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

Occupy the SEC Sues Federal Reserve, SEC, CFTC, OCC, FDIC and U.S. Treasury Over Volcker Rule Delays

Occupy the SEC (OSEC) has filed a lawsuit in the Eastern District of New York against six federal agencies, over those agencies’ delay in promulgating a Final Rulemaking in connection with the “Volcker Rule” (Section 619 of the Dodd-Frank Act of 2010).

Congress passed the Volcker Rule in July 2010 in order to re-orient deposit-taking banks towards safe, traditional activities (like offering checking accounts and loans to individuals and businesses), and away from the speculative “proprietary” trading that has imperiled deposited funds as well as the global economy at large in recent years.  Simply put, the Volcker Rule seeks to limit the ability of banks to gamble with the average person’s checking account, or with public money offered by the Federal Reserve.

Almost three years since the passage of the Dodd-Frank Act, these agencies have yet to finalize regulations implementing the Volcker Rule.  Section 619(b)(2)(A) of the Dodd-Frank Act set a mandatory deadline for the finalization of the Volcker regulations.  That deadline passed over a year.  Despite this fact, the federal agencies charged with finalizing the Rule have yet to do so.  In fact, senior officials at the agencies have indicated that they do not intend to finalize the Volcker Rule anytime soon.

The longer the agencies delay in finalizing the Rule, the longer that banks can continue to gamble with depositors’ money and virtually interest-free loans from the Federal Reserve’s discount window.  The financial crisis of 2008 has taught us that the global economy can no longer tolerate such unrestrained speculative activity.  Consequently, OSEC has filed a lawsuit against the agencies, seeking declaratory, injunctive and mandamus relief in the form of a court order compelling them to finalize the Volcker Rule within a timeframe specified by the court.

The lawsuit names various officials at the following U.S. federal agencies: the Federal Reserve, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the U.S. Department of the Treasury.

Occupy the SEC submits comment letter on money market fund regulation

Occupy the SEC (OSEC) has submitted a comment letter to the members of the Financial Stability Oversight Council (FSOC) in response to the Council’s proposals for regulating money market funds (MMFs).  FSOC will consider public comments on MMF reform and will make recommendations to the Securities and Exchange Commission (SEC), which will ultimately implement final regulations.

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.  OSEC also proposes that the FSOC (and ultimately the SEC) consider allowing fund managers to offer both floating and buffered Net Asset Value (NAV) structures, with full price transparency, so that fund investors have full knowledge of the risks involved, and can choose the fund structure that best aligns with their preferences.

The letter is available here.

Occupy the SEC has some questions for Mary Jo White

Occupy the SEC (OSEC) has submitted a letter to the members of the Senate Committee on Banking, Housing and Urban Affairs in anticipation of the upcoming confirmation hearing of Mary Jo White. The letter requests that the Committee submit a series of questions to Ms. White regarding her intentions as Chairman of the SEC.

Figures from industry, media and the government have expressed their support for White’s nomination, along with expectations that she will bring tenacity and toughness to the position based on her track record as a prosecutor. While we are hopeful that she will live up to these expectations, Ms. White’s more recent work as a defense attorney raises significant questions that OSEC would like to see addressed in the hearing.

Specifically, we are concerned about the potential conflicts posed by her work representing many of the executives and institutions that she will be in charge of regulating. Her track record, together with comments about the prosecution of banking executives, raise questions that – if left unanswered – could further undermine the public’s faith in the integrity of the SEC.

The letter and accompanying press release are available on our website, www.occupythesec.org.

Occupy the SEC Submits Comments to the House Financial Services Committee in response to Chairman Bachus request for legislative proposals.


On Friday, September 7th, 2012, Occupy the SEC (“OSEC”) submitted a comment letter in response to Financial Services Committee Chairman Spencer Bachus’s August 7, 2012 invitation to investors, industry professionals and the public to offer their ideas and suggestions on how to formulate a less burdensome legislative alternative to the Volcker Rule.

A copy of the letter is available on the Occupy the SEC website: http://www.occupythesec.org/files/OSEC-Volcker-Alternative-Comment-Letter.pdf

Occupy the SEC continues to be concerned about the inordinate influence of the financial services lobby on legislative initiatives such as the proposed revision to the Volcker Rule under consideration here. The divergence between public support for the Volcker Rule and the opposition of many of the Committee members to the Rule is a particular point of concern. OSEC examines this disconnect further in the letter to the Committee and clarifies the need for a fortified version of the Volcker Rule.  Further, the letter discusses the fallacious arguments commonly raised in opposition to the Volcker Rule by conflicted members of the Financial Services Committee.


The Need for Credit Derivatives Reform

JP Morgan’s loss shows exactly why we need an effective Volcker rule or a return of Glass Steagall, along with transparency in all derivatives, especially credit derivatives.  While the markets are somewhat volatile now, we certainly are not in a 2008 freefall.  Yet JP Morgan managed to lose at least $2 billion and counting.  Under extreme conditions, could this derivative position have lost 10x that? 20x given there is practically zero liquidity during a crisis?

