Archive for the ‘Corporate Crime’ Category

Still Unsafe At Any Speed

Thursday, March 20th, 2014

unsafeIn a resounding affirmation of the principle that the cover-up is worse than the crime, federal prosecutors emphasized Toyota’s deceptive practices in announcing that the carmaker will pay $1.2 billion to settle a criminal charge relating to the sudden acceleration controversy. The Justice Department press release uses just about every synonym for dishonesty in describing Toyota’s misdeeds.

“The company admits that it misled U.S. consumers by concealing and making deceptive statements,” the release states, adding that the company “gave inaccurate facts to Members of Congress.” Later it says that Toyota “was hiding” critical information from federal regulators and that it made public a “false timeline.” U.S. Attorney Preet Bharara alleges that the company “cared more about savings than safety and more about its own brand and bottom line than the truth.”

Such strong talk is gratifying, but Toyota, like so many other corporate miscreants, was offered a deferred prosecution agreement in place of an outright conviction. This was made somewhat more palatable by the provision in the agreement that bars the company from deducting the penalty amount from its taxes.

Prosecutors used the announcement to convey a thinly veiled warning to General Motors that it too will have to pay a substantial amount to resolve its own legal entanglements on safety issues. Bharara declared: “Companies that make inherently dangerous products must be maximally transparent, not two-faced. That is why we have undertaken this landmark enforcement action. And the entire auto industry should take notice.”

GM’s announcement several weeks ago that it was recalling hundreds of thousands of its small cars because of an ignition switch problem mushroomed into a major scandal as information came to light suggesting that the company had dragged its feet in dealing with the issue, even though it was linked to 13 deaths. Federal regulators, which had received several hundred complaints relating to the problem, were also criticized for being slow to act. Both Congress and the Justice Department have launched investigations of the matter.

In recent days, GM has tried to spin the situation to its advantage, with CEO Mary Barra putting herself out front and making extravagant promises that such a safety lapse would never happen again. Living up to such a commitment will be even more difficult for GM than it was for Toyota, which used similar p.r. stratagems during earlier phases of its controversy and ultimately failed.

After all, the history of GM is filled with examples of irresponsibility on safety issues. It is now 50 years since Ralph Nader exposed the defects of GM’s Corvair, prompting the company to spy on him and thus inadvertently give a boost to the nascent corporate accountability movement.

Later, GM failed to act when presented with reports that poorly sealed panels on some of its cars could cause dangerous levels of carbon monoxide to leak into the passenger compartment. After some deaths were attributed to the problem in the late 1960s, the company finally recalled 2.5 million cars to repair the defect.

During the 1970s and 1980s the company was frequently criticized by environmentalists and consumer advocates for its efforts to weaken federal rules on emissions and for its resistance to regulations requiring passive restraints such as airbags in all automobiles. In 1990 GM finally agreed to put air bags in all of its U.S. cars starting in 1995.

In 1992 the New York Times published an investigation concluding that GM had recognized as early as 1983 that its pickup trucks with side-mounted gas tanks were highly dangerous but took no action until 1988, even then saying the change was for design rather than safety reasons. During that period, more than 300 people were killed in collisions in which the tanks exploded.

GM resisted recalling trucks with the side-mounted tanks even after the federal government asked it to do so. Instead, it launched a campaign against safety advocates and plaintiffs’ lawyers. In 1994 the company reached a settlement with the U.S. Transportation Department under which the federal government gave up on its effort to get GM to recall the trucks in exchange for which the company agreed to contribute $51 million to auto safety programs. GM still faced a series of personal injury lawsuits in connection with the exploding gas tanks, including one in which a Los Angeles jury awarded victims $4.9 billion in damages. GM appealed, and the case was later settled out of court for an undisclosed amount.

It remains to be seen how much GM has to pay in fines and settlements for its current ignition switch scandal, but it will take a lot of punishment to get a company with such a long history of safety lapses to change its ways for good.

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New in CORPORATE RAP SHEETS: a profile of Yum Brands and its controversies relating to wage & hour violations, sanitation lapses and animal cruelty.

J. Ponzi Morgan

Thursday, January 9th, 2014

morgan_madoffIt’s bad enough that for years JPMorgan Chase failed to alert federal authorities about the suspicious transactions being conducted by its customer Madoff Securities in what would later be revealed as a massive Ponzi scheme.

What’s equally damning in the criminal case the bank just resolved with federal prosecutors is that at times JPM seemed to want to get in on Madoff’s action.

The Statement of Facts to which JPM stipulated tells an interesting story about how, beginning in 2006, the bank began investing substantial sums (initially $343 million) of its own money in Madoff feeder funds in addition to issuing derivates tied to those funds and selling them to investors. In 2007 this business seemed so appealing that JPM’s London branch sought to write more than $1 billion in Madoff-linked derivatives.

This move had to be approved by the bank’s chief risk officer, who in 2007 nixed the plan after being told by a colleague that there is a “well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” While he was unwilling to risk $1.3 billion under such circumstances, the officer did allow the Madoff exposure to remain up to $250 million.

The JPM London trading desk subsequently became more uneasy about Madoff Securities. It pulled out of the Madoff feeder funds, and in 2008 it filed a report with UK regulators expressing concerns that Madoff’s returns were probably “too good to be true.” JPM failed to do the same in the United States, and that turned out to be an expensive oversight.

