Month: February 2020

Justice Deferred at Wells Fargo

In finally resolving its investigation of Wells Fargo for a brazen scheme to bilk customers through the creation of millions of sham fee-generating accounts, the Trump/Barr Justice Department employed some tough language but administered what amounted to a slap on the wrist.

DOJ issued a press release quoting Deputy Assistant Attorney General Michael Granston as saying that the settlement “holds Wells Fargo accountable for tolerating fraudulent conduct that is remarkable both for its duration and scope.” The release was accompanied by a 16-page summary of the bank’s abuses, including the adoption of “onerous sales goals and accompanying management pressure [that] led thousands of its employees to engage in: (1) unlawful conduct to attain sales through fraud, identity theft, and the falsification of bank records, and (2) unethical practices to sell products of no or low value to the customer, while believing that the customer did not actually need the account and was not going to use the account.”

The document states that senior Wells executives were well aware of the unlawful behavior yet continued to ratchet up the sales pressure on employees.

This recitation echoes the content of a 100-page notice issued earlier by Wells’ primary regulator, the Office of the Comptroller of the Currency. While the OCC imposed substantial financial penalties against several former executives of the bank, DOJ has not charged any individuals.

Justice imposed a $3 billion monetary penalty on Wells, which resolves criminal issues such as false bank records and identity theft as well as civil issues under the Financial Institutions Reform, Recovery and Enforcement Act and securities violations that may be brought by the SEC. That penalty is not insignificant but it will not be too much of a burden for a bank whose profits last year exceeded $19 billion.

Moreover, the impact of the criminal portion of the case was diminished by the inclusion of a deferred prosecution agreement rather than the filing of any actual charges. This overused gimmick (like its evil twin, the non-prosecution agreement) allows DOJ to give the impression it is being tough with corporate bad actors while actually failing to do so.

In its press release on the Wells case, DOJ tries to justify the use of the DPA by noting factors such as the bank’s cooperation with the investigation. Yet it also cites “prior settlements in a series of regulatory and civil actions.”

How are the bank’s prior bad acts, which according to Violation Tracker have resulted in more than $17 billion in penalties, an argument for leniency? If anything, they militate against the use of DPA, which was originally meant to provide an incentive for a company caught up in a single case of misconduct to return to the straight and narrow.

Wells Fargo, in fact, was the recipient, via its acquisition Wachovia, of a previous DPA in 2010 for anti-money-laundering deficiencies as well as a 2011 non-prosecution agreement in connection with municipal bond bid-rigging. Those deals do not appear to have much of a beneficial effect on the ethical climate at the bank.

Allowing Wells to once again evade true criminal responsibility is sending the wrong signal to a corporation whose conduct was so pernicious, both in cheating its customers and in coercing lower-level employees to participate in the massive fraud.

Behavior like this calls out for tougher penalties. In 2018 the Federal Reserve took a step in that direction by barring Wells from growing any larger until it cleaned up its business practices. The agency also announced that the bank had been pressured to replace four members of its board of directors.

Meanwhile, the Justice Department continues to rely on prosecutorial approaches that have done little to stem the ongoing wave of corporate criminality.

Bloomberg’s Wage Theft Problem

Michael Bloomberg was pummeled during the Democratic debate in Las Vegas over the treatment of women at his media and data company. Yet that is not the only blemish on the employment record of Bloomberg L.P. The company also has a serious problem with wage theft.

Violation Tracker lists a total of $70 million in penalties paid by Bloomberg for wage and hour violations, putting it in 32nd place among large corporations. Yet many of the companies higher on the list – such as Walmart, FedEx, and United Parcel Service – employ far more people than the roughly 20,000 at Bloomberg.

The bulk of Bloomberg’s penalty total comes from a 2018 collective action lawsuit in which it agreed to pay $54.5 million to resolve allegations that the company violated the federal Fair Labor Standards Act and state law in New York and California by failing to pay overtime to employees responsible for assisting customers using the proprietary software on Bloomberg financial data terminals.

The 2014 complaint in the case alleged that the employees were required to be at their desks before their shifts began, were required to use parts of their lunch hour to finish requests, and were required to work past the end of their shifts to finish jobs – all of which could cause them to work more than the 40 hours for which they were paid. Yet they received no additional compensation for the extra time, which the complaint said should have been paid at time-and-a-half.

For the next few years, Bloomberg’s lawyers fought the case both on substantive and procedural grounds, but they lost in their effort to prevent the certification of a class by the court. Whereas most employers who experience that setback agree to settle, Bloomberg wanted its day in court. The trial finally began in April 2018. After about a week of proceedings, the company apparently did not like the way things were going and entered settlement talks with the plaintiffs. A deal soon followed.

What makes the company’s aggressive posture in this case surprising is that it had previously settled four other wage and hour lawsuits for amounts ranging from $346,000 to $5.5 million.

Bloomberg’s wage theft litigation troubles expanded after the company had been cited twice for wage and hour violations by the U.S. Labor Department, paying a fine of $522,683 in 2011 and $547,683 in 2013.

In addition to all these cases, Bloomberg recently agreed to pay $3 million to settle another overtime lawsuit involving call center workers (the case is not yet in Violation Tracker).

Bloomberg is not the only tech company to have run afoul of the Fair Labor Standards Act. Google’s parent Alphabet, Intel, Apple, Adobe Systems, Microsoft, and Oracle are also high on the list of those companies that have paid the most in wage theft settlements and fines.

Yet Bloomberg LP is the only one on the list whose founder, majority owner and CEO is seeking to be the presidential nominee of a political party deeply concerned about the treatment of workers.

