Dirt Diggers Digest

Will Breuer’s Departure Finally Expose Banksters to Criminal Liability?

breuer President Obama’s choice of former prosecutor Mary Jo White to head the Securities and Exchange Commission is, despite her more recent work defending white-collar miscreants, being touted as a sign that the federal government will get tougher on corporate misconduct. Yet perhaps the more important issue, given that the SEC can bring only civil cases, is who will be chosen to replace Lanny Breuer as head of the Justice Department’s Criminal Division.

Breuer is planning to leave his post at the beginning of March. The announcement of his departure comes right after a PBS Frontline documentary called “The Untouchables” made him the symbol of the Obama Administration’s failure to bring criminal prosecutions of executives at the big banks responsible for the reckless practices that led to the financial meltdown of 2008 and the resulting economic slump from which the country is still struggling to recover.

Frontline’s Martin Smith put Breuer on the spot, confronting him with claims by sources from within the Criminal Division that when it came to Wall Street there were “no subpoenas, no document reviews, no wiretaps” and that at indictment approval meetings “there was no case ever mentioned that was even close to indicting Wall Street for financial crimes.” Smith also criticized Breuer for not working more closely with whistleblowers.

Near the end of the program, Smith asked Breuer about a speech he had given before the New York Bar Association in which he seemed to be saying that concern over the financial impact on individual banks influenced his decision not to pursue criminal prosecutions—implying that they are too big to prosecute. Amazingly, Breuer stood by that position.

Throughout the interview, Breuer insisted that he was pursuing justice against the banks, pointing several times to the civil cases that DOJ has filed. There have indeed been quite a few such cases brought by DOJ, the SEC and others. In the past few issues of this blog I’ve recounted the ones brought against Citigroup, Bank of America and JPMorgan.

I don’t want to leave out Wells Fargo, which is the smallest of the four giant institutions that now dominate U.S. commercial banking but has a record that is no less checkered.

In the same way that Bank of America assumed a slew of legal problems from its acquisition of Merrill Lynch and Countrywide Financial, and JPMorgan Chase did the same with regard to Bear Stearns and Washington Mutual, Wells Fargo has had to deal with numerous cases relating to the past sins of Wachovia, which it took over in 2008.

These have included: a $4.5 million fine imposed by industry regulator FINRA for violations of mutual fund sales rules; a $40 million settlement of SEC charges that the Evergreen Investment Management business Wells Fargo inherited from Wachovia misled investors about mortgage-backed securities; a $160 million settlement of federal charges relating to money laundering by customers; a $2 billion settlement with the California attorney general of charges relating to foreclosure abuses; an $11 million settlement with the SEC of charges that it cheated the Zuni Indian Tribe in the sale of collateralized debt obligations; and a $148 million settlement of federal and state municipal securities bid rigging charges.

Wells Fargo also had problems of its own making. In 2009 it had to agree to buy back $1.4 billion in auction-rate securities to settle allegations by the California attorney general of misleading investors. In 2011 it agreed to pay $125 million to settle a lawsuit in which a group of pension funds accused it of misrepresenting the quality of pools of mortgage-related securities. Soon after that, the Federal Reserve announced an $85 million civil penalty against Wells Fargo for steering customers with good qualifications into costly subprime mortgage loans during the housing boom. And then Wells Fargo agreed to pay at least $37 million to settle a lawsuit accusing it too of municipal bond bid rigging.

Wells Fargo was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. In July 2012 the Justice Department announced that Wells Fargo would pay $175 million to settle charges that it engaged in a pattern of discrimination against African-American and Hispanic borrowers in its mortgage lending during the period from 2004 to 2009. In August 2012 Wells Fargo agreed to pay $6.5 million to settle SEC charges that it failed to fully research the risks associated with mortgage-backed securities before selling them to customers such as municipalities and non-profit organizations.

In October 2012 the U.S. Attorney for the Southern District of New York filed suit against Wells Fargo, charging the bank with engaging in a “longstanding practice of reckless underwriting and fraudulent loan certification” for thousands of loans insured by the Federal Housing Administration that ultimately defaulted. And in January 2013 Wells Fargo was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses.

The sad truth is that settlements such as these are regarded by Wells Fargo as simply affordable costs of doing business. The same goes for Citi, BofA and JPMorgan. And unless Breuer gets replaced with someone tougher on financial crime, these banks have nothing to worry about.

Note: This piece draws on my new Corporate Rap Sheet on Wells Fargo, which can be found here.

Bluster Under Fire at JPMorgan Chase

Most chief executives use the World Economic Forum in Davos, Switzerland as an opportunity to solidify their relationships with other members of the global power elite. Jamie Dimon of JPMorgan Chase treats it as an occasion to strike back at critics. At the 2011 gathering he said he was sick of “this constant refrain—bankers, bankers, bankers.” This year he has been at it again, declaring that “we’re doing the right thing,” while regulators are “trying to do too much, too fast.”

What makes Dimon’s bluster all the more ridiculous is that it comes only a short time after he and other top executives at JPMorgan were reprimanded by a report produced by their own colleagues at the bank. The internal investigation was prompted by the ongoing scandal surrounding more than $6 billion in losses the bank experienced as the result of aggressive trading by its unit in London led by an individual nicknamed the London Whale.

For a document of this kind, the report is pretty blunt. It notes that during a conference call with analysts at an early stage of the controversy Dimon had agreed with a characterization of the matter as a “tempest in a teapot.” It goes on to accuse the bank’s chief investment office (CIO) of poor judgment and execution while alleging that the trading program in question had “inconsistent priorities” and “poorly conceived” strategies. The bank did not, the report says, “ensure that the controls and oversight of CIO evolved commensurately with the increased complexity and risks” of its activity. Such failings were behind the recent decision by the JPMorgan board to cut Dimon’s compensation in half.