JPM’s messy history with Madoff illustrates an interesting point about the relationship between individual white-collar crime and collective corporate crime. There’s long been a tendency to see corruption for self-enrichment (such as embezzlement) as being separate from misconduct by groups of people to enrich corporations (for example, price-fixing conspiracies).

In the case of Madoff and JPM, the two were closely connected. Madoff, who was working through his firm but was essentially running a one-man Ponzi operation, created conditions that were exploited (up to a point) by JPM to enhance the profits of the bank’s derivatives business. Even when that opportunity was deemed too risky by JPM, the bank failed to warn U.S. regulators and went on doing profitable banking business with Madoff.

In other words, the individual fraud being committed by Madoff was a source of profit for JPM, which in a sense became his co-conspirator.

The distinction between individual crime and corporate misbehavior is also a matter of perennial debate when it comes to punishment. Business apologists like to claim that corporations cannot really commit crimes and that only individuals should be prosecuted, knowing full well that such cases are much harder to prove.

What’s needed is a more aggressive approach toward the prosecution of both corporations and the higher-level executives responsible for their misconduct.

The JPM-Madoff case shows the limitations of the current system. No individuals were charged, and the bank was able to take advantage of the kind of deferred prosecution agreement that the Justice Department uses in almost every corporate case. Neither JPM nor the stock market seems to be fazed by the $2.6 billion payout. In fact, this is just the latest in a series of large settlements that JPM has made with prosecutors. Just two months ago, it agreed to pay $13 billion to resolve a variety of federal and state charges relating to the sale of toxic mortgage-backed securities.

Madoff himself was not able to buy his way out of a criminal conviction and prison time (150 years of it). There was a broad consensus that he deserved every penalty that could be imposed, to ensure that he could never defraud again.

We’re still waiting for a system of punishment that provides that kind of definitive treatment for rogue corporations such as J. Ponzi Morgan.

The 2013 Corporate Rap Sheet

Thursday, December 19th, 2013

Monopoly_Go_Directly_To_Jail-T-linkThe ongoing corporate crime wave showed no signs of abating in 2013. Large companies continued to break the law, violate regulations and otherwise misbehave at a high rate. Whatever lip service the business world gives to corporate social responsibility tends to be overwhelmed by bad acts.

Continuing the trend of recent years, 2013 saw an escalation of the amounts that companies have to pay, especially in the United States, to get themselves out of their legal entanglements. In November JPMorgan Chase set a record with its $13 billion settlement with the U.S. Department of Justice and other state and local agencies on charges relating to the sale of toxic mortgage-backed securities. JPMorgan’s legal problems are not over. There have recently been reports that it may face criminal charges and pay $2 billion in penalties in connection with charges that it turned a blind eye to the Ponzi scheme being run by Bernard Madoff while it was serving as his primary bank.

Other banks have also been shelling out large sums to resolve disputes over the sale of toxic securities in the run-up to the financial crisis. Much of the money has gone to settlements with mortgage agencies Fannie Mae and Freddie Mac. Bank of America alone agreed to pay out $10.3 billion ($3.6 billion in cash and $6.75 billion in mortgage repurchases) to Fannie.

Here are some of the year’s other highlights (or lowlights):

FORECLOSURE ABUSES. In January, ten mortgage servicing companies–including Bank of America, Citibank and JPMorgan Chase–agreed to an $8.5 billion settlement to resolve allegations by federal regulators relating to foreclosure abuses.

LIBOR MANIPULATION. In February, U.S. and UK regulators announced that the Royal Bank of Scotland would pay a total of $612 million to resolve allegations relating to rigging of the LIBOR interest rate index. In December, the European Union fined RBS and five other banks a total of $2.3 billion in connection with LIBOR manipulation.

ILLEGAL MARKETING. In November, the Justice Department announced that Johnson & Johnson would pay more than $2.2 billion to settle criminal and civil allegations that it improperly marketed the anti-psychotic drug Risperdal for unapproved use by older adults, children and people with development disabilities.

SALE OF DEFECTIVE MEDICAL IMPLANTS. Also in November, Johnson & Johnson agreed to pay more than $2 billion to settle thousands of lawsuits charging that the company sold defective hip implants, causing many individuals to suffer severe pain and injury from metallic debris generated by the faulty devices.

INSIDER TRADING. In March, the SEC announced that an affiliate of hedge fund giant SAC Capital Advisors had agreed to pay $602 million to settle SEC charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies. At the same time, a second SAC affiliate agreed to pay $14 million to settle another insider trading case. Later, SAC agreed to pay $1.2 billion to settle related criminal and civil insider trading charges.

PRICE-FIXING. In July, German officials fined steelmaker ThyssenKrupp the equivalent of about $115 million for its role in a price-fixing cartel. In September, the U.S. Justice Department announced that nine Japanese automotive suppliers had agreed to plead guilty to price-fixing conspiracy charges and pay more than $740 million in criminal fines, with the largest amount ($195 million) to be paid by Hitachi Automotive Systems.

