The Good

Elizabeth Warren grills banking regulators (Fed, Treasury, OCC) for HSBC wrist slaps. At what point does the government actually bring criminal charges? Mark Gongloff at Huff Post March 7. 2013

Senate Permanent Subcommittee on Investigations report said to implicate JP Morgan executives in London Whale losses. Committee could ask executives to testify. Ben Protess and Jessica Silver-Green March 4, 2013

The Bad

Goldman Sachs, sidestepping Volcker rule, finds a way to invest in private equity (with our money). Jessica Toonkel and Lauren Tara LaCapra at Reuters March 4, 2013.

The Ugly

Eric Holder states openly what we already know to be the DOJ’s position, the patently absurd claim that the big banks are too big to prosecute because prosecuting them would cause grave economic harm. Robert Borosage at Alternet March 7, 2013

The chilling war on whistleblowers continues. Just days after Michael Winston’s appearance in the highly critical “Untouchables” PBS documentary, the Appeals Court of California overturns his $3.8 million wrongful termination suit, which was one of only a few glimmers of justice post-2008. Matt Taibbi at Rolling Stone March 4, 2013

In a unanimous 0-9 decision, the Supreme Court today reversed the 2nd Circuit in the case of Gabelli v. SEC, holding that the “discovery rule” does not apply for punitive fraud actions brought by government enforcement agencies.  Our previous blog post describes the case and references the amicus brief that Occupy the SEC filed in the case.

The Supreme Court’s decision effectively reduces the allowable timeframe within which the government can bring penalty actions against fraudsters.  This will allow wrongdoers to escape liability for no good reason other than the fact that the applicable government enforcement agency did not bring a suit in time.  The Court explicitly acknowledges this possibility:

“We have . . . concluded that ‘even wrongdoers are entitled to assume that their sins may be forgotten.’”

Agencies like the SEC have spare resources.  An increased burden has been placed on the SEC with the passage of Dodd-Frank.  Meanwhile there have been sustained efforts in Congress to limit the agency’s funding.  The obvious consequence of this is that the SEC will bring fewer fraud actions within the shortened 5 year window.  This decision is essentially a “get out of jail free” card for untold numbers of fraudsters.

Sadly the court did not seem to take cognizance of this reality, or the justness of such an outcome.  It instead focused heavily on the absence of any prior caselaw specifically applying the discovery rule to a government enforcement action.  But that is circular reasoning.  A case comes before the Supreme Court only because it presents a novel question.  If there is already extensive caselaw on a particular legal issue, the Court is unlikely to grant certiorari (i.e. decline to hear the case in the first place).  So the Court should not have placed so much emphasis on the fact that the discovery rule had not been applied to government actions before.  The discovery rule has been applied for centuries, and the Court could have (and should have) extended it to government penalty actions.  After the Gabelli decision, private plaintiffs can benefit from the discovery rule, but the government, which represents the public, cannot.

The discovery rule starts the clock on the statute of limitations when the agency should reasonably have discovered the fraud.  On the one hand, the Court questioned how it could determine whether a large federal agency actually discovered a fraud (“when does ‘the Government’ know of a violation? Who is the relevant actor? “).  But the same decision gave many examples of how the SEC has the power to subpoena documents and conduct investigations.  Obviously these actions (subpoenaing documents and conducting investigations) are clear indications of when the Government “knows” about a violation.  These actions could easily establish the start date for the discovery rule.

All in all, the decision sets a troubling precedent.  It also reinforces the dire need for the SEC and other enforcement agencies to receive more funding.  The deck is now stacked against them.

Remember that infuriating high school teacher that assigned so much homework you couldn’t imagine finishing it all by the next day? The one that assigned you to read 150 pages, do a journal entry, and expected you to figure out complex equations at home all on top of your other classes? Even if you wanted to do a good job, time didn’t allow for it. This crazy overload of work is effectively what Congress and the President has done to the S.E.C. But instead of a single annoying teacher, it’s the slow gears of corrupt system that has laid one of its traps for a top watchdog. The trap? Designating more rules to write, more institutions to look after, more programs to create and more financial products to oversee all while keeping appropriations inadequate. The trap is to render the S.E.C. slower than molasses in January.

