OSEC Member Perspective – Occupy the SEC Submits Amicus Brief to the Supreme Court in Bank of America N.A. v. Caulkett, Advocating for Strip-off of Underwater Mortgages During Chapter 7 Bankruptcy

By Simisola Durosomo

Occupy the SEC (“OSEC”) has submitted an amicus brief in Bank of America N.A. v. Caulkett, and Bank of America N.A. v. Toledo-Cardona, two consolidated cases presently pending before the U.S. Supreme Court. Oral argument for these cases is set for Tuesday, March 24, 2015.

These cases focus on Sections 506(a) and 506(d) of the Bankruptcy Code, which, if read together, provide that a completely underwater lien must be voided under a Chapter 7 process. The Petitioner, Bank of America, claims that a Chapter 7 filing should not cause the strip off of an underwater second mortgage. Rather, an unsecured creditor should be allowed to uphold the lien, even if the mortgage is underwater and worthless. Bank of America takes the stance that sections 506(a) and 506(d) should be interpreted separately when it comes to determining the meaning of the term “allowed secured,” in keeping with the flawed reasoning of a prior Supreme Court case Dewsnupp v. Timm (1992).

In its amicus brief, OSEC argues that Bank of America’s position would produce a great injustice to those individuals who have filed for Chapter 7 bankruptcy. OSEC reminds the Court that a central purpose of bankruptcy law is to afford unfortunate debtors a “fresh start.” The banking industry’s misconduct has fueled, and continues to fuel the mortgage crisis. The bipartisan Financial Crisis Inquiry Commission found banks to be culpable in bringing about the Great Recession of 2008. The crisis distressed the economic status of millions of homeowners — currently there are 2.1 million underwater borrowers who are at risk of impending default and possible foreclosure.

The legislative history behind the implementation of §506 shows that subsections (a) and (d) were intended to be read jointly. Numerous House and Senate reports supplementing the passage of the Bankruptcy Code of 1978 confirm this. In fact, any ambiguities in understanding §506(d) can be remedied by reading that statute in conjunction with §506(a). OSEC also points to several policy considerations that favor the strip-off of wholly underwater liens during Chapter 7 liquidation.

OSEC Member Perspective – Bank Lobbyists Tread Familiar Ground in Omnicare Supreme Court Case

By Brandon Lev

Today the Supreme Court heard oral argument in Omnicare v. Laborers District Council Construction Industry Pension Fund, a case arising out of the Sixth Circuit. Omnicare is alleged to have misled investors about the legality of its pharmaceutical rebates and other practices.  The case centers on Section 11 of the Securities Act, which prohibits material misstatements in securities registration statements. Specifically, the Court will decide whether a Section 11 plaintiff must plead that the defendant subjectively knew that an offending misstatement of opinion was false.

By imposing this subjective knowledge requirement, the Court could severely undermine Section 11, which is a valuable tool in the toolbelt of aggrieved investors. Not surprisingly, industry lobbyists have lined up in support of the whittling down of Section 11.

The amici curiae briefs submitted in this case by the Chamber of Commerce (CC) and the Securities Industry and Financial Markets Association (SIFMA) demonstrate the troubling reasoning that underlies legal arguments supportive of Omnicare.

In its brief, the CC attempts to undermine the Omnicare investor-plaintiffs’ Section 11 claims by highlighting the Court’s prior contention that section 11 places a “relatively minimal burden on the plaintiff.” Furthermore, CC asserts that the strict liability interpretation of Section 11 poses untenable peril to businesses by punitively targeting innocent mistakes of opinion. They claim that this interpretation “…would deter issuers from engaging in public offerings in the United States.” Thus, CC believes that companies’ public offerings are predicated at least in part on the ability to express any self-assessing opinion regardless of objective fact and free from any accountability or risk. This is noteworthy because CC suggests that if any transaction between businesses and customers is to be fair, the burden of accounting for risk should be placed more heavily on investors. Because Section 11 does not conform to this conception of fairness, the CC believes the Court should instead rely on precedent formed by cases involving SEC Rule 14a-9.

