Bank Lawyer's Blog

Conflating A Little With A Lot

A friend of mine, a business consultant and "recovering lawyer," once told me that there wasn't a damned thing you could tell lawyers, because they thought they knew it all. This helps explain why his sojourn into the world of business consulting for law firms was so short. Another reason might have been what a boss of his once told him: "You not only don't suffer fools gladly, you don't suffer them AT ALL."

Being of the same temperament, I "feel his pain."

In an article in the March-April 1996 issue of the Harvard Business Review, entitled "Making the Most of the Best," Dartmouth's Tuck School of Business professors James Brian Quinn, Philip Anderson and Sidney Finklestein, expressed similar views, albeit with less exasperation. Of course, they didn't have to live with lawyers 24/7/365, either.

Because professionals have specialized knowledge and have been trained as an elite, they often tend to regard their judgment in other realms as sacrosanct as well. Professionals generally hesitate to subordinate themselves to others or to support organizational goals not completely congruous with their special viewpoint. That is why most professional firms operate as partnerships and not as hierarchies, and why it is difficult for them to adopt a uniform strategy.

The good professors were talking about doctors, accountants, investment bankers, management consultants and similar professionals, not merely lawyers. They all risk suffering from the twin dysfunctional traits of arrogance and hubris, the deadly combination embodied in its Platonic ideal form by THE GREATEST PRESIDENTIAL CANDIDATE EVER (aka "The Orange Man").

"I know a lot about a little, therefore, I know a lot about everything."

Or, as my friend less generously puts it: "Mix equal parts of arrogance and ignorance and you've got yourself a law firm."

Of course, you could have said the same for an accounting firm, a medical practice, or a business consulting firm. Nevertheless, singling out and picking on lawyers is simply more fun, isn't it?

Yeah, I thought you'd say that.

And while we're on the topic of a human being that wears a live animal for a hairpiece, let's not forget that if He-Who-Knows-More-Than-His-Generals is elevated to Bloviator-in-Chief in a few months, a side benefit for bankers might be that one of the biggest "Native American" burrs under the saddle of the banking biz might finally be forced out of public life and back on to the reservation. At least, that's the hope of Homer Simpson.

Pot, Meet Kettle

Since shortly after the onset of the financial meltdown and housing market collapse in 2008, a populist narrative has been that mortgage lenders and servicers have deprived defaulting borrowers of their rights by "robo-signing" documents and outright fraudulent manufacturing of note and mortgage assignments and similar practices in foreclosure actions. The narrative has a factual basis.

However, not all of the fraud may have been perpetrated by lenders. Recently, allegations have been made that at least one Florida lawyer falsified note assignments to make it appear that the notes had been assigned to a bank other than the one that initiated the foreclosure proceedings.

The allegations against Kalogianis center on promissory notes, the document in which a borrower promises to repay the lender. Promissory notes often change hands as mortgages are sold and resold. Many lenders went out of business after the housing crash. Because it was not always clear whom a borrower owed, promissory notes often were stamped with a "blank endorsement'' — whoever the promissory note was endorsed to would be legally entitled to foreclose and collect any money due.

"It's like a blank check,'' Weid­ner said.

In cases defended by Kalogianis, the companies seeking to foreclose said they filed promissory notes with blank endorsements. But at some point, the motion says, the notes in four of the cases were altered to show they had been endorsed by "Bank of New York, as trustee.''

In the fifth case, a blank endorsement was altered to show Wells Fargo had signed it, the motion says.

One company, BAC, lost its case against a Kalogianis client in 2014 when Kalogianis argued at trial that only Bank of New York could foreclose because it was the one that had endorsed the promissory note. (The case has since been reopened.)

Kalogianis denies the allegations and asserts that the lender falsified documentation and "was trying to 'turn the tables'' on him rather than lose the case."

"It is the plaintiff's own improper conduct … that should be reviewed,'' he said.

