Corporate Crime

Liar’s LIBOR

Mainstream economics would have us believe that interest rates are determined by the “invisible hand” of the market, except on those occasions when the Federal Reserve or other central banks intervene to modulate borrowing costs. One of the benefits of the current scandal embroiling the British bank Barclays is that it reveals the flimsy and fishy nature of one of the key rate-setting mechanisms of the global financial system.

That mechanism is the British Bankers’ Association’s London Interbank Offered Rate, an interest rate index that has been around since the 1980s. While LIBOR’s primary function is to represent what it costs big banks to borrow from one another over the short term, it has become the linchpin of hundreds of trillions of dollars of financial transactions ranging from complex interest-rate swaps to adjustable-rate home mortgages.

One would think that something so crucial to the efficient functioning of capitalism would be determined in a rigorous way. LIBOR rates, it turns out, are assembled in a remarkably arbitrary manner. They are based on figures submitted each day by major banks on what they think they would have to pay at that time to borrow in ten different currencies for 15 different periods of time. The upper and lower ends of the range are removed before the actual index is calculated by Thomson Reuters on behalf of the bankers’ association, but the figures are still based on what the banks decide to report as their perceptions.

While there has been debate since the beginning about the use of perceptions rather than actual transactions, serious questions about the integrity of LIBOR date back to the early stages of the financial meltdown in 2008. In April of that year the Wall Street Journal noted growing concerns that banks, whose individual LIBOR figures are made public, were adjusting those submissions downward to disguise the fact that their increasingly shaky condition was forcing them to pay higher rates for short-term loans.

The Journal then published its own analysis concluding that banks such as Citigroup and J.P. Morgan Chase, to avoid looking desperate for cash, had been reporting significantly lower borrowing costs to LIBOR than what other indicators suggested should have been the case.

By 2011, LIBOR discrepancies had moved from the realm of financial analysis to that of government oversight. The Swiss bank UBS disclosed that its LIBOR submissions were being reviewed by U.S. and Japanese regulators, and there were reports that other institutions were involved in the probes. It soon emerged that a group of megabanks were being investigated in various countries for colluding to manipulate the LIBOR rate. This, in turn, prompted a wave of lawsuits filed by institutional investors as well as by municipal governments whose interest rate swaps became less beneficial because of artificially low LIBOR rates.

Barclays is the first bank to be penalized for LIBOR shenanigans. The $453 million it is paying to U.S. and U.K. regulators to settle the case is more an embarrassment than a serious financial burden. Moreover, no executives or traders were charged, despite the smoking-gun emails quoted in the UK Financial Services Authority’s summary of the case. And, in an arrangement that is standard operating procedure for corporate miscreants these days, Barclays negotiated a deal with the U.S. Justice Department that allows it to avoid a criminal conviction.

It was satisfying to see the bank’s CEO Robert Diamond (phot0) forced to resign after the revelation of evidence suggesting that senior executives knew very well what was going on with the LIBOR manipulation. (Diamond, an American, also had to step down as a co-host of a fundraising event in London for Mitt Romney.) Yet we then had to put up with the ridiculous spectacle of Diamond testifying to a parliamentary committee that regulators were partly to blame.

The highlight of the hearing was when Labour MP John Mann told Diamond: “Either you were complicit, grossly negligent or incompetent.” After a pause, Diamond asked. “Is there a question?”

There is no question that the big banks are corrupt and that an interest-rate-setting system that depends on honest reporting by representatives of those institutions has no legitimacy.

Patriotism is for the Little People

ING’s “Your Number” ad campaign touts the financial services company’s ability to help customers figure out how much they need to save for retirement. We’ve just learned that ING’s own number is $619 million, the amount it had to pay to settle charges of having violated federal law by systematically concealing its prohibited transactions with Iran and Cuba.

The penalty agreed to by Netherlands-based ING is the largest in a series of cases in which major banks have been accused of doing business with countries targeted by U.S. economic sanctions. One of those banks is JPMorgan Chase, whose CEO Jamie Dimon just appeared before Congress to explain billions of dollars in trading losses and was treated with deference by most members of the Senate Banking Committee. It was just ten months ago that JPMorgan paid $88 million to resolve civil charges related to thousands of prohibited funds transfers for Iranian and Cuban parties.

JPMorgan got off a lot cheaper than some European banks, which were hit with criminal as well as civil charges. Apart from ING, Lloyds Banking Group paid $350 million in 2009, Credit Suisse paid $536 million that same year, and Barclays paid $298 million in 2010. Yet even those amounts did not cause much pain for the large institutions. In fact, they were undoubtedly happy to pay the penalties as part of arrangements that allowed them to avoid more serious legal consequences. They all were granted deferred prosecution deals under which they avoided a formal criminal conviction by vowing to clean up their act. A frustrated federal judge in the Barclays case called the settlement a “sweetheart deal” but approved it nonetheless.

