerful Senators (and the Public) Frustrated

The comments of two frustrated Senators during a 2010 hearing demonstrate that some powerful Members of Congress do understand what the public understands: big financial services malefactors are virtually “untouchable”:

Sen. Carl Levin (D-Michigan): “I believe in a free market. But if it’s going to be truly free, it cannot be designed for just a few people. It must be free of deception. It’s got to be free of conflicts of interest. It needs a cop on the beat, and it’s got to get back on Wall Street.”

Sen. Charles Grassley (R-Iowa): “If heads don’t roll, nobody makes any changes. I’m disappointed that in all of the wrongdoing that went on and all the fraud that went on, that there wasn’t an effort to go after bigger fish than the evidence shows they [federal government] went after.”

Transcripts PBS

Well, heads haven’t rolled Senator Grassley and, Senator Levin, there is still no effective cop on the Wall Street beat.

Congress Should Trust and Empower Lincoln’s “People”

Now, its time for Lincoln’s “government of the people, by the people and for the people” to actually empower the people.

First, Congress should restore the right of people to hold accountable those who knowingly aid and abet frauds that rob them.

Next, Congress should enact a real financial “Lincoln Law” empowering whistle blowers with the tools to catch the “big fish” on Wall Street and make them pay back what they have stolen. And, recoveries should be returned to the investors harmed by the underlying fraud and abuse whistleblowers uncover.

The False Claims Act now on the books authorizes treble damages for those who defraud the government, providing a real deterrent. Moreover, the whistleblowers (termed “relators”) who win their civil actions against fraudsters can be awarded up to 30 percent of funds recovered – a powerful incentive for Wall Street managers who know where the bodies are buried to go after big time wrongdoers.

Time for a Financial False Claims Act

A “Financial False Claims Act” should do the same by authorizing Wall Street whistle blowers to take actions independent of often conflicted government regulators against fraud perpetrators “too big to jail.” Such a law could also authorize the government to intervene in support of such civil actions, if they wish to do so. This is how the False Claims Act works.

Unfortunately, worried that a real whistleblower law could complicate the SEC’s program, the Commission’s inspector general has concluded that it is not the time to:

[empower] whistleblowers or other individuals . . . to have a private right of action to bring suit . . . on behalf of the government and themselves, against persons who have committed securities fraud.

SEC audits inspections

If not now, when?

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USA: History’s Largest Free Port for Financial Freebooters?

By Jeff McCord of The Investor Advocate

USA: History’s Largest Free Port for Financial Freebooters?

The term “freebooter,” derived from the Dutch vrijbuiter, means one who openly steals property. Once freebooters sailed the coasts of the Carolinas, Florida and Caribbean isles from free ports such as Port Royal, Jamaica, taking what they wished with little or no consequences because Jamaican Colonial authorities granted them immunity.

Today, a federal appeals court may determine if the United States has become the largest such free port for swindlers in modern history. At issue is the Supreme Court’s controversial 2010 decision (Morrison v. National Australia Bank), that provides immunity from investor accountability to off-shore shysters preying on Americans as well as on-shore fraudsters plundering foreigners as long as the fraudulent transactions take place outside the USA or involve securities listed overseas. Many experts believe Morrison also provides immunity from SEC civil and federal criminal actions.

“Political” High Court Decision to Curtail Investor Rights May Also Free Criminals

With Morrison, the Supreme Court “cavalierly overturned 40 years of precedent,” says former SEC commissioner and Brooklyn Law professor Robert S. Karmel. She says there was no compelling reason for the Supreme Court to even hear the case and onlyu did so to “further its campaign to limit [investor fraud] class actions to the extent possible”

See Justce Antonin Scalia’s majority [Morrison] opinion is blatantly political…NY law journal

Justice Scalia’s majority opinion may also be so broadly worded that the United States Court of Appeals for the Second Circuit may be compelled to conclude that no prosecution — civil or criminal — of wrongdoers peddling foreign securities is possible within the United States. Among other unfortunate and unforeseeable consequences, such a ruling would overturn the criminal convictions of two flamboyant “old school” fraudsters: Alberto Vilar, who falsely claimed to be a Castro-fleeing Cuban émigré but did have an investment operation in Panama (an old pirate haunt); and, Ross Mandell, a broker of questionable repute who resides in Boca Raton (the new Port Royal?).

Flamboyant Convicted Swindlers May Be Off the Hook

First, let’s meet Ross H. Mandell, a Boca domiciled broker with a regulatory challenged past – he was suspended from trading on the New York Stock Exchange — and million dollar life-style, the New York Times reported. A unanimous federal jury convicted him of running an old-fashioned “boiler room” operation in Florida to defraud mostly British investors by using fraudulent sales pitches to flog questionable stocks on a London exchange. Although, he allegedly defrauded Americans as well, his lawyers contend the statute of limitations had run out on those crimes.
New York Times columnist Floyd Norris recently described Mr. Mandell:

“The government says the money he gained from defrauding investors paid for ‘first-class flights, five-star hotel suites, expensive meals, adult entertainment and personal spending,’ even though his firm was losing money. It says some of the money was used for ‘work done on Mandell’s penthouse apartment at Trump U.N. Plaza’ in Manhattan.”

See: NYT…Us justce vs. foriegn fraud

Let’s now consider the case of Mr. Alberto Vilar, a high-profile broker-dealer who was found guilty in federal court of stealing millions of customers’ funds. Listed by Forbes in 2005 as among the 400 wealthiest men in America, Mr. Vilar had assets believed to total nearly $1 billion. He was an opera lover and a very generous, well-known patron. Despite his love of the performance art, Mr. Vilar reportedly embezzled $2 million from star tenor Placido Domingo, in an incident unrelated to his securities conviction. See: New Yorker

In an appeal citing Morrison, Mr. Vilar’s attorneys say he should be released from incarceration at a federal facility and his conviction overturned because the transactions and investments at issue were allegedly structured at the defendant’s Panamanian registered broker-dealer, rather than within the United States. In a sign some believe signals that the federal appeals court may agree, Mr. Vilar was ordered released on bail pending the appellate decision. See: Bloomberg…amerindo cofounders vilar and tanaka-wi release-on-bail

Foreign-Based Frauds of Petty Criminals and Too-Big to Fail Banks

These are simply two recent fraud cases that may be turned upside down by Morrison. And, although the alleged crimes were egregious, these were relatively small scale transgressions when measured against the off-shore connivances of too-big-to-fail banks that can cause multi-billion dollar investor losses. Think Goldman Sachs and its’ allegedly fraudulent sub-prime mortgage derived collateralized debt obligations structured in London, but sold to U.S. investors.

