Bank Lawyer's Blog

Make The Yultide Bright

Although I'll be "on holiday" for the next couple of weeks, I didn't want to leave before wishing all my millennial compadres a Very PC Christmas.

If You Blow A Whistle And No One Hears It, Has It Made a Sound?

In a story that appears to have been noticed only by a few conservative press and opinion sites, a former CFPB examiner and current "whistleblower," Cassandra Jackson, alleges that when she was an examiner for the CFPB, "her superiors at the CFPB asked her to falsify documents during her investigation into a Texas-based payday lending company, Ace Cash Express."

"During the course of this examination, I was asked to change, remove, and otherwise falsify documents connected with this examination," Jackson said.

Jackson said she was asked to remove document evidence proving Ace Cash Express was complying with CFPB rules and to write a report including findings she knew to be "false and fabricated."

"I was specifically told to cite Ace Cash Express for a violation for which I had verified the company was in compliance and to state that Ace Cash Express did not provide, and that the CFPB did not receive, documents that would have satisfied the CFPB's guidelines, despite having received that information from Ace Cash Express," Jackson said.

Jackson refused to follow management's orders and said she was retaliated against for not falsifying the report. Managers then "proceeded to modify the report" and used it to "garner" a $10 million settlement with the company, even though Jackson said her report "did not find significant violations by the lender."

Jackson alleges that as a result of her refusal to falsify her examination findings, she was given a poor performance review and later forced to resign. She also alleges "widespread racism and gender discrimination" at the Bureau in her five years there.

Jackson's allegations are set forth in a letter addressed to Attorney General Jeff Sessions on December 6, 2017, and also purportedly sent to a number of Congressional representatives and senators, including Jeb Hensarling, Maxine Waters, Mike Crapo, and Sherrod Brown, as well as Mick Mulvaney, Acting Director of the CFPB.

As far as I can discover, thus far there has been not a peep out of most of the main stream media or any of those who received the letter, about these allegations. I realize that the tax "reform" bill, as well as our fearless leader's daily tweets, have been sucking the oxygen out D.C., but these allegations are, to say the least, disturbing. You would think that Mulvany, Crapo and Hensarling would be all over this on purely partisan grounds, even if abstract notions of justice and fair play don't generate much enthusiasm in those deracrinated environs. Moreover, Maxine Waters has, in the past, been a critic of apparent discrimination at the CFPB, and the letter gives her some medium rare red meat to chew on in that respect.

We'll wait patiently to determine if these allegations have merit and, if so, whether or not they'll be swept under the rug because the powers that be have more important things to do, like worry about whether two FBI officials ostensibly bashing Donald Trump in "private" text messages, were actually covering up an extra-marital affair. After all, in the swamp, first things must come first. 

Inept But Not Evil

When last we looked in on the investigation by the Colorado Attorney General into the alleged hijinks of a couple of Colorado law firms that handled single family loan foreclosures that followed the 2008 recession, Fannie Mae and Freddie Mac had banned the firms from handling foreclosures on loans owned by the two government sponsored entities. In 2014, the Attorney general sued both firms, alleging a "massive fraud scheme" by the firms and related parties to overcharge defaulting borrowers. One of the firms settled immediately for a hefty $10 million (and slammed its doors shut), but the other, the The Castle Law Group, refused to settle, hired (among other legal counsel) one of the premier trial lawyers in Denver, Larry Pozner, and hunkered down and waged war with the Colorado AG. To the amazement of some, the trial judge not only found for Castle on all but one count in a 40-page complaint, he also, as The Denver Post's David Migoya points out, ripped a new, gaping orifice in the nether regions of the Colorado Attorney General and her staff.

The Colorado attorney general’s office was so haphazard and reckless in its failed pursuit to prove former foreclosure king Larry Castle and his law firm had defrauded thousands of consumers that a judge has ordered it to pay his attorneys’ tab – an amount that easily could toll into the millions of dollars.

Denver District Judge Morris Hoffman on Tuesday said Attorney General Cynthia Coffman “was wrong to bring and pursue most of this case” against Castle, his former law firm, The Castle Law Group, and two other associated businesses caught up in the investigation. He said the civil lawsuit the state filed was “substantially groundless and substantially frivolous” enough to merit the award of the defendants’ attorneys’ fees.