CC’s argument is based heavily on Virginia Bankshares and the interpretation of SEC Rule 14a-9 contained therein. Under such guidelines, plaintiffs would be required to prove that not only was the information presented to them false, but that Omnicare representatives knowingly presented this false information as true. Thus, CC’s argument can be characterized as demanding that burdens be shifted from businesses to shareholders, and that these burdens be virtually impossible to meet. Indeed, the above interpretation of Rule 14a-9 demands nothing short of gleaning information directly from another person’s mind. Such a burden of proof seems excessively stringent.

In contrast to CC’s preference for Rule 14a-9, SIFMA challenges directly the Sixth Circuit’s reading of Section 11. They argue that Section 11 “is not a strict liability statute.” Instead, it provides a narrower form of liability by granting underwriters due diligence protections if they have “reasonably investigated” and “reasonably believe” that the opinion expressed by an issuer is true. In essence, SIFMA argues that the strict liability interpretation of Section 11 is unfair because it punishes companies simply for being mistaken in their own beliefs, and does not provide specific guidelines by which underwriters can assess the veracity of issuer statements. Again, these arguments seem to hinge on the belief that in order for businesses to flourish, they must be absolved of the risks associated with offering securities. Instead, such risks should be placed squarely on the shoulders of investors and consumers, because the opinions expressed by issuers are sufficient for consumers to make educated investment decisions.

The above arguments are rooted largely in precedent established by the Supreme Court, and demonstrate the extent to which financial regulations have been interpreted so as to benefit businesses rather than consumers. Thus, Omnicare presents the Court with an opportunity to reverse these retrograde interpretations. In its own amicus brief, Occupy the SEC has urged the Supreme Court to uphold the Sixth Circuit’s strict liability interpretation.

At stake is here is whether or not our economy can be a fair institution that benefits the public.

Occupy the SEC Submits Amicus Brief to U.S. Supreme Court in Omnicare, Inc. v. Laborers, Advocating for Victims of Misrepresentation in Securities Offerings

Occupy the SEC (“OSEC”) has submitted an amicus brief in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, a case that is currently pending before the U.S. Supreme Court. The case centers on a key provision of the Securities Act of 1933 (“’33 Act”), Section 11, which creates an express right of action against issuers and their agents for material misrepresentations contained in the offering materials of registered securities.

Shoddy mortgage-backed securities played a pernicious role in the recent financial crisis, which destabilized the capital markets, soured the global economy and jeopardized the financial position of the average person. In the run-up to the crisis, the registration statements of many toxic securities falsely touted these instruments’ credit-worthiness, to the financial detriment of investors. Unfortunately, enforcement agencies such as the Securities and Exchange Commission have been of limited effectiveness in adequately addressing these wrongs. Section 11 is an important tool that aggrieved investors can use to seek remedy for misleading statements made by issuers and their agents.

Both Supreme Court precedent and the legislative history of the ’33 Act support the view that a Section 11 plaintiff need only allege a material misrepresentation in order to establish a claim. However, the Petitioners in this case (and numerous pro-industry lobby groups) have urged the Court to upend this history by requiring Section 11 plaintiffs to prove that the speaker of a materially misleading statement of opinion actually held a different opinion than the one expressed (“subjective falsity”).

OSEC’s amicus brief rejects the “subjective falsity” requirement, arguing that this novel standard would severely inhibit aggrieved investors from seeking redress for material misrepresentations contained in offering documents. The Supreme Court will hear oral arguments on the case in the upcoming term.

Occupy the SEC Submits Letter to SEC Re: Clearing Agency Regulations

Occupy the SEC (“OSEC”) has submitted a comment letter to the Securities and Exchange Commission (“SEC”) regarding that agency’s notice of proposed rulemaking on systemically important and security-based swap clearing agencies.

As numerous commentators have asserted, swaps and other exotic OTC derivatives contributed to the recent financial crisis.  These often-complex instruments were traded on shadowy markets and enabled an exponential growth of leverage and unpredictable, interconnected risk.  Under the banner of financial innovation and competition, these derivatives allowed sophisticated market players to exploit ordinary homeowners, municipalities and others.  The Dodd Frank Act has sought to shed light on these opaque markets, by requiring derivatives to be cleared through registered agencies.

