Bank Lawyer's Blog

The Underbelly Of The Mt. Holly Settlement

2015-05-28T22:04:00-05:00

The settlement of the Mt. Holly disparate impact case before it could be decided by the US Supreme Court were suspicious. At the time, it was thought by many that the US Justice Department had helped to engineer that settlement so that its (and HUD's and the CFPB's) use of that questionable doctrine in fair lending claims could continue for a while longer. The last thing the Feds wanted was for the SCOTUS to decide the matter, because they were worried (correctly) that it would strike down its use. At the same time, the banking industry wanted the SCOTUS to render a decision, because it thought that the court was more likely than not to strike down the doctrine's use in the fair lending context. The last thing that banks wanted was for the parties to the case to settle before the SCOTUS could render its decision (which is exactly what happened).

Recently, a rock has been overturned that has exposed a bunch of creepy-crawlers that work not for the federal government, but for the big banks that wanted the SCOTUS to rule in the Mt. Holly case. According to a former senior executive of Chase, that bank tried to get him to use his board position with a non-profit housing organization to "scuttle" the funding of the settlement. Moreover, the former executive, Wayne Trotman, at the time the mid-Atlantic market president of Chase, alleges that when he refused to breach his fiduciary duty as a member of the board of directors, the bank retaliated by firing him.

The fact that Mr. Trotman is an African-American adds not only to the radioactivity of the alleged wrongful conduct, but also substantial irony to those actions, if Mr. Trotman's allegations are true. While Chase counters that Trotman's claims are "baseless," Trotman's lawyers claim that they have "substantial evidence" to support them.

Obviously, the first thing that Trotman has to prove is that Chase pressured him to use his board position to scuttle the settlement. According to the linked article, which cites Trotman's Complaint, he claims that he was instructed to do so by Chase's Associate General Counsel, via email, even after he refused on the grounds that it would breach his fiduciary duty. The Complaint later states that another Chase attorney told him that he should not honor the request (which was also the position of his supervisor). Apparently, the ball started rolling in Jamie Dimon's office after he (and the heads of other large banks) received an email from Tim Pawlenty of the Financial Services Roundtable uirging the bankers to find ways to derail the settlement long enough for the SCOTUS to render a decision. There does not appear from the kinked article to be any order from Dimon that Trotman do anything, but, then, that's what subordinates are for: read the CEO's mind and "get 'er done" while retaining deniability for those residing at the top of Mt. Olympus.

The harder nut to crack for Mr. Trotman may likely be proving the causal connection between his decision to be an honorable man and not to breach his fiduciary duties, and his subsequent termination by Chase. It's impossible to determine that connection solely from the linked article, although I assume that the "substantial evidence" referenced by Trotman's lawyers indicates that they think that they can carry the water on that claim. The man worked for Chase for 19 years, received a "meets expectations" review shortly after the incident (although Chase substantially cut his bonus from the previous year, in which he received the same rating), then six months later received a mid-year performance rating of "poor" and was fired 14 days later without being provided an opportunity to improve. On its face, it looks like there might be fire with this smoke.

On the other hand, we haven't seen Chase's formal responsive pleading. In one press report, a Chase spokesperson told a reporter that Trotman 's position was eliminated in a "reorganization of markets." That spokesperson also claimed that Chase would "fight this in court." I guess that beats fighting it in the streets.

Obviously, it's too early to tell what the outcome of this lawsuit might be. The smart money in these situations is on a cash settlement with nondisparagement and confidentiality provisions in the settlement agreement, so that the "reputational risk" is mitigated and the whole sordid affair is swept under a rug.

Still. When it comes to picking a champion inducer of the gag reflex, it's often tough to choose between Big Banking and Big Government.

Reality Check

2015-05-20T21:48:00-05:00

While ideologues pontificating from ivory towers claim that community banks don't need regulatory relief, since they are doing just fine financially, boots on the ground tell a different story.

Community banks are drowning in a torrent of regulatory compliance costs, and Jack Barrett, president and CEO of First Citrus Bank, wants that to change.