The most comprehensive U.S. economic sanctions currently in force are aimed at Cuba, Iran, Burma/Myanmar, Sudan and Syria. More limited sanctions regimes apply to various other countries such as North Korea and Somalia. The Cuban sanctions, which date back to 1962, were adopted under the rubric of the World War I-era Trading with the Enemy Act. More recent restrictions are based primarily on the International Emergency Economic Powers Act of 1976.

Starting in the George W. Bush Administration, attention was directed from countries as a whole to designated individuals and organizations from those countries and others deemed to be acting against U.S. interests, including alleged terrorists and terrorist financiers. These parties are included in a list of Specially Designated Nationals and Blocked Persons maintained by the Treasury Department’s Office of Foreign Asset Controls (OFAC), which enforces the civil provisions of the sanctions laws.

Violations of these laws did not begin with the recent bank cases. In 2002 the Corporate Crime Reporter obtained documents from OFAC revealing previously unreported enforcement actions against companies such as Boeing, Citigroup, General Electric, Merrill Lynch and Morgan Stanley. The agency had brought 115 cases over a four-year period. Over the past decade, OFAC has been more open about its enforcement actions, but fewer U.S. companies are being targeted.

The reason is not that American firms have gotten more ethical, but rather because many of them have in effect been allowed to sidestep the law. In December 2010 the New York Times revealed that the Treasury Department has been granting licenses to many large companies to sell goods to Iran under an exceedingly broad interpretation of the agricultural and humanitarian exemptions. Among the products that sneaked in under those loopholes were cigarettes and chewing gum.

Whatever one thinks of the wisdom or efficacy of economic sanctions, the way in which large companies have related to them says a lot about corporate power. It’s clear that, whenever possible, they will put their commercial interests ahead of strict compliance with the law and adherence to the foreign policy objectives of their own government and those of its allies. When individuals collaborate with enemy nations they risk indefinite detention. When corporations do so, they receive affordable fines while avoiding serious legal consequences. Even admitted violators such as ING, Credit Suisse, Lloyds and Barclays do not end up on OFAC’s blacklist.

The late real estate tycoon Leona Helmsley once said that paying taxes is only for the little people; apparently, patriotism falls into the same category.

Will Big Pharma Remain Above the Law?

The recent announcement that a corporation agreed to pay $1.6 billion to settle regulatory violations would normally be considered significant news, but because the company involved was a drugmaker there was not much of a stir. That’s because Abbott Laboratories is only the latest in a series of pharmaceutical producers to pay nine- and ten-figure amounts to settle charges that they engaged in illegal marketing practices.

Abbott’s deal with federal and state prosecutors involves Depakote, which was approved by the Food and Drug Administration to treat seizures but which Abbott was charged with promoting for unauthorized uses such as schizophrenia and for controlling agitation in elderly dementia patients. The company admitted that for eight years it maintained a specialized sales force to market Depakote to nursing homes for the latter unauthorized use. In other words, it systematically violated FDA rules and encouraged doctors and nursing homes to use the drug in potentially unsafe ways.

Abbott follows in the footsteps of other industry violators:

In November 2011 GlaxoSmithKline agreed to pay $3 billion to settle various federal investigations, including one involving the illegal marketing of its diabetes drug Avandia.
In September 2010 Novartis agreed to pay $422 million to settle charges that it had illegally marketed its anti-seizure medication Trileptal and five other drugs.
In April 2010 AstraZeneca agreed to pay $520 million to settle charges relating to the marketing of its schizophrenia drug Seroquel.
In September 2009 Pfizer agreed to pay $2.3 billion to settle charges stemming from the illegal promotion of its anti-inflammatory drug Bextra prior to its being taken off the market entirely because of concerns that it was unsafe for any use.
In January 2009 Eli Lilly agreed the pay $1.4 billion—then the largest individual corporate criminal fine in the history of the U.S. Justice Department—for illegal marketing of its anti-psychotic drug Zyprexa.

The wave of off-label marketing settlements began in 2004, when Pfizer agreed to pay $430 million to resolve criminal and civil charges brought against Warner-Lambert (which Pfizer had acquired four years earlier) for providing financial inducements and otherwise encouraging doctors to prescribe its epilepsy drug Neurontin for other unapproved uses.

Soon just about every drugmaker of significance ended up reaching one of these agreements with prosecutors and shelled out what appeared to be hefty penalties. In fact, the amounts were modest in comparison to the potential revenue the companies could rake in by selling the drugs for uses far beyond what the FDA review process had deemed safe. A 2009 investigation by David Evans of Bloomberg noted that the $2.3 billion penalty Pfizer paid in connection with Bextra was only 14 percent of the $16.8 billion in revenue it had enjoyed from that drug over the previous seven years.

