WSJ: SEC fraud crackdown; BP oil spill

• 

• Updated April 11, 2012, 10:55 a.m. ET

Weighing SEC's Crackdown on Fraud

By JEAN EAGLESHAM

More than 100 people and firms have now been charged with fraud by the Securities and Exchange Commission, but criticism persists that the agency hasn't cracked down hard enough, Jean Eaglesham reports on Markets Hub. Photo: Joshua Roberts/Bloomberg.

More than 100 people and firms have now been charged with fraud tied to the financial crisis by the Securities and Exchange Commission, but that hasn't quelled criticism that the agency hasn't cracked down hard enough.
The SEC passed that milestone Friday when the regulator filed civil-fraud charges against two former Texas bank executives accused of using a loan-modification scheme to make bad real-estate loans look good.

Guy Stauber for The Wall Street Journal

SEC enforcement chief Robert Khuzami said the current total of 101 cases shows the agency is "highly effective in tackling financial-crisis wrongdoing." Of the 74 cases filed against individuals so far, the SEC went after 55 chief executives, finance chiefs or other top officers. In an interview, Mr. Khuzami said the number is "significant" and "sends a strong deterrent message."
The agency's critics, however, aren't budging. Sen. Charles Grassley (R., Iowa) sees in the same numbers signs that the SEC isn't tough enough even when it amasses strong evidence of crisis-related lawbreaking.
Since the start of 2009, the SEC has reached settlements with 24 of the 74 people charged by the agency, averting court trials. Executives who settled civil charges by U.S. securities regulators include former Countrywide Financial Corp. Chief Executive Angelo Mozilo, who agreed in October 2010 to pay $67.5 million. He didn't admit or deny wrongdoing.
"The SEC's weak settlements need scrutiny," Mr. Grassley said. "The lack of accountability from Wall Street encourages recidivism."

Related Reading

• Vote: Do you think the SEC has been effective in tackling financial-crisis wrongdoing?

Almost four years after the SEC filed its first civil charges alleging illegal behavior during the financial crisis, the results of its enforcement push are piling up. Officials regularly update a tally on the SEC website, and the agency has several likely enforcement actions in the pipeline, including a number that are related to mortgage-backed securities, according to people familiar with the matter.
But there isn't an end in sight to the battle over how to interpret the numbers. Critics claim the SEC has been too soft, outsmarted or underfunded as it pursues civil cases. Mr. Khuzami, who took over as enforcement chief in 2009 under current SEC Chairman Mary Schapiro, adamantly defends the agency's track record.
And some outside experts say the SEC is in an impossible position that it can't escape. Proving that a senior executive broke the law during the crisis is harder because defendants can argue the financial losses were due to a failure to predict the meltdown, rather than any fraud, they say.
In the 24 crisis-related cases where the SEC reached a settlement with a person, the median sanction was $203,751, according to calculations by The Wall Street Journal. The same defendants paid a combined $80.7 million in penalties.
Nearly all those penalties came from executives at collapsed mortgage lenders Countrywide, American Home Mortgage Investment Corp. and New Century Financial Corp. Their investors sustained losses of about $31 billion based on the three companies' peak stock-market value before the financial crisis erupted.
Mr. Khuzami said in the interview that it is "silly" to judge the penalties against much-bigger shareholder losses. One reason: Financial firms sank during the financial crisis for reasons that had nothing to do with fraud or illegal conduct.

Settling Up

View Interactive

Settlements in SEC enforcement actions against individuals related to the financial crisis.

"When you fine an auto-company executive, the fine doesn't include losses that occur when the company went bankrupt because it produced only gas guzzlers, had excessive pension costs and fell behind the competition," he said.
Still, some federal judges have denounced large gaps between losses to investors and the financial punishment agreed to by the SEC with company executives. In February, U.S. District Judge Frederic Block in Brooklyn, N.Y., said $1.05 million in penalties paid by two former Bear Stearns Cos. hedge-fund managers, Ralph Cioffi and Matthew Tannin, in a proposed deal to settle civil-fraud charges against them was "chump change" compared with the $1.8 billion lost by investors.
"You had some tough adversaries," the judge told an SEC lawyer. "They brought you down to your knees."
The judge has yet to approve the proposed settlement. A lawyer acting for Mr. Cioffi and a spokesman for Mr. Tannin declined to comment.
In a letter to Judge Block, SEC lawyers said the proposed punishment was "serious and comprehensive," noting that the two former hedge-fund managers agreed to temporary bans from working in the securities industry. The SEC also said it had to consider the risk of losing the case if it went to trial. In 2009, a Brooklyn jury acquitted the Bear Stearns managers of criminal charges related to the collapse of their funds.
Mr. Khuzami said no one at the SEC is "settling cases unless the settlement makes sense." The agency's power to expel people from the securities industry or from serving as directors of public companies is "probably one of the most powerful sanctions we have," he added.
The amount of money SEC officials can claw back from an ill-gotten profit is limited to pay or other profits that the agency can show were a direct result of the wrongdoing.
Executives often argue that most of their remuneration had nothing to do with the alleged misconduct.