Take financial “reform” post-2008. Dodd-Frank alone “requires the agency to promulgate more than 100 new rules, create five new offices, and produce more than 20 studies and reports” on top of “considerable new responsibilities that will have a significant long-term impact on the agency’s workload, including oversight of the over-the-counter (OTC) derivatives market and hedge fund advisers; registration of municipal advisors and security-based swap market participants; enhanced supervision of nationally recognized statistical rating organizations (NRSROs) and clearing agencies; heightened regulation of asset-backed securities (ABS); and creation of a new whistleblower program.”[1] In 2010 and 2011, the SEC was given a modest bump in appropriations to $1,571 Million and $1,673 Million respectively, up from $970 Million in 2009. But in 2012, the numbers dipped to $1,321 Million with all those “considerable new responsibilities that will have a significant long term impact,” still there.

This would be a deeply cynical way to suffocate the SEC. Amidst a financial crisis load them up with responsibilities and give them a modest bump in appropriations to implement them. Then slowly but surely take away the money, leaving them desperate for more workers just to simply meet deadlines. The banks love it. They get delays on upcoming rules that affect profit and a scrambling inefficient watchdog that they can laugh at.

This isn’t even taking into account the growth of the financial services industry itself. As Barry Ritholz writes, “Over the past 30 years, the financial world has grown exponentially in size, breadth and complexity of products, trading volume, and total assets under management.  In terms of personnel, assets under management, numbers of trader, managers, sales people, and mathematical PhDs., who work on the street increased dramatically.”[2] The S.E.C. has not. That just shows you the shift in Congress’s priorities in the last 30 years.

Now I’m not claiming that S.E.C. is necessarily being tethered by all this and genuinely wants to go after the banks. Regulatory capture plagues it as well, Robert Khuzami being exhibit A. But even if in the off chance a guy like Neil Barofsky got in there, he couldn’t even go after all the fraud. He’s a great prosecutor, not a one-man army.

In response to these troubling facts, come appropriations time in March, Congress must fund the S.E.C. so that it can effectively “fulfill its mission to protect investors” and “maintain fair, orderly and efficient markets.” If lawmakers truly wanted to improve the economy (and hence their reelection chances) they would understand that rooting out fraud, which inflates bubbles and undermines the system, is essential and can only be effectively combated by funding the agencies tasked to do so. Also, with the increase in complexity in today’s financial world, it’s essential to bestow our regulatory agencies not only with manpower but quality manpower. Manpower with the knowledge and understanding to root out fraud nestled deep in an intricate synthetic CDO or potentially guised in an institution such as MERS. Furthermore, the S.E.C.’s ability to take in monetary settlements by institutions that have broken the law is capped by their budget. In other words, their incentive to go after criminality in the financial services industry is capped by what Congress throws their way. These are perverse incentives for a country claiming to be all about “equality under the law”. I would hope to see a reversal in this detrimental incentive by congressmen taking the morally correct move in increasing the funding of the S.E.C. for Fiscal Year 2013.

-Bob Roberts

This term, the Supreme Court will consider an important question relating to when government enforcement agencies like the Securities and Exchange Commission (SEC) can no longer file civil fraud actions due to the statute of limitations. Gabelli v. SEC relates to allegedly fraudulent market-timing activities by Marc Gabelli, a former portfolio manager at Gabelli Funds LLC, and Bruce Alpert, a chief operating officer for the firm.

In April 2008, the SEC brought a civil fraud action against Gabelli and Alpert under the Advisers Act. The activities in question occurred between 1999 and 2002. The statute of limitations applicable to the Advisers Act claim, 28 U.S.C. § 2462, bars such claims by the government if they are filed more than five years from when the claim “accrues.”

Centuries-old caselaw holds that in fraud cases, “accrual” begins only when the aggrieved party discovers (or reasonably should have discovered) the transgressor’s fraud. This interpretation, known as the “discovery rule,” has a common-sense policy behind it. A perpetrator of fraud should not be able to avoid liability under a technicality simply because the aggrieved party remained unaware of the fraud for the limitations period (of five years, in the case of Gabelli).

Gabelli and Alpert have appealed the case to the U.S. Supreme Court, after having lost in the Second Circuit in an opinion co-written by Judge Jed Rakoff. Not surprisingly, financial industry lobbyists like Securities Industry and Financial Markets Association (SIFMA) and the American Bankers Association (ABA) have been vocal critics of the Second Circuit’s decision. SIFMA, the ABA and other anti-enforcement groups have filed amicus briefs before the Supreme Court, urging it to overturn the Second Circuit’s Gabelli decision. If the pro-industry lobbyists have their way, an untold numbers of fraudsters will be able to avoid liability under a technicality – 28 U.S.C. § 2462 – simply because their frauds remain undiscovered for certain statutory periods of time.