Actually, the internal report and the pay cut are not the worst of Dimon’s problems. A variety of federal agencies are doing their own investigations of the trading losses, and it is likely that the bank will face civil if not criminal charges.

All this does not come as a surprise. JPMorgan—which represents the consolidation of several of the most powerful New York and Chicago money center banks as well as the investment house founded by the legendary financier and robber baron J.P. Morgan—has a long history of aggressive business practices, including ones that cross the line into outright misconduct.

For example, the bank was charged with abetting the accounting fraud perpetrated by Enron, and in 2003 it had to pay $135 million to settle SEC charges. Two years later, the bank agreed to pay $2.2 billion to settle a suit brought by Enron shareholders. That same year, it agreed to pay $2 billion to settle a suit related to its role in underwriting bonds for a company, WorldCom, at the center of another accounting scandal.

In 2003, JPMorgan’s securities arm was part of a $1.4 billion settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities; its share was $80 million. In 2006 it agreed to pay $425 million to settle a lawsuit charging that its securities operation misled investors during the dot com boom of the 1990s.

During the financial meltdown in 2008, federal regulators got JPMorgan to take over two failing institutions—investment house Bear Stearns and mortgage lender Washington Mutual—that brought with them a variety of legal problems stemming from their reckless practices.

For example, in 2010 the Federal Deposit Insurance Corporation announced that Washington Mutual and JPMorgan had agreed to settle claims relating to the bank’s failure. The agency did not cite the size of the settlement, but it was later reported to be about $6 billion. The following year, WaMu agreed to pay $105 million to settle an investor lawsuit relating to its collapse. Three former WaMu executives later agreed to pay $64 million to settle with the FDIC, but most of the money was to be paid from insurance policies the bank had purchased for them.

In 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 Bear Stearns 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.

JP Morgan has also faced legal travails of its own making. In 2009 the SEC announced that J.P. Morgan Securities would pay a penalty of $25 million, make a payment of $75 million to Jefferson County, Alabama and forfeit more than $647 million in claimed termination fees to settle charges that the firm and two of its former managing directors engaged in an illegal payment scheme to win municipal bond business from the county.

In 2011 JPMorgan found itself at the center of a controversy over improper foreclosures and excessive interest rates in connection with home loan customers who were members of the military. The bank agreed to pay $56 million to settle charges of having violated the Servicemembers Civil Relief Act.

Also in 2011, the SEC announced that JPMorgan would pay $153.6 million to settle allegations that in 2007 it misled investors in a complex mortgage securities transaction. The following month, the SEC said that J.P. Morgan Securities would pay $51.2 million to settle charges of fraudulently rigging municipal bond reinvestment transactions in 31 states. The agreement was part of a $228 million settlement the firm reached with a group of federal regulators and state attorneys general.

Documents made public in a lawsuit against JPMorgan by a court-appointed trustee in the Bernard Madoff Ponzi scheme case suggested that senior executives of the bank had developed doubts about the legitimacy of Madoff’s investment activities but continued to do business with him. The lawsuit was later dismissed.

JPMorgan was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. In April 2012 the Commodity Futures Trading Commission imposed a penalty of $20 million on JPMorgan for failing to segregate customer accounts being handled on behalf of Lehman Brothers prior to that firm’s collapse.

In July 2012 JPMorgan 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. And 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.

One journalist in Davos reported that Dimon was wearing FBI cufflinks. Given this track record, FBI handcuffs might be more appropriate attire.

Note: This piece draws on my new Corporate Rap Sheet on JPMorgan Chase, which can be found here.

Bank of America Returns to the Scene of the Crime

BofA Home buyers beware: Bank of America is returning to the home loan market. According to the Wall Street Journal, BofA is “girding for a new run at the U.S. mortgage business.”

It apparently wants to reclaim a share of the fat profits that rivals such as Wells Fargo have been enjoying from a mortgage refinancing boom sparked by low interest rates. Those profits are particularly tantalizing given the other recent news about BofA: it reported a 63 percent decline in fourth-quarter net income.

Ironically, that plunge in earnings was caused by BofA’s previous screw-ups in none other than the mortgage market, specifically the billions of dollars it has had to pay Fannie Mae to settle charges that it sold the housing finance agency large quantities of faulty mortgage loans it had originated.

In the most recent settlement with Fannie earlier this month, BofA agreed to pay $10.3 billion while also agreeing to sell off about 20 percent of its loan servicing business. The New York Times front page article on the settlement was headlined: “Big Bank Extends Retreat from Mortgages.”

If two major newspapers are to be believed, in the course of just one week BofA went from retreat to advance. By all rights, BofA should not be allowed to perform this about-face.

BofA, including two companies it acquired in 2008, has done so much harm in both the mortgage market and the mortgage-backed securities market, that banishment would be the most appropriate punishment.

Let’s look back at the record. In July 2008 BofA completed the acquisition of the giant mortgage lender Countrywide Financial, which was becoming notorious for pushing borrowers, especially minority customers, into predatory loans and was growing weaker from the large number of those loans that were going into default. Later that year, amid the financial meltdown, BofA was pressured to take over the teetering investment house Merrill Lynch.

Merrill came with a checkered history. 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. In 2003 it paid $80 million to settle allegations relating to dealings with Enron. 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. 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.”

In 2011 BofA agreed to pay $315 million to settle a class-action suit alleging that Merrill had deceived investors when selling mortgage-backed securities. The following year, 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 2012 BofA announced that it would pay $2.43 billion to settle the litigation.