Enlarge Image

Getty Images

SEC enforcement chief Robert Khuzami says the agency has been 'highly effective' in crisis-related cases.

The repayment of such illegal profits is tax-deductible and covered by some corporate insurance policies. In 2010, Mr. Mozilo, the former Countrywide CEO, agreed to pay a $22.5 million penalty and disgorge $45 million of profits to settle civil-fraud charges.
At the time, Mr. Khuzami said the penalty was a fitting outcome for someone who concealed a "looming disaster" from investors, while dumping nearly $140 million in stock. Nearly half of the $45 million payment came from Countrywide's current owner, Bank of America Corp. BAC -3.25%
SEC officials said all of Mr. Mozilo's $67.5 million of sanctions went to help compensate investors for their losses, adding that it is hard for the agency to challenge indemnification rights in employment contracts or insurance policies.
A lawyer acting for Mr. Mozilo declined to comment, as did a spokesman for Bank of America.
In November, Ms. Schapiro asked federal lawmakers for the legal power to impose tougher sanctions, including penalties that reflect investor losses. Sen. Jack Reed (D., R.I.), the top member of a Senate banking subcommittee, hopes to introduce legislation soon that would give the SEC its sought-after firepower, according to a spokesman for Mr. Reed. "Stiffer penalties will help deter illegal behavior and crack down on repeat offenders," he said.
James Cox, a law professor at Duke University in Durham, N.C., said enhanced powers for the SEC probably wouldn't have a "bit of effect," Mr. Cox said. "The calculating of settlement amounts is clearly more art than science—and the real art is working out what the other side will accept."
Write to Jean Eaglesham at jean.eaglesham@wsj.com

• U.S. NEWS
• Updated April 24, 2012, 7:30 p.m. ET

First Criminal Case in Spill

Engineer Accused of Deleting Texts on Flow Rate, Which Can Determine Possible Fines

By TOM FOWLER

U.S. Coast Guard/Associated Press

Charges filed Tuesday arise from communications about the May 2010 attempt to plug a BP well in the Gulf of Mexico using a 'top kill' procedure.

HOUSTON—A former engineer for BP BP.LN -3.11%PLC was arrested Tuesday and accused of destroying evidence relating to the 2010 Deepwater Horizon explosion and oil spill, the first criminal case to arise from the incident.
Federal prosecutors charged Kurt Mix of Katy, Texas, with two counts of obstruction of justice for deleting from his iPhone hundreds of text messages about the spill that he exchanged with a co-worker and a contractor, according to a criminal complaint unsealed Tuesday.
Mr. Mix didn't enter a plea when he appeared in a federal courtroom here Tuesday wearing a purple dress shirt, khaki pants and handcuffs. A lawyer representing him at the proceeding, David Gerger, declined to comment after Tuesday's hearing.

Enlarge Image

Reuters

Former BP engineer Kurt Mix leaving a federal courthouse Tuesday.

The government said the deleted texts included estimates of how much oil was gushing into the Gulf of Mexico as BP tried to stem the flow, including some estimates that were significantly higher than BP was publicly acknowledging at the time.
Investigators have long been looking into whether BP intentionally withheld or played down the size of the spill, while the company has said it gave its best estimates at a time when its priority was to stop the leak. A tally of the flow rate—which the government eventually said was between 53,000 and 62,000 barrels of oil a day—is significant because any criminal fines under the U.S. Clean Water Act would be based on the number of barrels spilled.
BP said it wouldn't comment on the charges against Mr. Mix but that the company had clear policies requiring preservation of evidence in the case. The company said it was "cooperating with the Department of Justice and other official investigations into the Deepwater Horizon accident and oil spill."

The first criminal charges in the Deepwater Horizon accident were filed against a former BP engineer for allegedly destroying evidence. Tom Fowler has details on Mean Street. AP Photo.

Prosecutors said Mr. Mix was part of an internal team BP set up to estimate the amount of oil leaking from the well and to work on stopping the leak. The spill went on for 87 days after the initial explosion that killed 11 workers aboard the Deepwater Horizon drilling rig.
Magistrate Judge Stephen Smith approved Mr. Mix's release Tuesday on a $100,000 unsecured bond. He is to appear before a federal judge in New Orleans, where the charges were filed, a week from Thursday.
Mr. Gerger, the attorney, said he was standing in on behalf of Mr. Mix's Boston-based lawyer, Joan McPhee. Mr. Gerger also represents Robert Kaluza, one of two BP engineers stationed on the rig at the time of the accident.
Ms. McPhee didn't respond to messages seeking comment.
According to a Federal Bureau of Investigation affidavit filed with the criminal complaint, BP sent several notices to employees requiring them to save all electronic records concerning the well, including text messages. But in October 2010, Mr. Mix allegedly deleted about 200 messages he exchanged with a supervisor, and in August 2011 he deleted more than 100 texts that he had exchanged with a contractor, the government said.