The recent financial crisis is testament to the dire need for aggressive enforcement of antifraud laws. Unfortunately, this case could be the death knell for effective enforcement by agencies, which are overburdened, underfunded, and in many cases, beholden to industry. If the Supreme Court finds that the discovery rule does not apply to 28 U.S.C. § 2462, many of the misdeeds that caused the Great Recession of 2008 will go unpunished as the government runs out of time under the five year statute of limitations.

In view of the circumstances, Occupy the SEC has filed an amicus brief with the Supreme Court in Gabelli v. SEC, arguing that the law clearly requires an upholding of the discovery rule, and summarizing the many public policy reasons why regulatory agencies should enjoy broader, not stricter, fraud enforcement powers.

The Court will hear oral arguments on January 8, 2013, and issue a decision in late Spring 2013.

Click here for a copy of the amicus filing.

The following post was contributed by OSEC member Elizabeth K. Friedrich, and does not represent a consensus view of OSEC or Occupy Wall Street. It is cross-posted from View From the Metropole.

During the last few decades, big banks shifted their business model from one that sought the best interest of their customers to one primarily benefiting themselves. This shift manifested in the development of new practices, such as minimum balances for checking and savings, variable interest rates, ATM fees, credit card fees, fraudulent mortgages, synthetic/bundled products, pay day loans and in-access credit, to name only a few. They created these new products and fees to extract as much wealth from their customers and investors as possible, rather than advancing their advertised goal of ‘making customers’ money work & grow.’

This signaled a fundamental philosophical shift in the banking industry, one that can largely be blamed for the financial crisis in 2008. As banks became more and more aggressive in their pursuit of profits, they engaged in riskier and riskier behavior. The resulting crisis plunged the economy into a recession, sending the national unemployment rate above 10%, causing millions of foreclosures, and severely deepening the wealth gap, which pushed millions of middle-class families into poverty.

As a response to the banks and their role in the crisis, over 500,000 Americans decided to move 5 billion dollars out of big banks into credit unions on November 5th, 2011 (Bank Transfer Day). This served as a great example of what Americans can do to change a flawed system- leave and create/join another.

However, despite Bank Transfer Day’s success in 2011, it did not reach the same scale this year. Many Americans believe the economy is better – even growing. They want things to go back to normal; they want stability and long-term security. Unfortunately, banks cannot guarantee this – nor do they want to. Big banks would have to completely re-organize themselves to mitigate future risks and focus on creating stability and security for their customers and the economy.

Big Banks came out of the crisis on top, with bailouts and bonuses, no jail time and no trials, and no one to challenge their authority. What’s important to understand about them is that they have no inherent values or moral code. Their one priority is to make money and try to avoid regulation as much as possible. If they could take more risk and charge their customers more, they would!

Furthermore, with this lack of consequences Big Banks have behaved tyrannically. They control the financial system, the judicial system, and regulatory system. They are able to saturate any market all while claiming to be responsible and customer-driven. Due to our desire to get back to normal and move forward we too easily forget about the crimes they have gotten away with. We do not see the alternatives that are right in front of us: local, community-centered banks, and credit unions.

I think we can take a note from Colonialists during the Revolutionary War. The colonies were tired of being taxed, burdened by the crown’s rules, wants and desires. Colonists were working the farms, discovering the lands and at the same time sacrificing their lives to make Britain richer. (Of course, at the expense of the indigenous peoples who had inhabited the land before the colonists.) However, there is something that story can teach us as we navigate the post-crisis, un-regulated, and corrupted financial system.

Many people who observed and participated in Occupy Wall Street saw it as a global protest movement spanning continents from South America to Asia. For its participants, it represented a global political shift. Occupiers wanted to see changes, in leadership, in the tax system, and in the economic system, changes that would emphasize democracy and equity. They wanted to see reform in the financial system and many moved their money to show the banks their commitment.

Similarly, colonists did not want to answer to a king thousands of miles away that did care about their plight and nor empower them in any way. We can take a lesson from them; the British Empire was a broken system that could not be sustained in the new colonies. They were frustrated because Britain forced them to pay taxes, yet did not give them any representation in the British Parliament. They rallied behind the phrase, “no taxation without representation.” They demanded change when they saw no relief in sight; they revolted. The Colonies wanted independence and they wanted to create a new state where they could work and worship without fear of reprisal.