Whether petty criminals or clever multi-national corporate schemers, such wrongdoers may have been dealt a “get out of jail free” card by the Supreme Court. They have also been immunized from accountability to their victims.
Congress Should Take Action before Jolly Roger flies beside Stars and Stripes
Many agree with former SEC commissioner Karmel (cited above) that it is time for Congress to overturn Morrison. Salvator J. Graziano, Esq, a partner at Bernstein Litowitz Berger & Grossman, LLP, president of the National Association of Shareholder and Commercial Attorneys and former Assistant District Attorney for Manhattan agrees. He summed-up the wider repercussions of Morrison in calling for Congress to take action:

“With Morrison, the Supreme Court unwittingly has allowed the U.S. to become a safe haven for fraud so long as the securities at issue are listed abroad. On behalf of investors at home and abroad, we ask Congress to over-turn the unfortunate Morrison decision by restoring the rights of action of defrauded investors and clarifying the authority of federal regulators and the Department of Justice.”

Congress should act before the Jolly Roger flies beside the Stars and Stripes over Wall Street and Boca Raton.

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Guest post: “Mother” of All Bank Frauds Shocks and Awes Regulators

“Mother” of All Bank Frauds Shocks and Awes Regulators,
As LIBOR Victims Seek Justice

By Jeff McCord of The Investor Advocate
August 21, 2012

Many wonder why Federal regulatory precincts are so quiet several weeks following discovery that the London Interbank Offered Rate (LIBOR), a key interest rate determining charges to and earnings by American borrowers, lenders, pension funds, retirees and consumers had been rigged for years to benefit a handful of the world’s largest banks. Experts estimate damages to the economy can be measured in multiples of trillions of dollars.

Predictably, a relatively minor fine of $450 million – chump change in Jamie Dimon’s world – was levied by US and British regulators upon Barclays Bank, the most obvious of several likely perps in history’s biggest bank heist. Fortunately, the vigilant attorneys general of New York and Connecticut are issuing subpoenas to JP Morgan Chase and Citigroup, among other banks too big to regulate federally. And, private class action lawsuits charging violations of securities and anti-trust laws have been launched.

But, where are the expressions of horror and outrage, and other hot air emissions from the people’s elected representatives in Washington? We look in vain for a William Jennings Bryan, the Nebraska Congressman and 1896 presidential candidate who shouted at bankers: “You shall not crucify mankind on a cross of gold!”

Time to Order Golden Crosses?
Should middle-Americans use remaining credit on nearly maxed-out cards to buy life-sized gold-plated crosses at mall jewelry stores and report to their local mega-bank offices? Will bank “relationship managers” provide the nails, or will we need to pay for those as well?

These are just a few of the questions that cannot be fully answered until after the election. But, we can draw some conclusions from the statements of our presidential candidates and the views of well-informed observers.

Mitt Would Roll-back Regulations; President “Can’t get Too Involved”

First, let’s try on the Mitt. Governor Romney has long said he would roll back the regulatory knuckle raps enacted in the Dodd-Frank financial reform law. On the LIBOR fraud, he is apparently voting with his wallet. During his much publicized Olympic trip to London, Governor Romney met privately with bankers from Barclays and other financial behemoths, pocketing $2 million in campaign contributions for his time and this promise:

“I’d like to get rid of Dodd Frank and go back and look at [all financial] regulation piece by piece.”

With his Treasury Secretary accused of looking the other way years ago when as NY Fed Bank president he learned of LIBOR rigging, it is unlikely President Obama will call for “heads to roll.” Indeed, in one comment made by the White House on what is now being called the “Crime of the Century” by at least one syndicated columnist, White House press secretary Carney admitted he hadn’t discussed LIBOR with the President, but assured reporters the Administration supports financial reform, adding:

 “I don’t want to get too involved in Libor because I know it’s under investigation.”

What of the announced SEC and Department of Justice investigations? Based on their record pursuing the mortgage-backed securities and derivatives swindlers, we can’t hope for much. A Zachs financial analyst writes in a NASDAQ blog that a few more fines may be levied:

“Currently, we remain skeptical for JPMorgan and wait to see what the future beholds. If it is found guilty in this LIBOR scam, it is liable to be fined by authorities. Notably, in June, Barclays already faced a fine of $450 million by certain U.S. and U.K. authorities for rigging the rate.”

With recently revised and reported profits of $4.92 billion in just the first quarter of this year and with Cracker Jack PR and lobbying teams operating effectively, Jamie Dimon and his senior managers are likely sleeping soundly. After all, if anyone gets jail time, it will be line traders or lowly underlings.

Hedge Fund Says Private Lawsuits Will Recover LIBOR Damages
No wonder James Rickards, a New York hedge fund manager, author and columnist, wrote in US News & World Report that recovery of the immense financial damages suffered in this “mother of all bank scandals” by US mortgage holders, investors, small financial institutions and so many others will not come through regulators. Although a few criminal prosecutions may be launched and more fines levied, justice will be achieved and damages recovered by private lawsuits prosecuted by class action attorneys on behalf of victims, Rickards suggests.

He even dares to give voice to what many on Main Street have been thinking since 2008:

“Of course, the insolvency of a major bank in the face of LIBOR rate rigging charges cannot be ruled out. In that case, good riddance. The big banks have perpetrated a crime wave longer than that of Bonnie and Clyde. If it has taken the law this long to catch up with them, it’s better late than never.”