Enlarge Image

European Pressphoto Agency

A file picture released by the U.S. Coast Guard on April 22, 2010, shows the fire aboard the drilling rig Deepwater Horizon in the Gulf of Mexico.

Although some of the texts weren't recovered, the government said, others were through the use of "forensic tools."
Among those texts, according to the government, was an analysis of how much oil was flowing from the well as BP tried to plug the gusher by flooding the well with high-pressure drilling mud, an effort known as "top kill."
On May 26, 2010, the first day of the top-kill effort, Mr. Mix wrote, "Too much flowrate—over 15,000," the affidavit said. That was at a time when the company was saying publicly it estimated 5,000 barrels a day were flowing from the well.
What BP knew about the size of the spill and whether it was hiding that information from the government has been a major question surrounding the post-accident response, said David Uhlmann, a University of Michigan law professor and former head of the Justice Department's Environmental Crimes Section.
But Tuesday's charges "leave open the larger question of who will be held responsible for the spill itself," Mr. Uhlmann said.
Rep. Ed Markey (D., Mass.), who challenged BP estimates in the early days of the spill, said in a statement that the federal complaint "raises additional questions about what the company knew about the size of the spill at the time."
Though Tuesday's charges relate to efforts to stop the spill, federal investigators are also looking into whether several BP engineers involved in drilling the well provided false information to regulators about the risks associated with the project while drilling was in progress.
—Ángel González contributed to this article. Write to Tom Fowler at tom.fowler@wsj.com

Deterrence research inquiry

From: RDShatt@aol.com
To: garber@rand.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu
Sent: 5/3/2012 7:01:09 A.M. Central Daylight Time

Subj: A Framework for Analyzing Influences and Outcomes of Mass Litigation Episodes

Dear Dr. Garber,

I have embarked on this project concerning entity level liability versus officer and employee individual liability as a means to try to deter corporate wrongdoing.

I have read with great interest your 2009 article
A Framework for Analyzing Influences and Outcomes of Mass Litigation Episodes in the United States | RAND (full pdf text here).

Relative to the subject of deterrence, the article, on pages 22 and 23, says that "general deterrence effects are very difficult to establish empirically." More fully, your article says:

Deterrence of behavior that imposes more risk of injury than is socially desirable is widely accepted, along with compensation, as one of the two fundamental social purposes of a civil liability system.24 The fundamental idea is that civil law—for example, tort law—introduces the possibility of paying damages for injuries and thereb yalters the cost-benefit calculus of potential defendants when making decisions that affect the injury risk to which they expose their customers (e.g., Cooter & Ulen 2000:chapter 8; Kaplow & Shavell 2002:section 5). 

General deterrence effects are very difficult to establish empirically for at least three reasons. First, many of the legal doctrines and procedures of main interest to policy makers—e.g., products liability—vary little across states; thus, estimating deterrence effects by comparing corporate decisions or safety levels across states is not likely to be feasible. Second, in the products context, a product that is marketed nationally generally has the same physical features and carries the same warnings in all states.25 Thus, such decisions are effectively made at the national level, presumably on the basis of an assessment of the overall or average liability climate nationally. Third, researchers cannot observe what potential defendants would have done if the legal rules had been different.26 Thus, specific examples of deterrence effects on particular MLEs would be speculative.

Various failures of deterrence are apparent, however. An important class of  deterrence failures is “under deterrence” namely, instances in which safety-enhancing actions were not taken that, with the benefit of hindsight, would have been socially advantageous (and also in a defendant’s interest). One example is provided by litigation involving hip and knee implants defectively manufactured by Sulzer (Journal of Law and Health 2001-2002). This MLE involved thousands of products-liability claims filed in the late 1990s, and resulted in a global, limited-funds settlement for approximately $1 billion in damages. Serious injuries, litigation, and compensation payments were the result of a manufacturing defect, namely failure by Sulzer (during a limited time period) to clean implants that had been contaminated by oil. Other examples include failure to adequately study injury risks in instances such as breast implants (Angell 1997:54-55) and MER/29 (Rheingold 1968).

I did not find in the article any separate mention of officer and employee individual liability as a means to deter corporate wrongdoing. Given your general view of the difficulty of establishing deterrent effects empirically, it is possible there is little research potential for investigating scientifically a differential deterrent effect of officer and employee individual liability, and there may be no meaningful research on the subject.

In any event, let me ask: Can you cite me any research literature on the subject of the deterrent effect on corporate behavior of imposing officer and employee individual liability?

Thank you very much.

Sincerely,
Rob Shattuck



From: garber@rand.org
To: RDShatt@aol.com
CC: garber@rand.org
Sent: 5/3/2012 2:36:02 P.M. Central Daylight Time
Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Episodes

Rob:

I know very little about the literature on the kinds of liability you are asking about (i.e., "officer and employee individual liability"). I do recall seeing work by Tom Baker (Penn law school) related to D&O insurance—and Tom does get into deterrence effects in some of his work--you might try him. I don't recall seeing anything on holding corporate employees liable, except that DOJ has brought criminal complaints against individuals (high-level—probably all were officers) at Purdue Pharma (a privately held company) about marketing of OxyContin.

