Bank Lawyer's Blog

Florida Continues To Pummel Stern

Nearly two years ago, we noted that the Florida Bar had filed a complaint against former Florida Foreclosure King David J. Stern over alleged ethical lapses related to the meltdown of his foreclosure mill firm in the wake of a robosigning scandal. The wheels of justice grind exceedingly slowly (at least, they do in The Sunshine State), but last week, the Bar filed another whopper against Stern.

It took two years, but the Florida Bar has finally dropped a doozey of a complaint against former foreclosure king David J. Stern.

The 80-page complaint includes 17 counts or charges that Stern violated the Bar’s rules of professional conduct. The Bar alleges that Stern failed to properly supervise lawyers and non-lawyers at his firm and failed to halt regular violations of Bar rules.

The article summarizes the allegations made in the long complaint. Most have them appear to have been made public previously.

According to the newspaper, neither Stern nor his attorneys could be reached for comment (although another article states that Stern's lawyer, Jeffrey Tew, "told the newspaper Thursday that Stern has done nothing to warrant discipline"). Unfortunately for Stern, a former nemesis was ready and willing to pipe up with an opinion.

Former assistant state attorney general Theresa Edwards, who investigated Stern several years ago before being fired by the AG's office, said she thinks the bar should have acted sooner. (Contacted by the newspaper, the Bar declined, through a spokeswoman, to comment.)

"Considering the amount of money he's made, his bar license will be of little concern to him," said Edwards, who is now in private practice.

Biting off more than you can chew, then trying to gulp it down by cutting corners, appears, in retrospect, to have been a bad business plan. Then again, perhaps Ms. Edwards is correct. Perhaps he's made so much money that he won't care what the state does with his law license.

We'll see. At this rate, it may be another two years before this plays out. By that time, only crackpot bloggers may even remember who Stern was.

Some Grim News Just Got Grimmer

As regular readers know, I have been on a mission over the past several years to encourage would-be law students to consider equally enjoyable employment prospects, such as being screamed at by that Hell's Kitchen buffoon for splattering a souffle, or acting as a lifestyle adviser and match-maker for Kim Jong-un, or even being a dance instructor for the trifecta of Wynonna Judd, Kirstie Alley, and Mark Cuban. Even a pessimist like myself didn't realize how bad things have become for law students, though.

Excluding jobs funded by law schools, only 55.1 percent of all 2012 law school graduates were employed in full-time, long-term lawyer jobs on Feb .15, according to the analysis by the law school reform group Law School Transparency.

That's 1.1 percentage points lower than the 56.2 percent figure cited by the ABA, which includes school-funded positions in the number of graduates holding full-time, long-term lawyer jobs, according to the analysis.

Moreover, a "devastating" 27.7 percent of 2012 graduates were either underemployed, meaning they were working in short-term, part-time or nonprofessional jobs, or not employed, meaning they were either unemployed or pursuing an additional degree, according to Law School Transparency's analysis.

The ABA data showed that 10.6 percent of last year's graduates were unemployed and seeking work, but didn't total up the number of graduates who were unemployed and underemployed.

The group's analysis of the data also shows that fewer than half of the graduates at 66 schools—one-third of all ABA-accredited schools—were working in full-time, long-term legal jobs; less than a third of the graduates of 11 schools, or 5.5 percent of total, were so employed.

Law School Transparency's Executive Director had some sound advice for lawyers to be.

"Law school is too expensive relative to job outcomes," he said. "If you plan to debt-finance your education or use hard-earned savings, seriously think twice about attending a law school without a steep discount. For the vast majority of prospective law students who have not received a sizable scholarship, it makes sense to wait for prices to drop."

Or it makes sense to think about medical school. Or, save the costs of post-graduate education altogether and latch on to one the fastest growing job segments in the country: "cost estimator." If graduating law school students had devoted more time to cost estimation (and benefits) before they borrowed money to go to law school, many of them would not be facing the bleak prospects currently staring them in the face.