Another impediment for the lender is that there is no eyewitness who saw the alteration of the assignments, and there exists no clerk's office video which would reveal the alteration. The lender asserts that it must have been Kalogianis who altered the assignments because no other person who might have had access to the documents had a motive to falsify it. I'm not sure that's a winner. Remember, just like on "Cops," all suspects are presumed innocent until found guilty in a court of law. Moreover, if Kalogianis can prove his allegations that the lender engaged in other document fraud, then a judge could determine that any falsification of the assignments to show the Bank of New York as the assignee may just as well have been made by the lender rather than Kalogianis, perhaps as a desperate "Hail Mary" maneuver.

The Tampa Bay Times reporter does devote considerable space to recounting the colorful history of Mr. Kalogianis, including a couple of previous ethical complaints, his unsuccessful run for US Congress, and the fact that he worked his way through law school as a male stripper. So many of us worked our way through law school as strippers that I fail to see what bearing that might have on the lender's allegations.

Other than the allegations of a couple of clients of Kalogianis, both of whom alleged that the lender in their cases had "committed fraud," there is no similar recounting of the colorful past of the lender or any of its legal counsel. Perhaps they are all Carmelite nuns and monks who spent their law school years and beyond grappling with the dark night of the soul and had no time or inclination for strip bars or the US Congress, nearly identical fora in the popular imagination.

Certainly, the lender's motion in this case might be more persuasive if, as was the case with a motion brought by another foreclosing lender against Kalogianis, he was allegedly caught on camera.

This week, Bayview Loan Servicing, which is foreclosing on a Kalogianis' client on behalf of Bank of America, obtained a video of a man it says is Kalogianis looking at court files in the Pasco clerk's office. The video appears to show him removing a small object from an accordion folder, stamping a page in a court file and returning the object to the folder.

Kalogianis' attorney's defense is "nothing to see here" and "I'm rubber, you're glue, whatever you say bounces off me and sticks to you."

"I can't see anything incriminating other than a lawyer doing a diligent search, going through files looking for mortgage fraud,'' Cohen said of the video. "After all, it would not be unusual to find mortgage fraud on the part of Bank of America and its legal agents in that they've already stipulated to being responsible for tampering with evidence resulting in payment of billions of dollars of fines to avoid a possible criminal prosecution.''

Cohen said that Kalogianis has won "many cases'' in which promissory notes had not been stamped or signed by any lender.

"Why in the world would he want to do something that could potentially hurt his client by putting a stamp on a note?'' Cohen asked "Simply stated, there was no need for Constantine to stamp anything to win the case.''

Forging or altering public records, including court records, can be a felony punishable by up to five years in prison.

As I have discussed many times in the past, the last point is important. Anyone, lender, borrower, or their respective counsel, who falsifies public records ought to get the book thrown at them from a criminal law perspective. Winning or losing a foreclosure case should be collateral damage. At this point, we have nothing to judge but allegations and press reports, but we'll be following this one to see what, if anything, shakes out.

B of A Questions New Lawyer Salary Increases

Last week, we made an obscure reference to the fact that some of the nation's largest law firms have opted to raise the starting base salaries of their new associates from $160,000 per year to $180,000 per year. While many law school graduates come roaring out of the chute with a Mt. Everest of debt and an ant-hill's worth of job prospects (the result of what has been, for a number of years, a law school shell game), the nation's largest law firms still fight over the top students from the elite law schools, and for those lucky few, the pickings are rich and the competition is fierce. Apparently, the brain trusts that maneuver our private practice Titanics between the icebergs of fatal hubris and a wised-up corporate clientele decided that the time had come to butter their babies' biscuits with more moolah. Like lemmings, where a few go, the rest will surely follow.

Who would have thought that the initial push-back from clients would have come from a sector of the economy not known for being the first to any "space" but the feeding trough: big banks?

Bank of America Corp.’s top lawyer recently sent an email to a group of law firms calling the increases in associate lawyer pay unjustified, making it clear the bank wouldn’t help firms absorb the cost.