MANIPULATION OF ENERGY PRICES. In July, the Federal Energy Regulatory Commission ordered Barclays and four of its traders to pay $453 million in civil penalties for manipulating electricity prices in California and other western U.S. markets during a two-year period beginning in late 2006.

BRIBERY. In May, the Justice Department announced that the French oil company Total had agreed to pay $398 million to settle charges that it violated the Foreign Corrupt Practices Act by paying bribes to officials in Iran.

VIOLATION OF DRUG SAFETY RULES. In May, DOJ announced that generic drug maker Ranbaxy USA Inc., a subsidiary of the Indian company Ranbaxy Laboratories, had pleaded guilty to felony charges relating to the manufacture and distribution of adulterated drugs and would pay $500 million in fines.

VIOLATION OF RULES ON THE SALE OF NARCOTICS. In June, the U.S. Drug Enforcement Administration announced that the giant Walgreen pharmacy chain would pay a record $80 million in civil penalties to resolve charges that it failed to properly control the sales of narcotic painkillers at some of its stores.

DEALINGS WITH ENTITIES SUBJECT TO SANCTIONS. In June, New York officials announced that Bank of Tokyo Mitsubishi-UFJ had agreed to pay $250 million to settle allegations that it violated state banking laws by engaging in transactions with entities from countries such as Iran subject to sanctions.

LABOR LAW VIOLATIONS. In November, the National Labor Relations Board found that Wal-Mart had illegally disciplined and fired workers involved in protests over the company’s labor practices. A Wal-Mart spokesperson was found to have unlawfully threatened employees who were considering taking part in the actions.

CLEAN WATER ACT VIOLATIONS. In May, the Environmental Protection Agency announced that Wal-Mart had pleaded guilty to charges that it illegally disposed of hazardous materials at its stores across the country. The company had to pay $81.6 million in civil and criminal fines.

HEALTH AND SAFETY CODE VIOLATIONS. In August, Chevron pleaded no contest and agreed to pay $2 million to settle charges that it violated state health and safety regulations in connection with a fire at its refinery in Richmond, California that sent thousands of people to hospital for treatment of respiratory problems.

DELAYS IN RECALLING UNSAFE VEHICLES. In August, Ford Motor was fined $17.4 million by the National Highway Traffic Safety Administration for taking too long to recall unsafe sport utility vehicles.

PRIVACY VIOLATIONS. In November, Google agreed to pay $17 million to 37 states and the District of Columbia to settle allegations that the company violated privacy laws by tracking online activity of individuals without their knowledge.

Note: For fuller dossiers on many of the companies listed here, see my Corporate Rap Sheets.

The Rising Cost of Bad Business

Thursday, September 26th, 2013

A New York City Police office stands atEleven billion dollars. That’s the latest figure being leaked about the amount JPMorgan Chase could end up paying to resolve federal charges concerning the sale of toxic mortgage-backed securities in the run-up to the financial crisis. The word is that Attorney General Eric Holder personally rejected a $3 billion offer from the bank.

This is turning out to be an expensive period for JPMorgan. Earlier this month, it and Assurant Inc. had to pay $300 million to settle accusations that they forced homeowners into purchasing overpriced property insurance. A week later, the Consumer Financial Protection Board announced that the company would pay $80 million in fines and refund an estimated $309 million to more than 2 million customers for illegal credit card fees.

That same day, U.S. and UK financial regulators announced that JPMorgan would pay a total of $920 million to settle charges relating to the London Whale trading fiasco, with the bank admitting that it had violated securities laws.

What should we make of these settlements, particularly the eleven-figure one being hammered out with the Justice Department? To begin with, this is more evidence that corporations can no longer get away with paying trivial amounts to resolve criminal and civil charges and must part with amounts that have a noticeable financial impact.

JPMorgan is not alone in this category. Billion-dollar settlements have become almost commonplace in the various cases that have been brought against major banks in connection with toxic securities as well as foreclosure abuses, money laundering and manipulation of the LIBOR interest rate index.

Banks are not the only corporations paying out large settlement sums. Large pharmaceutical producers such as GlaxoSmithKline and Pfizer have also parted with ten-figure sums to resolve allegations relating to illegal marketing, withholding of safety data and defrauding federal healthcare programs. BP paid $4 billion to resolve criminal and civil charges relating to the Deepwater Horizon disaster.

There is a tendency among corporate critics to downplay these settlements because the cases were brought against the companies rather than their top executives. It is indeed frustrating to see CEOs that authorized reckless behavior get off scot free.

Yet the more fundamental question is whether individual prosecutions would be effective in deterring corporate misconduct. The assumption is that seeing some chief executives put on trial would strike fear in C-suites everywhere and cause firms to clean up their act. Some of this would occur, but I am not convinced it would be enough to stop corporate criminality. After all, high-profile cases against individuals have not put an end to insider trading.

Punishment of corporate executives needs to be accompanied by more aggressive actions against the companies they work for. One thing is clear: the new wave of billion-dollar settlements and penalties may be having a more noticeable financial impact, but they are still a manageable cost of doing business for the companies involved, especially in light of the fact that the payments are often, at least in part, tax deductible.