The Perils Of Trolling

Last night's post about Tuesday's United Western decision generated an attempt by an "anonymous" troll to leave an abusive comment this morning. I moderate comments, so it didn't make it past the "editor." In addition to some substantial "I hate Kevin" vitriol (some of it scatological), and threats that the regulators (of which the troll intimated he was one) would "get me" for my snark, it contained what I think are outright libelous per se statements regarding the former management of United Western and their outside counsel. The troll used a pseudonym and what I assume to be a phony hotmail account email address. I assume that the troll didn't realize that my blog service captures the unique IP address of all commenters, this IP address being one assigned by Cox Communications to a residence in the Annandale/Falls Church area of the Washington, D.C. suburbs. There's only one location with that assigned IP address, and it won't take more than  a John Doe subpoena to uncover the name of the account holder at that location.

I forwarded the comment and identifying information to United Western's attorneys. I assume that they'll take it from there. I think that it's time to remind the unhinged of the issues I raised in a post in 2007. In addition to other legal (and, if the troll is a lawyer, ethical) violations, the conduct constitutes a federal crime.

Please people: Get a grip. If my blog posts drive you so batty that you feel compelled to engage in illegal anonymous harassment, either seek professional therapy or...here's an idea...don't read this blog.

Too Reasonable For The Top Job?

There may be legitimate reasons, about which reasonable people (and, in addition, the writer for this blog) might disagree, to oppose Mary Jo White for the head of the SEC. One of dumbest reasons is that she's an experienced corporate attorney who has represented big banks.

"If nominated by the president, however, she will undoubtedly face some opposition on Capitol Hill due to her time defending high-profile financial institutions and Wall Street executives," Compass Point said.

God forbid that the SEC might be run by someone with hands-on expertise in the subject matter. Better the top spot should go to a career academic or bureaucratic hack, especially if they're 1/32nd Chippewa/Cherokee/Choctaw/Fugawi.

"White would also face scrutiny from Democrats due to a statement she made during a recent panel appearance urging caution when prosecuting financial crimes: 'We must distinguish what is criminal from what is reckless behavior or bad business decisions and not bow to the frenzy…And I worry the frenzy overrides reason and judgment sometimes.'"

I can see why Senators of a certain stripe might blanche at the prospect that the full-out campaign to criminalize corporate governance decisions that's been running full bore since Enron ran aground should take a brief pause for thoughtful reconsideration. Not "bowing to frenzy" is positively un-American these days.

Mary Joe's been nominated by The One, and a majority of the Senate travels in the same boxcar as The Nominator. Thus, I think any "hard questioning" of Ms. White will likely not derail her confirmation, if the White House is serious about pushing her.

Not that you'd take any political prognostication I make to Vegas and lay down serious money on it. After all, I'm the guy who once thought Diana Taylor was a shoo-in for the Chairman of the FDIC.

PATCO Played Out: A Few Lessons Learned

The last time we discussed the PATCO decision, the appellate court had found that the bank's security procedures to defeat account takeover were not "commercially reasonable," but had sent the case back down to the trial court to determine what legal responsibility the customer might have to prevent account takeover. Following that action, the bank and PATCO settled the case, so that burning legal issue was not resolved.

Recently, PATCO co-owner Mark Patterson and counsel Dan Mitchell were interviewed by Bank Info Security's Tracy Kitten about the lessons they think they learned from the case. Among those (along with my observations) are:

• PATCO approached the bank within the first month of the incident with a settlement proposal that turned out to be a heck of a lot less than what the bank eventually paid in settlement after three years of litigation. Both sides ended up enriching their legal counsel needlessly. Sweet!
• Community banks seem more willing to settle quickly than do larger banks. Mitchell and Patterson think that's because community banks are more concerned about the reputational risk if the dispute hits the press. Might this be a potential competitive marketing advantage for community banks? "Bank with us! We'll pay for your negligence!"
• Most cases of corporate account takeover are settled quickly, and off the radar screen. That certainly appears to be accurate from our personal experience. While many lawyers live to engage in disputes, bankers live to make money the old fashioned way: by doing business. It's hard to do business when you're the defendant and your customer is the plaintiff.
• Prospective litigation costs and reputational risk can be as much of a deterrent to bank customers pursuing litigation as they can be to banks.
• There's not much case law on these issues. Until there is, there is likely to be much jockeying for position, blustering and posturing by lawyers for both sides, unless responsible business leaders on each side of the table seize control early in the game and keep their eyes on the prize: salvaging the relationship (if possible) without breaking either the bank or the customer.
• Patterson thinks ACH should not be done by businesses, no matter how allegedly "strong" the security devices or procedures used. He claims that his business will use ACH only for tax payments. The reasons for his revulsion: the one-sided nature of the agreements prepared by the banks, which place almost all liability on the customer. Hey, that's why banks pay us the big bucks, Mark!
• Patterson and Mitchell do believe that customers have "some responsibility" for protecting their accounts from takeover. However, they claim that banks bear more responsibility than customers because they are "in a better position" to prevent and detect takeovers. While I don't disagree that banks should be more sophisticated in this area than the average small business owner, I'm still not willing to go as far as Patterson and claim that using a dedicated separate PC solely for online banking (and not for cruising Internet porn sites) is cost prohibitive for most small businesses. That simply doesn't pass the smell test for me. On the other hand, I'm an alleged elitist, so perhaps my view is slanted toward my liege lords and masters, "The Banks." Perhaps a refurbished eMachine for $250 is simply beyond the reach of the average small business. If that's the case, how much money would they stand to lose from any of their corporate accounts? Wouldn't cybercrooks just enter, laugh, and leave?

Whether you represent banks or bank customers, Mitchell's final words ring true.

I would bet my bottom dollar that there will be more lawsuits in the future in this area. What types of questions will come up really will depend on the unique circumstances of each case. But given the prevalence of corporate account takeover, you can bet that there will be more cases.

Defending The "Guilty"

In the continuing spirit of the holiday season, I'm deviating from the subject of banking law (and my other favorite topic: bashing politicians) to address a subject near and dear to my heart: the criminal justice system in this country. The following is a repost of an article I wrote a number of years ago for another, more personal, blog, but one I want to repeat, due to some recent discussions with people close to me whose study of our country's legal system seems to have been short-changed by our public school system, as well as by a private university of some distinction. As we are finding out in these difficult times, ignorance is not bliss.

A "blogging buddy" asked me: "I've often wondered how a defense lawyer could defend someone who was guilty, and defend that client with a clear conscience? To me, it's kind of like selling your soul. How do you view it? I know you're supposed to operate on the principal of presumed innocence, but sometimes it's so obvious that the person is, indeed, guilty."

Although I did criminal work early in my career, and I've been a consulting expert to criminal defense teams (as well as to the government) since then, I haven't been a criminal defense attorney in over 34 years. While I have no problem with the question, I may not be the best person to answer it without assistance.

I think Juanita Brooks, a criminal defense attorney at a firm where I was an equity partner "back in the day" (practicing bank regulatory and real estate law, not criminal law), comes very close to my feelings. In an article she wrote for a legal periodical that I have in hard copy but can not find online, she addressed the same topic as follows:  

Confront defense attorney Jaunita Brooks at a cocktail party about how she can, in good conscience, represent guilty people, and her first inclination is to flee.    

"Normally, I walk away and try to engage somebody else in conversation," Brooks says. "But if they won't let me, the honest answer is that I am not the one that makes the judgment about whether the person is guilty or not. My role as a criminal defense lawyer is to keep the system honest. Either a judge or a jury or my client will make the determination (of guilt)."    

Just doing her job. Like her colleagues, Brooks, a partner with McKenna & Cuneo, notes that about 95 percent of all people charged with a crime end up guilty via plea bargaining. (Of the 16,573 felony cases filed by the San Diego District Attorney last year, only 688 went to trial.) So by default, the overwhelming number of clients defense attorneys represent are found guilty of something. The remaining 5 percent, defense attorneys say, have a legitimate need for a trial, with the primary reasons being disagreement over plea bargain offers or belief that the accused is innocent of the charges.

That's the system. It's adversarial. Before the State can deprive a defendant of life, liberty or property (fines and seizures) by virtue of its power to enforce the criminal laws, it must prove the defendant's guilt beyond a reasonable doubt. To do this, the state employs a prosecutor who has, at his or her disposal, the investigative resources of the state, which are considerable, all paid for from the public treasury. The defendant has the right to counsel (and if he cannot afford to retain one, one will be appointed for him by the state). Because the state has the greater resources and the consequences, in a Western society that prizes individual liberty, are so severe, the state has the burden of proof.

