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SEC Charges Execs with Fraud at Fannie & Freddie

Following up on our September post "Big Bucks, No Whammies?" about the SEC's apparent inaction on the wells notices they had served to the execs of Fannie & Freddie. We write to report that Whammies finally came with  Friday's headlines . The SEC brought fraud charges after all, not just against Daniel Mudd, former CEO of Fannie Mae but also five others now charged with deliberately misleading government officials about the extent of their subprime exposure.

The NYTimes explores the charges in greater detail and there are new reports that an FBI investigation into the same conduct is underway which means the guys could face criminal charges.    Following the SEC announcement speculation had already begun that Mudd would soon step down as CEO at Fortress Investment Group (FIG).

“Can you really run a trading and investment firm with a guy accused of fraud in the corner office?”   a Fortress employee was reported to have asked.  Apparently not when the accusations become official. (UPDATE:  Mudd took leave as CEO of Fortress on Wednesday December 21)

Mudd has been on the board at Fortress since 2007,and was appointed CEO of Fortress when he left Fannie amid scandal after the bailout in 2008 Fortress is a publicly traded hedge fund which recently introduced new subprime mortgage bonds onto the market.... 

Wall Street’s “Moral Minority”

A New York Times article has revealed that long before Occupy Wall Street, the Sisters of St. Francis of Philadelphia were battling Wall Street over corporate responsibility. For the last thirty years, the Sisters have used the investments in their retirement fund to become Wall Street’s moral minority.

Using their status as shareholders, the nuns fought with Kroger over farm worker rights, with McDonald’s over childhood obesity, and with Wells Fargo over lending practices. They have met face-to-face with the heads of Lockheed Martin, BP, and General Electric. Most recently, they advised Goldman Sachs executives that the bank should protect consumers, rein in executive pay, increase its transparency, and remember the poor.

With their moral authority, the Sisters of St. Francis “can really bring attention to issues,” said Robert McCormick, chief policy officer of Glass, Lewis & Company, the proxy voting firm. “You haven’t seen shareholder activism until you see a nun battling it out with the CEOs. They can be devastating,” said Michael Passoff in a 2005 article on religious shareholder activists. Passoff works in the Corporate Social Responsibility Program for As You Sow, a leading organization in the strategizing and organizing of shareholder campaigns.

The nuns have been waging this war since 1980, when St. Francis Sister Nora Nash formed a committee with her community to combat troubling developments at the businesses in which they invested their retirement fund. The Roman Catholic order of over 500 nuns has teamed up with other orders and faith-based investing groups on shareholder resolutions. Much of Sister Nora’s activism takes place under the Interfaith Center on Corporate Responsibility, an umbrella group which includes Jews, Quakers and Presbyterians.

Sister Nora said that she and the order “want social returns, as well as financial ones.” She added, “when you look at the major financial institutions, you have to realize there is greed involved.”

The full New York Times article can be found here.

A Chance "To Talk About What's Broken" - Warren's take on Occupy Wall Street

Controversy surrounding Elizabeth Warren's position on Occupy Wall Street has been widely publicized this week, perhaps obscuring the simplicity and integrity of her words on the movement.    

Have you seen this powerful video yet? 

"I have been protesting Wall Street for a very long time. Occupy Wall Street is an organic movement, it expresses enormous frustration and gives a great faith all across the country for people to talk about what’s broken."

  

 



Unions Coming

In n+1, Penny Lewis, of the Murphy Institute for Worker Education and Labor Studies, writes about unions and Occupy Wall Street:

“It’s been a long time—since Seattle 1999—that so many US unions have thrown their support behind the kind of anti-corporate direct action we’re seeing in Zuccotti Park. Dozens, maybe hundreds, of locals; the internationals of AFSCME, SEIU, Teamsters, UAW, USW, among others; as well as the AFL-CIO itself—all have officially endorsed the protests. In its resolution of solidarity, TWU Local 100 hailed the courage of the protesters and described their occupation as a “dramatic demonstration of our own ideas.” And it’s true: runaway corporate greed, outrageous inequality, the corruption of our democracy—all are themes that have entered labor’s discourse these past few years since the economy went bust. The AFL-CIO has targeted banks, SEIU has spent millions in its Fight for a Fair Economy campaign, coalitions have fought foreclosures and marched on financial centers and conventions. Unionized Wisconsin graduate students and community allies demonstrated the power of an occupation, and in the process radicalized their brothers and sisters in the public sector there and beyond. Some of these public sector anti-austerity fights —like the one my own union has engaged—have challenged politicians and policies that give tax cuts to millionaires and just plain old cuts to us. These fights underscore why unions stand in solidarity with OWS.”