“The evidence, or lack of evidence, at trial was nothing short of breathtaking, especially compared to the investigative build-up and the serious and pervasive allegations in the complaint,” Hoffman wrote in a far-ranging, 20-page opinion. “The case (the state) put on wasn’t even a sick relative of the robust allegations they made. … Their 40-page, 217-paragraph complaint reads more like a press release than a complaint.”

[...]

A hearing to determine the amount the state must pay is to be held in February. It could reach into the millions of dollars since it includes several attorneys – some of them high-dollar counsel – over several years.

“It appears that all (of the) defendants made a substantial amount of money providing their services, and have since gone out of business and lost a substantial part, if not all, of their investments,” Hoffman wrote.

[...]

Hoffman called the government’s case amateurish, despite the “massive undertaking” of a two-year investigation that culled through more than 95,000 Colorado foreclosures, more than a million pages of documents and dozens of depositions.

The statements by the judge indicate to this casual observer that when it comes to calculating the final determination of the defendants' attorneys' fees for which the state of Colorado will be liable, there may be a heavy thumb resting on the defendants' side of the scales of justice. On the bright side for the AG, the judge seemed to indicate that although the Attorney General and her crew might have been somewhat lacking in judgement, legal skill, and even common decency, they weren't "evil" in the sense that, say, Pol Pot might have been.

Despite “the feeble trial they put on, and despite the minimal results they achieved, I do not believe (the state) acted in bad faith,” Hoffman wrote. “These were gross errors of judgment, not vindictiveness.”

Hoffman said the state blindly pressed on probably because the lawyers “subjectively thought this was a righteous case; they probably still do.”

“Being blinded by whatever blinded them – regulatory hubris, confirmation bias, group-think, ideology, guilt-by-association or even just cockeyed optimism – is not the same as bad faith,” Hoffman wrote.

He said a remark by the state’s lead lawyer on the case, Assistant Attorney General Erik Neusch, proved the state’s recklessness. Neusch once told Castle that Absolute owner Kathleen Benton was not “good-looking enough or educated enough” to be working without Castle’s help, according to Hoffman.

“Although this one heat-of-battle comment by Mr. Neusch was immature and unnecessary, I am not convinced it is the tip of a nefarious motivational iceberg,” Hoffman wrote. “The Attorney General was wrong to bring and pursue most of this case, but I am not convinced her assistants’ poor judgment masks an evil intent.”

Those observations of the judge might be inserted into a Wikipedia section on the term "damned by faint praise."

A couple of additional thoughts struck me as I read Migoya's article. First, the insults by Neusch about the lack of physical attractiveness and stupidity of a female defendant are stupefyingly tone deaf in the current social environment, especially when your boss is female. "Immature and unnecessary" is hard to argue with. To cause the politically incorrect denizens of this blog to "take a moment" and wonder what in the living hades might have caused a man who makes his living in a public arena to so "misspeak" is quite a feat. Also, I think that Cynthia Coffman is running for governor of Colorado, and if the snark in the comments section of the linked article is any indication of voter sentiment, the judge's ruling has not done her any favors on the public relations front.

Migoya indicates that the AG's office will appeal the court's ruling. Maybe we will be as entertained by the appeals court's opinion as we were by Judge Hoffman's.

Fourth Corner Back In Court

Our fascination with the persistence of the organizers of Fourth Corner Credit Union in pursuing a master account from the Federal Reserve Bank of Kansas City so that the credit union may serve businesses in Colorado that are somehow related to the state-legal-federal-illegal business of growing, processing, selling and distributing marijuana, continues unabated. In July, we discussed a "highly unusual" set of opinions and an order by a three-judge panel of the U.S. Tenth Circuit Court of Appeals that overturned a federal district court decision that upheld the right of the FRB to deny the credit union a master account, which is necessary to process transactions through the Federal Reserve system. The panel's actions gave the credit union the opportunity to file a new application for such an account, this time with an amended business plan providing that the credit union would serve only "marijuana legalization advocacy groups," and not (as the first application provided) "marijuana related businesses," at least until serving such businesses becomes legal under federal law.