Take the case of JPMorgan Chase. An $11 billion settlement would not go entirely to the Treasury. Reports of the negotiations suggest that $4 billion of the total would take the form of relief to consumers, which means that the payout could be stretched over a long period of time. We’ve already seen considerable foot-dragging by the large banks (including JPMorgan) that agreed last year to a $25 billion plan to address foreclosure abuses.

Even if JPMorgan had to shell out the remaining $7 billion in a single year, it would be only one-third of the more than $21 billion in profits it generated last year. That would hurt but would be far from fatal.

Rather than disparagement of rising monetary settlements, I’d like to see more analysis of how high the penalties would have to go in order to make a real difference in corporate behavior. It is also worth exploring whether the property seizures used by federal prosecutors against individual felons could be applied more aggressively against corporations. The discussion of JPMorgan’s settlement would be a lot more interesting if the company was facing a penalty such as forfeiture of one of its main business units.

Eric Holder & Company deserve some credit for raising the cost of doing bad business, but the price is still far too low.

 

Note: To see my newly updated Corporate Rap Sheet on JPMorgan Chase, click here.

What Did the Rescue of Merrill Lynch Get Us?

Thursday, September 12th, 2013

Ken Lewis, John ThainFive years ago at this time, only a week after the dramatic federal seizure of Fannie Mae and Freddie Mac, the next big financial bombshell landed:  the takeover of brokerage behemoth Merrill Lynch by Bank of America.

Much of the current commentary on the fifth anniversary of the financial meltdown is focusing on the collapse of Lehman Brothers, with plenty of speculation on what might have happened if the feds had not let Lehman go under. But just as significant is what did occur in the wake of the shotgun marriage of Merrill and BofA.

To put things in context, let’s review the checkered history of Merrill in the years leading up to the crisis. In 1998 it had to pay $400 million to settle charges that it helped push Orange County, California into bankruptcy four years earlier with reckless investment advice. In 2002 it agreed to pay $100 million to settle charges that its analysts skewed their advice to promote the firm’s investment banking business (plus another $100 million the following year). In 2003 it paid $80 million to settle allegations relating to dealings with Enron. In 2005 industry regulator NASD (now FINRA) fined Merrill $14 million for improper sales of mutual fund shares.

Merrill, whose charging bull logo served as a symbol of Wall Street’s drive, was a key player in the issuance of the flawed subprime-mortgage-backed securities at the center of the meltdown. In an early indicator of the problem of toxic assets, Merrill announced an $8 billion write-down in 2007. Its mortgage-related losses would climb to more than $45 billion.

BofA participated in the federal government’s Troubled Assets Relief Program (TARP), initially receiving $25 billion and then another $20 billion in assistance to help it absorb Merrill, which reported a loss of more than $15 billion in the fourth quarter of 2008. It later came out that while Merrill was racking up losses it paid out $10 million or more to 11 top executives. It was also belatedly revealed that Federal Reserve chairman Ben Bernanke and then-Treasury Secretary Henry Paulson had pressured BofA to conceal the extent of the financial mess at Merrill until after shareholders approved the acquisition. In the wake of that revelation, BofA shareholders stripped chief executive Kenneth Lewis of his additional post as chairman. Lewis later resigned from the CEO position as well.

In 2009 BofA agreed to pay $33 million to settle SEC charges that it misled investors about more than $5 billion in bonuses that were being paid to Merrill employees at the time of the firm’s acquisition. In 2010 the SEC announced a new $150 million settlement with BofA concerning the bank’s failure to disclose Merrill’s “extraordinary losses.” At the same time, New York Attorney General Andrew Cuomo filed civil fraud charges against Lewis personally, as well as BofA’s former chief financial officer Joseph Price for “duping shareholders and the federal government.”

In 2011 FINRA fined Merrill $3 million for misrepresenting loan delinquency data when selling residential subprime mortgage securities and later that year fined it $1 million for failing to properly supervise one of its registered representatives who was operating a Ponzi scheme.

In December 2011 BofA agreed to pay $315 million to settle a class-action suit alleging that Merrill had deceived investors when selling mortgage-backed securities.  June 2012 court filings in a shareholder lawsuit against BofA provided more documentation that bank executives knew in 2008 that the Merrill acquisition would depress BofA earnings for years to come but failed to provide that information to shareholders. In September 2012 BofA announced that it would pay $2.43 billion to settle the litigation.

The legal entanglements continue. Just last month, the Justice Department filed a civil suit charging BofA and Merrill of defrauding investors by making  misleading statements about the safety of $850 million in mortgage-backed securities sold in 2008. And in recent weeks BofA has had to agree to pay out about $200 million to settle cases involving past racial and gender discrimination by Merrill.

So what did the rescue of Merrill accomplish? It kept alive an investment operation that played a major role in the bringing about the near-collapse of the financial system and whose top people got paid handsomely as their recklessness threatened the survival of their own firm. And all this was taking place amid an atmosphere in which racial and sexual discrimination were apparently running rampant.

BofA may have thought it was building its empire when it gave in to pressure to rescue Merrill, but instead it took on vast new financial and legal liabilities. Perhaps the only good thing about the takeover was that it provided a deep-pocketed target for the lawsuits filed by the victims of Merrill’s abuses. Unfortunately, those lawsuits seem to have done little to change the ways of Merrill, BofA or any of the other big financial players. Perhaps a few more Lehmans would have done more to clean up the system.