The Countrywide acquisition also came back to haunt BofA. In 2010 it agreed to pay $108 million to settle federal charges that Countrywide’s loan-servicing operations had deceived homeowners who were behind on their payments into paying wildly inflated fees. Four months later, Countrywide founder Angelo Mozilo reached a $67.5 million settlement of civil fraud charges brought by the SEC. As part of an indemnification agreement Mozilo had with Countrywide, BofA paid $20 million of the settlement amount.

In May 2011 BofA reached a $20 million settlement of Justice Department charges that Countrywide had wrongfully foreclosed on active duty members of the armed forces without first obtaining required court orders. And in December 2011 BofA agreed to pay $335 million to settle charges that Countrywide had discriminated against minority customers by charging them higher fees and interest rates during the housing boom. In mid-2012 the Wall Street Journal reported that “people close to the bank” estimated that Countrywide had cost BofA more than $40 billion in real estate losses, legal expenses and settlements with state and federal agencies.

BofA faced its own charges as well. In 2010 it agreed to pay a total of $137.3 million in restitution to federal and state agencies for the participation of its securities unit in a conspiracy to rig bids in the municipal bond derivatives market. In 2011 BofA agreed to pay $2.8 billion to Fannie Mae and Freddie Mac to settle charges that it sold faulty loans to the housing finance agencies.

BofA was one of five large mortgage servicers that in early 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. Six months later, an independent monitor set up to oversee the settlement reported that BofA had not yet completed any modifications of first-lien mortgages or any refinancings.

Earlier this month, BofA was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses. Finally, as noted above, BofA agreed to pay $10.3 billion in a new settlement with Fannie Mae.

BofA claims that it has cleaned up its act, but it is difficult to believe that a bank so closely identified with predatory lending and investor deception has truly changed its ways.

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

Jack Lew’s Citigroup Baggage

For the past four years, the presence of Timothy Geithner as Secretary of the Treasury has been a blight on the Obama Administration.

In keeping with his weak performance as president of the Federal Reserve Bank of New York, Geithner has allowed Wall Street culprits to enjoy lavish assistance from taxpayers as they avoid any serious consequences for having brought on the financial crisis from which the country is still trying to recover.

Now that Geithner is departing, Obama had a chance to take Treasury in a new direction. His choice of White House chief of staff Jack Lew for the post is not a good sign. As a deficit hawk, Lew will reinforce the president’s regrettable inclination to take seriously the wrong-headed notion that the country has a spending problem.

Yet perhaps even more troubling is Lew’s background, particularly the fact that he is a veteran of one of the leading financial-sector miscreants: Citigroup. Unfortunately, it is not unusual for presidents to turn to Wall Street for their Treasury secretaries. Ronald Reagan brought in Don Regan from Merrill Lynch; Bill Clinton got Robert Rubin from Goldman Sachs; and George W. Bush turned to Goldman again when he chose Hank Paulson to be his third Treasury head. The difference is that Lew is the first Wall Street veteran to be chosen for Treasury since the financial meltdown of 2008 exposed the pernicious behavior of the giant banks.

While Lew is not a Wall Street lifer and is not coming straight from the private sector, his time at the bank (2006-2009) was not long ago. Moreover, he was personally involved in some of Citi’s dubious practices. In 2010 the Huffington Post reported that when Lew served as chief financial officer of Citi’s Alternative Investments operation his portfolio included investments put together by hedge fund manager John Paulson that made a killing by correctly betting that the housing market would tank. This was the same Paulson who helped Goldman Sachs put together a similar notorious deal that led to SEC charges and a $550 million settlement.

Actually, Lew’s dealings with Paulson are just the beginning of why it wrong for Obama to be selecting a veteran of Citigroup to such an important position in his administration. It is well known that Citi was bailed out by the federal government to the tune of $45 billion while also getting loss protection for some $300 billion in toxic assets. What some may have forgotten is the absolutely abysmal track record of Citi before and after the bailout, including the following:

It was the merger of Citibank and Travelers Group—technically illegal when it was announced in 1998—that played a key role in bringing about the disastrous policy of financial deregulation.

Citi gave a boost to predatory lending and subprime mortgages when it purchased Associates First Capital. In 2001 Citi had to pay $215 million to settle charges brought by the Federal Trade Commission in connection with Associates’ abusive practices.

In the wake of revelations that it helped Enron conceal its massive accounting fraud, Citi had to pay $2 billion to settle lawsuits brought by Enron investors. It later paid another $2.65 billion to settle lawsuits brought by investors in WorldCom, another perpetrator of accounting fraud, alleging that Citi failed to perform due diligence when underwriting the company’s bonds.

In 2010 the SEC announced that Citi would pay a $75 million penalty to settle allegations that it misled investors about its exposure to subprime mortgage-related assets. The following year, Citi paid $285 million to the SEC to settle charges that it defrauded investors in a $1 billion collateralized debt obligation tied to the U.S. housing market.

The settlement amount in the latter SEC case, which was far below the $700 million in losses suffered by the defrauded investors, was roundly criticized by the federal judge, Jed Rakoff, who was overseeing the case. Judge Rakoff also challenged the SEC’s willingness to let Citi get off without admitting guilt in the matter, calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest.” He rejected the settlement, but the SEC filed an appeal, which is not yet fully resolved.

Citi was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. That same month, U.S. attorney’s office in Manhattan announced that Citi would pay $158 million to settle charges that its mortgage unit fraudulently misled the federal government into insuring thousands of risky home loans. In August 2012 Citi agreed to pay $590 million to settle lawsuits charging that it deceived investors by concealing the extent of its exposure to toxic subprime debt. And just this month, Citi was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses.