Lonely Federal Candidate Calls for Accountability

At least one federal candidate this year joins Rickards in demanding accountability for LIBOR fraudsters. Elizabeth Warren, whose Massachusetts Senate campaign is not bank-rolled by financial services giants, says:

“Real accountability would mean prosecuting the traders and bank officials who violated federal laws and prosecuting the executives who knew what they were up to. It would mean forcing executives to pay back any inflated compensation that was based on padded profits.”

Syndicated columnist and University of Southern California professor Robert Scheer seconds Ms. Warren’s call for justice. Unfortunately, he doesn’t see jail cells for LIBOR fraud masterminds:

“Modern international bankers form a class of thieves the likes of which the world has never before seen. . . . The modern-day robber barons pillage with a destructive abandon totally unfettered by law or conscience and on a scale that is almost impossible to comprehend.”

Federal Judge Calls Time-out for LIBOR Suits, But Invites More

That brings us back to lawsuits and private enforcement of securities laws. Despite a decade or more of Congressional and Supreme Court efforts to reduce liability for those corporate and financial officers who design and perpetrate such complex crimes, investor and consumer lawsuits filed in federal and state courts can still recover damages and discipline robber barons with the only punishment they understand: taking away their money.

Small banks, municipalities, pension funds and other victims of the rigged LIBOR market are lining-up to do just that. In response to the magnitude and intricacy of the alleged violations of securities and anti-trust laws, on August 6th US District Judge Naomi Reice Buchwald in Manhattan placed a hold on new LIBOR lawsuits while she sorts out the complaints already filed. She did, however, encourage the filing of new complaints, as she explained to the Chicago Tribune:

“While parties are free to file new complaints—and, indeed, are encouraged by the court to do so if they do so promptly . . . I am imposing a stay on any action that is not the subject of a pending motion to dismiss. The stay will last until the current motions to dismiss are resolved.”

Once again, hedge fund manager Rickards explained in layman’s terms what is likely to happen:

“Bank defendants in cases like this typically ask a judge to dismiss the case because the claims are too vague. However, the facts in this case have already been made plain by Barclays . . . Once the plaintiffs get past the motion to dismiss, they begin discovery, which gives the class action lawyers access to internal E-mails, tape recordings, depositions, and other books and records of the perpetrator banks. Based on small glimpses of the doings at Barclays, the communications of the other major bank LIBOR trading desks could be shocking.”

Banks May Be Held Accountable This Time

Once the undoubtedly “shocking” internal documents of the mega-banks come to light and the public learns the sordid details of the “crime of the century,” politicians may find standing idle a difficult posture. Regulators and the Department of Justice may be handed the evidence to seriously prosecute the perpetrators (whether they want to or not).

If the private actions and discovery process are permitted to proceed, the mega-banks who have caused global economic mayhem of historic and biblical proportions may finally be brought to justice. Middle-Americans may get their day in court.
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Guest post: “The Pay Off: Why Wall Street Always Wins”

By Jeff McCord  is a former US Senate staffer, Securities Investor Protection Corp (SIPC) executive and has been a free-lance journalist for Dow Jones publications. His academic background in economics includes post-graduate work at the London School of Economics and George Washington University. He can be read at Investors Advocate.   


Book Review of “The Pay Off: Why Wall Street Always Wins” by Jeff Connaughton Published by Prospecta Press, August 2012-08-21

Brief Bio of Jeff Connaughton:
Mr. Connaughton served as Chief of Staff to U.S. Senator Ted Kaufman during the 111th Congress. He previously served as Special Assistant to the Counsel to the President (Abner Mikva) in the Clinton White House (1994-95) and as Special Assistant to then-Chairman Joseph R. Biden, Jr. of the Senate Judiciary Committee (1988-91). Following work as a lobbyist for Arnold & Porter (1998-2000), he was co-founder and a principal of Quinn Gillespie & Associates (2000 to 2009), corporate lobbying firm.
August, 22, 2012

The review:

This is the autobiographical coming of age story of Jeff Connaughton, a former aide to Democratic Senators Biden (D-DE) and Kaufman (D-DE) and a Clinton White House adviser. Before becoming Senator Kaufman’s chief of staff, he had struck it rich as a corporate lobbyist, partnering with Republican Ed Gillespie and others to co-found Quinn Gillespie & Associates in 2000. Mr. Gillespie, a former senior aide to House Majority Leader Dick Armey (R-TX) is credited as a principal author of the GOP’s 1994 “Contract with America.” And, during Mr. Connaughton’s years as his partner, Mr. Gillespie advised Senator George Allen (R-VA) on his re-election campaign. Allen famously lost that election after he twice publicly used the racial epithet “macaca” to describe a dark complexioned Democratic activist of Asiatic Indian descent.

Mr. Connaughton’s unabashed description of his own “revolving door” career goes a long way toward explaining why “Wall Street always wins.” He candidly says he has seen the enemy and it is “us.”
With an MBA from the University of Chicago and law degree from Stanford, Mr. Connaughton was well qualified for his government service and as a top corporate lobbyist. Here’s his description of his million dollar lobbying career prior to serving briefly on Joe Biden’s Vice Presidential transition team and then heading-up Senator Kaufman’s staff:

“For twelve years, I developed and implemented legislative and regulatory campaign strategies for corporate clients, including broker-dealers, banks, accountants, insurance firms, and Silicon Valley. During my years as a lobbyist, I made a big pile of money, enough to have a house in Georgetown, a speedboat on the Chesapeake [and plan a house in Costa Rica].”

Considering that experience, it is difficult to accept Mr. Connaughton’s protestation of innocent bewilderment upon learning of the impending 2008 financial meltdown and its causes:

“I’d been trained in business and law school to believe that corporate governance worked. Even though I knew Wall Street held Washington in a perpetual half nelson,
I still believed our laws would prevent hidden catastrophes and blatant fraud. Our system is based on full disclosure of independently audited financial statements
combined with oversight and enforcement from the Securities and Exchange Commission.”

As one who no doubt ably helped Wall Street hold Washington in a “half nelson” in partnership with the ideologically pure GOP de-regulator Ed Gillespie, Mr. Connaughton was either naïve or had fallen victim to that DC disease: ‘believing one’s own press releases.’