Note: This post draws from my newly updated Corporate Rap Sheet on Bank of America, which can be found here.

When Will the Big Banks Be Reined In?

Thursday, August 1st, 2013
Goldman Sachs aluminum

Goldman Sachs aluminum

In case anyone had doubts about the venality of the big U.S. banks, some recent news reports provide indisputable proof.

First, David Kocieniewski of the New York Times wrote a mind-boggling front-page report on how Goldman Sachs has been using a metals storage company to move large quantities of aluminum from one warehouse to another in Detroit. The maneuver, which exploits esoteric rules of the London Metal Exchange, generates millions of dollars in profit for Goldman and pushes up the price of products such as soft drinks sold in aluminum cans.

The creation of paper profits from aluminum shuffling is just one of the various ways that banks manipulate commodity prices. Occasionally they are called to task for their actions. The Federal Energy Regulatory Commission just announced that JPMorgan Chase would pay $410 million in penalties and disgorgement to ratepayers to settle charges that it manipulated electricity markets in California and the Midwest several years ago. The announcement came shortly after the agency ordered the British bank Barclays and four of its traders to pay $453 million in civil penalties in connection with similar abuses in the western United States.

Apparently these banks decided that Enron’s energy market manipulation from a decade earlier was a game plan rather than a cautionary tale.

Another Times piece reports that major banks have in effect blacklisted more than a million low-income Americans because their names appear in databases of supposedly risky customers. The article highlights a Brooklyn woman who ended up on such a list after she overdrew her checking account by all of $40 in 2010 and subsequently was turned down by numerous banks when she tried to open an account. Many of the blacklisted people had to resort to exploitative check-cashing services and payday lenders to conduct their financial transactions. Among the subscribers to ChexSystems, the largest of the databases, were said to be Bank of America, Citibank, JPMorgan Chase and Wells Fargo.

Allow that to sink it. Banks that have been involved in multi-billion-dollar scandals involving the deceptive sale of toxic securities, municipal bond bid rigging, foreclosure abuses and the like decide that it is too risky to take on a customer who once had a two-digit overdraft in her checking account.

For institutions such as these, the only proper response is to play as dirty as they do. A third NYT article reports that the city of Richmond, California is doing exactly that by employing its power of eminent domain to take over occupied homes that are under the threat of foreclosure and instead offer the owners new, more affordable mortgages that reflect the diminished value of the property. The banks, which have dragged their feet on foreclosure reforms, are indignant over the move and are, in the words of the Times, threatening to “bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity” to consider the tactic.

The need for bold tactics such as eminent domain has been brought about not only by the banks but also by the half-hearted efforts of the Obama Administration to deal with the foreclosure crisis. This is just one of the ways the administration has not held the financial industry fully responsible for the financial meltdown of 2008 and the repercussions that are still with us.

The President himself is spending his time these days lobbying Congress to support the selection of Larry Summers as the next chair of the Federal Reserve. This is the same Summers who, as Clinton’s Treasury Secretary, promoted the financial deregulation that helped usher in the bank recklessness that has done so much harm to the economy.

The Wall Street Journal recently revealed for the first time that Summers has been working as a consultant to Citigroup in addition to his previously reported roles advising a hedge fund, a venture capital firm and a money management company. Obama apparently thinks that someone with this kind of track record is well suited to oversee monetary policy as the head of an agency that is also one of the main banking regulators.

I’m more impressed with the public officials in Richmond, California.

R.I.P. for SAC?

Thursday, July 25th, 2013

SAC indictmentIt’s not clear what real value hedge funds add to the economy, but the apparent abuses of Steven Cohen’s SAC Capital Advisors have made one significant though unintentional contribution: They have breathed new life into the concept of a corporate death penalty.

The criminal and civil charges just filed against SAC by the U.S. Attorney’s Office in Manhattan for insider trading could very well lead to the demise of the firm, given that prosecutors are reportedly seeking forfeiture of some $10 billion. In fact, some analysts believe that forcing SAC out of business is the primary goal of the feds.

In recent years, federal prosecutors have appeared to do everything possible to avoid prosecutions of even the most egregious companies if the case threatened their viability. This has allowed many of the big banks to avoid major criminal charges for their role in the financial meltdown, money laundering or LIBOR interest rate manipulation.

Those that have faced charges have never been in danger of going under, given their ability to negotiate deferred prosecution agreements or the application of criminal charges to a minor subsidiary. Some of the penalties have been sizable (e.g. $1.9 billion for HSBC and $1.5 billion for UBS) but not big enough to sink them.

SAC is a different story. A $10 billion penalty would cripple the firm, which has already been experiencing a rapid outflow of assets since the insider trading charges first surfaced and SAC paid $616 million last March to settle civil charges brought by the Securities and Exchange Commission.

Prosecutors don’t have to worry about broad economic consequences of an SAC collapse. Some negative ripple effects might be felt in Stamford, Connecticut, where the firm is headquartered, but there are plenty of other wealthy firms and individuals there to generate business for luxury car dealers and the high-end service sector.

The fact that a firm such as SAC could disappear without causing any significant disruption raises the question of what purpose it serves in the first place.