Federal agencies that supervise financial institutions should focus on the largest institutions with the most complex transactions, Barrett wrote in a May 13 letter to Martin Gruenberg, chairman of the Federal Deposit Insurance Corp.

Barrett claims that the FDIC devotes three-quarters of its supervisory efforts to community banks that hold 13% of the industry's assets, while devoting only one-quarter to the largest banks.

“How is it sound for a soundness regulator to direct three times the amount of supervisor resources to 13 percent ($2.1 trillion) of industry assets, while 87 percent, $13.2 trillion of exposure, garners a mere 1/4th of supervisory resources?” Barrett’s letter said.

However, it's not the misallocation of FDIC resources, but the cost to First Citrus of managing all that regulatory scrutiny, that causes Barrett the most heartburn.

In 2014, First Citrus incurred $412,000 in expenses related to regulation, compared to less then $25,000 spent each year prior to 2008. The biggest chunk of regulatory expenses last year — $189,000 — was for personnel, as First Citrus, like many other community banks, has had to beef up compliance staff.

Regulatory costs equated to 72 percent of the bank’s net income of $662,000 in 2014.

"If we are too small to save, do the regulatory agencies know we are also small enough to drown in torrential compliance costs?” the letter said.

Yes, they know it. They'll pay lip service to the problem, then get about the business of consolidating the banking industry on the Canadian model favored by some. A few huge banks, working hand-in-glove with the central government to redistribute credit to those who most "deserve" it.

Vendor Mismanagement

2015-05-10T14:03:37-05:00

While banks have complained about the crushing burden of regulations in a post-Franken-Dodd world, in one area they could use a little more regulation. Not of the banks, but of third-party service providers to banks.

I have yapped repeatedly on this rag sheet about how banks need to treat regulatory guidance seriously. While some regulators send confusing signals about the legal enforceability of guidance, they have also made clear that they expect banks to comply with it. Period.

One piece of guidance that we have discussed is OCC Bulletin 2013-29 regarding third party relationships, which is a reworking and expansion of guidance first issued in in 2001 (OCC Bulletin 2001-47). Other federal financial institution regulators have issued similar guidance. One portion of that guidance deals with provisions that the OCC expects to be incorporated into written agreements between banks and their service providers. Banks who take regulatory guidance seriously attempt to ensure that their written agreements with their significant vendors meet the regulators' expectations.

If some technology service providers are to be believed, not many banks take the guidance seriously.

Repeatedly, attorneys who advise banks on such agreements will hear a common complaint: the bank asking for such a contractual provision is the only bank that has ever asked the vendor for the same. Putting aside my stock response ("You'll never be able to say that again, will you?"), let's take them at their word and see what this means.

Let's pick two provisions, access by the bank's regulators to the service provider's records concerning the services it provides to the bank, and a binding agreement by the vendor to provide the bank with a disaster recover plan and modifications to it. These aren't the only provisions. There are many more, but I don't make a living off this blog, so they'll have to do for now.

OCC Bulletin 2013-29 provides in part as follows:

In contracts with service providers, stipulate that the performance of activities by external parties for the bank is subject to OCC examination oversight, including access to all work papers, drafts, and other materials. The OCC treats as subject to 12 USC 1867(c) and 12 USC 1464(d)(7), situations in which a bank arranges, by contract or otherwise, for the performance of any applicable functions of its operations. Therefore, the OCC generally has the authority to examine and to regulate the functions or operations performed or provided by third parties to the same extent as if they were performed by the bank itself on its own premises.

That's pretty clear. Yet, we have repeatedly encountered service providers, including one of the major technology service providers in the United States, who have resisted such a contractual "stipulation". In one discussion, a service provider that was providing an online banking system and related customer-facing services asked the bank to cite the provision of the law that gave the OCC the right to have such access. When we gave it the citation to 12 USC 1867(c), it responded that its inside counsel did not agree with the OCC's interpretation of the Bank Service Company Act, and that examinations that it had permitted the OCC to make were purely voluntary and could be terminated at any time. We responded that we didn't give a flying fig in a rolling donut what its in-house counsel thought about the OCC's interpretation, since the law was clear on its face. In that case, we compromised on language that required such regulatory access "as is required by applicable law." However, we were told by that vendor that other banks did not insist on such a provision in the agreement.