Because he seems to tell his personal story frankly, readers can forgive Jeff Connaughton for a few self-serving remarks. Who among us wouldn’t do the same? But, anyone who lobbied for Wall Street and accounting firms during first eight years of the 21st Century and had witnessed Enron, WorldCom and so many other blatant frauds up-close, knew that corporate governance had become a quaint anachronism and financial statements barely worth the paper or digitized distribution.

Nevertheless, Mr. Connaughton’s insider description of the struggle among a few in Congress to gain meaningful post-meltdown financial regulation is worth the read.

He begins by describing the intellectual abduction of the young President Obama by the Goldman Sachs/Citigroup vetted and cleared team of William Geithner and Larry Summers. Readers who want more detail on their stranglehold on Administration economic policy and undermined the President’s goals should look no further than “Confidence Men,” by Ron Susskind.

Against great odds, Mr. Connaughton details the good faith efforts he and Senator Kaufman made in 2009 and beyond to push the seemingly conflicted Securities and Exchange Commission and Justice Department to launch civil and criminal prosecutions of those culpable for the financial meltdown. Although he concludes DOJ lacked the will to prosecute, Mr. Connaughton also describes testimony by SEC Enforcement Director Robert Khuzami who at a 2009 hearing explained why such prosecutions are exceedingly difficult in today’s world. Here’s how Mr. Connaughton tells it:

Khuzami put it this way during the hearing:
‘White-collar area cases, I think, are distinguishable from terrorism or drug crimes, for the primary reason that, often, people are plotting their defense at the same time they’re committing their crime. They are smart people who understand that they are crossing the line, and so they are papering the record or having veiled or coded conversations that make it difficult to establish a wrongdoing.’
In other words, Wall Street criminals not only possess enormous resources, they’re also sophisticated enough to cover their tracks as they go along, often with the help, perhaps unwitting, of their lawyers and accountants.

Messrs. Khuzami and Connaughton hit the nail on the head. Time after time, civil cases and a few criminal ones demonstrate that corporate and financial law and accounting firms actually knowingly help design, cover-up and otherwise aid and abet fraud. And, they do so with the knowledge that a combination of Congressional and Supreme Court actions have virtually relieved these professional advisers of liability for client advisory services.

In short, it is hard to prosecute securities fraud perps in a world in which Congress has decriminalized much of enabling behavior and actions required to plan and successfully execute fraud.

Mr. Connaughton ably describes the first major assault in the accounting and financial services’ industries’ war upon securities fraud laws and financial regulation. As a White House lawyer he saw:

President Bill Clinton steamrolled by Wall Street (and by its biggest booster, the most Machiavellian of United States Senators, Chris Dodd) circa 1995. Dodd had led Congress to overturn President Clinton’s veto of the Private Securities Litigation Reform Act, which he and the Republicans had drafted to gut the class action securities-fraud laws. It was the only Clinton veto given the back-of-the-hand by two-thirds of Congress. And it was my first taste of how Wall Street had come to own Washington.

The Private Securities Litigation Reform Act was merely the first of a decade-long effort by Congress and the Supreme Court to shield corporate securities fraud perpetrators and their professional aiders and abettors from shareholder and consumer accountability. During the same period, the dismantling of the Glass-Steagall Act’s separation of commercial and investment banking (this time supported by the Clinton Administration), enabled banks to use customer money to engage in the high-risk securities and derivatives practices — aided and abetted by their lawyers and accountants who covered-up the magnitude of risks taken — that led to the catastrophic 2008 meltdown.

Mr. Connaughton, whose Wall Street epiphany may have come too late to help correct Congress’ mistakes, describes how he and Senator Kaufman, a Member of the Senate Judiciary Committee, worked with other sincere reformers such as Senators Pat Leahy (D-VT) and Chuck Grassley (R-IA), among others, to build-up white collar crime fighting resources and push the SEC and DOJ to go after financial wrongdoers.
Sadly for all of us, Mr. Connaughton concludes:

Despite our nearly fanatical dedication, we and other reformers failed. To date, there have been no high-profile Wall Street prosecutions for financial wrongdoing. The stock market has become even more volatile and dominated by computer-driven trading. Too-big-to fail banks continue to act lawlessly, teeter on the brink, and destabilize the global economy. The post-crisis regulatory reforms (particularly, the Dodd-Frank Act) were and are being written by over-matched regulators with the help of Wall street lawyers instead of by the elected representatives of Americans, a substantial majority of whom support rules to rein in Wall Street excesses.

He knows personally of what he speaks.

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“Fear and Loathing” of Wall Street, 2012

by Jeff McCord of The Investor Advocate

“Fear and Loathing” of Wall Street, 2012

To-date, the presidential primaries have studiously avoided reference to the unfolding catastrophe brought to the American public just four years ago by the financial services industry. The political issues contested thus far bring to mind Hunter Thompson’s reporting of the 1972 election campaign:
“This may be the year when we finally come face to face with ourselves; finally just lay back and say it — that we are really just a nation of 220 million used car salesmen with all the money we need to buy guns . . .”
(See: “Fear and Loathing: On the Campaign Trail, 1972,” By Hunter S. Thompson)

Off the campaign trail, however, Stanford University scholar Lindsey Owens writes to tell us:

“Animosity toward banks, financial institutions, and Wall Street has been an important part of the public discourse since the bank bailouts of 2008. Indeed, Americans’ confidence in all three institutions has plummeted accordingly in the years since.

[W] hile changes in the business cycle have an effect on public opinion in this domain, it is the economic contractions that correspond to major scandals in the financial sector that motivate the largest shifts in confidence and provoke the most public outrage.”

Self-Loathing on Wall Street?

Professor Owens’ study of public opinion of Wall Street over the past 30 years suggests that even writer Hunter Thompson’s common man understands the difference between normal changes in the business cycle and financial industry scandals that actually contract real economic activity. Some of the geniuses on Wall Street also get it. In a recent poll by a corporate public relations firm (and long-time defender of financial services companies), a majority of Wall Street marketing executives admitted their industry’s own behavior caused its PR problems. Interestingly, 74 percent said “that increased regulation of the financial services industry will help their firms improve reputations and trust with customers.”