The company’s 2004 settlement should have been a deterrent against further off-label marketing, but, according to Bloomberg, Pfizer went right on doing it. Seeking maximum sales, regardless of restrictions set by the FDA, was an ingrained part of the company’s modus operandi. When the 2009 settlement was announced, John Kopchinski, a former Pfizer sales rep turned whistleblower, was quoted as saying: “The whole culture of Pfizer is driven by sales, and if you didn’t sell drugs illegally, you were not seen as a team player.”

Compared to other forms of corporate misconduct, such as securities violations, the drug companies are much more likely to have to admit to criminal violations in the off-label marketing cases. And the penalties are far larger than those imposed for most environmental and labor violations.

Yet these seemingly harsher enforcement practices appear not to have been very effective in putting an end to the illegal activity. In fact, the willingness of the drug industry to flout the drug safety laws raises serious questions about the effectiveness of FDA regulations and the federal criminal justice system in general. If a group of companies know that they can repeatedly break the rules and face consequences that fall far short of the potential gains from the illegal behavior, enforcement has little meaning.

What makes the situation even more outrageous is that off-label market is just one of numerous ways that the drug industry regularly violates the law—whether by defrauding federal programs such as Medicare or by covering up safety risks related to the approved uses of certain drugs.

The one thing that makes drug industry executives a bit nervous is that federal prosecutors have begun to show interest in reviving what is known as the responsible corporate officer doctrine, a provision of U.S. food and drug laws that could be used to hold executives personally and criminally responsible for violations. So far, the doctrine has been applied to only a few small fish. But if Big Pharma CEOs start appearing in perp walks, the industry may finally realize it is not above the law.

Will Discredited Murdoch Get His U.S. Comeuppance?

The recently released UK parliamentary report on the phone hacking scandal involving News Corporation is destined to become a classic exposition of corporate misconduct.

Its authors appear to have exhausted their thesaurus in coming up with various ways of accusing the company and its top executives, including CEO Rupert Murdoch, of deceit. The company’s long-time claim that the hacking was the work of a single “rogue reporter” is described as “false” (p.7) and “no longer [having] any shred of credibility” (p.67). Various assertions made by the company are said to have been “proven to be untrue” (p.9). Company officials are portrayed as having acted “to perpetuate a falsehood” (p.84), “failing to release to the Committee documents that would have helped to expose the truth” (p.14) and as having “repeatedly stonewalled, obfuscated and misled” (p.68).

The report does not come out and directly call Rupert Murdoch a dirty rotten liar, but it makes the same point in a more biting way when it says of the media mogul’s official testimony: “Rupert Murdoch has demonstrated excellent powers of recall and grasp of detail, when it has suited him” (p.68).

In language rare for a government document to use about a powerful corporation and its top executive, the report declares:

On the basis of the facts and evidence before the Committee, we conclude that, if at all relevant times Rupert Murdoch did not take steps to become fully informed about phone-hacking, he turned a blind eye and exhibited wilful blindness to what was going on in his companies and publications. This culture, we consider, permeated from the top throughout the organisation and speaks volumes about the lack of effective corporate governance at News Corporation and News International. We conclude, therefore, that Rupert Murdoch is not a fit person to exercise the stewardship of a major international company (p.70).

As satisfying as this statement is to read, my primary reaction is: what took so long? Murdoch has been the CEO of News Corp. for more than 30 years, and during that time he has done untold damage to the integrity and quality of the media industry worldwide. The phone hacking scandal was not an aberration in the history of the company or the career of its leader.

Murdoch has been unfit to lead at least since the 1970s, when he began acquiring major publications in the United Kingdom and the United States and infusing them with an insidious combination of sensationalism and Neanderthal politics. In the UK he also declared war on the newspaper unions.

Once he was firmly established as a print baron, Murdoch moved into broadcasting and film through the acquisition of Metromedia’s U.S. TV stations and the Twentieth Century-Fox movie studio. In the process he ran roughshod over federal newspaper/broadcasting cross-ownership regulations and played a major role in the decision by the feds to undermine those rules. Murdoch used his U.S. broadcasting empire not just to make money but to exercise a toxic influence on political discourse, especially through the Fox News Channel launched in 1996.

For Murdoch there has never been a clear dividing line between business and politics. He’s used his properties to promote his political views, and he’s used his political connections—even in a place such as China—to advance his business interests.

This practice has extended into the realm of book publishing, in which Murdoch has played a major role since the acquisition of HarperCollins (previously Harper & Row) in 1987. Murdoch has been accused of using Harper to curry favor with key political figures via lavish book deals. The most notorious of these cases involved none other than Newt Gingrich, who was revealed in 1994 to have received a $4.5 million advance on a two-book deal at a time when he was Speaker of the House and thus in a position to influence legislation to the benefit of News Corp.

It came out that Gingrich met with Murdoch personally shortly before signing the deal was struck. Although Gingrich called the criticism “grotesque and disgusting,” the controversy forced him to forgo the advance. HarperCollins also offered generous advances to other public figures such as Supreme Court Justice Clarence Thomas.