As I said, the process is adversarial, and both lawyers have an ethical duty to advocate their client's (state or defendant) position zealously. A judge or a jury makes the determination whether the client is "guilty" or "not guilty." The defense lawyer has a duty to make the state prove its case beyond a reasonable doubt, to attack the holes in the state's case, and to raise every legitimate defense and mitigating fact.

The system doesn't work the way in which it was intended to work if the defense attorney doesn't represent the "potentially guilty" as well as the "potentially not guilty." The "guilty" are separated from the "not guilty" only when the trier of law and fact has made its determination. The attorneys don't make the call. If you want "justice," in the terms of "innocence" and "guilt," human beings can't give it to you. You'd better look to God for that type of "justice." In our society of laws, "the process," functioning as it is intended to function (with all the flaws to which fallible human beings can subject it), is the best form of "justice" a civilized society can construct here on Earth, in my opinion.

I accept this system, which has evolved out of the British common law system, and has been adopted by the U.S. and all of the current and former members of the British Commonwealth. If you feel otherwise, try to change the system to something "better." Obviously, enough citizens feel that, on balance, it provides enough "rough justice" that they refrain from "self-help" (vigilante action), except in isolated instances that are usually, themselves, punished by the system.

I never felt bad about doing the job the system expected me to do and that I agreed to do, which is not to judge "guilt," but to provide the best defense to the prosecution's charges that I can provide. I would have felt worse if I hadn't done my best.

It's rarely that cut and dried, of course, which makes the question more theoretical than realistic. If to a defense attorney a client is "obviously guilty" of the crime with which he or she is charged, that means that the prosecution's unimpeachable evidence is very strong and the defenses are poor. In such a case, the defense attorney will do his or her best to get the most favorable plea bargain for the client, and make a recommendation to the client to accept it. The client makes the final decision, not the attorney.

I don't want to rehash my previous posts (here and elsewhere), because I've covered this same ground previously. Suffice it to say that I can't see how it would bother a defense attorney to defend a client who "obviously" (to the defense attorney) committed a crime. To not defend the client would be standing the system on its head. If it bothers you, don't be a criminal defense attorney. Do something else for a living.

Like offering counseling to an obviously evil person, for example. I just don't know how a person could do that. :-)

"I was once asked by a minister, 'How can you represent guilty people?'" says Carmela Simoncini of Appellate Defenders Inc. "I asked him, 'How can you preach to sinners?'"

Gigging Sharks For Christmas

As a client alert issued by the law firm bearing my favorite acronym (MoFo) put it so well, last week "Congress gave banks and other ATM operators an early holiday present."

On December 11, the Senate unanimously passed S. 3204, which eliminates the external fee notice requirement in the Electronic Fund Transfer Act, 15 U.S.C. § 1693, et seq. (“EFTA”). The House passed an identical bill, H. 4367, last July. The President is expected to sign the measure into law.

I'm not sure which holiday they were discussing, but I assume it was either Christmas, Hanukkah, or Kwanzaa. I doubt MoFo celebrates Festivus.

Once the law goes into effect, ATM operators will be required to give only the on-screen notice of transaction fees. The additional external notice that's currently required will go the way of the TAG.

As MoFo notes, this law will do away with the plethora of "frivolous lawsuits" that bottom-feeders and their shark enablers have been using to squeeze settlements out of banks and credit unions whose only offense was, in many cases, not having the external signs booby-trapped with claymore mines to discourage "unknown perpetrators" from stealing them shortly before plaintiffs' lawyers photographed the absence of signage and used that absence as the basis of a lawsuit on behalf of plaintiffs who used the ATM shortly after the external signs disappeared. Sure, some of those plaintiffs gave us an occasional cause to grin, but, for the most part, they were as welcome as would be Charlie Sheen as the keynote speaker at the Sisters of Charity Federation annual convention.