This shift could be a useful means to bring shady derivatives transactions “out of the shadows,” provided of course that clearing agencies are themselves robust and stable.  In some ways the risk associated with derivatives has not gone away – it has simply shifted to clearing agencies.  Thus, it is vital that the Commission not only promulgate strong regulations covering such agencies, but also enforce such regulations in a vigorous manner.

The SEC has proposed a dual framework for the regulation of registered clearing agencies, applying general standards under Rule 17Ad-22(d) for new entrants, and a more rigorous set of standards for covered clearing agencies under Rule 17Ad-22(e).  OSEC supports this dual framework, as it will allow new entrants to more firmly establish themselves as clearing agencies, which is important for the deconsolidation and diffusion of risk across the market.

Even so, in its comment letter OSEC has recommended that the Commission remain vigilant to prevent companies from engaging in regulatory arbitrage to avail of relaxed standards under Rule 17Ad-22(d).  OSEC also urges the Commission to exercise its blanket authority to designate risky companies as  “covered clearing agencies” subject to the stringent requirements of Rule 17Ad-22(e).  Further, OSEC urges the Commission to expand the role of external auditing to ensure compliance with clearing rules.

Occupy the SEC Submits Letters to Federal Reserve Board of Governors in Response to its Advance Notice of Proposed Rulemaking on Risky & Anticompetitive Physical Commodities Transactions under the Bank Holding Company Act

Occupy the SEC (“OSEC”) has submitted a letter to the Federal Reserve Board of Governors (“Board”) regarding that agency’s advance notice of proposed rulemaking on physical commodities transactions under three provisions of the Bank Holding Company Act (“BHCA”). The Board revisits these provisions at a time when the Dodd Frank Act’s momentous changes in systematic risk regulation and recent abuses of the BHCA demand heightened prudential regulation, including heightened examination and leverage-based and risk-based capital requirements, and divestiture of existing commodities operations. 

The Board now has the opportunity to reinstate the historical separation in American law between financial and commercial activities that kept banks from becoming Too Big to Fail and overwhelming the economy.  It can prohibit institutions that receive federal depository insurance and implicit federal guarantees to act in a manner that threatens environmental pollution and risks systematic financial contagion. It can limit or mitigate speculation in physical commodities and derivatives markets that has created artificial scarcity in products such as wheat and oil on which billions of people—and governments—are reliant.

The BHCA, passed in 1956, was only one response to concentration in the banking industry and repeated financial crises at the turn of the 20th century that often began with speculative commodities transactions.  Those crises also led to progressive citizens’ movements, and the Clayton Antitrust and the Federal Reserve Acts of 1913.  These laws helped prevent banks from limiting innovation and controlling financial and commodities markets—as well as the institutions of government themselves.

The Board must implement the systematic risk provisions of the Dodd Frank Act and the Volcker Rules’ limits on proprietary trading in limiting unsafe physical commodities operations.  The Board recognizes in the ANPR the risk that physical commodities operations in such fields as petroleum trading and refining pose to a still heavily leveraged and overly complex financial system.  OSEC agrees that a single environmental risk involving a Bank Holding Company (“BHC”) or Systematically Important Financial Institutions (non-BHCs) under Title I of the Dodd Frank Act could suffer liability, reputational, and liquidity risk that would threaten institutional survival and could contaminate and destroy the financial system.  The Deepwater Horizon disaster and the extensive operations of BHCs in fields such as energy management are excellent examples of the operations’ multi-tiered threats.  As a result, the Board cannot ignore that license that Title I provides for it to institute severe leverage-based and risk-based capital requirements, reporting and disclosure requirements, and liquidity requirements, among other regulations.  The merchant banking rules, with permit passive investments in companies with physical commodities trading operations, are limited under the Volcker Rule’s restrictions on private equity investments.  The Board must also institute reporting and disclosure requirements, more extensive bank monitoring, and limit the duration and active management of merchant banking investments.

