ThePopTort

For Law Day, Honoring Those Fighting Forced Arbitration

It’s Law Day, everyone! Actually, it’s May Day. Law Day was a fairly recent Cold War-era creation by a very paranoid United States who thought the whole Maypole/flower basket thing had been taken over by communists. But whatever. We’ll take it.

For Law Day, we would like to honor those who actually respect our legal system and want to free it from the clutches of corporate wrongdoers.  And in fact, we found some yesterday. In fact, we found 37 members of the U.S. House and Senate, led by Senator Al Franken, who yesterday, wrote a powerful letter to new Securities and Exchange Commission Chair Mary Jo White saying:

"We are deeply concerned that the Commission's failure to respond to the dangers posed by widespread forced arbitration will weaken existing investor protections.… We urge the Commission to act quickly to exercise its authority...to prevent this practice and protect investor rights."

The lawmakers are urging “U.S. securities regulators to prohibit Wall Street brokers from forcing customers to sign away their legal right to sue” via forced arbitration clauses with class action bans. (See more about the problems with forced arbitration and class action bans here.)

Notes Reuters, “Brokerages typically require customers to sign pre-dispute arbitration agreements when opening their accounts. Under such agreements, disputes between a brokerage and a customer go to arbitration; customers are prohibited from suing in court.”  Say the lawmakers: 

[T]he SEC should use the authority given to the agency under the Dodd-Frank financial law to reform arbitration clauses.

“To our disappointment, in the almost three years since the Dodd-Frank Act's enactment, the commission has largely disregarded this important mandate.… The time is ripe for the commission to act under [Dodd-Frank] to protect the investing public and prevent further abuse of forced arbitration contracts.”

The legislators also asked the SEC to monitor how many brokers are including mandatory arbitration agreements and class action waivers in their client contracts.

Reuters also notes,

The issue came into the spotlight recently after Charles Schwab Corp expanded the mandatory arbitration clauses in its customer contracts to include class action waivers.

The Financial Industry Regulatory Authority tried to fight the Schwab move by filing a disciplinary action, saying the class action waiver violated its rules.

But a hearing panel upheld Schwab's measure in February.

FINRA is appealing the ruling to the National Adjudicatory Council, a FINRA appellate body that reviews disciplinary decisions.

In the letter to White, the lawmakers said they were alarmed by the Schwab case and said it should be a catalyst for the SEC to act.…

Earlier this month, one SEC commissioner, Luis Aguilar, called for the SEC to take steps to scale back or limit the use of mandatory arbitration agreements.

Aguilar, who in his speech said “allowing investors to take their legal claims to court would 'enhance investor protection and add more teeth to our federal securities laws,'” isn’t the only regulatory official concerned about this arbitration practice. About 17 members of the North American Securities Administrators Association earlier “conducted meetings with more than 40 lawmakers, delivering the same message: That investors should be allowed to go to court to settle a grievance against their broker.”

Meanwhile, Public Citizen has begun a petition drive aimed specifically at Charles Schwab, asking people to “Stand up to Chuck” and "to remove from its terms for investors the forced arbitration clause and the ban on joining together in class actions. Schwab should honor its customers’ rights and end its shameful fight against the Financial Industry Regulatory Authority."

If you do nothing else to honor Law Day today, sign Public Citizen's petition! And while you are at it, don't forget to thank Senator Franken, whose record opposing forced arbitration has been truly inspiring!

Mortgage Back Securities Case –Will SOL Problems Mean SOL Ending?

One of the themes we like to cover occasionally at ThePopTort is how the civil justice system can sometimes step in when the criminal justice system has failed. (See e.g., here.) It can be a very beneficial approach. But it’s not perfect.  To wit ...

This week, New York’s Attorney General, Eric Schneiderman, filed a massive fraud case against mortgage-backed securities.  Notably, these are not criminal prosecutions and the question was answered in news reports today why not.  Writes AP, "The felony statute of limitations under New York's Martin Act against securities fraud is five years, so it's too late to bring a criminal case.”  Instead, Schneiderman filed a civil suit alleging misconduct by Bear Stearns & Co. (successor, JP Morgan Chase) in 2006-2007, which “cost investors $22.5 billion in losses and left them holding an additional $30 billion in bad loans."  But interestingly, even in civil fraud cases, the statute of limitations is six years i.e., he's about to run out of time for any other case.