With respect to business continuity plans, OCC Bulletin 2013-29 provides the following:

Ensure that the contract requires the third party to provide the bank with operating procedures to be carried out in the event business resumption and disaster recovery plans are implemented. Include specific time frames for business resumption and recovery that meet the bank’s requirements, and when appropriate, regulatory requirements. Stipulate whether and how often the bank and the third party will jointly practice business resumption and disaster recovery plans.

Recently, we have encountered a technology service provider who provides a critical online banking service that absolutely refuses to agree to any provision in the agreement that addresses business continuity plans or procedures. While it states that it has such a plan and that the bank can review it, it will not agree to put anything in the contract regarding such plans. Again, the bank was informed by the vendor that it has never agreed to provide such contractual protection to a financial institution, and that no other bank has insisted upon it. Again, this is a critical service provider whose service, if it went "offline" for any length of time, would cause intense heartburn to the bank.

These are only two examples. There are many, many more. It's as if not only are many vendors unaware of requirements that their bank clients must meet (and that have been required for over a decade), but that many banks do not care about complying with regulatory guidance. In the case of smaller institutions, there is also the problem that they lack the expertise to negotiate, or perhaps they believe that they do not have sufficient importance to the vendor to bargain effectively. Whatever the reasons, many of them are rolling over with their paws in the air instead of trotting in the other direction.

This leaves those banks that take regulatory guidance seriously in a tough position. Some of them are simply walking away and trying to find vendors who "get it," even if they are not the first choice from a purely business standpoint. Others end up negotiating with themselves to arrive at less-than-reasonable contractual compromises.

I have a couple of suggestions for the regulators. First, try enforcing the guidance across the board. There are financial institutions who are trying to "do it right," but who are being undercut by those who aren't. Moreover, use your authority under the Bank Service Company Act and otherwise to bring home to the vendors directly that if they want to play in this arena, they need to play by your rules. Some of them are not getting the message. Perhaps it would be helpful to start naming names on both ends of the spectrum. Perhaps that would get some attention.

In fairness, there are technology service providers who are doing it right. They understand the guidance, and while they are not willing to fall over and play dead, they are willing to make a reasonable attempt to accommodate what is essentially appropriate risk allocation between the parties, and appropriate accommodation to their customers' regulators' expectations. They "get it." Here's hoping that more of them eventually get the message, as well.

Don't Ask, Don't Tell

2015-04-26T21:33:00-05:00

You may recall last year's pronouncement by the head of FinCEN, Jennifer Shasky Calvery, that 105 financial institutions were, thanks to the amazing guidance provided in February 2014 by FinCEN, servicing state-legal, federal-illegal marijuana businesses. Apparently, less than 10% of those are in Colorado, land of the free and home of the dazed, because according Colorado Rep. Jared Polis, only eight commercial banks and two credit unions in that state are banking the pot biz, and none of them want to be publicly named.

I assume that they don't want to happen to them what happened to publicity-challenged MBank out of Oregon. As recently related in published reports, that Oregon bank announced in January that it was open for (marijuana) business not only in Oregon, but in Colorado, and that it had the "tacit approval" of the FDIC to bank the unbankable. Within less than a week, because it was supposedly "overwhelmed" by the response from Colorado marijuana businesses, it pulled entirely out Colorful Colorado. Now, it's announced that it has pulled out of the entire marijuana business nationally, even in its home state of Oregon, apparently haven satisfied the munchies and gotten a good night's sleep. Like the Colorado exit, the industry-wide exit is supposedly due to the unexpected response of unbanked pot sellers and the bank's determination that "the bank is not big enough to provide and support all of the compliance components required."