Hedge funds have been around for decades, but they used to be low-profile firms serving a limited clientele of wealthy individuals. During the 1990s hedge funds came out of the shadows. Hordes of young investment professionals like Steven Cohen left the stodgy confines of Wall Street and opened their own hedge funds. No longer satisfied with the prospect of becoming a mere millionaire at a brokerage firm, these hotshots saw the chance to become multimillionaires through esoteric investment techniques beyond the comprehension of mere mortals.

The dream of unlimited wealth was shaken in 1998, when a hedge fund called Long-Term Capital Management—which had used $2.2 billion in assets to acquire financial positions with a value of more than $1 trillion—was on the verge of collapse. Concerned that a failure of this magnitude would weaken the entire financial market, the Federal Reserve intervened by putting together a group of investment banks that bailed out the hedge fund and its rich investors.

Events such as this tarnished the reputation of hedge funds but did not result in a stampede among their clients, which included a growing number of pension funds. In fact, the sluggish performance of the stock market in the wake of the dot.com collapse made affluent investors even more interested in the extraordinary returns that hedge funds seemed to offer.

Despite the hype in the business press about funds pulling in annual returns of 40 percent or more, many hedge funds struggled to outperform the stock market. Looking for the big score, some turned back the clock to the financial maneuvers of the 1980s. Rather than simply engaging in financial plays, they used their holdings in companies to press for corporate restructuring to pump up the stock price or in some cases bought out the firm entirely in order to reshape it. Hedge fund managers began to behave like the corporate raiders of the 1980s, and some of those raiders, such as Carl Icahn, transformed themselves into hedge fund managers.

Yet even these approaches could not provide levels of return high enough to meet the inflated expectations of hedge fund investors. All the evidence suggests that firms such as SAC decided that the only way to beat the market was to obtain information that no one else had; in other words, by resorting to insider trading.

That was the message of the successful prosecution of Galleon Group founder Raj Rajaratnam in 2011 and is also at the heart of the SAC indictment, which alleges not just some isolated instances of insider trading. Instead, it charges that such behavior was inherent in the way SAC has operated:

The relentless pursuit of an information “edge” fostered a business culture within SAC in which there was no meaningful commitment to ensure that such “edge” came from legitimate research and not Inside Information. The predictable and foreseeable result, as charged herein, was systematic insider trading.

If SAC’s goose is indeed cooked, the next issue is what happens to its competitors. There’s no reason to believe that any of the other big hedge funds have been any more scrupulous in their pursuit of an information edge. Perhaps what we should be talking about here is not just the death penalty for a single company but for an entire industry.

China’s Familiar Charges Against Glaxo

Thursday, July 18th, 2013

big-pharma-pills-and-moneyGlobal corporations piously claim to adhere to the laws of the countries in which they do business, knowing full well that those laws in many places are weak or are not rigorously enforced.

It’s thus amusing to see British drug giant GlaxoSmithKline squirm in the face of corruption charges unexpectedly brought by the Chinese government. GSK purports to be shocked by allegations that its Chinese executives used funds laundered through travel agencies to bribe doctors, hospitals and public officials to purchase more of its products. The company insists that it has zero tolerance for such behavior and that a recent internal investigation had found no evidence of corruption  in its Chinese operations.

These protestations are as unconvincing as the Chinese government’s claims that it is simply enforcing the law—as opposed to giving its emerging pharmaceutical  industry a leg up. GSK’s alleged transgressions are little different from the practices that it and the rest of Big Pharma employ around the world.

Take the United States. In recent years, GSK has become known as the company that pays massive amounts to resolve wide-ranging allegations brought by regulators and prosecutors.

Some of those charges involved payments very much like the ones it is being accused of making in China. GSK was charged with giving kickbacks to doctors and other health professionals to prescribe drugs such as the anti-depressants Paxil and Wellbutrin for unapproved (and possibly dangerous) purposes.  Payments also went to figures such as radio personality Drew Pinsky, who was given $275,000 by the company to promote Wellbutrin on his program.

The kickback allegations were among the charges covered by a $3 billion settlement GSK reached with the U.S. Justice Department in 2012. Also included in the deal were accusations that GSK withheld crucial safety data on its diabetes medication Avandia from the Food & Drug Administration and that it defrauded government healthcare programs in its pricing practices.

These safety and pricing matters were the culmination of years of controversy surrounding GSK and its predecessor companies. The safety issues dated back at least to the 1950s, when Smith, Kline & French was among the firms linked to Thalidomide and its horrible legacy of birth defects.

Until it was sold off in the late 1980s, Glaxo’s infant formula business, like that of Nestle, was accused of undermining public health in the third world by marketing the powder to women who were so poor that they tended to dilute the formula to the point that it lost its nutritional potency.

In the 1980s, SmithKline Beckman was the target of a rare criminal case brought under U.S. drug laws for failing to warn regulators and the public about the potentially lethal side effects of its blood pressure medication Selacryn.

Later years saw frequent charges that GSK suppressed evidence about the dangers of Paxil, especially in children. There were also many cases involving pricing abuses, including one in which GSK paid $150 million to resolve allegations of violating the federal False Claims Act in its dealings with Medicare and Medicaid.