Not to worry.  Turns out that the AG’s office may have struck some kind of deal with a bunch of banks so that the statute of limitations has been tolled, whereby the defendants have “waived their right to dismiss otherwise time-barred matters.”  Explains Bloomberg,

The tolling agreements, reached this year, stop the clock on the six-year statute of limitations and ensure Schneiderman can bring civil fraud claims against banks for conduct going as far back as 2006, said the person. The agreements don’t necessarily mean that suits will be filed, the person said.

Indeed, observe some critics, 

Actually, they create a strong possibility that other cases won’t be filed, or that they will be filed in a very narrow fashion.

A financial firm or any other defendant doesn’t allow a tolling agreement out of the goodness of their heart. It comes out of a negotiated process. The prosecutor gets to stop the clock on the statute of limitations, but must give up something in return. Maybe they’re given the opportunity to stop Schneiderman from filing a case at all, or maybe they’ve moved immediately to the settlement phase. Or maybe Schneiderman got the tolling agreement in exchange for agreeing not to prosecute or name any individuals in the cases. A tolling agreement isn’t free, in other words. And it would be good to know the cost of this.

Stay tuned.

Occupy The Globe and Lose the Pepper Spray

Early last September, we were trying to get over to the new drug store on Wall Street (yes, ThePopTort’s in that neighborhood), but we couldn't get there because of police barricades - all because a small group of protesters were marching down the street. “Talk about overreaction,” we thought. “Blocking the street because of a few marchers?”

Hah.  Little did we know – nor could we have imagined - that this little march down Wall Street would eventually turn into one of the most significant global movements of our time – Occupy Wall Street. Tomorrow, OWS will mark May 1 - International Workers' Day - with calls for a general strike, marches and protests all over the world. “’We call upon people to refrain from shopping, walk out of class, take the day off of work and other creative forms of resistance disrupting the status quo … Four years after the financial crisis, not a single of the too-big-to-fail banks is smaller; in fact, they all continue to grow in size and risk,’ the group's press office said in an April 26 e-mail.” 

In New York City,

Tom Morello of the Grammy Award-winning rock band Rage Against the Machine along with 1,000 other guitar-playing musicians will accompany a march to Union Square at 2 p.m., according to the maydaynyc.org website. That will be followed by a "unity rally" at Union Square at 4 p.m.; a march from there to Wall Street at 5:30 p.m.; and a walk to a staging area for "evening actions," which organizers at the April 25 meeting said would be the so-called after-party.

Occupy-related events are planned in 115 cities throughout the U.S., from college towns such as Amherst, Massachusetts, and Ann Arbor, Michigan, to Los Angeles, Houston, Chicago and Philadelphia.

But here’s the other thing.  As this movement has grown, unfortunately so has some of the “overreaction” by law enforcement.  For example, "About 2,100 Occupy Wall Street protesters in New York have been arrested since the demonstrations began, said Bill Dobbs, a member of the group's media-relations team."

So today, in U.S. District Court in Manhattan, “four City Council members accused JPMorgan Chase & Co., Brookfield Office Properties Inc., Mayor Michael Bloomberg and Police Commissioner Raymond Kelly, of suppressing free speech and using excessive force against protesters.”

They say, “police conduct is so problematic that the force needs an outside monitor.”

The city and police violated demonstrators' free speech rights, used excessive force, arrested protesters on dubious charges and interfered with journalists' and council members' efforts to observe what was going on, the four City Council members and others say in the federal civil rights suit. …

While Occupy activists have gone to court before over particular episodes in the movement's contentious history with the city, the new lawsuit is a nearly 150-page compendium of complaints, amplified by the council members' participation. A local Democratic Party official, freelance journalists and Occupy activists also are plaintiffs.

Their criticisms range from a police official's much-discussed use of pepper spray on penned-in protesters in September to the temporary removal of demonstrators from Manhattan's Union Square in March.