Good luck with your ambitious project. Please send me whatever you write when appropriate.

Best,

Steve

From: RDShatt@aol.com
To: garber@rand.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu, tombaker@law.upenn.edu
Sent: 5/6/2012 8:58:51 A.M. Central Daylight Time

Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Epis...

Dear Dr. Garber,

Thank you very much for your quick reply.

My project is trying to draw in an array of significant actors, including lawmakers, regulators, judges, prosecutors, state attorneys general, plaintiffs' lawyers, corporate management, and ethics and compliance professionals.

Regardless of whether there is meaningful scientific research on the deterrence effect of imposing liability on responsible officers and employees for corporate wrongdoing, general knowledge about human nature is suggestive that consideration needs to be given to that, and policymakers and other actors will shape the law or take other action based on what their judgement tells them.

You referred to the Department of Justice. Three Wall Street Journal articles when I started my project last year were suggestive that the Obama administration was possibly shifting to targeting individuals. See this, this, and this.

Punishment inside the corporation of individual officers and employees has been incorporated in Section 8B2.1(b)(6) of the Federal Sentencing Guidelines for Organizations, which provides:

The organization 's compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

While the deterrence value of individual liability, from society's point of view, needs to be evaluated without other bias, some of the important actors are probably not bias-free. For more on this, see Interim project report. (I am sure your own studies have provided you much insight about the way biased self-interest can affect the consideration, evaluation and implementation of social policy and process.)

To my knowledge ethics organizations such as the Ethics & Compliance Officer Association and the Ethics Resource Center are unwilling to give attention to this subject. I know it is a hard topic to wrestle with. Your own article may contribute to a greater sense of the importance of my subject. Individual liability for corporate wrongdoing continues to be reported in the news. Last month, one Wall Street Journal article reported a "first" criminal case in the BP oil spill event against an engineer who was accused of deleting texts on flow rate, and another article, entitled "Weighing SEC's Crackdown on Fraud," reports that the SEC has charged more than 100 people and firms with fraud tied to the financial crisis, and that, of 74 cases filed against individuals, the SEC went after 55 chief executives. These articles can be found here. This all seems to cry out for thoughtful consideration by ethics and compliance professionals.

I hope I will learn more whether there is anything that the RAND ICJ or CCEG will pick up on here (or I will find they have already explored and written about the same).

I will include Professor Baker to receive a copy of this email and will follow up with him as you suggest.

Sincerely,

Rob Shattuck

From: tombaker@law.upenn.edu
To: RDShatt@aol.com, garber@rand.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu, tombaker@law.upenn.edu
Sent: 5/6/2012 9:04:13 A.M. Central Daylight Time
Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Epis...

I am not interested in being involved with a project that calls itself "combatting plaintiffs lawyers."

From: RDShatt@aol.com
To: tombaker@law.upenn.edu
Sent: 5/6/2012 9:18:22 A.M. Central Daylight Time
Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Epis...

Thank you very much for your quick reply, Professor Baker. If there is any critique you would like to make of anything I say in my blog, I will be pleased to post the same.

Sincerely,

Rob Shattuck

Robo-signing settlement and FSGO Sec. 8B2.1(b)(6)

From: RDShatt@aol.com
To: askdoj@usdoj.gov, jmcpherson@naag.org, pslesinger@mortgagebankers.org, CCross@csbs.org, dsaunders@aarmr.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu
Sent: 4/26/2012 8:18:32 A.M. Central Daylight Time

Subj: Robo-signing settlement and FSGO Sec. 8B2.1(b)(6)

To the addressees:

I wish to ask some things of the state attorneys general, the Department of Justice, the Conference of State Bank Supervisors, the American Association of Residential Mortgage Regulators, and the Mortgage Bankers Association. My questions concern Sec. 8B2.1(b)(6) of the Federal Sentencing Guidelines for Organizations, as it relates to, and as it may be affected by, the $25 billion settlement that has been made by Ally Financial, JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America regarding the alleged mortgage-servicing and home-foreclosure abuses stemming from the so-called "robo-signing" practices. The questions are, in part, prompted by the recent HUD report about the pressures that were put on bank foreclosure workers (as reported in this Wall Street Journal article).

Sec. 8B2.1(b)(6) of the Federal Sentencing Guidelines for Organizations provides that:

The organization 's compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

My questions are these: Is there, or should there be, any connection between, on the one hand, the prosecution of the governmental "robo-signing" complaint, and its settlement, and, on the other hand, the defendant banks, under their compliance and ethics programs, undertaking disciplinary measures against culpable officers and employees? In answering the question, please address the extent to which it is expected that Federal and state authorities will undertake criminal or civil actions against individual bank officers and employees, and also the actual or expected interface, be it facilitative or otherwise, between governmental authorities and the banks related to undertaking disciplinary measures against officers and employees (including whether and how the "robo-signing" settlement affects, or will affect, the same, be it positively or negatively).