Unfortunately, there remains plenty of ATM-related chum to attack the predators. The ADA, for example. Where there's a financial remedy tied to a solvent defendant, the plaintiffs' bar will always find the basis for a claim, no matter how far into the ionosphere they have to travel to find it.

Bank of America Propels Young Lawyer To Fame and (Potential) Fortune

Eighteen months ago, we made the official call: "B of A has become the poster child for foreclosure dysfunction." Of course, we were way late in throwing that flag, but unless we could belabor the obvious, we'd be out of blogging material.

The incident that prompted our banal observation was the sweet foreclosure by a wrongfully foreclosed-upon Florida couple upon a Bank of America branch, a theatrical performance engineered by an attorney only eight months out of law school. It turns out that the lawyer, Todd Allen, has turned his fifteen minutes worth of fame into a potential career in Hollywood.

Allen said his life has changed quite a bit. He never anticipated getting nationwide attention.

"After that, my career took off," said the 35-year-old East Naples resident who is originally from Utah. "I started getting a lot more business and a lot more referrals."

Allen, of the Naples firm Goede & Adamczyk, is voluntarily taking more free cases and quickly became a national media source for the foreclosure crisis.

[...]

What surprised Allen the most was receiving calls from people out of the state all facing foreclosures, he said.

[...]

In summer 2011, Allen and the Nyergeses signed with a producer in Los Angeles and entered into a contract to make a movie.

"The idea is being shopped around to movie houses but nothing has happened yet," Allen said.

Allen said he doesn't have a preference of which company decides to do the film as long as the scope of the foreclosure crisis and the impact it has on people is accurate.

When asked who he wants to play his part, the married father of three children said he really doesn't care.

"I just want it to be funny," he said of the movie.

I'm sure it will be funny Todd, although The Daily Show "report" on the incident will be difficult to top.

The High Cost of Vindication

The conundrum for bank officers and directors, and other institution-affiliated parties, who are hit with regulatory enforcement actions, is that, notwithstanding the strong belief of the accused that they are not "gulity as charged," the cost of fighting an enforcement action often far outweighs the cost of a civil money penalty. Often, that disparity is enough to induce the defendant to settle, albeit with a bitter taste in his or her mouth.

Then, there are folks like Patrick Adams. Four years ago, we discussed the difficulties faced by Dallas-based T-Bank when it was accused by the OCC of violating the Bank Secrecy Act in the course of its dealings with third party payment processors. The bank entered into a consent C&D with the OCC. Adams, the then-CEO of the bank, was also hit with an enforcement action and, unlike the bank, decided that he wouldn't knuckle under to charges that he thought were not justified. Lo and behold: a couple of weeks ago, an administrative law judge agreed with him.

Vinson & Elkins won a major victory for client  Patrick Adams, former President and CEO of T-Bank in Dallas, when C. Richard Miserendino, Administrative Law Judge for the United States Department of the Treasury, recommended that all charges of alleged unsafe and unsound banking practices brought by the Office of the Comptroller of the Currency (OCC) against Adams be dismissed in their entirety. The 151-page opinion issued on November 8, 2012,  followed a week-long trial with 19 witnesses in Fort Worth earlier this year.

The decision recommends complete dismissal of the charges, with the judge issuing findings against the OCC on all of its allegations. The judge specifically found that Adams (1) did not violate any laws or regulations; (2) did not engage in any reckless, unsafe, or unsound practices in his management of the Bank; and (3) did not breach his fiduciary duties to the Bank.

Good for V&E. More important, good for Patrick Adams.

On the downside, Adams spent four years fighting charges that apparently weren't supportable (at least, the ALJ thought that they weren't) and spent God-knows-how-much money on lawyers and litigation expenses in the process. You'll also notice that Mr. Adams is described as the "former" president and CEO of the bank.

Unlike a private party who files a lawsuit that eventually turns out to be a pile of bat guano, it's extremely difficult to go after the government for any recompense in situations such as these. As one person close to the case observed, "They can do what they want with impunity knowing that you either can't afford to fight them or that they have no 'risk of loss' (you supposedly can't sue them for damages)." Actually, you can sue them, but the qualified immunity that protects them makes it a fool's errand to do so in all but the rarest of cases.