It may be pure coincidence, but it appears that any time a bank is publicly "outed" as a banker to the stoned, the bank pulls out of the business. None of the 105 institutions cited by Ms. Calvery or the ten cited by Mr. Polis was named. Had they been, how many of them would have "pulled an MBank"? Most, if not all, is my guess.

Unlike banking payday lending, a perfectly legal business that the regulators are trying to eradicate, banking marijuana selling, a blatantly illegal business (under federal criminal laws), is just fine with the federal banking regulators as long as the bank flies under the radar screen. It's OK to service an illegal drug business as long as you (A) file the right kind of Cheech & Chong SAR or SARs, and (B) don't ever, ever, let anyone but the illegal business owners and bank officials know about it. Do you think that this state of affairs breeds cynicism and contempt for the rule of law? Me, too.

"Don't Ask, Don't Tell." It was bad policy for the US military and it's no better for the US banking business.

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

2015-04-06T21:35:00-05:00

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!"

Compliance Costs: No Ceiling In Sight

2015-04-01T21:49:00-05:00

These days, Chief Compliance Officers should be awarded combat pay. In a recent think piece reprinted in the American Banker (paid subscription required), author Jennifer Openshaw claims that CCOs will need a knew tool: a crystal ball.

"The key is that they have to be more risk identifiers than ever," says Barbara Stettner, managing partner at the international law firm of Allen & Overy. "The expectation is that CCOs will have to look around the corner for the organization—where is tech taking us, and what are the global risks the firm will be facing given the business line they're engaged in? They can't just be putting fires out anymore; now, it's about thinking ahead. I have this new tech, or a new generation that can't get off iPads, so how does that impact compliance and my role?"

Openshaw thinks that three key future risk areas for CCOs will be technology, cybersecurity, and new investment products and markets. Layered onto this smorgasbord of cutting edge risks is the impact of social media.

Social media platforms are evolving along with technology, and that can complicate the life of a CCO. The old marketing and advertising rules won't change much, but the forums—Twitter, LinkedIn, and so on—will continue to develop and pose significant challenges to the industry.

[...]

Social media platforms are evolving along with technology, and that can complicate the life of a CCO. The old marketing and advertising rules won't change much, but the forums—Twitter, LinkedIn, and so on—will continue to develop and pose significant challenges to the industry.

...David Rozenson, counsel and senior consultant at Boston Compliance, sees an inherent compliance conflict looming.

"As the social media platforms become more complex, the best approach for CCOs may be to keep it simple—to establish basic principles and prohibitions regarding employees' use of social media and stressing that they apply to all communications outside of the work environment," he says.

Unfortunately, the easy approach may mean that your more social media-savvy competitors, who take more risk, but spend the time and money to manage it, leave you eating their dust.

As Opensahw also observes, these evolving areas of risk mean that spending on compliance will not be decreasing.

Expect more pressure to find return on investment on the higher mechanisms required for compliance, and more struggles between CCOs and CEOs on the subject.

As I've noted in the past, because the commercial banking and credit union businesses are highly regulated, they're poor venues for wild and wooly types at one end of the spectrum and anal-retentive bean counters at the other end of the spectrum. The financial institution regulators want you dancing a waltz, and if you insist on jitterbugging, sooner or later you'll be bounced from the dance hall. On the other hand, in an era where risks are increasingly sophisticated, you can't skimp on compliance. You may not need to sit behind the wheel of a compliance Ferrari, but driving a horse and buggy won't cut it.

Yes, it's tough to make a buck in the current environment, and not merely due to the Federal Reserve's damn-the-savers management of interest rates. Elevated compliance costs are one reason for the consolidation of the banking industry (to achieve economies of scale), as well as for the dearth of de novos (although other factors drive both trends). But, there you have it. It costs more to comply now than it used to cost, and it is likely to cost even more in the future.

And the beat(ing) goes on.

Lawmen Sue To Stop The (Reefer) Madness

2015-03-23T07:09:37-05:00

You would think that when all a state wants to do is let weed-lovers light up, their neighbors would just chill and let them have serious conversations, along the lines of the following:

The Dude: It's like what Lenin said... you look for the person who will benefit, and, uh, uh...