The addressees are parties who had involvement with, or who have or should have special knowledge about what went on in connection with, the "robo-signing" settlement. I appreciate that the addressees are not the most primary sources of information for obtaining answers to my questions, and, if the addressees don't feel they are in a position to answer my questions, in whole or in part, I will understand.

Thank you.

Sincerely,

Rob Shattuck

From: jmcpherson@NAAG.ORG
To: RDShatt@aol.com, askdoj@usdoj.gov, pslesinger@mortgagebankers.org, CCross@csbs.org, dsaunders@aarmr.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu
Sent: 4/30/2012 8:19:09 A.M. Central Daylight Time
Subj: RE: Robo-signing settlement and FSGO Sec. 8B2.1(b)(6)

Good Morning Mr. Shattuck,

Please forgive my tardy response. I was out of the office last week and received your note this morning.

The National Association of Attorneys General (NAAG) was not involved in negotiations or settlement involving the state Attorneys General and the major mortgage processing companies. NAAG is also not involved in the execution or enforcement of that agreement. I recommend you correspond directly with the Attorneys General who were involved in the effort. Their e-mail and surface mail address can be found on our web site at www.naag.org.

Thank you,

Jim

 From: dsaunders@aarmr.org

To: RDShatt@aol.com
CC: DDOMINGUE@ofi.la.gov
Sent: 5/1/2012 4:50:42 P.M. Central Daylight Time
Subj: Re: Robo-signing settlement and FSGO Sec. 8B2.1(b)(6)

Dear Mr. Shattuck:

Relative to your questions please refer to:

Nationalmortgagesettlement.com

Best Regards,

David Saunders

Executive Director

American Association of Residential Mortgage Regulators

1025 Thomas Jefferson St., NW

Suite 500 East

Washington, D.C. 20007

e: dsaunders@aarmr.org 

From: PSlesinger@mortgagebankers.org
To: RDShatt@aol.com
Sent: 5/2/2012 4:51:07 P.M. Central Daylight Time
Subj: RE: Robo-signing settlement and FSGO Sec. 8B2.1(b)(6)

Mr. Shatt, You ask questions relating to the AG settlement that I lack the ability to answer, based on the limited public availability of the terms of the settlement and the special expertise needed to assess in the current context the relationship between criminal sentencing guidelines and the settlement of a civil action. I second the recommendation of another recipient of your email that you submit your questions to the AGs’ umbrella organization or to individual AGs.

Phyllis K. Slesinger

Senior Vice President & General Counsel, Human Resources and Legal Affairs

Mortgage Bankers Association

Phone: (202) 557-2869 begin_of_the_skype_highlighting            (202) 557-2869      end_of_the_skype_highlighting

Fax: (202) 621-1469

WSJ 3/13/12- pressure on foreclosure workers

[This article is relevant to questions that are raised in project  about entity level versus officer and employee individual liability as means to try to deter corporate wrongdoing.]