On the other hand, I think it's always useful for both government attorneys and those who oppose them to keep in mind the following ethical consideration, which, though "aspirational" in nature and part of the since-replaced Model Code of Professional Responsibility, embodies what the legal profession has long held to be proper conduct by those lawyers who wield the power to wreak havoc on the lives of the regulated:

EC 7-14 A government lawyer who has discretionary power relative to litigation should refrain from instituting or continuing litigation that is obviously unfair. A government lawyer not having such discretionary power who believes there is lack of merit in a controversy submitted to him should so advise his superiors and recommend the avoidance of unfair litigation. A government lawyer in a civil action or administrative proceeding has the responsibility to seek justice and to develop a full and fair record, and he should not use his position or the economic power of the government to harass parties or to bring about unjust settlements or results.

As I said, the above ethical guidance is aspirational. I will not be holding my breath while await its tenets to influence the behavior of anyone.

Big Accounting Gets Its Turn In The Dock

For those of you wondering when the accountants of a failed bank were finally going to get their ticket to ride, wait no longer. As Kevin LaCDroix reported on his blog a couple of weeks ago, the FDIC has sued both the internal and external audit firms of the failed Colonial Bank. Connoisseurs of fine FDIC litigation knew it was only a question of time before the FDIC attempted to grab the tails of big accounting firms' malpractice insurance policies and hitch a ride to the promised land. Colonial Bank provided a good couple of ponies to ride.

The complaint alleges that while Taylor Bean was carrying out its “increasingly brazen” fraud, PwC “repeatedly issued unqualified opinions” for Colonial’s financial statements, and Crowe “consistently overlooked serious internal control issues” – and, more the point, both failed to detect the fraud. The complaint alleges that if the firms had detected the fraud earlier, it would have prevented losses or additional losses that the bank suffered at the hands of Taylor Bean. The complaint asserts claims against the firms for professional negligence, breach of contract, and negligent misrepresentation. The complaint alleges that in the absence of the firm’s wrongful acts, the Taylor Bean fraud would have been discovered by 2007 or early 2008, and “losses currently estimated to exceed $1 billion could have been avoided.”

Giving credit to Thompson Reuters' Alison Frankel, Kevin raises a potential hitch in the FDIC's giddyup.

As Alison Frankel discusses in her On the Case blog (here), the accounting firms are likely to raise the in pari delicto defense, “which holds that one wrongdoer can't sue another for the proceeds of their joint misconduct” The FDIC has anticipated this defense in its complaint, alleging that the two bank employees that facilitated the Taylor Bean fraud were “rogue employees” who acted our of their own self-interest and not at the direction of or to the benefit of the bank, but rather to the detriment of the bank.

According to Frankel, counsel for PwC doesn't think much of that approach.

PwC is represented by Elizabeth Tanis of King & Spalding, who took issue in a statement with the FDIC's assertions. "The Colonial Bank executive who spearheaded the fraud on the Colonial Bank side has testified that her actions were motivated by a desire to prevent loss to the bank and to save an important client relationship. She further testified that (Taylor Bean) was paying Colonial Bank $20 million to $30 million per month in interest," Tanis said. Moreover, Tanis said, auditors can't be expected to have uncovered a fraud that was "so well-concealed that neither the FDIC nor the OCC discovered it, even when they performed targeted exams of the mortgage warehouse lending division, where the fraud occurred."

I think that we all know that what the FDIC is doing here has little to do with what it thinks it can ultimately get away with if this case ever makes it to trial. No, they understand that big accounting firms and their insurers make decisions with a bean-counting mentality. If they can buy their way out of this litigation for an amount that eliminates the crapshoot of litigation, avoids paying defense counsel's kid's annual tuition at Cornell, and passes the "spit-up-a-little-in-my-mouth" thresh hold, they'll likely elect to pay off the FDIC, regardless of whether or not they think the accountants actually committed malpractice. The FDIC needs to survive a motion to dismiss and its prospects will look worthwhile. Unless, of course, PwC decides to give Ms. Tanis & Co a chance to win the suit on summary judgment.

From a personal standpoint, I'd like to see the court rule on the in pari delicto defense. Then again, it's not my money at risk.