The ANPR does not comprehend that BHC physical commodities trading threatens more volatile core commodities prices and the growth of the economy and jobs.  The Board, however, has a dual mandate to limit inflation and ensure full employment and cannot only concern itself with the stability of a jury-rigged and unreliable financial system as it threatens to malfunction and explode. OSEC contends that the physical commodities trading operations risk the productivity and safety of the entire economy and stable, dependable job growth.  They also threaten to limit access to vital commodities such as wheat, soybeans, aluminum, and oil and cause increased poverty and geopolitical disruption.

OSEC contends that the Board intensified these dual crises when it failed to apply the proper criteria in its actions on the complementary, grandfathering, and merchant banking provisions of the BHCA.  The Board, starting in 2003, approved such actions as petroleum trading as complementary to financial activities without properly analyzing their risks to financial system and firm safety and soundness as well as competition in the physical commodities markets.  Evidence of illegal price manipulation and risky activity demands the rescission of those orders and divestiture of physical commodities operations.  The Board improperly interpreted the temporary and permanent grandfathering provisions of the Act to permit new BHCs to hold onto an unlimited swath of physical commodities activities.  The Act generally allows for only a three year temporary conversion period, with two extensions, and institutions such as JP Morgan and Goldman Sachs that became BHCs after Sept. 1999 can only hold onto physical commodities activities they possessed in Sept. 1997.  OSEC asserts that the Board implemented merchant banking rules with few restrictions on the lengthy term they can be held or on active BHC management of subsidiaries and little role for active internal Board monitors at those institutions.

These omissions demand that the Board revisit its regulations and orders and require divestiture or at least extensive prudential limits on physical commodity operations.  The recent financial crisis illustrated the limits to prudential regulation and tools such as Value at Risk for both banks and regulators when it comes to unpredictable and severe crises.  We recommend that the Board adopt a precautionary approach and at least require transparent reporting and disclosure, significant leverage-based and risk-based capital requirements, liquidity requirements, and limits on the duration and intensity of BHC management of operations.  Prudential regulation would mitigate but not resolve the difficulties with the current BHCA operations.

Indeed, the Board fails to recognize in its ANPR that physical commodities operations could result in massive environmental liability and that the Federal government could become responsible for initial remediation and cleanup costs.  Under statutes such as Superfund (CERCLA), the possibility that the Federal government will become responsible for initial remediation costs is significant.  There is a possibility of massive initial, or even permanent, social and environmental disruption even if the polluter does not evade its responsibilities under the bankruptcy or resolution procedures under Title II of the Dodd Frank Act.  There is no justification for providing a further subsidy so that BHCs can engage in risky and socially unproductive activities.

The Board has also failed to recognize that the massive and cumulative physical commodities investments permitted under the complementary provisions of the BHCA require that the agency issue an Environmental Impact Statement.  The National Environmental Protection Act (“NEPA”) requires that agencies make such statements before certain major agency actions, such as permitting risky petroleum drilling, to allow for a fully informed process.

The Board, finally, fails to square the explicit and implicit subsidies that BHCs receive with their negative effects on physical commodities and derivative markets as well as productivity.  Since deregulation in the 1980s, physical commodities and derivative markets have increasingly resembled other speculative financial markets.  Further permission for speculation will allow unfair competition with BHCs using the massive capital structures that are the product of heavy government guarantees to concentrate resources and benefit from insider information to the detriment of customers and the public.  Recent Federal Energy Regulatory Commission enforcement actions against J.P. Morgan and other BHCs manipulating the energy markets illustrate the negative effects on the economy.  Although certain customers could benefit from deals, they threaten the productivity and stable growth of the economy.

OSEC contends there is no justification for allowing activities that were the subject of criminal prosecution in the Enron crisis and which threaten global financial safety to continue.  The Board must significantly revise its prior orders and regulations to permit a safer, more productive financial sector and a wider economy that works for the benefit of all.

Occupy the SEC Submits Letter to FDIC Regarding its Proposed Implementation of Too Big to Fail Regulations Under Title II of the Dodd Frank Act

Occupy the SEC (“OSEC”) has submitted a letter to the FDIC regarding that agency’s proposed regulations implementing Title II of the Dodd Frank Act (“DFA”).  Title II of the DFA contains vital provisions that, if properly implemented, would help address the troublesome risks presented by “Too Big to Fail” (“TBTF”) financial institutions.