One of the council members who sued, Ydanis Rodriguez, “was accused of resisting arrest while trying to get to the protesters' encampment in lower Manhattan's Zuccotti Park as police uprooted them Nov. 15. He emerged with visible scrapes to his head and said police assaulted him. Prosecutors recently dropped the charges against the councilman, saying they couldn't secure the testimony of a key officer in the incident. ‘I feel that the NYPD misused its powers,’ he said.”

Meanwhile, writes The Gothamist,

The Manhattan DA's office has dropped charges against an Occupy Wall Street protester just as the protester's attorney was poised to subpoena Deputy Inspector Anthony Bologna. Marisa Holmes was videotaping Bologna discharging pepper spray into a group of protesters when she was charged with obstructing governmental administration. "I would have loved to see 'Tony Baloney' on the stand," Holmes told the Daily News. But Bologna still might get his day in court, as two women have sued Bologna and the city over the incident.

For his actions on September 24, Bologna was docked 10 vacation days and transferred from his considerably more prestigious Manhattan South post to a position in Staten Island, presumably keeping him out of the thick of tomorrow's May Day actions. But if The Vigilogna does show up, don't be surprised if he uses 'ole Spicy again.

Stay safe, New York. 

The Big Securities Fraud Fall Off

Did you know that in the mid-1990s, during the disastrously counterproductive “deregulation hysteria” that gripped the country, Congress made it much more difficult for defrauded investors to bring any kind of legal action?  (Read more here.) That law was called the Private Securities Litigation Reform Act.  Interestingly, another thing the PSLRA did was to allow researchers to start tracking securities fraud settlement data.  Since 1996, Stanford Law School and Cornerstone Research have been doing just that.  Let me just say, if you thought that the economic collapse would have led to a steady increase in securities fraud cases, you would be wrong.  Sort of.  Cornerstone’s new study came out today and here is what researchers found:

The number and size of securities fraud settlements that won final U.S. court approval fell in 2011 to the lowest in a decade, amid a drop in cases linked to accounting problems and U.S. Securities and Exchange Commission enforcement activity.

According to a study being released on Wednesday by Stanford Law School and Cornerstone Research, courts in 2011 approved 65 such settlements totaling a mere $1.36 billion, down from 86 settlements totaling $3.21 billion a year earlier.

The dollar amount is less than half the $2.78 billion recovered in 2003, which had been the lowest since the adoption the prior year of the Sarbanes-Oxley corporate governance law.

Sarbanes-Oxley, you may recall, was enacted after the Enron disaster despite the U.S. Chamber of Commerce's furious lobbying against it, saying “an accounting error should never be seen as a crime,” and “[b]usiness should stop apologizing for being the one institution in America that really works.”  Uh huh.  Actually, the law that eventually passed was considered by many to be pretty watered-down and certainly, it did nothing to prevent the financial collapse a few years later.  But back to those securities fraud cases.

It does seem very unlikely that defrauded investors would simply have stopped being enraged, but that’s not really what has happened.  In fact, one of the Cornerstone authors told the New York Times that the 2011 stats were “an anomaly,” and “we already see some signs that in 2012, this trend will be reversing.”  Specifically,

[L]arge settlements involving American International Group Inc. and other companies, as well as increased SEC enforcement activity, may make 2012 a more rewarding year for investors.  Settlement totals for 2012 will include AIG's $725 million settlement to resolve claims accusing the insurer of accounting fraud and stock price manipulation.

Other accords topping $100 million that may also be included are with Lehman Brothers Holdings Inc.; wireless equipment company Motorola Solutions Inc.; National City Corp, a bank now owned by PNC Financial Services Group Inc.; and private education company Apollo Group Inc.

But while 2011 may have been a year of “weaker” cases, it also true that today it has become more difficult to bring cases due in part to “tougher standards of proof imposed upon by the U.S. Supreme Court and market instability that has made it more difficult for shareholders filing suit to say they weren’t aware of the inherent risk of investing.”

Something to keep our eye on, for sure.

Raj Rajaratnam and the Jury System

You know those people who say that juries can’t understand complex evidence, that they base verdicts on emotion and are so arbitrary and irrational that they should be abolished and replaced by “experts”?