“While we respect the firms’ judgment about what best serves their long-term competitive interests, we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions,” David Leitch, Bank of America’s global general counsel, wrote in the email, reviewed by The Wall Street Journal.

A Bank of America spokesman declined to comment.

The linked article from The Wall Street Journal discussed other aspects of standard big law firm business practices that have annoyed clients. Among those is training inexperienced lawyers on the client's tab by billing them at rates that give clients sticker shock.

The chief litigation officer for a Fortune 100 company said $180,000 for a first-year isn’t justified, pointing by way of comparison to a lawyer in the company’s litigation department with 20 years of experience who doesn’t make that much money. “Why would we ever think a first-year associate is worth that?” the lawyer said, adding that they recently denied a firm’s request to charge $400 an hour for a first-year.

In the normal course of a lawyer's career, she or he should become much more efficient as she or he becomes more experienced. In addition to paying an hourly rate that seems excessive, the clients may also pay for more hours that it will take the "newbie" to complete the task. Apparently, the "chief litigation officer" who was cited thinks that it's the law firm's job to bear the cost of training the new lawyers until such time as their experience level permits them to deliver "value" for the buck(s) charged. If the firm wants to pay a new lawyer 15 grand a month, that's its business. If the firm expects to pass that cost along to the client, it appears that Bank of America and other large purchasers of Big Law legal services are saying "fuggedaboutit.!"

The article also discusses ways in which big banks and other businesses have been working in recent years to staunch the bleeding of outside legal costs. This discussion might be of interest to community and regional banks, as well. In addition to trimming the number of firms used, the clients have explored alternatives to traditional hourly billing.

Historically, law firms charged their clients in only one way: by the hour. While many in-house lawyers grumbled about the arrangements, saying they encouraged inefficiency and led to eye-popping bills, they mostly paid them.

But within the last decade or so, companies have pushed back. They now routinely demand “flat-fee” arrangements for a single piece of work, like a lawsuit or a transaction. And many have stopped paying for photocopies and legal research, items that were once rubber-stamped.

In-house lawyers have also ramped-up their resistance to paying for the most junior lawyers, often saying they won’t pay for first- and second-year lawyers even if they are staffed on assignments. Such lawyers, the thinking goes, are too often billed out at hundreds an hour to perform relatively menial tasks, like reviewing documents.

As another large corporate general counsel puts it, what ultimately matters is the "value" delivered by the lawyer to the client. Is the result and/or the advice worth what the client pays for it? Regardless of a lawyer's hourly rate or law firm compensation, when the client gets the monthly bill, does he or she think they have been "well served" by that lawyer? Obviously, that's a business judgment call; however, if the sentiments expressed in the linked article are any indication, many business clients are going to be appraising the "value" of inexperienced, but highly paid, lawyers with a critical eye, especially regarding first year lawyers who may be billing at an hourly rate commensurate with that of a lawyer in a smaller firm with, literally, decades more experience in the subject matter.

Countrywide: Closed For Good

Maybe it's the fact that in another six months or so, the regime change here in the Land of the Free will lead many of the the current crop of enforcers in D.C. out the revolving door and into the loving arms of Big Law, where those wet behind the ears begin the learning curve with 15 grand a month of pocket money. Maybe it's the fact that they knew all along that they were pushing the envelope and, when called on it, they simply shrugged, smiled, and said "Ya' got me!" Whatever the reason, the U.S. Justice Department appears to be throwing in the towel several years earlier than my initial expectation, as a result of the US Second Court of Appeals decision that squashed the Justice Department's fraud claims against Bank of America that arose out of the former Countrywide Mortgage's so-called "Hustle" subprime loan program.

According to The Wall Street Journal, this week, the Justice Department sent letters to various former officers of Countrywide, including the infamous Angelo Mozilo (aka "The Tan Man"), that told them that Justice would do some justice by not filing any civil law suits against them.

Government lawyers sent letters within the past week to Mr. Mozilo and other Countrywide executives advising that the investigations against them were closed, and thanking them for their cooperation, these people said.