While the legal troubles of Murdoch and News Corp. continue in the UK, the question is whether there will be consequences on this side of the Atlantic, where the company is headquartered. The bribery aspects of the phone hacking call out for prosecution under the Foreign Corrupt Practices Act, and there has been speculation about such as investigation since last summer.

For too long, Murdoch has sidestepped U.S. law to build his empire, even going so far as to become an American citizen to get around restrictions on foreign media ownership. There would a delicious irony if what finally brought his comeuppance is misbehavior outside the country.

Wal-Mart and Watergate

Wal-Mart has been probably been accused of more types of misconduct than any other large corporation. The latest additions to the list are bribery and obstruction of justice. In an 8,000-word exposé published recently in the New York Times, top executives at the giant retailer are reported to have thwarted and ultimately shelved an internal investigation of extensive bribes paid by lower-level company officials to expand Wal-Mart’s market share in Mexico.

While Wal-Mart’s outrageous behavior is often in a class by itself, the bribery aspects of the allegations are far from unique. In fact, Wal-Mart is actually a late arrival to a sizeable group of major corporations that have found themselves in legal jeopardy because of what in corporate circles are politely called questionable foreign payments.

That jeopardy has grown more significant in recent years as the Securities and Exchange Commission and the Department of Justice have stepped up enforcement of the Foreign Corrupt Practices Act, or FCPA, which prohibits overseas bribery by U.S.-based corporations and foreign companies with a substantial presence in the United States.

It is often forgotten that the Watergate scandal of the 1970s was not only about the misdeeds of the Nixon Administration. Investigations by the Senate and the Watergate Special Prosecutor forced companies such as 3M, American Airlines and Goodyear Tire & Rubber to admit that they or their executives had made illegal contributions to the infamous Committee to Re-Elect the President.

Subsequent inquiries into illegal payments of all kinds led to revelations that companies such as Lockheed, Northrop and Gulf Oil had engaged in widespread foreign bribery. Under pressure from the SEC, more than 150 publicly traded companies admitted that they had been involved in questionable overseas payments or outright bribes to obtain contracts from foreign governments. A 1976 tally by the Council on Economic Priorities found that more than $300 million in such payments had been disclosed in what some were calling “the Business Watergate.”

While some observers insisted that a certain amount of baksheesh was necessary to making deals in many parts of the world, Congress responded to the revelations by enacting the FCPA in late 1977. For the first time, bribery of foreign government officials was a criminal offense under U.S. law, with fines up to $1 million and prison sentences of up to five years.

The ink was barely dry on the FCPA when U.S. corporations began to complain that it was putting them at a competitive disadvantage. The Carter Administration’s Justice Department responded by signaling that it would not be enforcing the FCPA too vigorously. That was one Carter policy that the Reagan Administration was willing to adopt. In fact, Reagan’s trade representative Bill Brock led an effort to get Congress to weaken the law, but the initiative failed.

The Clinton Administration took a different approach—trying to get other countries to adopt rules similar to the FCPA. In 1997 the industrial countries belonging to the Organization for Economic Cooperation and Development reached agreement on an anti-bribery convention. In subsequent years, the number of FCPA cases remained at a miniscule level—only a handful a year. Optimists were claiming this was because the law was having a remarkable deterrent effect. Skeptics said that companies were being more careful to conceal their bribes, and prosecutors were focused elsewhere.

Any illusion that commercial bribery was a rarity was dispelled in 2005, when former Federal Reserve Chairman Paul Volcker released the final results of the investigation he had been asked to conduct of the Oil-for-Food Program in Iraq. Volcker’s group found that more than half of the 4,500 companies participating in the program—which was supposed to ease the impact of Western sanctions on Iraq—had paid illegal surcharges and kickbacks to the government of Saddam Hussein. Among those companies were Siemens, DaimlerChrysler and the French bank BNP Paribas.

The Volcker investigation, the OECD convention, and the Sarbanes-Oxley law (whose mandates about financial controls made it more difficult to conceal improper payments) breathed new life into FCPA enforcement during the final years of the Bush Administration and after President Obama took office.

The turning point came in November 2007, when Chevron agreed to pay $30 million to settle charges about its role in Oil-for-Food corruption. Then, in late 2008, Siemens agreed to pay the Justice Department, the SEC and European authorities a record $1.6 billion in fines to settle charges that it had routinely paid bribes to secure large public works projects around the world. This was a huge payout in relation to previous FCPA penalties, yet it was a bargain in that the big German company avoided a guilty plea or conviction that would have disqualified it from continuing to receive hundreds of millions of dollars in federal contracts.