Unlike many corporate settlements, GSK’s $3 billion deal with the feds required it to plead guilty to several criminal counts. It also had to sign a Corporate Integrity Agreement with the Department of Health and Human Services.

In other words, the company is in effect on parole and subject to heightened scrutiny. The Chinese accusations seem to point to a big, fat violation of the U.S. Foreign Corrupt Practices Act. That would jeopardize GSK’s settlement and subject it to new penalties and sanctions.

Foreign corporations have long taken advantage of China’s lax regulatory system. Now that the People’s Republic is (selectively) cracking down, a company such as GSK deserves no sympathy.

The Kochs’ Stake in Pollution

Thursday, May 30th, 2013

Accountability_LATimesPuppets_300x250_FINALREVISED050813_2Koch Industries and the billionaire brothers who run it are best known for their involvement in rightwing causes. The latest controversy is over the Kochs’ reported interest in purchasing the Los Angeles Times and other major newspapers owned by the Tribune Co. A campaign centered in L.A. is mobilizing opposition to such a deal among newspaper subscribers and Tribune shareholders, warning that a Koch takeover would create a new Fox News.

What often gets forgotten is that Koch Industries is not just part of the Koch ideological machine. It is a huge privately-held conglomerate with annual revenues of more than $100 billion and operations ranging from oil pipelines and refining to paper products (it owns Georgia-Pacific), synthetic fibers (it bought Lyrca and Stainmaster producer Invista from DuPont), chemicals, mining and cattle ranching.

I’ve just completed one of my Corporate Rap Sheets on Koch Industries, and it’s clear that the sins of the company go far beyond the political realm. The following is some of what I found.

In November 2011 the magazine Bloomberg Markets published a lengthy article entitled “The Secret Sins of Koch Industries” that made some explosive accusations against the company: “For six decades around the world, Koch Industries has blazed a path to riches—in part, by making illicit payments to win contracts, trading with a terrorist state, fixing prices, neglecting safety and ignoring environmental regulations. At the same time, Charles and David Koch have promoted a form of government that interferes less with company actions.”

What Bloomberg revealed for the first time were the allegations involving bribery and dealing with Iran. The article reported that the company’s subsidiary Koch-Glitsch paid bribes to secure contracts in six countries (Algeria, Egypt, India, Morocco, Nigeria and Saudi Arabia) and that it violated U.S. sanctions by doing business with Iran, including the sale of materials that helped the country build the world’s largest plant to convert natural gas to methanol used in plastics, paints and chemicals.

The environmental cases alluded to by Bloomberg had been previously reported and included the following.

In 1995 the U.S Justice Department, the Environmental Protection Agency and the United Stated Coast Guard filed a civil suit against Koch Industries and several of its affiliates for unlawfully discharging millions of gallons of oil into the waters of six states. In one of the largest Clean Water Act cased ever brought up to that time, the agencies accused Koch of being responsible for more than 300 separate spills in Alabama, Kansas, Louisiana, Missouri, Oklahoma and Texas.

In 1997 Tosco Corporation (now part of ConocoPhillips) sued Koch in a dispute over costs related to the clean-up of toxic waste at an oil refinery in Duncan, Oklahoma that used to be owned and operated by Koch. In 1998 a federal judge ordered Koch to contribute to those costs, and that ruling was upheld by an appeals court in 2000. The companies later settled the matter out of court.

In 1998 Koch agreed to pay $6.9 million to settle charges brought by state environmental regulators relating to large oil spills at the company’s Rosemount refinery in Minnesota. The following year it agreed to plead guilty to related federal criminal charges and pay $8 million in fines.

Also in 1998, the National Transportation Safety Board found that the failure of a Koch subsidiary to protect a liquid butane pipeline from corrosion was responsible for a 1996 rupture that released a butane vapor. When a pickup truck drove into the vapor it ignited an explosion that killed the driver and a passenger. In a wrongful death lawsuit a Texas jury awarded the father of one of the victims $296 million in damages.

In 2000 the U.S. Justice Department and the EPA announced that Koch Industries would pay what was then a record civil environmental fine of $30 million to settle the 1995 charges relating to more than 300 oil spills plus additional charges filed in 1997. Along with the penalty, Koch agreed to spend $5 million on environmental projects in Texas, Kansas and Oklahoma, the states where most of its spills had occurred. In announcing the settlement, EPA head Carol Browner said that Koch had quit inspecting its pipelines and instead found flaws by waiting for ruptures to happen.

Later in 2000, DOJ and the EPA announced that Koch Industries would pay a penalty of $4.5 million in connection with Clean Air Act violations at its refineries in Minnesota and Texas. The company also agreed to spend up to $80 million to install improved pollution-control equipment at the facilities.

In a third major environmental case against Koch that year, a federal grand jury in Texas returned a 97-count indictment against the company and four of its employees for violating federal air pollution and hazardous waste laws in connection with benzene emissions at the Koch refinery near Corpus Christi.

The Bloomberg Markets article reported that a former Koch employee said she was told to falsify data in a report to the state on the emissions.  The company was reportedly facing potential penalties of some $350 million, but in early 2001 the newly installed Bush Administration’s Justice Department negotiated a settlement in which many of the charges were dropped and the company pled guilty to concealing violations of air quality laws and paid just $10 million in criminal fines and $10 million for environmental projects in the Corpus Christi area.