“We are pleased to see this investigation concluded without any further claim against Mr. Mozilo,” said his lawyer David Siegel.

I'll bet they are pleased. Mr. Siegel was sufficiently courteous to refrain from thanking the Justice Department back for providing years of legal work for defense counsel that has now resulted in the close of the investigation without criminal charges or civil lawsuits being pursued. For litigation attorneys, this is called "stroking the long ball." And, as ESPN's Sport Center loved to tell us, "Chicks dig the long ball."

To the "Occupy [Insert Venue Here]" crowd, this latest outrage will be further proof that the system is rigged in favor of fat cats and the bureaucrats who stroke them. On the other hand, those of us with actual experience in this area saw this coming years ago. From a September 22, 2009 blog post that discussed the outlook for folks like Angelo ever doing the perp walk:

Unlike the last round, when the savings and loan industry went into a tailspin, proving that CEOs and other senior executives knew about and encouraged, much less actively participated in, the fraud is tougher to prove in connection with the subprime mortgage mess. I recall a number of instances involving failed Texas thrifts in the late 1980s where there was ample evidence that thrift owners and senior executives were swapping dead horses for dead cows, making stock loans to an owner of another thrift to purchase 100% of the stock in his own S&L in return for the borrower causing his S&L to purchase a bunch of participation interests in the lender's portfolio of exquisitely ripe carcasses known as acquisition and development loans (in which the lender funded 100% of the acquisition and developments costs AND all of the interest reserve, leaving the borrower with as much equity in the collateral as a US congressperson's integrity). This time around, the CEO's and Chairman's muddy paw prints aren't stamped all over the lender's records.

"The problem is finding the executives' fingerprints on the consumer files," said Peter Henning, a law professor at Wayne State University. "Angelo Mozilo may have set the tone at Countrywide, but there is no way you're going to find his fingerprints on any of those mortgages."

Even Marg Helgenberger of CSI couldn't find enough CEO DNA in these files to make a case. I'd like to watch her try, though.

If you want to become completely bent out of shape about the relative lack of suffering inflicted on Wall Street and its cronies over their role in the meltdown, consider the fact that no one in Congress has had their wrists slapped, either. Barney Frank and Friend-of-Angelo Chris Dodd even managed to get their names emblazoned on a piece of "financial reform" legislation for all eternity, masking for future generations (who seem to have short memories in any event) the major roles those two actors played in the drama. When it comes to skating, it seems to me that most of the culprits had their blades finely honed.

Let's hope that the late British physician, Havelock Ellis, was wrong when he said “Every society has the criminals that it deserves.”

Ex Post Facto Expertise

Several years ago, I expressed some amusement (in a "gallows humor" sense, I admit) about the fact that the CFPB was sending attorneys to classes to obtain basic knowledge about bank law after they were hired. Ideological purity, I assume, was the primary job qualification. Therefore, I take it as a perversely encouraging sign that the Adjustment Bureau's former General Counsel and Acting Deputy Director (a different position than "In Real Life Deputy Director") last week announced that she was quitting the agency and jumping feet first into the dung heap of the financial services business.

Meredith Fuchs, who recently stepped down as acting deputy director of the Consumer Financial Protection Bureau, is joining Capital One as the bank’s senior vice president and chief counsel on regulatory issues, according to a report from TheHill.com.

Fuchs served as general counsel at the CFPB before she was named acting deputy director in July 2015 after Steve Antonakes stepped down as deputy director.

The revolving door between the regulator and the regulated is so common in the fever-ridden Potomac Tidal Basin that it hardly raises an eyebrow in a cesspool that might soon be ruled by a man possessed of aeronautically engineered hair and the debonair demeanor Al Bundy. Still, there is something just a bit askew when the resume of the person who was the General Counsel and then Acting Deputy Director of an agency with such extensive power and authority over financial services lists a single job in the financial services industry after she leaves that agency. Perhaps you can find such a job there.