Title II seeks to allow for orderly resolution of troubled Systemtically Important Financial Institutions (“SIFIs”) in a manner that spares taxpayers the undue burden of supporting the colossal financial conglomerates that led to the 2008 financial crisis.

Unfortunately, a weakly-implemented Title II would be nothing more than a backdoor-bailout for overleveraged SIFIs.  OSEC has encouraged the FDIC to impose stringent penalties for SIFIs that are required to fall under its receivership under Title II.  The mistakes made by the government in handing out a billion dollar under the Troubled Asset Relief Program (TARP), completely free of any meaningful warrants or conditions, must not be repeated.

OSEC encourages the FDIC to recoup compensation from culpable management at troubled SIFIs, and to set future limits on executive compensation at bridge financial companies under receivership.  Excessive executive compensation at trouble SIFIs only serves to drain vital capital.  Financial executives should not be permitted to profit from their managerial malfeasance, especially when relying on the government to ease their companies’ unwinding and reorganization.

OSEC also encourages the FDIC to require bloated SIFIs to spin off subsidiaries, which would reduce these conglomerates’ anticompetitive market power.  Requiring divestitures would also serve to dilute risk across a greater number of entities, which in turn would reduce the risk that any of those entities would will be considered “Too Big to Fail” due to systemic inter-connectedness.

The final regulations must contain serious disincentives for SIFIs to undergo Title II receivership, otherwise the Title II resolution process will become just another version of a government bailout.

Occupy the SEC Awaits Agency Votes on Final Version of the Volcker Rule: Promulgation of Vital Component of Dodd-Frank Already Delayed by Two Years

On December 10, 2013, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corp. (“FDIC”) are scheduled to vote on a final version of regulations implementing Section 619 of the Dodd-Frank Act, better known as the “Volcker Rule.”  The Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission(“SEC”) are also expected to vote on the regulation around that same time.

Occupy the SEC (“OSEC”) urges these financial regulators to vote favorably on the Volcker Rule, instead of re-proposing it, as has been suggested by the U.S. Chamber of Commerce and other pro-bank lobbyists.  A vigorously enforced Volcker Rule could help avert another financial crisis similar to the Great Recession of 2008.  That crisis was caused in large part by excessive bank speculation in trading markets, and the Volcker Rule seeks to reduce the risk associated with these activities by prohibiting proprietary trading by government-backstopped banks.

In February 2012, OSEC issued a 325-page comment letter to the banking regulators urging vigorous and robust implementation of Section 619.  OSEC also issued letters to members of Congress in the summer of 2012 during the government’s investigation into JP Morgan’s “London Whale” trading losses, which could have been averted with a strongly enforced Volcker Rule.  In February 2013, OSEC filed a lawsuit against the above-mentioned financial regulators and the Department of Treasury for their delay in implementing the Volcker Rule, which by Congressional mandate should have been finalized by October 2011.

OSEC will issue an analysis of the Rule once the final version, which is expected to exceed 1000 pages, is issued later this month.

Occupy the SEC is a group of concerned citizens, activists, and financial professionals that works to ensure that financial regulators protect the interests of the public, not Wall Street. For further information, visit  http://occupythesec.org or email info {at} occupythesec .org.


Occupy the SEC Submits Comment Letter to Securities and Exchange Commission on Proposed Money Market Regulations

Occupy the SEC (OSEC) has submitted a comment letter to the Securities and Exchange Commission (Commission) in response to its proposed regulations covering the money market fund industry.

Five years ago the Money Market industry suffered a severe crisis caused by a multitude of factors.  Inadequate and feckless regulation was indubitably one of these factors.

In its comment letter, OSEC commends the Commission for now taking positive steps to fill this regulatory lacuna with prudential regulations that have the potential to preserve market stability and investor confidence. The SEC proposal follows some of the recommendations that OSEC submitted earlier to the Financial Stability Oversight Council (FSOC), but misses several important reforms.