In February 2009 Halliburton and its former subsidiary Kellogg Brown and Root agreed to pay a total of $579 million to resolve allegations that they bribed government officials in Nigeria over a ten-year period. A year later, the giant British military contractor BAE Systems reached settlements totaling more than $400 million with the Justice Department and the UK Serious Fraud Office to resolve longstanding multi-country bribery allegations. In April 2010 Daimler and three of its subsidiaries paid $93 million to resolve FCPA charges. Other well-known companies that have settled similar bribery cases since the beginning of 2011 include Tyson Foods, IBM, and Johnson & Johnson. In most cases companies have followed the lead of Siemens in negotiating non-prosecution or deferred prosecution deals that avoided criminal convictions.

A quarter century after the Watergate investigation revealed a culture of corruption in the foreign dealings of major corporations, the new wave of FCPA prosecutions suggests that little has changed. There is one difference, however. Whereas the bribery revelations of the 1970s elicited a public outcry, the cases of the past few years have generated relatively little comment in the United States—except for the complaints of corporate apologists that the FCPA is too severe. Among those apologists are board members of the Institute for Legal Reform (a division of the U.S. Chamber of Commerce), whose ranks have included the top ethics officer of Wal-Mart.

The Wal-Mart case could turn out to be a much bigger deal than previous FCPA cases—for the simple reason that the mega-retailer appears to have forgotten Watergate’s central lesson that the cover-up is often punished more severely than the crime. A company that has often avoided serious consequences for its past misconduct may finally pay a high price.

Con JOBS

Bipartisanship in Washington is back from the dead, at least for the moment, but its reappearance illustrates what happens when the two major parties find common ground: Corporate skullduggery gets a boost under the guise of helping workers.

That’s the story of the bill with the deliberately misleading acronym — the JOBS Act — which emerged from the cauldrons of the financial deregulation crowd and has now been embraced not only by Republicans but also by the Obama Administration and many Congressional Democrats. An effort by Senate Democrats to mitigate the riskiest features of the bill has failed, and now the legislation seems headed for final passage.

More formally known as the Jumpstart Our Business Startups Act, the bill is based on the dubious premise that newer companies are having difficulty raising capital and that weakening Securities and Exchange Commission rules—including those contained in the Sarbanes-Oxley law enacted in the wake of the Enron and other accounting scandals of the early 2000s—would allow more start-ups to go public, expand their business and create jobs. The outbreaks of financial fraud in recent years have apparently done nothing to shake the belief that less regulated markets can work miracles.

For many, that notion may be more of a fig leaf than an article of faith. One clear sign that the JOBS Act is trying to pull a fast one is that the “emerging growth companies” targeted for regulatory relief are defined in the bill as those with up to $1 billion in annual revenue. This is just the latest example of an effort purportedly designed to help small business that really serves much larger corporate entities. (What proponents on the JOBS Act don’t mention is that the SEC already has exemptions from some of its rules for companies that can somewhat more legitimately be called small—those with less than $75 million in sales.)

Critics ranging from the AARP to state securities regulators have focused on provisions of the JOBS bill that would allow start-up companies to solicit investors on the web, warning that this will pave the way for more scams.

I want to zero in on another issue, which is central to the mission of the Dirt Diggers Digest: disclosure. In the name of streamlining the rules for the so-called emerging growth companies, the JOBS Act would erode some of the key transparency provisions of the securities laws.

This is fitting, given that the original sponsor of the bill, Rep. Stephen Fincher of Tennessee (photo), has been embroiled in scandals involving gaps in his personal financial disclosure and last year was named one of the “most corrupt” members of Congress by the watchdog group CREW.

The first problem with the JOBS bill is that it would allow firms planning initial stock offerings to issue informal marketing documents and distribute potentially biased analyst reports well before they have to issue formal prospectuses with thorough and candid descriptions of their financial and operating condition. In other words, the bill would postpone real disclosure until after the company has used a bogus form of disclosure to generate a quite possibly misleading image of itself.

When the company does have to file with the SEC, it would have to provide only two years of audited financial statements rather than three and would be exempt from reporting requirements such as the disclosure of data on the ratio of CEO compensation to worker compensation mandated by the Dodd-Frank Act. It would also be exempt from having to give shareholders an opportunity to vote on executive pay practices.

What’s worse, the JOBS bill also seems to opening the door to a broader erosion of disclosure provisions for all publicly traded companies. The bill would order the SEC to conduct a review of the Commission’s Regulation S-K to determine how it might be streamlined for “emerging growth” companies.

Yet it also calls for the SEC to “comprehensively analyze the current registration requirements” of the regulation, which could mean a weakening of the rules for all companies, no matter what their size. Regulation S-K is the broad set of rules determining what public companies have to include in their public filings on issues ranging from financial results to executive compensation and legal proceedings.

It is bad enough that the JOBS bill exploits the country’s desperate need for relief from unemployment to push changes that might mainly benefit stock scam artists. The idea that it could also allow unscrupulous corporations to conceal their misdeeds is truly infuriating. We just finished celebrating Sunshine Week; now Congress is hard at work promoting darkness.