I'm sure that Capital One is looking for "insight" into the attitudes and workings of the CFPB and, when ethical waiting periods have expired, access and even credibility, when necessary, to perhaps lessen the impact of the next blow from the CFPB's cudgel. I'm sure that Ms. Fuchs will provide it. Her resume marks her as an extremely bright and talented lawyer. Let's hope  that when the door swings back to the regulatory side and she re-enters government service, she has a lot more hands-on experience with the financial services businesses that she's regulating than she had the first time around the block. Maybe she'll start a trend at the CFPB: know something about the business before you start regulating it. The regulated might want to see if things improve with an approach other than on-the-job training.

Clamping Down On Class Action Legal Fees

A potentially disturbing warning has come out of California (paid subscription required): class action plaintiffs' attorneys' fees might [shudder] come to be based upon actual work done. While this isn't disturbing to American banks and other businesses who've been victimized by subject to class action lawsuits in which the plaintiffs are rewarded with a Pez dispenser and a signed copy of "Transcendental Meditation The Trump Way," while their attorneys rake in bazillions a tidy sum, it must be disconcerting to the vultures lawyers who run class-action firms. We'll try to say a prayer for all of them (my preference would be "Lead all souls to heaven, especially those most in need of thy mercy").

Typically, attorneys who represent plaintiffs in class actions—like employees accusing a company of discrimination, or customers claiming a product misled them—are paid a percentage of any money recovered for their clients. The payouts, which nationally average about 25% of the collected funds, can be substantial.

But a Berkeley, Calif., lawyer who has waged a decadeslong crusade to reduce class-action fees is pushing to pay lawyers based only on the hours they put into a case.

“Every dollar class lawyers get for their fee is a dollar the class doesn’t get for recovery,” the lawyer, Lawrence Schonbrun, said.

He lost his fight in two lower courts, but the Supreme Court of California decided earlier this year to consider the issue and could rule in the coming months. Mr. Schonbrun argues that California case law requires the hourly method to be applied, an interpretation that others dispute.

[...]

The California appeal stems from a 2004 wage-and-hour class action against staffing firm Robert Half. In 2013, a judge approved a $19 million settlement on behalf of 4,000 employees, who said they were denied overtime pay and other benefits. Using the percentage method, $6.33 million was slated for the plaintiffs’ attorneys.

Mr. Schonbrun, who represents one of the employees, is trying to convince the court that the lawyers should instead be paid according to the amount of work they put in.

But the plaintiffs’ lawyers say in a court filing that if their percentage-based fee is overturned, “class counsel will be less inclined to take on complex class action suits against large, well-financed institutions.” They haven’t been paid while the appeal works its way through the courts. Robert Half said it doesn’t have a stake in the fee dispute.

Being less inclined to take on complex class action suits against large, well-financed institutions" is a bad thing?

The CFPB would think so. Last month, it proposed to ban arbitration provisions that would prevent consumer financial class action lawsuits. The political left ant the trial lawyers' bar in this country have been making whoopee together for years, so that's to be expected. On the other hand, if trial lawyers only get paid for the actual hours they work, that still will act as a deterrent to class action lawsuits no matter what the CFPB does regarding arbitration provisions. I mean, why would a lawyer want to only get paid for what he or she actually does? Are you kidding me??

Before we get all misty-eyed about the folks who are taking this fight to the California Supreme Court, however, let's drill down a bit deeper into their motivation.

Mr. Schonbrun, who began his fight against high fees in the late 1990s, is part of an active field of so-called fee objectors, who step into class actions to challenge the plaintiffs’ attorneys’ fees.

Such objectors sometimes make side deals with plaintiffs’ lawyers looking to avoid prolonging a lawsuit, and they can be paid as much as $1 million, those familiar with the practice say. Mr. Schonbrun said he has filed objections in 150 cases and in some instances received more than $100,000 for his role in reducing a fee.

You read that right: some of the professional "fee objectors" cut deals with class action lawyers to ease up in return for the payment of some cold, hard cash. All sides of the bar in this struggle make hard examples of "soft and cuddly."

As usual, the people getting the short end of the stick are the plaintiffs.