Lew, of course, was not personally responsible for all these offenses, but his association with this rogue bank is strong enough to disqualify him from a top economic policy position.

Note: This history draws from my new Corporate Rap Sheet on Citigroup, which was just posted here.

The Goldman Sachs Rogue Money Machine Keeps Humming

While Congress and the Obama Administration were busy with their fiscal cliff negotiations on New Year’s Eve, Goldman Sachs quietly submitted a batch of filings to the SEC about its own tax initiative. The rogue investment banking firm said it would accelerate the payment of $65 million in stock awards to ten executives, including CEO Lloyd Blankfein, so that they would be subject to 2012 tax rates rather than the expected higher 2013 levels.

Goldman is not the only firm to use the calendar as a form of tax avoidance. Wal-Mart did the same for its shareholders by speeding up the payment of dividends—a boon worth an estimated $180 million for the controlling Walton Family.

Yet there is something particularly galling about this behavior on the part of Goldman, which played such a large role in the financial crisis that, much more than the federal deficit and debt on which Washington is fixated, brought about our current economic problems. Despite facing various federal prosecutions and investor lawsuits, Goldman continues to reward its top people lavishly while begrudging a bit of extra money to Uncle Sam. That is the same the federal government which provided $10 billion in bailout aid and virtually interest-free borrowing to help Goldman get through the crisis (and declined to bring criminal charges against it).

I came across the news about the timing of Goldman’s stock awards just as I was finishing my first Corporate Rap Sheet of the new year, which is about none other than Goldman. I thought I would use this week’s Dirt Diggers to summarize the sordid track record of the firm.

Goldman Sachs, once lionized as the premier “money machine” of Wall Street has in the past few years become synonymous with greed and duplicity. A firm that long prided itself on putting the interests of its clients first was revealed to have repeatedly sold securities that it fully expected to plunge in value. Rolling Stone reporter Matt Taibbi’s depiction of Goldman as “a giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” and Greg Smith’s reference to Goldman as “toxic and destructive” in a New York Times op-ed announcing his departure from the firm are two of the most frequently quoted phrases about the financial crisis.

Goldman’s reputation was beginning to unravel even before the financial crisis:

In 2003 it paid $110 million as its share of a global settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities.

In 2005 the SEC announced that Goldman would pay a civil penalty of $40 million to resolve allegations that it violated rules relating to the allocation of stock to institutional customers in initial public offerings.

In 2006 Goldman was one of 15 financial services companies that were fined a total of $13 million in connection with SEC charges that they violated rules relating to auction-rate securities. In another case relating to auction-rate securities brought by the New York State Attorney General, Goldman was fined $22.5 million in 2008.

When the crisis erupted in 2008, Goldman gave in to pressure from federal regulators to convert itself into a bank holding company and received a $5 billion capital infusion from Warren Buffett’s Berkshire Hathaway. Goldman also received $10 billion from the federal government’s Troubled Assets Relief Program (TARP). During this period, Goldman profited from subprime mortgages through its ownership of Litton Loan Servicing, which it sold in 2011 in the wake of numerous abuse allegations.

The forced restructuring of Wall Street took place largely under the direction of Treasury Secretary Hank Paulson, who resigned as Goldman’s CEO in 2006 to take the post at the request of President George W. Bush. Although Paulson was required to liquidate his sizeable Goldman holdings before moving to Treasury, his actions during the 2008 crisis were widely criticized as working to the benefit of his former firm. Chief among these was the allegation that he allowed Lehman Brothers to collapse while taking pains to bail out insurance giant A.I.G., which had extensive dealings with Goldman and which used its federal support to pay off its obligations at 100 cents on the dollar. In the case of Goldman, this amounted to $12.9 billion.

Goldman soon became the leading symbol of the excesses that led up to the financial meltdown. The Taibbi quote was the most colorful of many unflattering depictions of the firm. Blankfein initially responded to the criticism by making the far-fetched claim that Goldman was doing “god’s work.” When that did not go over well, he issued an apology for the firm’s mistakes and vowed to spend $500 million to help thousands of small businesses recover from the recession. That did little to rectify the situation.

In April 2010 the SEC accused Goldman of having committed securities fraud when it sold mortgage-related securities to investors without telling them that the investment vehicle, called Abacus, had been designed in consultation with hedge fund manager John Paulson (no relation to Hank Paulson), who chose securities he expected to decline in value and had shorted the portfolio. The Goldman product did indeed fall in value, causing institutional customers to lose more than $1 billion and Paulson to make a bundle. Paulson was not charged, but the SEC did name Fabrice Tourre, the Goldman vice president who helped create and sell the securities.

In July 2010 the SEC announced that Goldman would pay $550 million to settle the Abacus charges. The settlement also required Goldman to “reform its business practices” but did not oblige the firm to admit to wrongdoing. In January 2011 Goldman announced that an internal review of its policies in the wake of the SEC settlement had found that only limited changes were necessary. Others apparently saw matters differently:

In November 2010 FINRA fined Goldman $650,000 for failing to disclose that two of its registered representatives, including Fabrice Tourre, had been notified by the SEC that they were under investigation.

In March 2011 the SEC announced that it was bringing insider trading charges against former Goldman director Rajat Gupta. He was accused of providing illegal tips, including one about Warren Buffet’s $5 billion investment in Goldman in 2008, to hedge fund manager Raj Rajaratnam. (Gupta was later convicted and sentenced to two years in prison.)

In April 2012 the SEC and FINRA fined Goldman $22 million for failing to prevent its employees from passing illegal stock tips to major customers.