To read Lewis’ full article, Unions Coming, click here.

The article first appeared in n+1’s Occupy! An OWS-Inspired Gazette, that can be downloaded for free here.  

What Wall Street Protestors Should Ask For



Jeffrey R. McCord posted today on The Investor Advocate about “What Wall Street Protestors Should Ask For and the Third Battle of Manassas.” The top four on his personal wish list:

1. The Feds should start enforcing the laws already on the books against misrepresentation in the sale of financial instruments including mortgage back securities and derived products and abusive mortgage lending practices aimed at unsophisticated consumers.
2. As the lion of the Federal Reserve, Paul Volcker, and others have been saying for several years, it is time to restore the Glass Steagall Act’s separation of commercial banking from investment banking.
3. President Obama should talk the talk and walk the walk of real change.
4. The President and Congress should restore to the American people the legal rights to hold accountable those who defraud and otherwise abuse them.  

In closing, McCord asks the protestors to give Obama and Congressional Dems a second chance.

You can read McCord’s full article here.

Occupy Wall Street: A Symptom of Growing Distrust

As the Occupy Wall Street protests continue into their second week, media reports on the protests have largely been critical, focusing on their apparent lack of organization and the perceived “flakiness” of the protesters.

In our opinion, the protests are a symptom of a growing distrust of Wall Street, softening regulations, and no end in sight to years of corporate malfeasance and greed.

Suggested reading on Occupy Wall Street:

1. Allison Kilkenny, in The Nation, takes The New York Times to task;
2. The Times article that riled Ms. Kilkenny;
3. n+1’s Notes From an Occupation;
4. Salon’s Glenn Greenwald asks, “What’s behind the scorn of the Wall Street protests?”; and
5. The Dissenter blog’s take on “Why the establishment media and power elite loathe Occupy Wall Street."

Big Bucks. No Whammies?

Tick Tock. Tick Tock.  In a scenario reminscent of the classic game show Press Your Luck.  It appears Former Fannie Mae CEO Daniel Mudd  may get a reprieve  courtesy of new Dodd-Frank stopwatch.  Mudd was put on notice March 11th that he could face regulatory action for his role in misrepresenting the underwriter's subprime exposure to investors and government agencies.  But Dodd-Frank amendments enacted last year introduced a 180 day time limit compelling Commission staff  to "either file an action or provide notice to the Director of the Division of Enforcement of its intent to not file an action,” within 180 days of the Wells Notice. 

The probe centers on his time at Fannie Mae and his role in creating the subprime debacle that would shock the country and the world.  But given the radio silence, observers wonder if  new admendments that were intended to make the agency more proactive in handling such cases have backfired.   

An alternate theory is that the inaction is related to reports that the SEC is winding down its investigations of Fannie & Freddie the NY Times reported that Fannie settlement talks were underway and fraud charges would likely be dismissed.  

As we explore more in the Pomerantz Monitor this month.  Fannie & Freddie Conservator the FHFA  also announced in early September that they'll seek to recover $196 billion in new actions against 17 banks for misrepresenting CDO risks to the underwriters.

For his part, Mudd has shown little remorse.  His failure, he said, was only that he could not maintain the “delicate balance,” required to meet such expectations.   Since taking over the CEO position at Fortress Investment Group Mudd's appetite for subprime has continued unabated.  In May, the publicly traded hedgefund unveiled subprime bond Springleaf acquired from AIG.  They  even managed to secure triple A rating from S&P after that agency had downgraded US treasury securities. 

So far, for Mudd its big bucks, and no whammies. 

In Madoff Case, Second Circuit Affirms Use of “Net Investment Method” to Compensate Victims

The Second Circuit was recently called upon to evaluate how the losses of investors in the Madoff Ponzi scheme should be calculated under the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”).  When a broker-dealer, such as Madoff, fails, SIPA establishes procedures for compensating that broker-dealer’s customers out of its liquidated assets.  In particular, SIPA establishes a special fund of “customer property” for priority distribution exclusively among customers based on the “net equity” value of their investments with the broker dealer.  These provisions are designed to protect investors against financial losses arising from the insolvency of their brokers.  