Donny: I am the walrus.

The Dude: You know what I'm trying to say...

Donny: I am the walrus.

But, no. The neighbors can't get their redneck noses out of Colorful Colorado's smokin' hot ganja biz.

A few months ago, Oklahoma and Nebraska sued Colorado in the US Supreme Court, asking Clarence Thomas to speak up loudly enough, and Stephen Breyer to venture back from his exploration of Martian law long enough, to stamp out Colorado's raging forest fire of legalized recreational pot sales. The wind blows east and south out of the Rockies, and those states apparently are worried about the deleterious effects on their citizens of second-hand smoke. Banks in Colorado didn't need another reason to avoid banking the recreational MJ business, but that lawsuit certainly didn't lessen the risk.

Recently, Sheriffs in Nebraska and Kansas, joined by six traitorous Colorado sheriffs, filed yet another lawsuit against Colorado's governor (appropriately named "Hickenlooper") over the same issue (legalization of recreational pot sales).

“This suit is about one thing — the rule of law,” Larimer County Sheriff Justin Smith said in a news release. “The Colorado Constitution mandates that all elected officials, including sheriffs, swear an oath of office to uphold both the United States as well as the Colorado Constitutions.”

The last time we saw federal supremacy thrown around so much it involved the OCC's march-to-the-sea over the blazing husk of the 10th Amendment in defense of the right of national banks to thumb their noses at guys like Eliot Mess, the"Sheriff of Wall Street." At that time state bank regulators and law enforcement officials weren't so keen on the federal supremacy clause (or the National Bank Act). Now that Franken-Dodd and the Cuomo v. Clearing House Corporation decision have put chinks in the preemption armor of national banks, that particular reason for hating federal preemption doesn't have as much steam. People who hate federal preemption in this situation are not people who want to save the state from those who would use federal preemption to break state laws, but people who want to break federal law in order to engage in a state-sanctioned activity.

Some legal experts think that the latest lawsuit has a chance of success of somewhere between "slim" and "none."

Sam Kamin, a law professor at the University of Denver, was skeptical of the sheriffs’ argument. He said no law requires local officers to act as de facto federal drug agents.

“Of the four (lawsuits), this is the one with the least merit,” Kamin said. “They have targeted not just the (marijuana store) regulation piece but they’re also essentially saying Colorado can’t legalize marijuana. No one has ever gone that far.”

Even if true, that leaves three more lawsuits that continue to add to the risk of banking marijuana businesses, whether or not they are "legal" under state law.

US Justice Department to Banks: SARs May Not Be Sufficient

2015-03-17T21:44:00-05:00

Most bankers I know always love to receive a helping hand from federal law enforcement officials in making their daily lives just a little bit better. That's why I'm sure that most bankers smiled wide when an Assistant US Attorney General recently told a gathering of bankers that when it comes to reporting suspicious activity, a SAR is often not nearly enough.

“The vast majority of financial institutions file suspicious activity reports when they suspect that an account is connected to nefarious activity,” said assistant attorney general Leslie Caldwell in a Monday speech, according to prepared remarks. “But, in appropriate cases, we encourage those institutions to consider whether to take more action: specifically, to alert law enforcement authorities about the problem.”

[...]

A tip-off from a bank about a suspicious customer could lead law enforcement to seize funds or start an investigation, Ms. Caldwell said.

Sure, that makes sense. Bankers have nothing better to do than to do your job for you, right Leslie? The difference between filing a SAR and picking up the phone and reporting your suspicions to a cop is that the SAR is confidential (the subject of the report should never know one was filed) and applicable law provides for banks that file them a "safe harbor" from a lawsuit by the subject of the SAR (in all but in cases of the most egregiously bad faith filings). Those specific protections do not apply to a phone call or an email to a cop.