While a $40 billion loss still would not leave JP Morgan insolvent, it would most likely put it below regulatory capital minimums, especially considering a fair amount of JP Morgan’s other assets would have lost value too.  This in turn could lead to a liquidity squeeze, (an ability to obtain funds needed in the near-term, typically from short-term markets), which could leave JP Morgan unable to meet its obligations.  In that case, JP Morgan would essentially be bankrupt and a bailout, to protect depositor assets would most likely be necessary.

There is also a concern whether a similar bailout would even be possible.  Consider that the total amount of the bank and corporate bailouts was $16 trillion across all Fed and Treasury programs (source: CBO, July 2011).  While the bailouts were mostly low or no-cost loans, they cost the government at least 2% – 3% per annum, borrowing long term and lending short term.  Can the country afford something like this again?

Worse, this is not even the largest threat.  Everyone in the financial world is worried about the level of borrowing both in the US and globally.  The leverage is extremely high when one considers the sum total of government, corporate and personal borrowing.  Yet the amounts discussed do not even consider the $80 trillion to $300 trillion credit derivative market (depending on your source).

Derivatives add leverage to an economy.  An investor in credit derivatives agrees to an obligation to pay based upon a reference asset, but only puts up a small portion of the notional amount as collateral.  So a $1 billion credit derivative may only have $100 million or more likely closer to $10 million as collateral.  What this implies is $900 million or $990 million of assumed risk without collateral.  That is essentially added leverage to the system.  Multiply this type of leverage by the credit derivative market size and we have a catastrophe waiting to happen.

Further, unlike cash obligations, derivatives are promises to pay and therefore include counterparty risk.  Unlike Goldman Sachs selling a bond to AIG, if the bond defaults, the only loss is to AIG’s account.  If a credit derivative, at 50x the notional size of a bond trade, goes bad for one counterparty, it may be so bad that the other counterparty would now suffer losses as well.  Indeed this is what happened with AIG and led to $182 billion of taxpayer funded bailouts and guaranties.

So if the market suffers another downturn, how many more crippled institutions will we have that will require a bailout, due to direct exposure on their assets, credit derivative positions or counterparty risk?  What would happen to the economy in the face of such gargantuan losses, even if a bailout could save the market again?  Both are scary questions.

Since credit derivatives are not standardized and not traded on transparent markets, there is no way regulators can adequately check the exposure and market value of financial institutions.  And therefore, our markets are in a precarious position, especially with an overleveraged U.S. Government standing behind the deposits of too big to fail banks.

By: Anonymous OccupytheSEC Member

House Volcker Letter Needs Support

On April 26th, Occupy the SEC sent out the following email as a call to action to the members of our mailing list:


Dear Friends,

We wrote to you last week, asking you to call your Senators and Representatives and encourage them to attend our Volcker Rule Congressional Briefing, which was held this past Monday, April 23.  We want to sincerely thank all of you who called your Congresspeople.  Approximately 60 staffers attended from both the House and Senate, and the briefing was very well-received.

We now ask you to take an additional action in support of the Volcker Rule.

This morning, Senators Levin (D-MI) and Merkley (D-OR) put out a letter calling on our financial regulators to finalize a strong version of the Volcker Rule by the summer.  Twenty-two Senators have co-signed the letter, which has been finalized.

There is a draft companion letter circulating today in the House of Representatives that is being pushed by Rep. Blumenauer (D-OR3), Rep. Waters (D-CA35) and many other representatives.  It is important that as many members of the House of Representatives as possible co-sign the companion letter.  This would show the regulators that Congress is looking to them to complete the rule by the summer, without loopholes.

Please call your House representative and ask him/her to co-sign Rep. Blumenauer et al’s Volcker Rule letter.

The easiest way to do this is to call the Capitol switchboard at (202) 224-3121, and ask for your Representative’s office by name. You can also look up your Representative on Open Congress.

When you call, we suggest you tell the staffer:

I am your constituent, and I am calling to ask Rep. _____ to co-sign the  Volcker Rule letter being circulated by Rep. Blumenauer and Rep. Waters.  The letter calls on the regulators to finalize a strong Volcker Rule by this summer.

In case the person you speak to needs more information about the Volcker Rule, you could tell them:

The Volcker Rule is section 619 of the Dodd-Frank Act.  It is an important rule that will help address systemic risks to our banking system and the Too Big to Fail status of institutions managing trillions of federally insured deposits.  I support the rule and ask you to co-sign the letter from Rep. Blumenauer and Rep. Waters.

Thank you for your help and support.

In Solidarity,
Occupy the SEC

For More Information:
What is Occupy the SEC?
What is the Volcker Rule?
What was Glass-Steagall?