Good Cop or Bad Cop Obama?

Barack Obama, bad cop, used the State of the Union address to talk tough about fighting white-collar crime, announcing new initiatives to investigate financial industry fraud and the abusive lending that led to the mortgage meltdown. Unfortunately, the administration of Obama the “good” cop has spent the past three years allowing the perpetrators of those same offenses to escape serious punishment.

The latest indication of the administration’s weak enforcement record came in a report issued just a day before the State of the Union by the Office of the Special Inspector General for the Troubled Asset Relief Program, known inside the Beltway as SIGTARP. Not only have the feds failed to put the financial fraudsters behind bars—they can’t even control the industry’s bloated executive pay packages.

Soon after he took office in 2009, Obama made headlines by denouncing banking industry bonuses as “shameful.” He went on to impose $500,000 limits on the cash compensation of senior executives at firms that had received “exceptional assistance” from the Treasury, meaning that they had gotten the fattest bailouts during the 2008 financial crisis. The firms in that category were AIG, Bank of America and Citigroup as well as General Motors and Chrysler, along with the finance affiliates of those automakers.

The impact of the move was diminished somewhat after it soon came to light that AIG was giving out scores of seven-figure bonuses to the employees of the unit that caused the collapse of the company and necessitated a massive federal intervention. The Obama Administration and Congress responded to the uproar by creating a “compensation czar” under the auspices of the Treasury Department to oversee executive pay practices at the designated firms.

Kenneth Feinberg, the Washington lawyer named as czar, challenged the pay deals these firms had already made with their top officers and had successes such as getting outgoing Bank of America CEO Kenneth Lewis to forgo all of his pay for 2009. In October of that year, the Obama administration said that it would impose a plan devised by Feinberg to cut pay of top earners at the designated firms by about 50 percent. For more than a year there was a steady stream of news articles about the tough measures being meted out by Feinberg until his resignation in September 2010.

According to the new SIGTARP report, much of this was no more than Kabuki theatre. It found that the efforts of Feinberg in what is formally known as the Office of the Special Master (OSM) were less than draconian: “The Special Master could not effectively rein in excessive compensation at the seven companies because he was under the constraint that his most important goal was to get the companies to repay TARP [funds].” The report admits that OSM did bring about some pay reductions, but the idea of a $500,000 pay ceiling was rendered meaningless by its decision to approve “total compensation packages in the millions.”

The largest of those packages was received by AIG CEO Robert Benmosche: $10.5 million in total pay, including $3 million in cash, or six times the purported ceiling. This outsized compensation was going to the company that probably did the most to cause the crisis and that will end up costing the government more than any other bailed out firm.

Many others at the designated firms also broke through the flimsy ceiling. Overall, SIGTARP found, OSM approved 68 pay packages in excess of $1 million in 2009, 71 in 2010 and the same number in 2011. In the latter years there were fewer pay packages for OSM to review, since Citigroup and Bank of America had repaid the special assistance that triggered the oversight of their compensation practices. There have been reports that they took the step precisely to escape that oversight. Given how lenient Feinberg had been in allowing exceptions, it is not clear why they bothered.

Along with the depiction of OSM as a pushover, what is perhaps most telling about the SIGTARP report is the appended response from the Treasury Department. Despite all evidence to the contrary, Treasury claims that “OSM has succeeded in achieving its mission.” It also tries to rewrite history by claiming that the $500,000 limit was not a ceiling at all, but simply “a discretionary guideline.” And it insists that OSM allowed the firms to exceed the maximum only for good reasons, even though SIGTARP pointed out that those reasons were not documented.

Like Feinberg, President Obama has tried to project an image of being tough on corporate abuses while repeatedly caving in behind the scenes. It remains to be seen whether Obama, facing pressures from the Occupy movement and the threat of losing his re-election bid, finally gets serious about prosecuting financial crime or continues the charade.

Fighting for the Right to Be a Weak Regulator

The conservatives fulminating about the Consumer Financial Protection Bureau and President Obama’s recess appointment of Richard Cordray to head it may feel outmaneuvered at the moment. But if history is any guide, the bureau will not be too big a threat to the financial powers that be.

The federal government is filled with regulatory agencies whose main mission seems to be to protect the interests of the largest companies they are charged with regulating. There’s always the possibility that the CFPB will be the exception to the rule of regulatory capture, but the fledgling entity would have to clear some high hurdles.

Cordray and his colleagues would do well to study the track record of the federal agency that has supposedly served as a financial watchdog for the past seven decades: the U.S. Securities and Exchange Commission. The CFPB is getting off the ground just as the SEC is embroiled in a dispute that reveals its cozy relationship with the big banks and its feckless approach to enforcement.

