May 2023 Archives

Targeting the Infant Formula Giants

The Agriculture Department’s Women, Infants and Children (WIC) program is one of the many forms of social assistance that could be seriously affected by Republican efforts to cut supposedly wasteful federal spending as a condition of approving an increase in the debt ceiling.

If there is waste in WIC, it’s not being caused by the low-income women receiving nutritional aid. A more likely culprit are the corporations providing the infant formula distributed through the program.

The Federal Trade Commission has revealed that it is investigating whether suppliers have been colluding in their bids for contracts awarded by the state agencies that administer WIC. Any such collusion would be made easier by the fact that the infant formula market in general and the WIC portion of it are dominated by three large companies.

Two of the three—Abbott Laboratories, which produces the Similac brand, and Nestlé, which sells the Gerber brand—have acknowledged that they are involved in the investigation, while Reckitt Benckiser has declined to comment.

This is not the first time these companies have come under regulatory scrutiny. Back in 2003 Abbott and a subsidiary paid a total of $600 million in civil and criminal penalties to resolve charges that the company made illegal payments to institutional purchasers of its tube-feeding products and then encouraged the customers to overbill government health programs.

Over the past two decades, Abbott and various subsidiaries have paid another $98 million in various False Claims Act cases brought by federal and state prosecutors. This does not include hundreds of millions more paid in false claims and antitrust penalties by the portions of Abbott that were spun off as AbbVie in 2013.

Nestlé’s infant formula business has a history of controversy for another reason. During the mid-1970s Nestlé was made the target of a campaign protesting the marketing of infant formula in poor countries. Activists from organizations such as INFACT and progressive religious groups charged that the aggressive marketing of formula by companies like Nestlé was causing health problems, in that poor mothers often had to combine the powder with unclean water and frequently diluted the expensive formula so much that babies remained malnourished.

Nestlé initially responded to the boycott of its products with a counter-campaign, seeking to discredit its critics. The company later changed its posture, agreeing to comply with a marketing code issued by the World Health Organization. In the years that followed, Nestlé was frequently criticized for failing to comply with the code and for engaging in various questionable practices.

In 2019 Reckitt Benckiser, based in the United Kingdom, paid over $1.3 billion in penalties in connection with the improper marketing of the opioid Suboxone. It paid another $50 million to the FTC to resolve allegations of engaging in a deceptive scheme to thwart the introduction of a low-cost generic alternative to that drug.

Reckitt entered the infant formula business through the 2017 acquisition of Mead Johnson, producer of Enfamil. In 2012 Mead Johnson had paid $12 million to settle allegations by the SEC that the company violated the Foreign Corrupt Practices Act through improper payments to healthcare professionals at government-run hospitals in China.

Given these rap sheets, along with controversies over recalls and shortages, it will not come as a surprise if the FTC finds that these companies engaged in bid-rigging. The remedy should involve an effort to attract more suppliers to the WIC infant formula market, especially honest ones.

Wells Fargo Pays More for Its Sins

When the Consumer Financial Protection Bureau announced in 2016 that it was fining Wells Fargo $100 million for creating fee-generating customer accounts without permission, bank executives may have thought they could simply pay the penalty and move on.

Instead, Wells has had to contend with a series of regulatory and legal consequences. The latest is a $1 billion settlement the bank has just agreed to pay to resolve a class action lawsuit brought by shareholders accusing it of misrepresenting the progress it had made in improving its internal controls and compliance practices. The deal ranks among the largest securities settlements of all time.

In between the initial CFPB action and the new lawsuit resolution, Wells confronted the following:

In 2018 the Federal Reserve forced out several board members and took the unusual step of barring Wells from growing in size until it improved its compliance. It is telling that the asset cap is still in place.
That same year, Wells paid $575 million to settle litigation over the bogus accounts brought by state attorneys general.
In 2020 the U.S. Justice Department announced that Wells would pay $3 billion to resolve potential criminal and civil liability, but the bank was allowed to enter into a deferred prosecution agreement rather than having to plead guilty. The Trump DOJ also declined to bring charges against any individual executives.

While the monetary penalties paid by Wells are not trivial, they are far from punishing for an institution with nearly $2 trillion in assets and $13 billion in annual profits. They also do not seem to have had much of a deterrent effect.

In 2022 the CFPB took new action against the bank, compelling it to pay a $1.7 billion penalty and provide $2 billion in redress to customers to resolve allegations that it engaged in a variety of new misconduct. Wells was found to have repeatedly misapplied loan payments, wrongfully foreclosed on homes, improperly repossessed vehicles, and incorrectly assessed interest and fees, including surprise overdraft charges. Some 16 million customer accounts were said to have been cheated one way or another.

That 2020 deferred prosecution agreement means that Wells has in effect been on probation. Why, in light of the CFPB case, has the bank not been found to be in violation of that agreement? Is it simply because Wells is now focusing its alleged misconduct on real accounts rather than the fake ones it had been creating? That would be like letting a mugger off the hook for using a knife rather than gun.

Not only should Wells have its probation revoked, but it should undergo something analogous to what the FDIC does when a bank is in financial disarray. Federal regulators should find Wells to be in ethical disarray and take it over while fundamental changes are made to bring it back to some semblance of compliance.

The alternative is letting a rogue institution continue to prey on its customers in any way it can.