In a similar vein, consider the “cry in the wilderness” of the Goldman Sachs derivatives salesman who publicly resigned via the New York Times over the firm’s routine “ripping off of clients”:

“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all. It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets.’ “

Feds Deny Wall Street Execs the Expiation of More Regulation

Sadly, if guilt-riddled Streeters truly want more regulation and reform, this year may mark the rare non-event of Wall Street not getting what it wants from government. Indeed, enactment of the so-called JOBS legislation – a bill with massive bi-partisan Congressional support eagerly signed by the President – may prove the antipathy of what financial marketing executives desire. Here’s what SEC Commissioner Luis Aguilar said in a March 26 statement about the “Jumpstart our Business Start-ups Act”:

“I  share the concerns expressed by many that [the JOBS bill]. . . would be a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult. Currently, the SEC and other regulators may be put on notice of potential frauds by advertisements and Internet sites promoting “investment opportunities.” H.R. 3606 would put an end to that tool. Moreover, since it is easier to establish a violation of the registration and prospectus requirements of the Securities Act than it is to prove fraud, such scams can often be shut down relatively quickly. H.R. 3606 would make it almost impossible to do so before the damage has been done and the money lost.”

Fear of Wall Street at Regulatory Agencies?

Loathing and self-loathing of Wall Street hasn’t gotten us very far. This is, in part, because of fear of Wall Street – fear that it may not continue to dish out the $14 million plus given to Congressional candidates in the election cylce ending June 30, 2011, and fear that it may take legal action should government bite the hand that feeds it. It is the latter fear that apparently makes regulators timid about implementing even the modest reforms of the Dodd-Frank Act, which requires new rules to reign-in the wild derivatives market, among other changes.

First, a New York Times editorial on March 24 summarized the problem with derivatives:

If there is one lesson from the financial crisis that should be indelible, it is that unregulated derivatives are prone to catastrophic failure. And yet, nearly four years after the crash, and nearly two years since the passage of the Dodd-Frank law, the multitrillion-dollar derivatives market is still dominated by a handful of big banks, and regulation is a slow work in progress. That means Americans, and the economy, remain at risk. . . . Unreformed, [derivatives] will cause havoc again.
Secondly, numerous media explained why neither the Times nor honest Wall Streeters will get the regulation they crave. Underwriters and marketers of derivatives have evidently filed frivolous lawsuits against the feds, making regulatory personnel fearful of writing new rules required by law.

 Here’s how Reuters reported it on March 8:

Some U.S. regulators are “paralyzed” by the threat of lawsuits from Wall Street firms seeking to slow or stop the rollout of rules that would crimp their bottom line . . . Bart Chilton, a commissioner at the Commodity Futures Trading Commissioner, said if regulators live in fear of a lawsuit alleging they failed to consider sufficiently the costs and benefits of a rule, rulemaking slows or halts and opponents have succeeded. Regulators, already months behind in implementing rules from the Dodd-Frank financial reform law passed in 2010, are bracing for additional legal challenges as more regulations are completed.

Turns out, the International Swaps and Derivatives Association, Inc. and the Securities Industry and Financial Markets Association have already filed two lawsuits on behalf of JP Morgan Chase, Goldman Sachs and Morgan Stanley alleging the CFTC did not adequately consider the costs to industry of new regulations on speculative derivatives based upon oil, gas and other commodities. For more, see Bloomberg.

Fear and Loathing of Wall Street: Private Investors Pick-up Slack

Fortunately, as timid federal regulators move at a snail’s pace, private investors led by pension funds are actually taking action against the underwriters of spurious derivative products, misrepresented sub-prime mortgage backed securities products and other hooligans along with their professional enablers.

Interestingly, although the number of resolved securities class action lawsuits alleging fraud and other wrongdoing (typically led by institutional investors) declined overall in 2011 to 65 from 86 in 2010, settlements by underwriter defendants in such lawsuits matched an all-time high of 26 percent of the total (of all securities class action settlements) reached in 2010. And, $1.36 billion was recovered for investors through all securities class action settlements approved by federal courts in 2011.

Last year’s largest legal victory for shareholders was the $208.5 million won from the officers, directors, the underwriter and auditor of Washington Mutual bank, the first and largest bank to fail in the then unfolding sub-prime mortgage and derivative catastrophe.
Read more here.

SEC Two Months Late in Fulfilling Dodd-Frank Obligation

Unfortunately, the Supreme Court decisions eliminating private accountability for those who knowingly enable securities fraud (Central Bank and Stoneridge) and immunizing from liability in America foreign based fraudsters who prey upon US investors (Morrison) continue to limit the ability of private actions to enforce securities laws and protect the public.

And, speaking of Morrison and foot dragging on implementing the lawful reforms of the Dodd-Frank Act, as of March 19, the SEC was two months late in issuing a report to Congress on whether or not the anti-US investor Morrison decision should be overturned.

Apparently, federal regulators cannot fully decide just whose side they are on: the American people they are empowered to protect or the financial services firms they are empowered to regulate?
Fear and loathing of Wall Street may be universal sentiments among the public, thoughtful financial executives and the federal government during this election year.

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Guest Post: Anti-Investor Supreme Court Decision and the SEC

By Jeff McCord of The Investor Advocate

Impending SEC Recommendation on Anti-Investor Supreme Court Decision a Bellwether on Regulator’s View of “Public Interest”

In one of its filings prior to U.S. Judge Jed Rakoff’s celebrated November 28th refusal to rubber stamp an SEC-Citicorp deal allowing the bank – a “recidivist offender” — to escape significant damages and an admission of wrongdoing for what may have been egregious, knowing fraud in Citi’s sale of bad mortgage-related assets to unwitting investors, the SEC incredibly asserted that “the public interest . . . is not part of [the] applicable standard of judicial review [of the proposed Citicorp settlement.]” To that, Manhattan federal Judge Rakoff simply responded: “This is erroneous.” [see Rakoff ruling here ]

Just a few years’ ago, the idea that a federal judge would need to remind a federal regulatory agency that the judicial and executive branches work on behalf of the public interest would have seemed ludicrous. Now, it is long over-due.