OSEC has submitted its comments in order to ensure that the new MMF rules are developed with input from the perspective of the public, in light of the fact that the public is likely to bear the greatest costs of the systemic risk stemming from the MMF industry.

In its letter, OSEC recommends that regulators consider a series of measures that address gaps in the SEC’s 2010 MMF reforms.  Specifically, OSEC calls for enhanced diversification, increased liquidity and transparency, and greater fund board accountability so that fund investors have full knowledge of the risks involved, and can choose the fund structure that best aligns with their preferences.

The comment letter is available at OSEC’s website as a PDF.

Occupy the SEC Submits Amicus Brief to U.S. Supreme Court in Consolidated Troice Cases, Advocating for Fraud Victims

In October 2013, the U.S. Supreme Court will hear oral arguments on three consolidated cases, Chadbourne Chadbourne & Parke LLP v. Troice, Willis of Colorado Inc. v. Troice and Proskauer Rose LLP v. Troice.  Even though these cases have largely fallen below the general public’s radar, they are extremely important, as an incorrect decision by the Supreme Court could severely limit the ability of victims of financial fraud to seek justice.

These cases relate to two statutes passed in the 1990′s, the Private Securities Litigation Reform Act (PSLRA) and the Securities Litigation Uniform Standards Act (SLUSA).  The financial lobby was able to convince Congress that the nation’s courts were flooded with frivolous securities fraud cases.  To address that perceived problem, Congress passed the PSLRA, which placed several hurdles on securities fraud filings in federal court.  Later, when it seemed that fraud victims had found a way to get around PSLRA, by filing securities fraud cases under state law (instead of federal securities law), Congress passed SLUSA.  The SLUSA statute completely forbids class actions brought under state law if the case alleges fraud that is “in connection with” a federal securities transaction.

Since the passage of SLUSA, every circuit court and the Supreme Court have wrestled with what “in connection with” actually means.  The Court is again addressing the issue in the Troice cases.

The financial lobby has filed briefs arguing the Court should define “in connection with” broadly.  Occupy the SEC (“OSEC”) has filed an amicus brief opposing the lobby.  OSEC’s brief explains that an overly broad definition of “in connection with” would significantly hamper the ability of victims of financial fraud to file civil claims.  Many transactions that have little to do with securities fraud (e.g., loan fraud or mortgage fraud) would no longer be eligible for review under state law.  Federal court filings are generally more burdensome and expensive.  The bottom line is that a broad definition of “in connection with” would mean fewer lawsuits against financial fraudsters.  That outcome would embolden other fraudsters, and would leave fraud victims with fewer civil court options.

OSEC’s amicus brief is available at: http://occupythesec.org/files/OSEC-Troice-Amicus.pdf

The Good, The Bad, & The Ugly – Week of 7/22/2013


Senate hearing earlier this week on bank holding companies (the designation that GS and MS were granted, and one which JPM already had) and their involvement in physical commodity markets, as a follow up to the bombshell NYTimes article last weekend. Warren and Brown asked very hard-hitting questions, and an academic named Saule Omarova gave some fantastic testimony. Her paper is essential reading.  Some background by Michael R. Crittenden and Christian Berthelsen at The Wall Street Journal July 23, 2013.

Federal grand jury delivers a 41-page indictment to hedge fund SAC Capital for insider trading. Heidi Moore at the Guardian July 25, 2013.

Elizabeth Warren and other democratic senators defy party and hold firm on student loan rates. Tracy Jan at The Boston Globe July 24, 2013.


Recent bombshell New York Times article details how Goldman shuffles aluminum around warehouses, shaving a penny here a penny there, and as a result racks up billions in costs to the public. Not to mention the London Metal Exchange, the regulator here, is filled with bankers from all the major Wall St banks. Next up: Copper. David Kocieniewski at The New York Times July 20, 2013.

Lawrence Summers, sexist proponent of complete deregulation, is the potential frontrunner to head up the FED. What worse candidate is there to pick? A most revealing pick for the supposed lesser of two evils Obama. What gymnastics will establishment liberals do to defend this one? David Dayen at Salon July 24, 2013.