Back in October, as part of its belated and half-hearted response to the chicanery that led to the financial meltdown of 2008, the SEC announced that giant Citigroup had agreed to pay $285 million to settle charges that it had misled investors about a $1 billion issuance of housing-related collateralized debt obligations that Citi knew to be of dubious value and had bet against with its own money. As is typical in such SEC cases, Citi neither admitted nor denied doing any wrong.

That would have been the end of a typical case if the judge overseeing the matter, Jed Rakoff the Southern District of New York, had not done something remarkable. He declined to rubberstamp the settlement and raised a host of questions about the size of the settlement—which was well below the estimated $700 million lost by investors—and the failure of the SEC to get Citi to admit guilt.

Rakoff (illustration), who had questioned settlements in several other SEC cases, rejected the deal the agency made with Citi and ordered a trial on the matter. In his November 28 order (which I retrieved, along with other case documents, from the PACER subscription database), Judge Rakoff called the amount of the settlement “pocket change to any entity as large as Citigroup” and said it would have little deterrent effect. He also pointed out that the SEC’s decision to charge Citi with mere negligence and allow it to avoid admitting guilt “deals a double blow to any assistance the defrauded investors might seek to derive from the S.E.C. litigation in attempting to recoup their losses through private litigation, since private investors not only cannot bring securities claims based on negligence.” In other words, Rakoff was accusing the agency of protecting the interests of the big bank.

Calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest,” Rakoff thundered:

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts – cold, hard solid facts, established by admissions or by trials -it serves no lawful or moral purpose and is simply an engine of oppression.

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.

Instead of using Rakoff’s powerful order as leverage to extract a larger settlement from Citi, the SEC went on the attack against the judge. It appealed Rakoff’s order to the federal court of appeals, arguing that its enforcement process would be crippled if it had to hold out for admissions of guilt. Rakoff fired back with a charge that the agency had misled the appeals court and had withheld key information from him.

As the pissing match continues, one could only imagine the satisfaction felt by Citi at being able to sit on the sidelines and watch its regulator do battle with the judiciary to preserve its ability to handle financial misconduct with kid gloves. The SEC has suddenly become aggressive—not in fighting fraud but in defending its right to be a weak regulator. Richard Cordray, take heed.

Challenging the Corporate Gods

When the founders of the Japanese camera maker Olympus decided in the 1920s to name their company after the home of the Greek gods, they could not have imagined how appropriate that appellation would be nine decades later.

The current accounting scandal at the firm demonstrates the kind of arrogant and unscrupulous behavior frequently attributed to Zeus and other deities.

In October it came to light that the company had paid out suspiciously large sums for some dubious acquisitions. Under pressure from regulators and law enforcement agencies, Olympus management named a panel of outsiders to look into the matter. While they were doing their work, the company admitted that for decades it had been hiding losses from high-risk, off-balance-sheet investments through those bogus deal fees.

The revelation was a serious blow to the reputation of the company, its top executives and its outside auditors—the Japanese branches of global accounting giants KPMG and Ernst & Young—which had signed off on the cooked books. It’s been reported that KPMG auditors raised questions about the merger fees, prompting Olympus to switch its business to Ernst & Young. What’s not clear is whether KPMG ever did anything about its misgivings over the company’s creative accounting.

President Shuichi Takayama bowed deeply in apology while admitting to the deception (photo), but the controversy would not die down. For a while there were reports (subsequently denied by the company) that the Yakuza, Japan’s organized crime networks, might have been involved.

Any hope that this scandal would blow over were removed in early December, when that panel of outsiders—consisting of lawyers, judges, prosecutors and accountants—released a report of its findings. The document (only the summary is online) is devastating. After outlining a complex scheme to hide the investment losses by shifting funds through foreign and domestic accounts, it concludes that there were serious failures of management oversight, corporate governance (board members are described as yes men), transparency, auditing and other aspects of accountability. The management of Olympus was described as “rotten to the core” and the scandal as a “malignant tumor.”

Along with the strong words there appears to be some strong action. Japanese prosecutors have just raided the Tokyo headquarters of Olympus and the home of its former chairman in search of evidence for what are expected to be criminal charges. There is also talk that the company could be delisted from the Tokyo Stock Exchange.

It remains to be seen how steep a price the company and the other guilty parties pay for this long-term fraud, but the treatment of Olympus already stands in stark contrast to the way in which many U.S. officials have been handling cases of domestic corporate misbehavior.

Whereas in Japan there is still the possibility of serious consequences for corporate fraud, in this country the penalties are in effect a slap on the wrist. That’s the only way to describe the way in the large banks, for example, have resolved the few cases that have been brought against them for misconduct that brought on the financial crisis that still afflicts us.

In the latest of these, Bank of America is paying $335 million to settle allegations that it (actually, the Countrywide Financial business it acquired) steered minority borrowers into predatory mortgages. Earlier, Citigroup negotiated a $282 million deal to settle fraud charges with the Securities and Exchange Commission that was so sweet the judge in the case protested.