Theodore Case, an American Airlines pilot in Atlanta who has been a plaintiff in a class-action labor dispute for more than 12 years, said he unsuccessfully fought against his lawyers to reduce their fee request of $15.5 million, based on a 30% calculation of a settlement. When paying a percentage, “the only people it benefits is the attorneys,” said Mr. Case, who received about $113,700 of the settlement money.

Funnel Accounts: Be Very Afraid

While slaving away for "The Man," alert reader John Thomas warned me that FinCEN's black ops storm troopers are hot on my trail and to run for cover before they scooped me up and waterboarded me, not for any useful information I might cough up but just for the sheer pleasure of watching me drown.

Funnel account activity was the standout trend in Suspicious Activity Report (SAR) filings in 2014, according to the latest report from the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

FinCEN’s second annual SAR Stats,  published Wednesday, highlights how FinCEN uses SARs to track down criminals through their use of the financial system. It was based on SARs filed from March 1, 2012, through Dec. 31, 2014.

FinCEN defines a funnel account as an account that receives multiple cash deposits, often in amounts below the cash-reporting threshold, and from which funds are withdrawn in a different geographic area with little time between deposits and withdrawals.

According to FinCEN, funnel account activity was mentioned almost 10,000 times in SARs in 2014.The same references occurred no more than 123 times in 2012 and 2013.

While it eventually occurred to John that FinCEN had misspelled my name, I doubt that would have deterred them for long. Upon receiving that warning, I stopped the practice of making multiple cash deposits, and now make a cash deposit only when checks received total $9,999.99, which given my astoundingly low billable hourly rate and dearth of clients will mean that I am making deposits only twice a year. In addition, I have bribed FinCEN's pet goat, Elizabeth Maxine Waters-Warren, with a family concoction: funnel cake. I have thereby assured myself that any SAR with the name "funnel," "funnell," or "kevin" eventually will go the way of most SARs: into a compost heap.

Thanks for the heads up, John. You saved my bacon, or at least, my cabrito.

Subprime May Return, But Will It Be In A Pine Box?

Former community banker and occasional guest poster Pat Dalrymple is a columnist for a Colorado newspaper who has a former insider's view on the sometimes wild and wacky world of commercial lending. You didn't think it was either wild or wacky? Read Pat's latest column.

He’s baaaack.

No, neither Jason, nor Freddie, nor Arnold has returned after having been absolutely, irrevocably annihilated in the last episode.

Rather, it’s subprime, the evil force that terrorized America, from Wall Street to Main Street to Elm Street, that may be coming soon to a closing near you.

A residential mortgage lender has announced that it’s making loans of up to $2 million that don’t require tax returns or employment verifications. Nor does it set a minimum time from a short sale that the borrower might have had. Bankruptcies and foreclosures require only two years’ seasoning after the event. Income is verified through bank statements, and an income-to-debt ratio can be as high as 50 percent.

The loan to value ratio is capped at 85 percent, but no mortgage insurance is mandated. A 700 credit score will qualify a borrower for a $2 million loan, and only 500 is necessary for a mortgage up to $750,000. And, to top it all off, cash-out refis are OK.

Sounds kind of scary, doesn’t it?

Pat parses the underwriting risks, and comes to the conclusion that money can be made on this type of lending, "subprime" or not, and that from an underwriting standpoint, it's not "scary" at all. To him, the business reward can outweigh the risk. However, the "scary" fly in the ointment is something far more terrifying than a default on an undercollateralized loan. It's something that utters the horrifying names "trial lawyers" and the Cherokee princess known as "The Spawn of She Who Dances With Donors" (h/t Dennis Miller) in the same fetid breath.

The new regulations that have come online in 2014, and this year say that lenders have a so-called “safe harbor” if they make loans underwritten to conforming, i.e., Fannie Mae, guidelines. These loans are called “qualifying mortgages.” If a loan is outside that qualifying mortgage safe harbor it means that a borrower, whose house is in foreclosure, can actually allege that the lender did not adequately assess the borrower’s ability to repay when making the loan, and sue the lender.