Fourth Corner filed just such an application with the Federal Reserve. Instead of promptly granting the master account, the FRB had the temerity to request "additional information" from the credit union. The credit union  alleged that the FRB had no right to request such information, and instead of providing the information, Fourth Cornet filed suit in federal district court in Denver, once again seeking an order to compel the FRB to approve the application. We are not certain what information was sought by the FRB. Perhaps, whether the directors, officers and controlling shareholders prefer Auntie Delores or Willie's Reserve weed, or more background information on the credit union's head of physical security, a man known simply as "El Chapo." For the humor challenged among the readership, the immediately preceding sentence was not intended to be serious.

Whatever information was sought, rather than play out the string with the administrative process until the FRB issued a final decision that could then, without question, be appealed, the credit union has decided to pursue its oft-repeated claim that the granting of a master account is a mere "ministerial function." Since the organizers have been at this for years and, we assume, are more than exhausted with the FRB's foot-dragging, I understand their desire to force a decision from the Fed. At the same time, I fear that appealing the request for additional information may give the district court and/or a majority of whatever three-judge panel (or full court, if it makes it that far) hears the case, another "out" to refuse to to make a substantive ruling, and to send it back down the line again. Among the previous panel, one judge appeared to take the position that the granting of a master account was not a ministerial function, another judge appeared to take the position that it was, and the third judge was harder to pin down than Nancy Pelosi was on the subject of whether or not John Conyers should resign.

University of Alabama Law School professor Julie Hill, whose opinion carries weight with this blog on these matters (but don't hold that against her), thinks that while normally the granting of a master account is a ministerial matter, this situation is anything but "normal."

“Normally it is a ministerial action, but normally people who ask for a Federal Reserve account don’t say, ‘When we get it, our plan is to violate federal law. It’s a totally unique situation,” said the Alabama professor.

“When (Federal Reserve officials) hear Fourth Corner say, ‘No, we won’t violate federal law, even though we told you that was our plan to do that before,’ what are they supposed to do?

“It seems to me a reasonable regulator in that circumstance would say, ‘I probably need to do a little bit more investigation to make sure I believe what Fourth Corner is saying now, that they really won’t violate federal law.'”

As was obvious from the discussion of the decision in July, one of the three appeals court justices did not believe the assertions of the credit union that it would serve only advocacy groups. This was of concern because the original application with the FRB said that serving as a financial institution to marijuana related businesses was the raison d'être of the credit union's creation. One of the other justices opined that the court must accept at face value the assertions of the credit union that it won't serve illegal (under federal law) businesses in this regard. The third justice didn't reach that issue in his opinion. Therefore, it's impossible to tell at this point how the court would rule on this aspect, the need of the FRB for "additional information" under these circumstances.

If the credit union ultimately wins on this issue (and how many months down the road that might be is anyone's guess), its spokesman admits that there are other stumbling blocks with the new business plan.

Even if the court rules in Fourth Corner’s favor, it remains to be seen whether the credit union can get enough investor support, startup capital and clients to be sustainable — especially since plant-touching businesses remain off-limits.

“We’re pretty confident that we’ll win this one,” Goldfogel said. “It’s really a question of how much we can do with it once we win it.”

Unmentioned are the additional hurdles of other regulatory approvals. We discussed these in July.

One of the linked articles also notes that the NCUA denied the credit union's application for insurance of accounts and that there is ongoing litigation between the NCUA and the credit union over that denial. While the FDIC and NCUA have statutory standards that guide them in their decision to approve or deny such applications, they have traditionally been granted wide discretion by the courts in interpreting those standards. In that respect, while the spokesperson for the credit union asserts that it was always in the credit union's business plan to service marijuana legalization advocates, I suspect that that business plan weighed heavily on the side of serving marijuana related business other than merely "legalization advocates." By agreeing to serve only a limited type of marijuana related business until the "big earners" (such as licensed pot shops) are legalized under federal law, will that give the NCUA ammunition for its decision to deny insurance of accounts? I do not know the answer, I'm merely raising the issue. I'm also observing that the master account from the FRB is only one high hurdle that the credit must still jump on the path to opening its doors (which it originally planned to open a couple of years ago). Insurance of accounts is another, and the modified business plan, while potentially helping it jump one hurdle, may hinder it in jumping another.

Stay tuned. This battle is a long way from over.