The problem is determining how each investor’s “net equity” should be calculated, particularly when the broker-dealer in question was a Ponzi schemer who never carried out the stock trades investors thought they were effectuating.  Normally, net equity is calculated by reference to each customer’s account at the time of liquidation, including the growth of each customer’s investments up to that time.  But what if the customer’s funds were never actually invested in any securities?  Should an investor who entrusted his money to Madoff be given credit for the growth of his investment over time—even if that growth was an illusion created out of whole cloth by the fraudster?

In the case In re Bernard L. Madoff Inv. Sec. LLC, 2011 U.S. App. LEXIS 16884 (2d Cir. Aug. 16, 2011) certain former Madoff investors appealed a decision of the United States Bankruptcy Court for the Southern District of New York approving use of the so-called “Net Investment Method” of calculating investor losses under SIPA.  Under that method, each investor’s “net equity” is calculated as the difference between the amounts they deposited with Madoff and the amounts they eventually withdrew.  That meant that Madoff’s customers would get credit only for the money they had actually deposited, not the paper gains in their investment over time.  In other words, if an investor had ultimately withdrawn more money than they deposited with Madoff, they would have no net equity in the SIPA customer fund. 

In challenging the use of the Net Investment Method, the appealing investors argued that they were entitled to recover the market value of the securities they believed they had purchased, as reflected on their last customer statements from Madoff.  This method of calculating net equity is known as the “Last Statement Method.”  The Bankruptcy Court agreed with the SIPA Trustee that, if the Last Statement Method were used, then claimants who had withdrawn funds from their Madoff accounts in excess of their initial investments would end up taking away resources from investors who hadn’t yet been made whole.  Thus, under these circumstances, the Last Statement Method would yield an inequitable result.

The Second Circuit agreed with the Bankruptcy Court that to compensate investors who had withdrawn more than their initial investment would inequitably diminish the amount of customer property available to other investors.  The Court’s decision, however, clearly leaves open the possibility that other valuation methods may continue to be used in more conventional SIPA cases not involving fabricated customer statements.

Government Launches Investigation of Employment Practices at Home Builders

The Labor Department has demanded records from several of the country’s top home builders, including PulteGroup Inc., Lennar Corp., D. R. Horton Inc., and KB Home.  The investigation is being conducted pursuant to the Fair Labor Standards Act, which governs wages, hours, overtime, and the employment of minors.  According to The Wall Street Journal in an article here, the housing crisis has created enormous pressure to keep building costs down -- leaving the industry’s workers particularly vulnerable.  “Contractors Unions have for years complained about pay and working conditions in the industry, alleging pay scales below minimum wage and failure to pay overtime.  The Laborers International Union of North America in 2008 issued a study that called employees at home builders the newest victims of the housing market crisis because of underpayment.”

Say-on-Pay Update

As we have reported in earlier posts on “Say-on-Pay,” the Dodd-Frank Act provides for an advisory shareholder vote to approve executive and board compensation at most public companies.  While companies have overwhelmingly passed their Say-on-Pay votes this proxy season, 39 out of approximately 2000 companies have reported failures.  Twenty-five percent of these failures have occurred in the energy sector, and almost all failed votes have followed on the heels of a “no” recommendation by the institutional investor watchdog, Institutional Shareholder Services.

The Dodd-Frank Act also provides that shareholders decide how frequently Say-on-Pay votes are held -- the options ranging from every one to three years.  As expected, companies who failed this year’s Say-on-Pay vote also saw their shareholders demand such votes every year.

While these votes are advisory in nature, plaintiffs are using failures to bolster unjust enrichment and corporate waste claims in shareholder lawsuits.  The stronger cases have coupled these claims with federal claims under the proxy rules, often attacking a company’s “Pay-for-Performance” policies.  So far, two such shareholder lawsuits -- against KeyCorp and Occidental Petroleum -- have settled.  A significant part of the KeyCorp settlement included substantial compensation policy reforms.  The terms of the settlement in Occidental (whose CEO Ray Irani has been paid almost $300 million over the past decade) are largely confidential.  The remaining cases are pending.

We are encouraged that shareholders are standing up for the principle -- both at the corporate ballot box and in litigation when necessary -- that public companies should not increase executive compensation as shareholder returns decline.