In July 2012 a federal appeals court rejected an effort by Goldman to overturn a $20.5 million arbitrator’s award to investors in the failed hedge fund Bayou Group who had accused Goldman of helping to perpetuate a Ponzi scheme.

That same month, Goldman agreed to pay $26.6 million to settle a suit brought by the Public Employee’s Retirement System of Mississippi accusing it of defrauding investors in a 2006 offering of mortgage-backed securities.

Some good news for Goldman came in August 2012, when the Justice Department decided it would not proceed with a criminal investigation of the firm’s actions during the financial crisis and the SEC dropped an investigation of the firm’s role in a $1.3 billion subprime mortgage deal. All in all, Goldman has emerged largely unscathed from these controversies. Its reputation may be in tatters, but its rogue money machine keeps humming.

The full Corporate Rap Sheet for Goldman can be found here.

The 2012 Corporate Rap Sheet

Corporate crime has been with us for a long time, but 2012 may be remembered as the year in which billion-dollar fines and settlements related to those offenses started to become commonplace. Over the past 12 months, more than half a dozen companies have had to accede to ten-figure penalties (along with plenty of nine-figure cases) to resolve allegations ranging from money laundering and interest-rate manipulation to environmental crimes and illegal marketing of prescription drugs.

The still-unresolved question is whether even these heftier penalties are punitive enough, given that corporate misconduct shows no sign of abating. To help in the consideration of that issue, here is an overview of the year’s corporate misconduct.

BRIBERY. The most notorious corporate bribery scandal of the year involves Wal-Mart, which apart from its unabashed union-busting has tried to cultivate a squeaky clean image. A major investigation by the New York Times in April showed that top executives at the giant retailer thwarted and ultimately shelved an internal probe of extensive bribes paid by lower-level company officials as part of an effort to increase Wal-Mart’s market share in Mexico. A recent follow-up report by the Times provides amazing new details.

Wal-Mart is not alone in its behavior. This year, drug giant Pfizer had to pay $60 million to resolve federal charges related to bribing of doctors, hospital administrators and government regulators in Europe and Asia. Tyco International paid $27 million to resolve bribery charges against several of its subsidiaries. Avon Products is reported to be in discussions with the U.S. Justice Department and the Securities and Exchange Commission to resolve a bribery probe.

MONEY LAUNDERING AND ECONOMIC SANCTIONS. In June the U.S. Justice Department announced that Dutch bank ING would pay $619 million to resolve allegations that it had violated U.S. economic sanctions against countries such as Iran and Cuba. The following month, a U.S. Senate report charged that banking giant HSBC had for years looked the other way as its far-flung operations were being used for money laundering by drug traffickers and potential terrorist financiers. In August, the British bank Standard Chartered agreed to pay $340 million to settle New York State charges that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators about its actions; this month it agreed to pay another $327 million to settle related federal charges. Recently, HSBC reached a $1.9 billion money-laundering settlement with federal authorities.

INTEREST-RATE MANIPULATION. This was the year in which it became clear that giant banks have routinely manipulated the key LIBOR interest rate index to their advantage. In June, Barclays agreed to pay about $450 million to settle charges brought over this issue by U.S. and UK regulators. UBS just agreed to pay $1.5 billion to U.S., UK and Swiss authorities and have one of its subsidiaries plead guilty to a criminal fraud charge in connection with LIBOR manipulation.

DISCRIMINATORY LENDING. In July, it was announced that Wells Fargo would pay $175 million to settle allegations that the bank discriminated against black and Latino borrowers in making home mortgage loans.

DECEIVING INVESTORS. In August, Citigroup agreed to pay $590 million to settle a class-action lawsuit alleging that it failed to disclose its full exposure to toxic subprime mortgage debt in the run-up to the 2008 financial crisis. The following month, Bank of America said it would pay $2.4 billion to settle an investor class-action suit charging that it made false and misleading statements during its acquisition of Merrill Lynch during the crisis. In November, JPMorgan Chase and Credit Suisse agreed to pay a total of $417 million to settle SEC charges of deception in the sale of mortgage securities to investors.

DEBT-COLLECTION ABUSES. In October, American Express agreed to pay $112 million to settle charges of abusive debt-collection practices, improper late fees and deceptive marketing of its credit cards.

DEFRAUDING GOVERNMENT. In March, the Justice Department announced that Lockheed Martin would pay $15.9 million to settle allegations that it overcharged the federal government for tools used in military aircraft programs. In October, Bank of America was charged by federal prosecutors with defrauding government-backed mortgage agencies by cranking out faulty loans in the period leading to the financial crisis.

PRICE-FIXING. European antitrust regulators recently imposed the equivalent of nearly $2 billion in fines on electronics companies such as Panasonic, LG, Samsung and Philips for conspiring to fix the prices of television and computer displays. Earlier in the year, the Taiwanese company AU Optronics was fined $500 million by a U.S. court for similar behavior.

ENVIRONMENTAL CRIMES. This year saw a legal milestone in the prosecution of BP for its role in the 2010 Deepwater Horizon drilling accident that killed 11 workers and spilled a vast quantity of crude oil into the Gulf of Mexico. The company pleaded guilty to 14 criminal charges and was hit with $4.5 billion in criminal fines and other penalties. BP was also temporarily barred from getting new federal contracts.

ILLEGAL MARKETING. In July the U.S. Justice Department announced that British pharmaceutical giant GlaxoSmithKline would pay a total of $3 billion to settle criminal and civil charges such as the allegation that it illegally marketed its antidepressants Paxil and Wellbutrin for unapproved and possibly unsafe purposes. The marketing included kickbacks to doctors and other health professionals. The settlement also covered charges relating to the failure to report safety data and overcharging federal healthcare programs. In May, Abbott Laboratories agreed to pay $1.6 billion to settle illegal marketing charges.