Meddling in Mergers

President Trump’s effort to influence the outcome of the prosecution of his buddy Roger Stone represents another threat to the rule of law in the United States. Yet it is not just the rule of criminal law that is endangered. The Trump Administration has also been meddling with civil law, particularly in the area of antitrust.

This has been going on for a while. Early in his administration, the Trump Justice Department sought to block AT&T’s acquisition of Time Warner, mainly, it appears, because the president wanted to get back at Time Warner subsidiary CNN for its negative coverage of him. Even after a federal court ruled in favor of AT&T and allowed it to close the deal, DOJ continued its legal crusade. A year ago, some critics were arguing that Trump’s actions with regard to AT&T amounted to an impeachable offense.

Last year, DOJ did Trump’s bidding by opening an antitrust investigation of four automakers that had sided with California in a dispute over whether the state could maintain its stricter automobile emissions standards in the face of the administration’s move to ease those standards at the federal level. Recently, DOJ quietly dropped the probe after concluding that the companies had violated no laws—something that was clear from the beginning.

As with criminal cases, Trump is trying to use antitrust laws not only to harm his opponents but to reward his friends. Exhibit A here is the proposed merger of T-Mobile and Sprint. A federal judge has just ruled in favor of the deal, which will greatly reduce competition in a wireless industry that is already highly concentrated. One study found that it would also depress wages of workers at cellphone retail stores.

The case had been brought by attorneys general in 13 states and the District of Columbia concerned that the combination had received approval from the Justice Department and the Federal Communications Commission.

Those approvals came amid reports over the past year that the merger was being strongly promoted by the White House. Trump is very chummy with Masayoshi Son, the chair of Sprint’s Japanese parent SoftBank, who has cultivated close ties with the president by making lavish promises of new investments in the U.S. that are unlikely to materialize. SoftBank, in fact, is in bad shape financially, due to setbacks relating to its stakes in companies such as We Work and Uber.

Meanwhile, T-Mobile also stoked the administration’s enthusiasm for the merger by spending hundreds of thousands of dollars at Trump’s DC hotel.

When Trump does not have a personal stake in the matter, he seems willing to large mergers proceed. He made some noises about the combination of aerospace giants Raytheon and United Technologies but then dropped the matter. The deal is expected to close in the next few months.

Other big combinations have also been succeeding. Last year alone, Bristol-Myers Squibb acquired Celgene; Occidental Petroleum bought Anadarko; Walt Disney took over a big chunk of Twenty-First Century Fox; and so on.

What we are left with are two problems. On the one hand, we have an administration that is largely willing to left corporate concentration continue unchecked. On the other hand, we have a president who is willing to selectively intervene in deals to help friends and harm foes.

Both practices are exactly the opposite of what is in the public interest. The antitrust laws should be applied rigorously to control corporate power, and a president should refrain from meddling in deals, especially when it’s done for personal political reasons. But that’s not the way it works in Trumpworld.

Bribery and Airbus

Given all the talk about the globalization of supply chains and other business activities, it is encouraging to see that international coordination can also occur when it comes to the investigation of corporate misconduct.

That is part of the story in the recent announcement that law enforcement agencies in the United States, Britain and France worked together to bring about a $4 billion settlement with Airbus to resolve allegations of bribery and export-control violations in its dealings with countries such as China, Malaysia and Ghana.

Unfortunately, cross-border cooperation can also result in the spread of undesirable practices. The Airbus deal included a deferred prosecution agreement offered by the UK’s Serious Fraud Office. Britain imported such arrangements from the United States, whose Justice Department also offered one to Airbus.

At least Britain has used DPAs sparingly – the Serious Fraud Office website lists half a dozen prior to Airbus, while the U.S. DOJ has handed out more than 200 of them, along with a roughly equal number of related non-prosecution agreements.

Part of the justification for these deals is that they will discourage corporations from repeating their offenses by holding out the possibility of an actual criminal prosecution should that occur. But Airbus is a company that already had a history of bribery.

A 2003 article in The Economist described this track record involving customers in countries such as Kuwait and India. In 2018 Airbus had to pay more than 80 million euros to resolve a bribery investigation conducted by the Munich Public Prosecutor relating to the sale of fighter aircraft to Austria. The new settlement with Airbus was the culmination of an investigation that lasted for years.

Bribery, in fact, has long been a pervasive problem in the aerospace industry, including U.S. players. Among the revelations that occurred during the Watergate investigation was the fact that companies such as Lockheed and Northrop frequently paid questionable payments to gain foreign contracts. The uproar over these payments, which also involved companies in other industries, helped bring about the Foreign Corrupt Practices Act—the key law used by U.S. prosecutors in their portion of the case against Airbus.

The FCPA has also been used against other foreign aerospace companies. These cases include an $800 million settlement with aircraft engine manufacturer Rolls-Royce that also involved prosecutors in the UK and Brazil; a $107 million settlement with Brazilian aircraft manufacturer Embraer; and a $400 million settlement with Britain’s BAE Systems.

Bribery has been such a significant issue for Airbus that the company had planned to include a chapter on its scandals in a book it had commissioned to celebrate its fiftieth anniversary. Airbus executives apparently thought that publishing that unflattering content would highlight the company’s purported commitment to transparency and thus help it negotiate a more favorable deal in its negotiations with prosecutors. Airbus subsequently decided that the move might actually have the opposite effect, and it cancelled the publication of the book.

That may have been the wiser course of action. Airbus got the deferred prosecution agreements it was seeking and thereby protected its ability to bid on government contracts. The public, however, is left to wonder whether the company and its competitors will ever cease their corrupt practices.