An impending SEC recommendation to Congress (due in January) on whether an anti-US investor Supreme Court decision (Morrison, discussed below) should be overridden will help answer a timely question: has the Commission heard and understood Judge Rakoff’s admonition?

“Prosecuting Bus Boys and Nannies rather than Wall Street Bandits”

When it comes to the need to hold Wall Street fraud perpetrators accountable in the public interest, the Justice Department itself received a wake-up call from one long-time Member of the House Judiciary Committee, Zoe Lofgren (D-CA,16th District), who in May said prosecutors were more focused on immigration offenses than the on-going financial crisis:

The Department [of Justice] is spending its resources prosecuting nannies and bus boys who are trying to get back to their families. And, yet we have not brought any prosecutions of the bandits on Wall Street who brought the nation and the world to the brink of financial disaster. (Bloomberg)

Led by Lofgren, the California delegation of Democratic Members of Congress on October 10 called for Administration officials and the Federal Reserve to conduct an investigation into “systemic wrongdoing by financial institutions” in the mortgage markets.

Regulators Must Believe in Regulation to Prosecute White Collars, Professor Says

In a story on Judge Rakoff’s ruling, even the reliably establishment FORTUNE magazine opined:

For decades, financial wrongdoers have been able to skip public accountability, and slide out from under the consequences by paying out a sometimes substantial sum and moving on to the next deal.

Like Judge Rakoff’s obvious conclusion that the SEC should work on behalf of the public interest, University of California professor of criminology and law Henry N. Pontell made this “goes without saying” observation in a New York Times interview:

When regulators don’t believe in regulation and don’t get what’s going on, there can be no major white-collar crime prosecutions.

Denying US Investors’ Recourse When Foreign Stock Issuers Defraud Them

In what may be a bellwether on the SEC’s understanding of “what’s going on” in relation to its mission of protecting investors in the public interest, in January the Commission must recommend to Congress whether or not it should override one of the most notorious anti-US investor Supreme Court decisions to come out of a Court not known for acting in the interests of investors, consumers or the public. Specifically, the Dodd-Frank Act directs the SEC to review and make recommendations on Morrison v. National Australia Bank Ltd, a 2010 decision that denies U.S. investors the legal right to hold accountable any foreign listed company (such as Toyota, BP, Sony, DaimlerChrysler or Deutsche Bank) that defrauds them in a securities transaction — even if the wrongdoing takes place on U.S. soil. The decision has caused many meritorious investor lawsuits to be tossed from U.S. courts, denying Americans recourse.

Many pension funds, retirement plans, investor and public interest groups have written letters asking the SEC to recommend Congress override Morrison. Fourteen public pension funds managing more than $700 million in retirement funds for teachers, policemen, firemen, and other public servants in California, Colorado, Delaware, Florida, North Carolina, Maryland, Pennsylvania, Rhode Island and other states made a common sense argument:

[Morrison should be reversed because under that decision, foreign companies] can market their shares to American investors, can obtain a significant portion of their market capitalization from American investors, can file their financial statements with the [SEC], and can even engage in fraudulent conduct on U.S. soil, yet cannot be held liable under U.S. law to the victims of their fraud.

And, the pension funds (like Judge Rakoff and more than one professor) reminded the SEC that its mission as stated on its own website is “to protect investors and maintain fair and orderly markets.” The Exchange Act that established the SEC actually says protecting “the public interest and the interest of investors” are the objectives of the law.

Prudent Fund Management Practices “Turned Upside Down” by Supremes

For decades, to discharge their fiduciary responsibility, public pension funds have invested only in securities, including foreign stocks and bonds, protected under United States securities laws. And, prior to Morrison for more than twenty years, modern portfolio management practices dictated that pension funds reduce risk through investment diversity – both by country and industry.

For pension funds, investing in foreign based companies such as Toyota, Nokia, BP and others had been common and considered prudent,” explains Salvatore J. Graziano, a partner at the law firm of Bernstein Litowitz Berger and Grossman, LLP and president of the National Association of Shareholder and Consumer Attorneys. “Fund managers knew that if a foreign company they invested in committed fraud, corporate governance abuses, or other wrongdoing within the United States or harmed U.S. investors, they could hold such a company and its managers accountable and seek recovery of their investment losses in U.S. District Courts. These fund management practices and investor protections were turned upside down in 2010 by Morrison.

Watch SEC on Morrison

Has the Administration heard and absorbed the messages sent to it by Judge Rakoff, many of America’s largest pension funds, professors and millions of polled individuals that its’ Wall Street policies may have strayed from the public interest? In coming weeks, watch what the SEC recommends to Congress regarding Morrison.
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Originally published at The Investor Advocate

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By Jeffrey R. McCord of The Investor Advocate


“Occupy” Annual Meetings and Court Rooms

The spectacular fall and bankruptcy of Jon Corzine’s MF Global Holdings within clear sight of mostly inactive regulators reminds us that “the system is still far too vulnerable and the work of regulatory reform far from finished,” to quote a NEW YORK TIMES editorial on the subject . But, how to continue regulatory reform in a world in which one House of Congress is controlled by anti-regulatory zealots and existing regulators are too often afflicted by chronic DC/NY revolving door syndrome?

In frustration, President Obama has finally begun using Executive Orders to try to accomplish more positive economic change. And, as we all know, he was preceded and prodded by the growing ranks of the Occupy Wall Street movement spreading nationwide and into Europe.
As their visibility and perceived importance of OWS increase, more arm chair generals (me included) are putting forth a lengthening agenda of reforms we hope protestors will demand. One percipient OWS observer hit a big nail on the head when he identified the following economic pressure point progressives should slam:

“If I had to give the Occupy Wall Street movement a piece of advice, I would tell them to focus their growing chorus against Wall Street excesses on corporate governance reform. . . . [That] may sound innocuous, or tedious, or overly academic, but if this movement wants to put the fear of God into the corporate chieftains who are looking down from their towers in Manhattan at the masses below, needs to take the time to explain to its foot soldiers exactly how power is wielded in a modern corporation.”