COVERING UP SAFETY PROBLEMS. In April, Johnson & Johnson was ordered by a federal judge to pay $1.2 billion after a jury found that the company had concealed safety problems associated with its anti-psychotic drug Risperdal. Toyota was recently fined $17 million by the U.S. Transportation Department for failing to notify regulators about a spate of cases in which floor mats in Lexus SUVs were sliding out of position and interfering with gas pedals.

EXAGGERATING FUEL EFFICIENCY. In November, the U.S. Environmental Protection Agency announced that Hyundai and Kia had overstated the fuel economy ratings of many of the vehicles they had sold over the past two years.

UNSANITARY PRODUCTION. An outbreak of meningitis earlier this year was tied to tainted steroid syringes produced by specialty pharmacies New England Compounding Center and Ameridose that had a history of operating in an unsanitary manner.

FATAL WORKFORCE ACCIDENTS. The Bangladeshi garment factory where a November fire killed more than 100 workers (who had been locked in by their bosses) turned out to be a supplier for Western companies such as Wal-Mart, which is notorious for squeezing contractors to such an extent that they have no choice but to make impossible demands on their employees and force them to work under dangerous conditions.

UNFAIR LABOR PRACTICES. Wal-Mart also creates harsh conditions for its domestic workforce. When a new campaign called OUR Walmart announced plans for peaceful job actions on the big shopping day after Thanksgiving, the company ignored the issues they were raising and tried to get the National Labor Relations Board to block the protests. Other companies that employed anti-union tactics such as lockouts and excessive concessionary demands during the year included Lockheed Martin and Caterpillar.

TAX DODGING. While it is often not technically criminal, tax dodging by large companies frequently bends the law almost beyond recognition. For example, in April an exposé in the New York Times showed how Apple avoids billions of dollars in tax liabilities through elaborate accounting gimmicks such as the “Double Irish with a Dutch Sandwich,” which involves artificially routing profits through various tax haven countries.

FORCED LABOR. In November, global retailer IKEA was revealed to have made use of prison labor in East Germany in the 1980s.

Note: For fuller dossiers on a number of the companies listed here, see my Corporate Rap Sheets. The latest additions to the rap sheet inventory are drug giants AstraZeneca and Eli Lilly.

The Right to Freeload

The justifications cited by Michigan Gov. Rick Snyder for why he signed the “right to work” law that Republicans rammed through a lame duck session are as spurious as the name of the bill itself. The statutes now in place in two dozen states using that label provide, of course, no right to employment yet take advantage of the fact that the uninformed may jump to that conclusion.

Snyder has offered several rationales for his decision to approve legislation he had not previously supported. With a straight face he told Joe Scarborough of MSNBC that the law would make unions stronger by holding them more accountable to members, but he went on to repeat the platitudes about “freedom” that the corporate-backed proponents of the law disingenuously employ.

On top of that, Snyder has made the assertion that being a RTW state will make it easier for Michigan to attract new investment and jobs to the state, citing data from the Indiana Economic Development Corporation. The relationship between RTW and attractiveness to corporations is not a simple matter. On the one hand, there is a body of literature showing that RTW does not have a significant impact on job growth or the rate of new business formation. Yet, as Peter Fisher points out in his review of this literature in chapter 6 of his recent report Selling Snake Oil to the States, there is evidence showing that RTW states tend to have lower wage rates and lower per capita income.

There is no doubt that those lower wages along and lower rates of unionization are appealing to at least some low-road companies. In many RTW states there is a long history of coddling such firms. As James Cobb shows in his book The Selling of the South: The Southern Crusade for Industrial Development, 1936-1990, Dixie was using the availability of cheap, non-union labor as a selling point in industrial recruitment even before Section 14(b) of the 1947 Taft-Hartley Act created RTW by giving states the right to outlaw union security provisions in labor agreements. Cobb notes that some southern communities went so far as to offer written commitments to those investors that their operation would be union-free.

It is interesting that Snyder cites Indiana and its IEDC in his economic development rationale for RTW. That state and agency have relied much less on RTW than on subsidies in the effort to attract investment. Both lures are currently given equal billing on the homepage of the IEDC website, yet inside the site there is nothing more about RTW yet there are numerous pages about the myriad business tax credits and other kinds of assistance the state has to offer.

There is also a body of literature showing the limited effectiveness of such financial “incentives” in fostering economic growth, but here too there are some mercenary companies that will respond to handouts. The IEDC, by the way, has been the subject of investigative reporting showing that it has exaggerated the job-creation impact of its activities.

In his Snake Oil to the States report, Peter Fisher notes that RTW, by allowing workers who decline to join an existing union to avoid contributing to the cost of the collective bargaining from which they benefit, should really be called Right to Freeload.

The same can be said about the corporate subsidies that are at the heart of the economic development efforts of Indiana and numerous other states. Special tax breaks granted to certain companies mean that they are not paying their fair share of taxes, forcing other companies and households to make up the difference.

Michigan is actually a special case in this regard. Since taking office, Snyder has pushed the state to rely less on business tax credit programs, which under his predecessor had reached astronomical levels. However, his motivation for this has been to reduce taxes on all companies, meaning that the business sector overall will pay less and thus increase the burden on families.

By reducing wages, RTW is another way of allowing business to avoid paying its fair share of economic growth. The pattern is clear: through a combination of low wages, weak unions, subsidies and low business tax rates, the Right wants to build a society based on corporate freeloading.

