December 2019 Archives

The 2019 Corporate Rap Sheet

While the news has lately focused on political high crimes and misdemeanors, 2019 has also seen plenty of corporate crimes and violations. Continuing the pattern of the past few years, diligent prosecutors and career agency officials have pursued their mission to combat business misconduct even as the Trump Administration tries to erode the regulatory system. The following is a selection of significant cases resolved during the year.

Online Privacy Violations: Facebook agreed to pay $5 billion and to modify its corporate governance to resolve a Federal Trade Commission case alleging that the company violated a 2012 FTC order by deceiving users about their ability to control the privacy of their personal information.

Opioid Marketing Abuses: The British company Reckitt Benckiser agreed to pay more than $1.3 billion to resolve criminal and civil allegations that it engaged in an illicit scheme to increase prescriptions for an opioid addiction treatment called Suboxone.

Wildfire Complicity: Pacific Gas & Electric reached a $1 billion settlement with a group of localities in California to resolve a lawsuit concerning the company’s responsibility for damage caused by major wildfires in 2015, 2017 and 2018. PG&E later agreed to a related $1.7 billion settlement with state regulators.

International Economic Sanctions: Britain’s Standard Chartered Bank agreed to pay a total of more than $900 million in settlements with the U.S. Justice Department, the Treasury Department, the Federal Reserve, the New York Department of Financial Services and the Manhattan District Attorney’s Office concerning alleged violations of economic sanctions in its dealing with Iranian entities.

Emissions Cheating: Fiat Chrysler agreed to pay a civil penalty of $305 million and spend around $200 million more on recalls and repairs to resolve allegations that it installed software on more than 100,000 vehicles to facilitate cheating on emissions control testing.

Foreign Bribery: Walmart agreed to pay $137 million to the Justice Department and $144 million to the Securities and Exchange Commission to resolve alleged violations of the Foreign Corrupt Practices Act in Brazil, China, India and Mexico.

False Claims Act Violations: Walgreens agreed to pay the federal government and the states $269 million to resolve allegations that it improperly billed Medicare, Medicaid, and other federal healthcare programs for hundreds of thousands of insulin pens it knowingly dispensed to program beneficiaries who did not need them.

Price-fixing: StarKist Co. was sentenced to pay a criminal fine of $100 million, the statutory maximum, for its role in a conspiracy to fix prices for canned tuna sold in the United States. StarKist was also sentenced to a 13-month term of probation.

Employment Discrimination: Google’s parent company Alphabet agreed to pay $11 million to settle a class action lawsuit alleging that it engaged in age discrimination in its hiring process.

Investor Protection Violation: State Street Bank and Trust Company agreed to pay over $88 million to the SEC to settle allegations of overcharging mutual funds and other registered investment company clients for expenses related to the firm’s custody of client assets.

Illegal Kickbacks: Mallinckrodt agreed to pay $15 million to resolve claims that Questcor Pharmaceuticals, which it acquired, paid illegal kickbacks to doctors, in the form of lavish dinners and entertainment, to induce them to write prescriptions for the company’s drug H.P. Acthar Gel.

Worker Misclassification: Uber Technologies agreed to pay $20 million to settle a lawsuit alleging that it misclassified drivers as independent contractors to avoid complying with labor protection standards.

Accounting Fraud: KPMG agreed to pay $50 million to the SEC to settle allegations of altering past audit work after receiving stolen information about inspections of the firm that would be conducted by the Public Company Accounting Oversight Board. The SEC also found that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results.

Trade Violations: A subsidiary of Univar Inc. agreed to pay the United States $62 million to settle allegations that it violated customs regulations when it imported saccharin that was manufactured in China and transshipped through Taiwan to evade a 329 percent antidumping duty.

Consumer Protection Violation: As part of the settlement of allegations that it engaged in unfair and deceptive practices in connection with a 2017 data breach, Equifax agreed to provide $425 million in consumer relief and pay a $100 million civil penalty to the Consumer Financial Protection Bureau. It also paid $175 million to the states.

Ocean Dumping: Princess Cruise Lines and its parent Carnival Cruises were ordered to pay a $20 million criminal penalty after admitting to violating the terms of their probation in connection with a previous case relating to illegal ocean dumping of oil-contaminated waste.

Additional details on these cases can be found in Violation Tracker, which now contains 397,000 civil and criminal cases with total penalties of $604 billion.

Note: I have just completed a thorough update of the Dirt Diggers Digest Guide to Strategic Corporate Research. I’ve added dozens of new sources (and fixed many outdated links) in all four of the guide’s parts: Key Sources of Company Information; Exploring A Company’s Essential Relationships; Analyzing A Company’s Accountability Record; and Industry-Specific Sources.

Corporate Law & Order

Some of the best episodes of the old Law & Order television series were the ones in which the prosecutors investigated corporate misconduct. In 1992, for example, one episode titled “The Corporate Veil” featured a plot involving a medical equipment manufacturer’s sale of faulty pacemakers.

In real life, district attorneys focus mostly on homicides and other street crimes, but the business culprits depicted on Law & Order were not entirely imaginary. Local prosecutors do sometimes target rogue corporations, especially in certain parts of the country.

The latest expansion of Violation Tracker documents this fact. My colleagues and I at the Corporate Research Project of Good Jobs First looked at the records of district attorneys in the country’s 50 largest counties and 50 largest cities (some of which use other titles for their prosecutors, such as state attorney and prosecuting attorney).