That suggestion from Kris Broughton, an independent journalist, blogger and national media commentator who also uses the moniker “brown man thinking.” (See ) And, his African-American heritage may have informed his choice of this agenda item usually overlooked by progressives. But, it was activism by individual and institutional investors (in the form of company annual meeting ballot initiatives and shareholder voting and litigation) that helped end the abomination of legal racial oppression and separation of races in South Africa, and achieve expansion of civil rights at home.
Shareholder Activists Help Defeat Apartheid .

One of the first effective blows against apartheid in South Africa by the international community was wielded by the Episcopal Church in 1971. As a shareholder in General Motors Corporation, then a profitable corporate behemoth standing astride the world, instead of ignoring the voting rights its share ownership bestow, the Church:

“introduced a shareholder proposal . . . requesting that General Motors cease operations in South Africa, a nation then enforcing a very strict apartheid, including total separation by race in the workplace (jobs, pay, drinking fountains, etc). The registrant’s [General Motors’ subsequent] proxy statement [mailed to all shareowners] revealed that one of GM’s directors, the Rev. Leon Sullivan, had voted against the Board’s decision to oppose the [South African] shareholder proposal. At the annual meeting, Rev. Sullivan came down from the dais and spoke in favor of the shareholder proposal. The upshot of the ‘conflict’ on GM’s Board was the creation, by a coalition led by General Motors, but consisting of almost all of the major U.S. corporations operating in South Africa, of the ‘Sullivan Principles,’ a code of conduct to abolish apartheid in their South African workplaces.”(See more at: , the Interfaith Center on Corporate Responsibility.)

That radical and successful non-violent action initiated by a mainstream Christian denomination ultimately led faith-based organizations from virtually all major religions within the United States to form The Interfaith Center on Corporate Responsibility (ICCR). Today, it is comprised of 275 members and affiliates — including faith-based institutional investors such as pension funds, foundations, hospital corporations, economic development funds, asset management companies and colleges — that have investment portfolios collectively valued at more than $100 billion. They own shares in most major corporations and actively use the governing rights those shares convey to promote honest and socially responsible management of companies in which they invest. ICCR board member Jeffrey Dekro of Jewish Funds for Justice, for instance, is a catalyst for investment in low-income community development.

Fighting Capitalist “Heresies” With Capital
Back in 2002, when most investors and citizens were still angry from the last round of egregious corporate fraud and abuse (think Enron, Global Crossing, WorldCom, Adelphia Communications, etc), the NEW YORK TIMES reported on the interfaith group’s shareholder activism by focusing on ICCR executive Sister Patricia Daly, a member of the Catholic Dominican order:

“Sister Daly views her work as following in the tradition of the Dominican order, founded in the 13th century by St. Dominic to fight heresies and untruths. ‘We’re dealing with some of the heresies and untruths of capitalism,’ Sister Daly said.”

Risk Metrics Group, a profit-making associate member of Sister Daly’s ICCR, provides research and advice to governments, corporations, academics, institutional investors and others seeking unbiased actionable information on securities markets and companies that issue securities. Although recently acquired by a larger consulting firm (Institutional Investor Services, Inc.), Risk Metrics remains a leader in providing clients with decision-making data on corporate governance matters. And, the number of institutional investors willing and interested in fostering corporate management reform has expanded far beyond the ranks of the faith-based.

“Short-term Profit Maximization is not a Sustainable Model”

In an interview, Lucas Green, an attorney and a research director for Institutional Investor Services Inc.’s corporate governance unit, said socially aware shareholders can and should exert a positive influence on how corporations are governed. Today, institutions – particularly pension funds serving employees, academic personnel and union members – are using more than proxy ballots to force change at poorly and dishonestly governed companies. They are going to Federal court, where, like civil rights activists and environmentalists before them, they use class actions to unite all shareholders in tackling a corporation’s embedded executives.

Admittedly, the prospect of strategic corporate proxy battles, institutional investor led litigation, and such key “corporate governance” issues as management compensation packages are enough to make the eyes of many OWS protestors (and most other citizens) glaze over. But, the ISS’s Lucas Green explains how the interests of Main Street are aligned with some of the nation’s largest public and union pension funds pushing for real change:

“One only has to look back to the Enron, WorldCom and more recent scandals to see the relevance of how corporations are governed to the interests of all investors including individuals and the overall health of our economy. Experience demonstrates that a corporate structure that places the highest value on short term profit maximization and short term stock price gain is not a sustainable model. Executive compensation packages should encourage long-term, sustainable growth and health.

“The interests of public pension funds, which are often among the largest investors in any given corporation and which seek effective, honest corporate governance focusing on the long term, are aligned with the public interest in several ways. The beneficiaries of pension funds themselves are typically individual employees and, more broadly, the funds in their role as big investors can also exert a positive influence on securities markets and the economy.”

Adjusting United Healthcare’s Moral Compass
As an example, in his lengthy paper on litigation in corporate governance, Mr. Green cites a lawsuit led by the California Public Employee’s Retirement System (CALPERS), a huge pension fund with about $236 billion in assets under management, that helped force extensive reform in the way the giant healthcare insurer United Healthcare Group, Inc. is managed. (See Green’s study at )

A few years ago, amid a federal investigation (in 2006) into the illegal back-dating of stock options to enrich senior United Health managers, a separate New York State Investigation (in 2008) of alleged fraud in consumer healthcare billing, and other allegations of fraud in the sale of its securities to investors, CALPERS and other investors successfully pursued a class action against United Health in federal court that in 2009 won the following:
— $925.5 million for allegedly defrauded shareholders;
— creation of a more independent board of directors to exercise better oversight of United Health management;
— reform of United Health executive compensation packages to discourage future wrongdoing.
Pension Funds Can Do Better Than SEC at Thwarting Wrongdoing
Ample research in recent years demonstrates that class action lawsuits led by such powerful investors as CALPERS can achieve better results at holding wrongdoers financially accountable and in deterring future misbehavior than even the Securities and Exchange Commission (SEC). For nearly a decade, two law professors, James Cox of Duke University, and Randall Thomas of Vanderbilt, have studied the role of institutional investor-led lawsuits in combating fraud and other corporate abuse. In a joint paper published last year, they concluded:

“[P]rivate suits headed by an institutional lead plaintiff . . . appear to [target bigger corporate wrongdoers and achieve] better settlements and lower attorneys’ fees awards
[than lawsuits led by individual investors]. SEC enforcement efforts, while significant, have tended to focus on weaker [and smaller corporate malefactors as] targets, suggesting that the big fish get away.”