If the suit takes place during the first three years of the life of the loan, and the borrower is successful, that borrower can collect from the lender all the interest and fees paid during those three years, plus attorney fees (this last phrase is kind of important). After three years, there’s no cash settlement; the amount is simply offset against the foreclosure.

For a big lender, there has to be a goodly number of these cases before the company is at risk, and the likelihood of that is less in a recovering economy. But those three little words, “plus attorney fees,” really gets the attention of the class action bar.

And then there’s the regulatory risk, which could be considerable. No law or reg says a lender can’t make loans that are not “qualifying mortgages.” But the assumption of the Consumer Financial Protection Bureau, the federal big-dog regulator, is that these loans can be traps to abuse consumers. And no lender wants to spark the attention of the CFPB.

This agency has enormous power. It answers to nobody but Congress, which isn’t exactly the best manager of anything. And the bureau can levy enormous fines, called civil money penalties, on the companies and people who work for these businesses. Just one CFPB audit can pull the plug that can send a lender down the drain.

A lender venturing outside the safe harbor can be like a Methodist missionary taking pictures in North Korea.

You’re definitely being watched.

Coloring outside the lines used to be dangerous because you could lose your shirt if you didn't manage the elevated risks with dexterity and price the product appropriately to compensate for the fact that the "earners" had to more than makeup for the "non-earners." In that respect, the economics were pretty much the same as those governing a Mafia family, so most subprime lenders "got it." Today, it's much more dangerous because you may have to face your two biggest nightmares: a lawyer with an cause of action that might have actual merit, and a government bureaucracy staffed by true believers and accountable only to God/Gaia/Zeus/Baal/Richard Dawkin's Eternal Nothingness/[Insert Name of Favorite Cosmic Muffin or Nihilist Here].

That should scare away all but the psychopathic, the suicidal, or the moronic. Or, perhaps, that rare fellow who looks into the muzzle of the .44 Magnum and says to himself, "Ya' know, come to think of it, I AM feeling lucky today!"

CFPB Spin Is Unspun

For those readers who have failed to parse the nuances of the CFPB's 728-page report to Congress on mandatory arbitration provisions in consumer contracts (mandated by Franken-Dodd), Ballard Spahr has you covered. They've not only read it, they've distilled the essence of the CFPB's analysis of the reams of statistics it compiled into the phrase "figures don't lie, but liars figure" (my characterization, not necessarily the law firm's).

To absolutely no ones surprise, the CFPB does not like consumers being obligated to arbitrate their claims rather than exercising their Gaia-given right to send the children of class-action plaintiff's attorneys to an Ivy League school for both undergraduate and post-graduate degrees. The brainchild of a demagogue who not only created a Native American ancestry for herself out of the whole cloth of "grandma always told me," but who also awakens in the wee hours from fevered dreams of toddlers falling into punji-stake-lined pits of "tricks and traps" set by commercial banks and their fellow travelers, the CFPB looks at the statistics regarding consumer arbitration and sees what its creator sees: unremitting evil.

Unfortunately for the CFPB's ideological imperative, Ballard Spahr concludes otherwise: "In fact, the study confirms that arbitration does benefit consumers."

Please read the entire client alert. For those who have actual lives, here are some highlights.