In the period since the beginning of 2000, we found a total of 565 instances in which local prosecutors brought cases against corporations for offenses such as fraud against consumers and hazardous waste violations that resulted in a company’s paying a monetary fine or settlement. The aggregate penalties came to $5.9 billion.

These cases are far from evenly distributed among the large localities. California’s counties and cities, with 441 successful actions against corporations, account for more than three quarters of the nation’s cases.

California is also unusual in that its localities frequently band together to bring cases against large companies. We found 191 of these group lawsuits that together resulted in more than $1.8 billion in fines and settlements. These include a $1 billion settlement reached this year by 18 California counties and other public entities with Pacific Gas & Electric to resolve claims relating to the company’s role in major fires.

These multi-jurisdictional lawsuits are similar to those more often brought by groups of state attorneys general. In September, the Corporate Research Project published a report on these multistate cases, based on a compilation of more than 600 such actions.

The ability of California counties and large cities to pursue cases against corporations is strengthened by the state’s Unfair Competition Law and False Advertising Law, which prohibit many forms of predatory business conduct. Local prosecutor activism has caused tension with the state attorney general’s office, which views itself as the appropriate protector of the public against corporate abuses.

Although California’s local prosecutors have a commanding lead in the number of corporate cases, New York’s have collected the most penalty dollars. The Empire State’s $3.5 billion total (compared to $2.3 billion in California) is due mostly to a dozen very large cases brought against major foreign banks by the Manhattan District Attorney’s Office. The banks, such as BNP Paribas and UniCredit, were accused of doing business with parties subject to international economic sanctions.

New York local prosecutors have brought a total of 88 business misconduct cases that resulted in fines or settlements. The only other state in double digits was Texas, with 12 cases generating $12 million in penalties. Large localities in nine more states had one to six cases each: Arizona, Colorado, Florida, Illinois, Louisiana, Minnesota, Ohio, Oklahoma and Utah.

The local prosecutors’ cases, along with an update of the existing categories, brings the number of entries in Violation Tracker to 397,000 with aggregate penalties of $604 billion.

Note: In addition to the local prosecutors’ cases, the new Violation Tracker update includes cases from eight state and local consumer protection agencies as well as more than 200 cases from the New York Department of Financial Services with total penalties of more than $10 billion. The latter is the first portion of what will be complete coverage of state financial regulatory agencies throughout the country.

Putting Strings on Bank Mergers

The U.S. financial system has survived a decade without another meltdown like that caused by the proliferation of toxic securities in the late 2000s. The credit belongs to tougher regulation, not to a moral conversion on the part of the large banks. Those institutions still exhibit significant ethical deficits even as they grow larger.

That’s why new legislation on bank mergers being introduced by Sen. Elizabeth Warren and Illinois Rep. Chuy Garcia makes sense. The Bank Merger Review Modernization Act would require regulatory agencies to apply more rigorous standards when deciding whether to approve proposed deals.

Those standards would include a quantitative risk metric, consideration of the impact on market concentration for specific banking products, Community Reinvestment Act ratings and approval by the Consumer Financial Protection Bureau.

Those measures are all fine, but I would also suggest that regulators be required to consider the full track record of each party when it comes to compliance with a broad range of laws regulations.

I say this having compiled a large quantity of documentation of bank misconduct in my work on Violation Tracker. I am continuously amazed at the number and variety of cases in which banks have been involved as well as the eye-popping penalties they have paid to buy their way out of legal jeopardy.

The Violation Tracker penalty total for the financial services industry now stands at $305 billion (since 2000), and that number will increase by about $8 billion next week when we post an update that for the first time will include cases brought by the New York State Department of Financial Services and the Manhattan District Attorney’s Office.

Those agencies have brought several dozen major cases against large banks, especially foreign-based ones, for violations of international economic sanctions, money-laundering regulations and rules regarding the manipulation of foreign exchange markets.

Warren and Garcia express specific concern about the combination of SunTrust and BB&T, which are merging to form a new “Too Big to Fail” bank they are naming Truist.

There is good reason for the banks to shed their old identities. According to Violation Tracker, SunTrust has racked up more than $1.5 billion in penalties. These include a 2014 case in which the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, and the attorneys general of 49 states and the District of Columbia required the company to address mortgage servicing misconduct by providing $500 million in loss-mitigation relief to underwater borrowers. It also required SunTrust to pay $40 million to approximately 48,000 consumers who lost their homes to foreclosure. At the same time, SunTrust had to pay $418 million to resolve a related case brought by the Justice Department for originating and underwriting loans that violated its obligations as a participant in the Federal Housing Administration insurance program.

As if that was not enough, SunTrust had to pay another $320 million as part of the resolution of a DOJ criminal case alleging that it misled numerous mortgage servicing customers who sought mortgage relief through the federal Home Affordable Modification Program.

BB&T has paid more than $130 million in penalties, most of which came from a 2016 case in which it agreed to pay $83 million to the Justice Department to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the Federal Housing Administration that did not meet applicable requirements.

Why, one might ask, should corporations with such blemished records be allowed to merge and become the country’s sixth largest bank, whose combined resources will allow it to capture additional market share? It might be worth exploring whether, in addition to the kind of safeguards being proposed by Warren and Garcia, banks with a substantial record of misconduct could be barred from participating in mergers, or at least be required to take additional steps to make amends to the customers and communities they have harmed.