Revolution can be something that takes place in your heart and mind not always in the streets. One of the most powerful things Americans have is their deposits, savings, and demand for credit. Americans can break their relationships with the banks and engage in a system that revolves around access, accountability, and fairness. We can change the way Big they operate by taking ourselves out of the equation and utilizing community development financial institutions from regional banks to credit unions.

Large banks believe that because they are convenient, they can do what they want. That convenience is the determining factor in a customer’s decision. Americans need to be ok with lack of convenience and over-saturation to discover what other types of banking options there are. Large banks believe they are seen as the only option and that people want easy answers.  Only when Americans make demands and call out big banks will they feel pressure to change.

What does breaking your relationship with a big banks do?

1. Tells them they cannot conduct business as usual.
2. Tells them you do not agree with their business practices, policies, products and services.
3. Tells them that what happened in 2008 will not be forgotten or ignored.

Today, I believe Americans have to declare their independence from banker rule by moving their money out just as colonists revolted and declared independence from British rule. What I am suggesting to you is an action that will force open a space for the largest banks to listen to customers-to serve in their best interest. This is not a proposal for class warfare but to understand right now; the banking system does not work for me but against me.

Start by researching your local banks and credit unions:

• www.ncua.gov
• www.cdcu.coop
• www.cuany.org
• www.fdic.gov
• www.cuna.org
• www.nerdwallet.com
• www.moveyourmoney.org
• www.occupywallstreet.net

Contact:

Elizabeth K. Friedrich

ekfriedrich@gmail.com

The following post was contributed by OSEC member Anchard Scott, and does not represent a consensus view of OSEC or Occupy Wall Street. It is cross-posted, with slight edits, from aluation.

The tension between the obvious need for financial regulatory reform and the reality of the weak tea we have been served is rooted in the politics of the regulatory process. The usual culprit is the most obvious one – aggressive lobbying by industry trade groups and others who go to work directly on lawmakers in order to shape laws and rules to reflect their clients’ interests. Another common pressure point for lobbyists is their participation in the public comment process embedded in the process of developing new regulations. That’s where we have historically focused our efforts at OSEC.

The third area gets much less attention but can be equally effective (if more costly). If an industry is unsuccessful in having a law or set of regulations changed to its liking, it can always sue in court in the hope of having the rule overturned. That is exactly what happened earlier this year, when a judge handed the derivatives industry a victory by blocking the Commodity Futures Trading Commission from implementing its proposed rules on position limits.

By way of background, the rules in question were part of the Dodd-Frank overhaul of banking and finance regulation, and were drafted to address the problem of concentration in commodity markets. As recent lawsuits against JP Morgan and Barclays have shown, commodity markets are vulnerable to manipulation, especially when individual traders or firms become too large relative to other participants. The fact that these same markets act as the central pricing mechanism for basic goods like energy and food makes the problem particularly acute.

Through Dodd-Frank, Congress instructed the CFTC to extend its prior authority to impose limits on the positions of firms and traders by specifying more clearly the parameters of those limits. Prior to Dodd-Frank, the law in question had simply given the CFTC the right to impose such limits “from time to time” and “as the Commission finds are necessary.” The CFTC amended the rule with several pages of granular detail on exactly what kinds of limits it would enact, and made clear that the new position limits were to be a permanent feature of commodity and other derivatives markets.

Both the industry and several of the CFTC commissioners were strongly and vocally opposed to the new rules. However, their opposition was insufficient to overcome the agency’s general interpretation that they were forced to act by Congressional decree, and the rules were ultimately passed by a majority vote of the commissioners.

This is where the industry reached for its final option. Two trade groups (ISDA and SIFMA) filed a joint suit questioning whether CFTC had acted with the appropriate authority in enacting the laws, and claimed that the agency had overstepped its mandate by doing so without establishing that they were strictly necessary. Amazingly, their suit hinged on the following highlighted language from the amended Act that created the CFTC (presented here with the Judge’s emphasis):

For the purpose of diminishing, eliminating, or preventing such burden, the Commission shall, from time to time, after due notice and opportunity for hearing, by rule, regulation, or order, proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person . . . under contracts of sale of such commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility, or swaps traded on or subject to the rules of a designated contract market or a swap execution facility, or swaps not traded on or subject to the rules of a designated contract market or a swap execution facility that performs a significant price discovery function with respect to a registered entity, as the Commission finds are necessary to diminish, eliminate, or prevent such burden.