• "The data demonstrate that arbitration is faster and more economical than litigation."
• The costs of arbitration borne by a consumer are less than the filing fees for a lawsuit.
• "Even when consumers initially paid a modest share of the fees, in 56 of 123 arbitrations examined by the study, they were reimbursed in the arbitrator’s award for at least some of the fees."
• "According to the CFPB’s own statistics, arbitration was thus a factor in only 8 percent of the class actions studied."
• "[I]n 60 percent of the class actions, the putative class members got nothing. And none of the class actions went to trial. By contrast, of 341 cases that were resolved by an arbitrator, in-person hearings were held in 34 percent of the cases, and there were at least 146 cases in which arbitrators reached a decision on the merits of the parties’ claims. The CFPB has it backwards—it is class actions that are a barrier to consumers obtaining meaningful relief in arbitration."
• "In arbitrations where consumers obtained relief on their affirmative claims and the CFPB could determine the award amount, the average grant of relief to the consumer was $5,389, meaning an average recovery of 57 cents for every dollar claimed. Based on 73 of 74 individual federal court claims in which a judgment was entered for the consumer, the average amount awarded to the consumer was $5,245. So consumers fare just as well in arbitration as in court, and perhaps even better."
• Class action plaintiffs' lawyers, on the other hand, made out like bandits. "Attorneys’ fees awarded to class counsel in settlements during the period studied amounted to a whopping $424,495,451."
• "[T]he study’s Achilles’ heel: like the CFPB’s preliminary study issued in December 2013, it fails to examine the actual experiences of consumers who have gone through arbitration. In ascertaining whether consumer arbitration is in the public interest, real consumers’ actual experiences with arbitration and class action proceedings is at least as important as a telephone survey asking randomly selected consumers about their awareness of arbitration clauses in their credit card contracts, if not more so."

The "fact-driven" CFPB apparently ignores the facts. Instead, it opts for conclusions that are best summarized by the following representative headline from the left-leaning (i.e., "mainstream") magazine Time: "CFPB Says Mandatory Arbitration is Bad for Consumer.

Although the CFPB promises to meet with all "stakeholders" before adopting regulations on these provisions, that's like a vigilante posse in Wyoming during the 1880s saying they'd give a cattle rustler a fair trial before they hung him. Expect the CFPB to try to pound a stake through their heart. Meetings are window dressing to paper over a foregone conclusion with the appearance of due deliberation.

Ponzi Not Gone(zi)

Nearly five years ago, we discussed the risk that Ponzi schemes posed to banks and the need for the BSA/AML personnel of the bank to be skilled on detecting the warning signs. The recent judgment against PNC in St. Louis ought to hammer home that point.

A jury in federal court here on Monday awarded $491 million in damages in a civil lawsuit sparked about seven years ago by the collapse of a Clayton-based company selling prepaid funerals.

[...]

After a five-week trial, the jury awarded $355.5 million of compensatory damages and $35.5 million in punitive damages against PNC Bank and $100 million more against Forever Enterprises, the latter being a defunct family-owned holding company.

The suit is based upon the "bad conduct" of officers of a company (NPS) that sold prepaid funeral contracts. PNC's predecessor bank acted as the trustee of the contracts.

NPS promised customers across the country that money from prearranged funeral contracts would be held in trust. Claims were supposed to be funded by life insurance policies payable to the trust. But federal authorities found that company officers and others spent some of the money on lavish lifestyles instead.

Beginning in the early 1990s, liabilities exceeded trust assets, the plaintiffs said, and NPS could pay for funerals only by using cash from new contracts.

More than 97,000 victims — customers, funeral homes, insurers and financial institutions — lost money, federal officials have said.

The officers went to prison. PNC has now taken it in the shorts, financially speaking, although the bank has vowed to appeal. I expect any right-minded financial institution would rather pay lawyers millions to fight a nearly half-billion-dollar verdict than to meekly pay it. After all, you need to send a message to potential plaintiffs' lawyers that you need to come strapped (again, financially speaking) if you're gonna' mess with PNC. In addition, the bank might actually be sincere in its "respectful" position that the jury screwed the pooch (judicially speaking) and that it can win on appeal (even if "win" means paring the size of the verdict down to an amount that won't choke a Clydesdale).

Regardless of the outcome on appeal, the verdict demonstrates why banks need to be locked and loaded when it comes to spotting potential Ponzi schemes. That might be a harder task in a state like Colorado or Oregon, where recreational marijuana use is legal and all of this stuff gets lost in a cloud of smoke, man, and then....ummm...ahhhh... What was I saying?

Oh, yeah: "Beware the Ponzi" or "Man, that rug really tied the room together."