As a commenter to the linked article observed, "[i]f the Feds would actually do something about the millions of SARs we (financial institutions) have filed, some of these criminals would be in jail." To "do something," the Feds would have to rip those SARs from the gravitational pull of the black hole into which they're apparently dumped and read them, something that bankers have believed for years rarely happens. On the other hand, as FinCEN's head boasted last year regarding all the Cheech & Chong SARs that banks in Colorado have been filing on "legal" marijuana-related businesses, FinCEN actually read 62% of them. That left 38% to be eventually transformed into goat pellets after being consumed by FinCEN's pet goat.

My guess is that many banks will continue to believe that filing a SAR is a more than sufficient "tip off" for any law enforcement agency that actually is interested in uncovering crime.

Ponzi Not Gone(zi)

2015-03-10T21:52:00-05:00

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."

Changing of the Guard at DOJ

2015-03-01T21:55:00-06:00

The recent confirmation of Loretta Lynch as the none-too-soon successor to the current Commissar Attorney General of the United States, engendered a lot of speculation about whether or not the exit of "Fast and Furious" Holder will also spell the end of Operation Choke Point. In a Senate hearing, Ms. Lynch was less than enlightening on this point.

In response to questions by Senator Mark Lee, a Chock Point critic, she sounded positively tepid.

Lynch told the senator that should she be confirmed, she would work with him to ensure that law-abiding Americans aren’t targeted by the initiative.

“I look forward to hearing your concerns and working with you on them,” she said.

Let's hope that when she uses the term "working with you" she doesn't really mean "working you over." Time will tell.

On another issue, however, she differs markedly from her boss, the Department of Justice, and FinCEN, which have been falling all over themselves to aid the heirs to Cheech and Chong to light up their bongs. Unlike Barack, Loretta loathes the demon weed.

A federal prosecutor in New York, Ms. Lynch told the Senate Committee on the Judiciary she disagreed with the president’s no-big-deal take on pot, saying, “I certainly don’t hold that view and don’t agree with that view of marijuana as a substance.”

“I think the president was speaking from his personal experience and personal opinion, neither of which I’m able to share,” Ms. Lynch said. “But I can tell you that not only do I not support the legalization of marijuana, it is not the position of the Department of Justice currently to support the legalization. Nor would it be the position should I become confirmed as attorney general.”

A stated opposition to "legalizing" marijuana could be read as merely opposing legalization at the federal level. In addition, personally opposing legalization, even at the state level, does not necessarily translate into abandoning the current position of the DOJ as embodied in the "Cole Memorandum" and its spawn at the DOJ and FinCEN. That position appears to be that as long as a state legal marijuana business doesn't run afoul of eight listed activities which the DOJ thinks are "really, really bad" (as opposed to being merely "really bad"), then federal law enforcement will look away. In the case of banks that service such "legal/illegal" businesses, as long as they file special super secret SARs and perform initial and ongoing due diligence with a level of detail that would confound the NSA, the Feds will cut them a break, as well.

Pot's proponents claim that we should not take Ms. Lynch seriously. They note that she was testifying before a committee chaired by the marijuana-repulsed Chuck Grassley. I guess their point might be that she was "spinning" (i.e., committing perjury).

Assuming, however, that she was actually delivering her honest opinion to Senator Grassley, I think that Ms. Lynch's arrival on the scene may bode ill for the "three monkeys approach" to the future enforcement of federal drug laws against businesses that are engaged in state-legal-federal-illegal marijuana businesses. "Looking the other way" might prove to be a thing of the past for the DOJ, even before a Republican AG takes office in 2017 (should a Republican win the White House in 2016).

Moreover, the rogue banks in Colorado, Oregon, and elsewhere, who, in banking marijuana businesses, have been operating under the "don't-ask-don't-tell" benevolence of the FDIC and other federal banking regulators who take their cues from the head of the Executive branch (although they would deny that allegation until the end of time), may find that the examiners who have been giving them "tacit approval" to bank marijuana businesses as long as they don't make that fact public, are suddenly attacked by fits of rectitude and begin to take federal drug trafficking laws seriously again. If that happens, good luck with holding the agencies to their "tacit" approval.