The Wall Street Journal, March 13, 2012, 3:20 p.m. ET

Government Reports Detail Pressure on Foreclosure Workers

By ALAN ZIBEL

Facing a wave of delinquent loans, managers at Bank of America Corp. BAC +0.37%and Wells Fargo & Co WFC +1.16%. pressured staff to speed up foreclosures without a proper review of the process, according to government audits released Tuesday.
Overwhelmed Wells Fargo workers voiced concerns to managers about signing loan documents and informed managers they "could not handle the workload," according to the inspector general of the Housing and Urban Development Department. But management didn't correct the problem and proceeded to cut the mandatory time frame for turning around documents to one or two days from between five to seven days to 24 to 48 hours, the inspector general said in a report.
A Bank of America manager apparently signed a foreclosure-related document about every two minutes of a typical work day for an entire two-month period, the inspector general said.
The HUD inspector issued reports about foreclosure-handling practices at five major U.S. banks, including J.P. Morgan Chase & Co JPM +1.00%., Citigroup Inc. C +0.51%and Ally Financial Inc., after the banks filed court documents Monday as part of a $25 billion settlement of allegations they violated state and federal foreclosure laws.
The inspector general's reports, unreleased until now, were held back as they were being used by federal officials as evidence of violations and served as leverage for the government during the settlement process.
Regulators and officials have faced criticism throughout the yearlong settlement negotiations for not doing a comprehensive investigation of alleged misconduct. Officials have pointed to the audits, among other investigations that predated the robo-signing controversy, to rebut those concerns.
The HUD inspector conducted the reviews because banks are charged with managing loans guaranteed by the Federal Housing Administration, which is part of HUD. When FHA loans default, banks submit claims to be reimbursed for any losses, but they can be forced to pay damages if they don't follow federal rules in processing those loans.
Banks have agreed to pay $5 billion in fines as part of the settlement, of which officials said $900 million will go to the FHA. The remaining $20 billion will be used for a variety of loan assistance to homeowners that owe more than their homes are worth and are at risk of foreclosure.
"The reports we just released will leave the reader asking one question--how could so many people have participated in this misconduct?" the inspector general, David Montoya, said. "The answer: simple greed."
Addressing the need for swift foreclosures, a Wells Fargo manager said in a March 2008 email that "due to attorney feedback and our wonderful challenging environment, this 48 hour turnaround time is critical," according to the HUD inspector's report. Wells Fargo also hired a former pizza restaurant worker, a department-store cashier and factory worker to process foreclosure documents in a Fort Mill, S.C., office, according to the report.
"The matters raised in the report cover observations that are two-four years old and they have been addressed," said Vickee Adams, a Wells Fargo spokeswoman. "Wells Fargo has made significant strides with implementing a number of changes in line with industry and regulatory servicing standards."
The report on Bank of America included statistics showing one bank official signed around 8,800 documents per month—or nearly one every two minutes for a typical 40-hour work week—in July and August of 2010. It also included employee performance reviews showing workers were expected to process as many as 50 documents per hour. The company "evaluated employee performance based in part on metrics for processing high volumes of documents," the report said.
Bank of America spokesman Dan Frahm said the report "references activities from over a year ago that have been addressed as we do all we can to modify loans when possible and to ensure foreclosures are fair when they are unavoidable."
Citigroup's mortgage unit "regularly signed foreclosure documents when not in the presence" of a notary public, as required by law, the inspector general said. The practice ended in February 2010. The report also noted Citi employees signed 60 to 200 documents per day. A Citi spokesman said the bank, at its own initiative, started working on improving its foreclosure-handling practices in fall 2009.
J.P. Morgan Chase declined to comment.
The report on Ally found an employee "routinely" signed 400 foreclosure documents known as affidavits per day and 10,000 a month, without reviewing the supporting documentation. The company "did not establish an effective control environment to ensure the integrity of its foreclosure process," the report said.
"We regret that possible procedural deficiencies with respect to certain affidavits occurred," Ally spokeswoman Gina Proia said. "When senior management became aware of the issue, they took quick and decisive action to address it."
—Nick Timiraos contributed to this article. 

Questions to ERC re: FSGO Sec. 8B2.1(b)(6)

From: RDShatt@aol.com
To: pat@ethics.org
Sent: 4/24/2012 4:06:14 P.M. Central Daylight Time

Subj: Questions re: FSGO Sec. 8B2.1(b)(6)

Dear Dr. Harned,

Sec. 8B2.1(b)(6) of the Federal Sentencing Guidelines for Organizations provides that:

The organization 's compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

Questions:

1. Does the Ethics Resource Center receive and study information about instances in which disciplinary measures have been taken by corporations, in order to evaluate whether corporations are employing disciplinary measures in an "appropriate" way, to evaluate the effectiveness of such measures, and to develop guidance, standards and procedures for corporations and their ethics officers concerning the use of disciplinary measures?

2. Does compliance and ethics extend beyond the strictly criminal, and does Sec. 8B2.1(b)(6) apply as well to corporate wrongdoing that gives rise to civil liability (i.e., are disciplinary measures to be used in the case of corporate wrongdoing that gives rise to civil liablity)?

3. Taking as a example the recent $25 billion robo-signing settlement agreement among the Justice Department, state attorneys general, and Ally Financial, JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America, do you know whether, under the compliance and ethics programs of those banks, anything has happened or will happen as regards disciplinary measures being taken against officers and employees of the banks?

4. Taking again as an example the robo-signing settlement, what interaction do you think there is between, on the one hand, the actions of the banks in responding to and ultimately disposing of the civil action (or threat of civil action) by the Justice Department and state attorneys general, and, on the other hand, the use of internal disciplinary measures by the banks against officers and employees? Does the former (i.e., the actions in responding to and effectuating settlement with the government) facilitate the latter (i.e., the internal disciplinary measures)? Does the former impede or impair the latter in any way? Does the "no admission of wrongdoing" in the legal settlement and the lack of a determination whether wrongdoing has or has not taken place create difficulty in using internal disciplinary measures against officers and employees? Is there diversion of corporate resources and attention to the legal enforcement matter that deprives the compliance and ethics program of adequate attention and resources to do its job?

5. Questions 3 and 4 concern a very large legal case. There are probably hundreds of civil actions annually of all sizes against corporations in which corporate wrongdoing is alleged (which are frequently settled with no admission or determination of wrongdoing) , and about which questions such as those posed in 3 and 4 above could be asked. Do you feel ethics and compliance officers at corporations should be asking themselves and their management such questions?

Thank you.
Sincerely,
Rob Shattuck

[Note: after sending above email I saw this article about government report detailing pressure on mortgage foreclosure workers.]

Interim project report (draft)

The instant project was nominally commenced last June.   I have been pushing for more than ten years on the question of entity level liability versus officer and employee individual liability as a means to deter corporate wrongdoing.

While many interested parties have declined to comment or take a position on the issue, I don't think anyone has taken the position that entity level liability is sufficient by itself for trying to deter corporate wrongdoing and that officer and employee individual liability should be dispensed with as a tool.