With the purchase of Georgia-Pacific in 2005, Koch acquired a company with its own environmental and safety problems. For example, in 1984 a G-P plant in Columbus, Ohio had spilled 2,000 pounds of phenol and formaldehyde that reached a nearby community. Residents complained of health problems from that incident and from a huge industrial waste pond that the company continued to maintain at the plant.

In 2009 the U.S. Justice Department and the EPA announced that G-P would spend $13 million to perform clean-up activities at a Michigan Superfund site where it previously had a paper mill. In 2010 G-P was one of ten companies sued by the Justice Department over PCB contamination of the Fox River in Wisconsin. Unlike the other defendants, G-P had already settled with DOJ by agreeing to a $7 million penalty and to pay for the costs of a portion of the clean-up. One of the other defendants, Appleton Papers, called the settlement a “sweetheart deal.”

More recently, Koch Industries has been caught up in the controversy over the Keystone XL pipeline. In 2011 Inside Climate News reported that Koch already responsible for 25 percent of the tar sands oil being imported from Canada into the United States and stood to benefit greatly from the new pipeline. Koch denied its involvement, but Inside Climate News found documents filed with Canada’s Energy Board contradicting that statement.

An August 2012 report by the Political Economy Research Institute at the University of Massachusetts-Amherst identified Koch as being among the top five corporate air polluters in the United States.

The reason the Kochs rail against regulation is clear: they’ve got a big stake in pollution.

Note:  The full rap sheet on Koch Industries can be found here.

JPMorgan Chase in the Sewer

Thursday, May 9th, 2013

dimonThe business news has been full of speculation on whether JPMorgan Chase Jamie Dimon will go on serving as both CEO and chairman of the big bank, in light of a shareholder campaign to strip him of the latter post. The effort to bring Dimon down a notch—and to oust three members of the board—is hardly the work of a “lynch mob,” as Jeffrey Sonnenfeld of Yale suggested in a New York Times op-ed.

That’s not to say that a corporate lynching is not in order. JPMorgan’s behavior has been outrageous in many respects. The latest evidence has just come to light in a lawsuit filed by California Attorney General Kamala Harris, who accuses the bank of engaging in “fraudulent and unlawful debt-collection practices” against tens of thousands of residents of her state.

In charges reminiscent of the scandals involving improper foreclosures by the likes of JPMorgan, the complaint describes gross violations of proper legal procedures in the course of filing vast numbers of lawsuits against borrowers, including:

  • Robo-signing of court filings without proper review of relevant files and bank records;
  • Failing to properly serve notice on customers—a practice known as “sewer service”; and
  • Failing to redact personal information from court filings, potentially exposing customers to identity theft.

JPMorgan got so carried away with what the complaint calls its “debt collection mill,” that on a single day in 2010 it filed 469 lawsuits.

The accusations come amid reports of ongoing screw-ups in the process of providing compensation to victims of the foreclosure abuses. For JPMorgan, the California charges also bring to mind its own dismal record when it comes to respecting the rights of credit card customers.

In January 2001, just before it was taken over by what was then J.P. Morgan, Chase Manhattan had to pay at least $22 million to settle lawsuits asserting that its credit card customers were charged illegitimate late fees.

In July 2012 JPMorgan Chase agreed to pay $100 million to settle a class action lawsuit charging it with improperly increasing the minimum monthly payments charged to credit card customers.

The credit card abuses are only part of a broad pattern of misconduct by JPMorgan. In the past year alone, its track record includes the following:

In October 2012 New York State Attorney General Eric Schneiderman, acting on behalf of the U.S. Justice Department’s federal mortgage task force, sued JPMorgan, alleging that its Bear Stearns unit had fraudulently misled investors in the sale of residential mortgage-backed securities.  The following month, the SEC announced that JPMorgan would pay $296.9 million to settle similar charges.

In January 2013 JPMorgan was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve charges relating to foreclosure abuses. That same month, bank regulators ordered JPMorgan to take corrective action to address risk management shortcomings that caused massive trading losses in the London Whale scandal. It was also ordered to strengthen its efforts to prevent money laundering. In a move that was interpreted as a signal to regulators, JPMorgan’s board of directors cut the compensation of Dimon by 50 percent.

JPMorgan’s image was further tarnished by an internal probe of the big trading losses that found widespread failures in the bank’s risk management system. Investigations of the losses by the FBI and other federal agencies continue.

In February 2013 documents came to light indicating JPMorgan had altered the results of an outside analysis showing deficiencies in thousands of home mortgages that the bank had bundled into securities that turned out to be toxic.

In March 2013 the Senate Permanent Committee on Investigation released a 300-page report that charged the bank with ignoring internal controls and misleading regulators and shareholders about the scope of losses associated with the London Whale fiasco.

In an article in late March, the New York Times reported that the bank was facing investigations by at least eight federal agencies. Last week, the newspaper revealed a new investigation of JPMorgan by the Federal Energy Regulatory Commission, which was said to have assembled evidence that the bank used “manipulative schemes” to transform money-losing power plants into “powerful profit centers.”

You know a bank is in big trouble when the coverage of its activities includes phrases like “lynch mob,” “sewer service” and “manipulative schemes.“