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New in CORPORATE RAP SHEETS: a dossier on drugmaker Merck, including its Vioxx scandal (which led to billions in fines and lawsuit damages), tax dodging and more.

Summing Subsidies

My colleagues and I at Good Jobs First were excited at the publication of the New York Times series on the “United States of Subsidies,” since it brings a great deal of attention to a problem—corporate abuse of economic development assistance—that we have been working on for more than a decade.

We were also pleased to see the online database that the Times posted to go along with the articles. We had provided a copy of the master spreadsheet for our Subsidy Tracker database to Louise Story, the author of the series, and she made extensive use of it. Although the Times obtained some information from other sources, it appears that about 98 percent of their company-specific listings come from Subsidy Tracker. (SEE UPDATE BELOW.)

Now that we have had a few days to examine the Times database, we see that there are some flaws in the way the paper used our data.

First, a few words on Subsidy Tracker. In recent years, a growing number of states began to put company-specific information on at least some of their economic development awards—grants, tax credits, tax abatements, etc.—online. This was often in response to the subsidy accountability movement that we and our allies have built.

The problem was that these disclosures usually happened via hard-to-find reports and web pages that were often difficult to search even when you did locate them. Good Jobs First decided to collect all these disclosures and combine them into one national search tool. We introduced Subsidy Tracker in December 2010 with 43,000 listings from 124 subsidy programs in 27 states.

Over the following two years, we have expanded that to the current total of 247,000 listings from 409 programs in all 50 states and the District of Columbia. That expansion was not due entirely to wider official online transparency. Using open records requests, we also obtained unpublished data on scores of additional programs (the total is currently 89). By posting this information to Subsidy Tracker, we became, in effect, the original online disclosure source for these programs.

In recent months we’ve begun applying this approach to city and county subsidy programs, which are far behind their state counterparts in terms of online disclosure.

Despite all this effort, we recognized that we still could not claim to have captured anywhere near all the subsidy awards that have been made across the country. Not only did we still lack many programs, we also have irregular numbers of years of data among programs. That’s why we have not yet built into Subsidy Tracker a feature that enables instant aggregation of all the awards going to a particular company.

Along with the remaining gaps in the data, there is much that needs to be done with regard to the listings we do have to allow accurate aggregation. This includes the standardization of the variations in company names in our source materials, linking of parent and subsidiary companies, and accounting for mergers and acquisitions. There’s also the problem that some states report subsidy amounts for single years and others for multiple ones. These challenges are all part of our future work plan.

After getting our raw data, the Times did not consult with us on exactly how it would be used. We thus had no opportunity to warn the paper against the perils of aggregation. Specifically, we were not aware of the paper’s plans to create what it calls its $100 Million Club.

It is with this listing that the pitfalls in the Times approach become most apparent. The companies that receive the largest subsidies often get them in the form of packages negotiated with state and local officials. These packages usually consist of awards from various programs and may also involve project-specific awards outside established programs. Some of these pieces of packages are not included in state disclosure channels. It is part of our plan to research packages through other means and add them to Subsidy Tracker as a separate category. We’ve already begun the process in the Key Deals section of the state pages of the Accountable USA section of the Good Jobs First website.

The Times supplemented the roughly 154,000 entries it took from Subsidy Tracker with about 2,000 listings the paper obtained on its own or from an expensive subscription service produced by a company called Investment Consulting Associates. This enabled the inclusion of entries that were gleaned from press releases but had not yet been reported in the official program lists we rely on for Subsidy Tracker.

Yet the $100 Million Club still ends up with numerous instances in which the totals understate the true amount the big subsidy grabbers have received.

For example, the Times lists a total of $338 million for Boeing, including $218 from South Carolina. Yet it has been estimated that the package Boeing got by locating a new Dreamliner assembly line in the Charleston area could be worth some $900 million.

Apple is said to have received a total of $119 million, yet the Times fails to include more than $60 million in subsidies the company got for a data center in North Carolina.

The Times $100 Million Club also misses some major recipients entirely, including Volkswagen, which got more than $500 million in connection with an assembly plant in Tennessee, and ThyssenKrupp, which got more than $1 billion in subsidies for a steel mill in Alabama.

And these only include deals dating back to 2007, which is the period the Times used in compiling its $100 Million Club. The larger Times database seriously understates the size of major deals that took place earlier. For example, it lists only $19.3 million for GlobalFoundries in New York State, even though the company took over a $1.2 billion deal originally offered to Advanced Micro Devices (which isn’t listed at all).

We applaud the Times for the great reporting that went into its United States of Subsidies articles, but the paper fell short when it came to the compilations featured in its database. Good Jobs First will continue to build our Subsidy Tracker tool and in the future will create what we hope will be a more accurate and complete version of a $100 Million Club.

UPDATE

After this blog was posted, Louise Story contacted us with some concerns. She confirmed that 98 percent of the entries (a total of 152,729) in the Times database came from Subsidy Tracker, but she says the number of entries that came from other sources was actually 3,844 rather than the 2,000 we estimated. She added that in dollar terms, a subject we did not address in the blog, Tracker entries account for 67.3 percent of the total in the Times database. However, we cannot verify that number because the Times has not given us its underlying spreadsheet.

Story also believes that the blog should have mentioned the fact that she contacted me several weeks ago to say that the articles and database would be published soon and in effect told me about her aggregation plans. She did indeed contact me but gave the impression that her work was completed, meaning that an effort to suggest any changes in methodology would have been moot at that point.

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New in CORPORATE RAP SHEETS: A dossier on Swiss drug giant Novartis and its history of selling unsafe drugs, price-gouging, toxic dumping and gender discrimination.