The dozens of provisions that follow this paragraph were all added as part of Dodd-Frank, and specify exactly how the new limits are meant to work. Crucially, they also draw their authority from the paragraph above, which is treated as providing the CFTC the right to impose such limits in general.

What the industry successfully claimed was that the language in the paragraph did no such thing. Instead, they claimed, the language gives the CFTC that power only if it can show the laws are necessary. The CFTC argued that Congress itself mandated that the agency move forward with new rules. While no one involved was under any other impression, the ambiguity in the language (which led to all sorts of verbal contortions on both sides) was sufficient for the judge to block the new rules and send them back to the CFTC for more work.

I have only recently started reading legal and regulatory documents so this sort of sloppy language comes as an unwelcome surprise. The entire paragraph I quote above is a single sentence, and is one in which exactly what word is modifying what is extremely slippery. But this is hardly unique in that regard – there is even an established legal doctrine called the Rule of the Last Antecedent that attempts to clarify how judges and counsel should approach such situations. The fact that the body of laws and regulations that govern our daily lives is often so poorly written that they can be challenged on that basis is absurd.

The other unwelcome surprise in this case was the poverty of the CFTC’s arguments in support of its authority. The agency’s counsel put forward a number of reasons for why the agency could act, but (according to Judge Wilkins) none were substantive. Instead, they relied on word placement, Congressional intent and other factors, none of which answered the central question of whether they were acting in accord with their governing rules.

This case may end well – the CFTC has announced that it is appealing the ruling, which hopefully means that the agency has found a much stronger set of arguments (I believe strongly in the need for position limits, so I am biased in this regard). Until then, speculators are free to amass enormous positions, all thanks to a combination of sloppy wording and an industry willing to exploit every loophole imaginable.

Those interested in a more legal explanation should click over to this excellent summary by Keith Bishop.

- Anchard Scott

FOR IMMEDIATE RELEASE:

Occupy the SEC and OWS-Alternative Banking Working Group call for the Financial Stability Oversight Council to follow the consultation requirements of the Dodd-Frank Act in drafting new recommended rules for money market funds, and to open their closed-door meetings to all stakeholders. 

New York, NY – November 5th, 2012

Occupy the SEC and the Alternative Banking Working Group have sent a joint letterto Secretary of the Treasury Timothy Geithner and SEC Chairman Mary Schapiro asking for a change in the process of crafting money market fund regulations

The collapse of Lehman Brothers exposed the systemic importance of money market funds, which link millions of individual investors to the short-term commercial paper markets. The SEC enacted a first phase of reforms in 2010, but was unable to reach a majority vote among the Commissioners earlier this year on the next phase of proposed rules. This failure led the Financial Stability Oversight Council to step in earlier this year.

While it is encouraging to see renewed pressure for regulation, there are signs that the process of crafting the proposed rules has been compromised by undue industry influence. Rather than working solely with the SEC to develop recommendations for public comment as required by Section 120(b)(1) of the Dodd-Frank Act, recent press reports indicate that members of the FSOC have been consulting with industry in closed-door meetings to gather their input.

Prioritizing the industry’s views in developing its recommendations before the public has a chance to comment runs counter to both the requirements of the law as well as any concept of regulation as a public good. The unwelcome alignment between regulators and the regulated is most obvious in the parallels between Secretary Geithner’s letter to the FSOC and a key industry proposal from BlackRock. This appears to be another example of giving the financial industry preferential influence in the process of rulemaking, one that risks making the public comment process a mere ex-post formality.

We call on the regulators to end this practice of secretive consultations with industry, to follow the requirements of Rule 120 in developing their recommendations, and to develop their proposed regulations with the interests of all stakeholders – not only industry – in mind.

Occupy the SEC is a group of concerned citizens, activists, and financial professionals with decades of collective experience working at many of the largest financial firms in the industry. For further information, visit http://occupythesec.org or email info@occupythesec.org.

Alternative Banking Working Group is a group of concerned citizens, activists, and financial professionals with two goals: the first is to explore and, if possible, establish alternative banking systems, that might replace the current system. The second goal is to broadly understand and educate people about the current financial system.  For further information, visit http://alternativebanking.nycga.net.