There is a constituency in the ethics community that would prefer no intrusion of the law and regulators into corporate affairs and that would like self-policing alone to suffice.  Some of this constituency may have such a strong preference and belief that they would advocate relying entirely on self-policing.  Currently, it seems clear that lawmakers, regulators, prosecutors, judges and others are not going to go along with that.

While no interested party seems to be prepared to take the position that entity level liability is adequate by itself,  there are reputable commentators who are clear in a belief that entity level liability alone is not sufficient and are open advocates of individual  liability.  For example, see the March 21, 2009  email here in response to this email inquiry I made regarding the Vioxx litigation of several years ago.

Gretchen Morgenson, the author of Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon,  has been very vociferous in complaining about officers, directors and employees not being held accountable for things that went on during the financial crisis.  See this entry.

Last May I started raising the question whether the Obama administration was shifting to targeting individuals.  See this entry.  Three Wall Street Journal articles at the time were suggestive that this was the case. See this, this, and this.

The Ethics Resource Center endeavored in 2010 to engage with federal enforcement officials related to the ERC's white paper Too Big To Regulate: Preventing Misconduct in the Private Sector .  This white paper was predicated on a view that recent events had raised "significant" questions about the effectiveness of government regulation and the ability of regulators to prevent misconduct. The paper listed eight such questions, the last of which was one of possible resignation, to wit: "Have we simply reached the point where regulating corporate conduct is an impossible job?"

The paper did a lot of circling around the government's enforcement approach and the corporation's self-regulatory approach. The paper covered numerous points and issues, variously supportive of and questioning of the two sides. The paper acknowledged that differences persisted and called on the two sides to continue to try to bridge the gap.

I wrote this email to the Ethics Resource Center and this email to the government officials that urged consideration of the issue of entity level versus officer and employee liability as means to try to deter corporate wrongdoing.  These emails produced no response.

Generally, I have encountered widespread disinterest.

In some cases, it seems clear that  parties who should have an interest in my project are not interested in responding to me, because it does not entirely suit their interest to respond or because they have other more important interest.

For example, in the case of state attorneys general, entity level liability has important publicity value to them, and I believe that reduces their interest in determining their position on the issue of entity level liability versus officer and employee individual liability as a means to deter corporate wrongdoing. State attorneys general also have significant "turf" issues vis a vis the United States Justice Department that are of much greater priority for them.  See this link and this link (no response received to the email in the latter link).

Corporate management I am quite sure has little interest in responding to a project like mine that asks questions that may lead to suggestions for altering the legal machinery to increase officer and employee individual liability in connection with corporate wrongdoing.

Plaintiffs' lawyers have a huge financial interest in entity level liability, so much so that, thus far, I have made little effort to contact them regarding my project.  Defense lawyers rake in millions of dollars defending against the plaintiffs' lawyers, and it is not in the interest of the defense lawyers to scrutinize the deterrence value of entity level liability.

I think corporate ethics officers, including the Ethics & Compliance Officer Association, are not able to respond very well, because they cannot diverge publicly from views of their corporate management bosses who, as mentioned above, want to stay away from anything that might lead to increasing officer and employee liability.

Consultants in the business ethics field have been non-responsive to my project. This is probably due to there being little revenue potential for them from my project and follow up that might grow out of my project, such as efforts to educate and persuade lawmakers, judges, and state attorneys general regarding the subject matter.

In the academic community, there currently seems to be greater interest in internal corporate culture, corporate leaders cultivating it positively, and the same being transmitted to employees through internal programs, and there is much less interest in how intrusive externalities of the law, courts, prosecutors and regulators should best be brought to bear on improving corporate behavior. This seemed supported by a review I did of articles in the Business and Ethics Quarterly from the past couple of years and the email correspondence I attempted with authors that is posted here and here.

Also, there are limits on the current ability of science and research to produce sufficient proof about  relevant matters to satisfy other "players," such as lawmakers, judges and regulators.  A good example is whistleblowing.   The Comment from the Business Roundtable Institute for Corporate Ethics, which is second comment at this link, cites the 1999 article Trust and Distrust in Organizations  in support of  the statement "Well intended actions can have unintended consequences, as illustrated by one academic study showing that employees who are subjected to additional, compulsory oversight measures often 'become less committed to internal standards of honesty and integrity in the workplace,' which are precisely the standards that promote sustainable, long-term value."  This probably provides little evidentiary proof to regulators about what regulations shall be promulgated.  By the same token, there is probably little scientific measurement of the societal benefit from paying whistleblowers (or from allowing whisteblowers to go directly to governmental authorities).  This current limitation of science and research probably applies to measuring the deterrent effect of entity level liability versus officer and employee individual liability.

If other parties are not interested, how bothered should I and the few others referred above (Gretchen Morgenson, the Vioxx commentator) be?  How big deal is there here?  Other interested parties need to answer that for themselves, and I can only reprise the possible important considerations I see.