Goldman Gives In

The verdict in the Trump case was not the only court victory against sexism this week. Lawyers for women who worked in securities and investment banking positions at Goldman Sachs announced that the Wall Street giant has agreed to pay $215 million to settle a long-running gender discrimination case.

Some 2,800 current and former employees at Goldman will share in the settlement, which resolves a case first filed back in 2010. Along with the payout, the company will take steps to improve gender equity in pay and promotions.

For years, Goldman strenuously denied allegations that its personnel evaluation system systematically placed women at lower rankings than men, and it aggressively sought to reverse the certification of the class in 2018. Those efforts were unsuccessful, eventually resulting in the scheduling of a trial in June of this year. Trials are rare in discrimination class actions, since juries are thought to be more sympathetic to plaintiffs.

Goldman finally decided to give in, becoming the latest large company to settle a class action gender discrimination lawsuit. Other cases during the past two decades documented in Violation Tracker include the following:

In 2022 Sterling Jewelers paid $175 million to settle litigation alleging that for years it had discriminated against tens of thousands of women in its pay and promotion practices.
In 2010 drug giant Novartis paid $175 million to settle charges of gender discrimination, including pregnancy discrimination.
In 2022 Google agreed to pay $118 million to settle class action litigation alleging it discriminated against women in its salary practices.
In 2007 Morgan Stanley paid $46 million to a class of about 3,000 women to settle gender discrimination allegations.
In 2018 the retail chain Family Dollar paid $45 million to more than 37,000 former and current managers who alleged they were paid less than their male counterparts. That case took nearly 15 years to get resolved.
In 2004 Boeing paid more than $40 million to a class of female workers who alleged they were denied desirable job assignments, promotional opportunities, and management positions.
In 2013 Merrill Lynch paid more than $38 million to a group of women employed as financial advisors who said they were discriminated against in pay and promotion.
In 2014 United Airlines paid $36.5 million to settle a lawsuit alleging that the company engaged in gender discrimination by requiring female flight attendants to weigh less than comparable male ones.
In 2008 Smith Barney paid $33 million to women formerly employed as financial advisors who claimed they were paid less than their male counterparts.
In 2011 Wells Fargo paid $32 million to settle a lawsuit alleging that its Wachovia Securities subsidiary gave female financial advisers fewer opportunities than their male co-workers with respect to promotions, assignments, signing bonuses and compensation.

What this list show is that gender discrimination has been an issue in a wide range of companies and occupations, but sexism has been especially problematic in the traditionally macho world of Wall Street. Now that perhaps the most elite firm in the industry has capitulated, the worst abuses may finally come to an end.

Rogue Rescuer

Once again federal regulators have turned to JPMorgan Chase to rescue a failing smaller bank. For the moment, the customers of First Republic Bank may be pleased that their accounts are being taken over by a larger and more stable institution.

Yet they may not be quite so happy to learn that their savior has a much worse record when it comes to compliance with laws and regulations. As shown in Violation Tracker, First Republic was named in only a handful of enforcement actions and paid penalties of less than $4 million. JPMorgan, on the other hand, has 236 Violation Tracker entries and has paid over $36 billion in fines and settlements.

The contrast with First Republic is partly a matter of size. JPM’s vast operations give it many more opportunities to get into trouble. Those operations have included the marketing of residential mortgage-backed securities which turned out to be toxic and which resulted in legal actions that cost the company billions. Some of these entanglements were inherited by JPM when it took over Bear Stearns and Washington Mutual in 2008.

Yet JPM has also had problems when it comes to the treatment of its own customers in the course of routine banking functions. This has become clear to me in the course of assembling data for the latest category of class action litigation to be added to Violation Tracker: consumer protection lawsuits.

The collection is not yet done, but I have already identified more than a dozen settlements in which JPM has paid out hundreds of millions of dollars. Among these are the following:

* In 2012 JPM agreed to pay $100 million to settle litigation alleging it improperly raised interest rates on loan balances transferred to credit cards.

* In 2020 JPM agreed to pay more than $60 million to settle litigation alleging it overcharged customers serving in the military, in violation of the Servicemembers Civil Relief Act.

* In 2014 JPM agreed to pay $300 million to settle litigation alleging it pushed mortgage borrowers into force-placed insurance coverage whose cost was inflated due to kickbacks.

* In 2012 JPM agreed to pay $110 million to settle litigation concerning improper overdraft fees resulting from the way that debit-card transactions were processed.

* In 2011 JPM agreed to pay up to $7.8 million to settle litigation alleging it charged credit card customers hidden fees after deceptively marketing special deals on balance transfers and short-term check loans.

* In 2014 JPM and several subsidiaries agreed to pay more than $18 million to settle litigation alleging the use of misleading loan documents to steer borrowers to adjustable-rate mortgages.

* In 2018 JPM agreed to pay over $11 million to settle litigation alleging it improperly charged interest on Federal Housing Administration-insured mortgages that were already paid off.

These were all cases brought by private plaintiffs. JPM also paid hundreds of millions more in consumer protection fines and settlements to federal and state agencies. Among these was a 2013 case brought by the Consumer Financial Protection Bureau in which JPM paid a $20 million penalty to the agency and over $300 million in refunds to two million customers for what were said to be illegal credit card practices.

There is widespread concern that rescue deals are allowing a too-big-to-fail bank like JPM to grow even larger. Yet we should also worry that more and more of the population is being forced to do business with megabanks that seem to regard themselves as too big to have to comply with laws that protect consumers.