The Corporate Entitlement Problem

To the extent that the United States has a real fiscal crisis, it has been exacerbated by aggressive tax avoidance on the part of big business. Now the chief executives of many of those same giant corporations are inserting themselves at the center of the current fiscal cliff debate, claiming they know what is best for the country.

The Campaign to Fix the Debt, whose “CEO Fiscal Leadership Council” now has more than 100 members from the corporate elite, is not, of course, proposing that the Fortune 500 start paying its fair share of federal taxes. In fact, the group is pursuing an agenda that may very well result in their companies’ paying even less to Uncle Sam.

As the Institute for Policy Studies has pointed out, companies represented in Fix the Debt stand to save tens of billions of dollars from the territorial tax system the campaign seems to be promoting. IPS has also shown the hypocrisy in the fact that the Fix the Debt CEOs calling for “reforms” in Social Security have fat personal retirement assets from their companies, while many of those firms are underfunding their employee pension plans.

There are numerous other ways in which the companies represented in Fix the Debt are far from honest brokers in dealing with the fiscal cliff—and in actuality engage in practices that exacerbate the country’s fiscal and economic problems.

Take the fact that among those companies are some of the most anti-union employers in the United States, beginning with Honeywell, whose CEO David Cote is on the steering committee of Fix the Debt and is one of its main spokespeople. After members of the Steelworkers union at a uranium facility in Illinois balked at company demands for the elimination of retiree health benefits, reductions in pension benefits and other severe contract concessions, Honeywell locked them out for 12 months.

Also on the council is Lowell McAdam of Verizon Communications, which for years has fought against union organizing at its Verizon Wireless unit and took a hard line in its most recent round of contract negotiations covering its unionized workforce.

Then there is Douglas Oberhelman, the CEO of Caterpillar, which has one of the most contentious labor relations histories of any large company, including a 15-week strike at one plant earlier this year prompted by management demands for far-reaching contract concessions.

Not to mention W. James McNerney, Jr. of Boeing, which was accused of opening an assembly plant in right-to-work South Carolina as a form of retaliation against union activism at its traditional manufacturing center in the Seattle area.

These anti-union crusaders have helped bring about a climate of wage stagnation that not only undermines the living standards of their employees but also weakens businesses that depend on their purchasing power.

Fix the Debt CEOs also seem to think that their companies deserve to be lavishly rewarded when they make investments that create jobs. While it is difficult to discern these rewards at the federal level, where they come through the fine print of the Internal Revenue Code, the payoffs are abundantly clear in the lucrative subsidy deals the corporations receive from state and local governments.

For example, that Boeing plant did not only get the promise of a workforce that in all likelihood will remain unorganized. South Carolina also bestowed on the company a state and local subsidy package that has been valued at more than $900 million.

Verizon has received more than $180 million in subsidies from state and local governments around the country. Caterpillar got an $8.5 million grant from Gov. Rock Perry’s Texas Enterprise Fund as well as local subsidies when it eliminated jobs in Illinois and opened a new plant in the Lone Star State. Honeywell has received subsidies in at least 14 states.

The subsidy recipients represented in Fix the Debt are not limited to that anti-union group; there are many others. For example, Goldman Sachs, whose CEO Lloyd Blankfein has been a frequent spokesperson for the campaign, took advantage of $1.65 billion in low-cost Liberty Bonds when building its new headquarters in Lower Manhattan.

The refusal of these companies to deal respectfully with unionized workers and their insistence on taking lavish taxpayer subsidies they don’t need are two symptoms of a flawed business culture. The United States does have an entitlement problem, but it is not related to Social Security, Medicare or Medicaid. It is the notion held by too many large corporations and their CEOs that their narrow interests are synonymous with the national interest. Rather than presuming to fix the debt, big business needs to fix itself.

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New in CORPORATE RAP SHEETS: a dossier on drug giant GlaxoSmithKline, including its $3 billion fraud settlement with the federal government.

Pfizer’s Long Corporate Rap Sheet

The Dirt Diggers Digest is taking a break from commentary for the Thanksgiving holiday, but the Corporate Rap Sheets project marches on. I’ve just posted a dossier on drug giant Pfizer. Here is its introduction:

Pfizer made itself the largest pharmaceutical company in the world in large part by purchasing its competitors. In the last dozen years it has carried out three mega-acquisitions: Warner-Lambert in 2000, Pharmacia in 2003, and Wyeth in 2009.

Pfizer has also grown through aggressive marketing—a practice it pioneered back in the 1950s by purchasing unprecedented advertising spreads in medical journals. In 2009 the company had to pay a record $2.3 billion to settle federal charges that one of its subsidiaries had illegally marketed a painkiller called Bextra. Along with the questionable marketing, Pfizer has for decades been at the center of controversies over its pricing, including a price-fixing case that began in 1958.

In the area of product safety, Pfizer’s biggest scandal involved defective heart valves sold by its Shiley subsidiary that led to the deaths of more than 100 people. During the investigation of the matter, information came to light suggesting that the company had deliberately misled regulators about the hazards. Pfizer also inherited safety and other legal controversies through its big acquisitions, including a class action suit over Warner-Lambert’s Rezulin diabetes medication, a big settlement over PCB dumping by Pharmacia, and thousands of lawsuits brought by users of Wyeth’s diet drugs.

Also on Pfizer’s list of scandals are a 2012 bribery settlement; massive tax avoidance; and lawsuits alleging that during a meningitis epidemic in Nigeria in the 1990s the company tested a risky new drug on children without consent from their parents.

READ THE ENTIRE PFIZER RAP SHEET HERE.