These buy-your-way-out-of-legal-jeopardy deals also apply to non-financial firms. Alpha Natural Resources, which purchased the notorious Massey Energy, agreed to pay $209 million to resolve charges against Massey stemming from last year’s catastrophic mining disaster in West Virginia. At least when Merck agreed to pay $950 million to resolve charges over the illegal marketing of its painkiller Vioxx it also pleaded guilty to a criminal charge. But that doesn’t mean much of anything in terms of the company’s ability to operate.

A payment of a couple of hundred million does not mean much to a company such as Citigroup, which has assets of nearly $2 trillion. Until companies fear legal consequences that stand in the way of business as usual or put top executives behind bars, they will continue their nefarious ways. After all, like their Japanese counterparts, many of them are “rotten to the core.”

Making Corporations Disappear

From the 11-year prison term and $92 million fine imposed on convicted insider trader Raj Rajaratnam to the apparent misappropriation of hundreds of millions of dollars in client funds at failed brokerage firm MF Global to the admission by Japan’s Olympus Corp. that it has been cooking the books for years, the news is full of reminders about the criminality that pervades the corporate world.

At the same time, the ongoing Occupy movement has been bringing renewed attention to the disastrous consequences of the Supreme Court’s Citizens United ruling that enshrined corporate personhood. One of the more popular protest messages seen at Occupy encampments is: “I will believe that corporations are people when Texas executes one of them.”

As Russell Mokhiber of Corporate Crime Reporter points out, the idea is not so far-fetched. For the past two decades there has been a small but persistent campaign to promote the idea that the state-granted charters of rogue corporations could be challenged, thereby putting them out of business. The movement was pioneered by Richard Grossman, who co-authored a well-circulated 1993 pamphlet entitled Taking Care of Business, which outlined legal and historical justifications for charter revocations.

Grossman’s evangelism helped create the Community Environmental Legal Defense Fund, which helps communities fight corporate intrusions at the local level, and the Program on Corporations, Law and Democracy, which publishes materials that “contest the authority of corporations to govern.”

These groups and others were challenging corporate personhood even before Citizens United, and groups inspired by these ideas launched campaigns to challenge the charters of outlaw corporations such as Union Carbide (largely because of its role in the Bhopal disaster) and Unocal (because of its role in oil spills, frequent workplace safety and health violations, and human rights violations in its relations with repressive governments).

The idea began to catch on. In 1998, Eliot Spitzer, then a candidate for New York Attorney General, said he would not hesitate to push for the dissolution of corporations found guilty of criminal offenses. In the early 2000s, groups in California pushed for a corporate three strikes law to deal with recidivist business offenders such as Tenet Healthcare.

The charter revocation concept waned for a while but had a resurgence last year in response to the outrageous behavior of BP in the Gulf oil spill and that of Massey Energy in creating the conditions that led to the Upper Big Branch mine disaster in West Virginia. Massey ended up being taken over by another company, but BP remains in business despite the fact that its misconduct in the Gulf occurred while it was on probation for earlier federal offenses relating to a 2005 refinery explosion in Texas and 2006 oil spills in Alaska.

The Occupy movement sets the stage for a new assault on corporate recidivists. There is no shortage of offenders. For instance, the New York Times just showed that numerous investment banks have committed repeated violations of Securities and Exchange Commission anti-fraud rules. Mokhiber suggests that potential candidates for the corporate death penalty include health insurers, nuclear power plant operators, giant banks and firms engaged in hydraulic fracking.

The real challenge is to figure out what it would mean to execute a giant corporation. There are few precedents for doing so. Nearly all the major companies that have gone out of existence have done so as the result of takeovers by other large firms. In a limited number of cases such as Enron and Lehman Brothers, companies were forced to liquidate, but by the time this happened the firms were effectively worthless.

Unanswered is the question of what would happen if a large and healthy corporation had to cease operations because of a charter revocation. Selling off the company piece by piece in fire sales to other large corporations would have the undesirable effect of increasing concentration in the industry.

While it may be morally satisfying to say that such a firm should simply vanish, that would be unfair to the workers and other stakeholders who may have played no role in the criminal behavior that brought on the revocation. Besides, this too could result in higher industry concentration as other firms capture the disappearing company’s market share.

What’s needed is a set of protocols for a just transition of a de-chartered company to a new corporate form based on principles such as trust busting (splitting up business behemoths into smaller entities), worker ownership, environmental responsibility and community oversight.

A distinction would have to be made between disappearing companies in those industries that serve a legitimate need and those which need to be phased out for reasons aside from the behavior of individual firms (coal, tobacco, for-profit health insurance, etc.).

Figuring out how to dismantle large companies will be a huge and complicated task, but it is an essential undertaking if we are ever to escape from the era of corporate domination.