What Can Peasants Do When Pitchforks are Parried by Police?
What can individual citizens – including our OCW surrogates serving at the front — do to reform corporate governance? The fortunate few who are still covered by pension funds
should contact their funds’ managers and encourage them to join the fight for reform. Citizens who are active in Christian, Jewish, Muslim and other faith-based organizations should ask their religious leaders to mobilize congregate financial resources and inherent strength in numbers of individuals to challenge corporate crime in both shareholder meetings and courts.

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Guest post: Frequently Maligned Class Action Lawsuits Actually Deter Financial Wrongdoing

By Jeff McCord is a former US Senate staffer, Securities Investor Protection Corp (SIPC) executive and has been a free-lance journalist for Dow Jones publications. His academic background in economics includes post-graduate work at the London School of Economics and George Washington University.


Though often criticized as frivolous and lacking economic benefit, new research by finance and accounting professors at Rutgers and Emory universities’ business schools finds that class action lawsuits are a strong deterrent to misrepresenting corporate financial results and other wrongdoing.  And, in many instances class actions are a stronger deterrent than SEC enforcement.
“Our research found statistically and economically significant deterrence associated with both SEC enforcement and class action lawsuits,” said Simi Kedia, Ph.D, MBA, associate professor of finance at Rutgers University School of Business in an interview with The Investor Advocate.  “We looked at firms in the same industry as the enforcement target and found that the average peer firm subject to SEC action and/or litigation reduces discretionary accruals (i.e., reporting as sales transactions for which payment has not been received) equivalent to 14 percent to 22 percent of the median return on assets in the aftermath of such enforcement.”
The study, a working paper presented at a couple conferences and now being circulated for comment before publication, measured the effectiveness of the two primary methods of federal securities regulatory and law enforcement:  “public” enforcement by the Securities and Exchange Commission; and, “private” enforcement through securities class action lawsuits.
Regulatory Failures Enhance Importance of Class Actions
A recent story by the New York Times’ Gretchen Morgenson reported on why private lawsuits are particularly important at a time when federal failure to enforce the law is considered one cause of our on-going financial-economic crisis and of public discontent with government:
“When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,” said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”
Lawsuits have long been a crucial method for shareholders to recover losses. A February letter to the Securities and Exchange Commission from the general counsel of the California Public Employees’ Retirement System noted that private litigants in the 100 largest securities class action settlements had recovered $46.7 billion for defrauded shareholders.”
“I am not surprised at all that rigorous unbiased research now proves class action law suits are a robust deterrent to financial fraud and wrongdoing,” explained Salvatore J. Graziano, Esq., president of the National Association of Shareholder and Consumer Attorneys.  “On behalf of defrauded institutional investor clients, securities plaintiffs’ attorneys routinely conduct thorough and ground breaking investigations of corporate defendants including securing information from knowledgeable former employees in our civil prosecutions.  In fact, private investor lawsuits at times also help further investigations by the SEC and other federal agencies.”
Indeed, the new study found that in cases where both the SEC and class action lawsuits take action, on average private lawsuits precede SEC action by 297 days .
Not surprisingly, the strongest deterrence effect was found when both SEC proceedings and class actions are launched.
Class Actions Recover More Money & Can be Stronger Deterrent than SEC
“Class action lawsuits, although often maligned as frivolous and socially wasteful, can have positive externalities by curbing aggressive reporting behavior of peer firms,” the paper by Dr. Kedia and her colleagues states.  Indeed, class action lawsuits recover far more money – twice as much or more — from wrongdoers than SEC actions, according to sources cited by the professors.  And, in most situations, the deterrence value of class actions (in the absence of SEC enforcement) is actually stronger than that of the SEC when acting without a corresponding class action.
This first study to validate the enforcement value of class actions through empirical research was conducted by Dr. Kedia and Shivaram Rajgopal, Ph.D., Chartered Accountant and Schaefer Chaired Professor of Accounting at Emory University’s Goizueta Business School, with Jared Jennings, a doctoral student at the University of Washington’s school of business.  Their paper, entitled “The Deterrence Effects of SEC Enforcement and Class Action Litigation,” reports their analysis of 474 SEC actions alleging financial statement misrepresentation and 1,111 class action lawsuits alleging violations of Generally Accepted Accounting Procedures during 1996 through 2006. The paper was first circulated for comment in June. 
Among other findings, the professors reported:
— “The SEC publicly targets a very small fraction of firms – in our sample only 0.74% of firms were subject to SEC enforcement. At these low levels of enforcement, a substantial fraction of misreporting is likely to go undetected.  Therefore, if potential miscreants consider the probability of detection to be too low, they are unlikely to change their behavior.”
— “Securities class action litigation for alleged reporting irregularities is more likely against an average firm – in our sample 1.28% of firms are subject to class action litigation.  The greater likelihood of class action litigation, combined with higher monetary sanctions, likely renders lawsuits as a potentially effective way to deter reporting irregularities at peer firms.
The purpose of the research was to empirically measure the value of SEC enforcement actions at a time when the Commission has been criticized as ineffective.  It also sought to assess the value of securities class action lawsuits, a legal remedy for investors and private enforcement mechanism that has been attacked for many years within corporate and political arenas.

Jeff publishes a blog ( to help promote investor protection and sustainable economic growth by reporting on securities regulatory and other investor-related news and developments ignored by mainstream media. He may be reached at

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