The main problem with entity level liability is that most of the punishment is imposed on shareholders, employees and others who are "innocent" (in the sense of not being active and knowledgeable participants in the wrongdoing) and it does not target directly the officers and employees who were active and knowledgeable in the perpetration of the wrongdoing.  Frequently the latter escape any financial punishment, and they may, in fact, have profited significantly through higher compensation from the corporation while the wrongdoing was going on.

Also, if there has been wrongdoing that has resulted in gains and profits, many of the "innocent" shareholders, employees and others who bear the burden  of the entity level liability may not have received any benefit from the wrongdoing.  (Think about shareholders who have purchased their stock recently in a situation where profits from previous wrongdoing have been paid out as dividends or as salaries and wages, or reflected in a higher stock price at which the new shareholders purchased their stock.  Such new shareholders have not benefited from the wrongdoing, but they bear part of burden ofthe corporate level liability for the wrongdoing.)

This entity level liability lends itself to significant abuse by plaintiffs' lawyers, and arguably by corporate management ("heads I win bonuses and stock options, tails you stockholders pay the corporate liability").  Entity level liability contributes to the widespread phenomenon of "settlements" in which there is no determination of what wrongdoing, if any, took place.  Absent such determinations, society's actors (including those engaged in the ethics mission) are deprived of important guidance.  I have long considered the Vioxx case as a particularly good example.  See this entry.

As the Vioxx entry indicates, besides the failure to provide "guidance," there is also arguably a great waste of economic resources that could be deployed in better ways for advancing the mission of business ethics.

To me, cases like the Vioxx litigation and the recent $25 billion "robo-signing" bank settlement cry out for asking and trying to answer the question "what kind of deterrence effect is achieved by this type of entity level liability?"  (As to the "robo-signing" settlement, neither the Mortgage Bankers Association (link) nor the Conference of Bank Supervisors (link)  wishes to engage in any discussion about what deterrent effect is achieved.  The National Association of Attorneys General is also not interested in discussing the same.)

On the other side from the foregoing problems posed by entity level liability, first, it needs to be kept in mind that, as regards civil law liability, deterrence is secondary to the primary objective of compensating persons who have been harmed by wrongdoing.  This can lessen the impetus to try to fix the problems of entity level liability described above from a deterrence standpoint.  More important are the problems that are posed by trying to impose any liability on officers and employees in the modern, complex business world..  The activities of large corporations are designed and carried out through the collective action of numerous corporate officers, employees and other agents. Amidst complexity, there are many nooks and crannies for employing deceptions and tricks to obtain wrongful gains, and there are myriads of conflicts of interest in which persons can improperly exercise their authority in one position to favor another economic interest they have in a different position.  Discovering all the relevant facts and elements of wrongdoing, including identifying all the officers and employees involved and determining their respective responsibilities, can obviously be extremely difficult, time consuming and expensive.

It would seem that the problems on both sides of entity level liability and of individual liability create a very difficult choice for society.  Society has a hard time measuring the increased deterrent effect, if any, of holding responsible officers and employees liable and a hard time weighing that against the cost and expense of constructing legal machinery that will undertake determinations about, and impose punishments on, responsible officers and employees.  The primary objective of compensation as regards civil law liability also contributes much difficulty in the societal choices.

As a result, there is thus plausible reason for business ethicists not to weigh in on the issue of entity level liability versus individual liability.

To the extent they do not weigh in, they marginalize themselves.  Many of the other interested parties have a stake in staying away from the issue, and the issue is in the moral bailiwick of the business ethicists to take a position on.  If they don't, they are in effect saying, "we are not up to reaching a position on this issue."  If they do not weigh in, they are sidelining themselves if and to the extent the Obama administration and its prosecutors are engaged in making decisions about pushing for individual liability. They further lose stature in trying to engage with the governmental authorities on whistleblowing and the "governmental approach." They also lose ability to engage with management about whether legal settlements are an acceptable modus operandi in light of the "guidance failure" accompanying the same, the large diversion and possible waste of corporate and societal resources that could be better deployed in prosecution of the ethics mission, and arguing that the corporate world needs to modify its stance against plaintiffs' lawyers by offering more officer and employee individual liability in exchange for reduced entity level liability.

I will continue to try to get business ethicists to react.

E-book pricing lawsuit and EO's

Ethics officers want to prevent corporate wrongdoing.  I am trying to propound increased officer and employee individual liability as a means to deter corporate wrongdoing.  I also think the law has a huge role in defining and determining what is wrongdoing.  The modern commercial world is exceedingly complex, and how ideas for corporate activities come to fruition and get implemented by a corporation can make it enormously difficult to have legal machinery to impose individual accountability and responsibility.

A current case in point is the civil antitrust lawsuit concerning e-book pricing that the United States Justice Department filed in U.S. District Court for the Southern District of New York against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster.  Contemporaneously with the filing of the complaint (which can be found here), the Justice Department settled with three of the defendants (press release announcing this can be found here).

Has there been wrongdoing?  What could ethics officers have possibly done to prevent it?  What officers and employees should be held personally liable for the wrongdoing?