Do you know who might not agree with that? The prosecutors who just won their case before a jury of eight women and four men in a two-month-long securities fraud trial against Galleon hedge fund’s Raj Rajaratnam.  The jury convicted him of five conspiracies and nine substantive counts of securities fraud for trading on, and passing along, material non-public information about more than a dozen companies.  The jury, I am guessing, wouldn’t agree either

Galleon was, by the way, “among the 10 largest hedge funds in the world in the early years of the last decade. It managed $7 billion at its peak in 2008. Rajaratnam’s net worth of $1.3 billion made him the 559th richest person in the world, Forbes Magazine said in 2009.”

The Wall Street Journal has much more about the jury process here. Mind you, like every jury, this one was not composed of securities “experts” but rather by everyday Americans like a former graphic artist for Apple, who could only remark after the jury’s 12-day deliberations, “I’m really tired. I’m tired, man.”

It is well accepted – and judges confirm - that litigating a complex case forces lawyers to sharpen presentation of their cases, allowing not only the jurors, but also the judge to understand them better. Gregory Little, a partner at White & Case and a former trial attorney with the Securities and Exchange Commission, said of the Rajaratnam case, 

“It was an impressive performance by the U.S. Attorney's office in terms of taking a very complicated set of facts and breaking it down and making it understandable for the jury. It's also a credit to the jury that they seemed to work very hard to understand all that evidence.”

In fact, there really is no question that juries are more than competent to handle complex cases. Check out, for example, Neil Vidmar and Valerie P. Han’s 2007 book, American Juries: The Verdict.  See also here.

So when doctors and hospitals brazenly complain about the “competence” of civil juries who find incompetent physicians or unsafe hospitals negligent in court, arguing that juries are too dumb to figure out the facts in a medical malpractice case (“We recommend creating 'health courts' made up of expert jurors who can better rule on whether a physician is liable for an injury …"), think about the Raj Rajaratnam jury and then think about how truly dumb an argument this is.

Desperate Homeowners Waive Rights

This morning, ProPublica co-published (with Slate) an eye-opening article about mortgage servicers.  These banks and lenders, some of the same companies that led to the financial crisis, are at it again.

Guilty of all sorts of abuses and violations of law, including robo-signing, which we talked about here, mortgage servicers have been facing increased litigation from homeowners.  They want the lawsuits to stop and they've figured out how to stop them!

In return for granting homeowners a “break” on their mortgages, mortgage servicers are forcing homeowners to waive their right to bring a lawsuit for anything having to do with their loan forever. 

Many desperate homeowners may not even realize they’re signing a waiver, since it’s buried in the fine print of their contracts.  But even if they are aware of it, they’re in a terrible position.  If they don’t sign, they’ll lose their homes.  What choice do they have?

What makes this worse is that regulators have already banned this practice.  But as ProPublica noted, mortgage servicers who limit or take away a homeowner’s right to sue have a variety of excuses:  they argue about the language in their contracts and exactly what it prohibits; they site a loophole in the regulation that they claim makes their actions legal; or, as in the case of Bank of America, they say the waivers are in the contracts as a mistake.  A mistake that somehow keeps happening!

And, perhaps most importantly, while the law forbidding these waivers applies to loan modifications, it does not apply to short-term forbearance agreements! 

In other words, a mortgage servicer might think twice about sticking a waiver in an agreement granting long-term relief, but they’d have no second thoughts putting a waiver in an agreement which offers short-term relief – forbearance agreements last anywhere from three to six months.   Your typical desperate homeowner, unable afford an attorney, might not realize that his three-month reprieve comes at such a high cost.

Funny that these are the same mortgage companies whose illegal and abusive predatory lending practices helped cause the subprime mortgage crisis.  As the Center for Justice and Democracy noted in a 2010 study, the mortgage companies could always be sued for predatory lending, while "Wall Street firms that pressured lenders to make these risky loans are not and they knew it at the time.” 

It seems the banks and lenders have had enough.  If homeowners can’t sue Wall Street firms, they don’t want to be sued either.   It remains to be seen if these waivers will hold up in court, but it’s pretty obvious that this is yet another example of corporations taking advantage of unsuspecting, vulnerable citizens.

The Foreclosure Blues (with Some Purple Tint)

We were a bit taken aback by the news that Prince, now on tour and in the midst of 21-dates in LA, happens also to be “singing the same tune as millions of American homeowners: The Foreclosure Blues.”  Apparently, the 20 acres that he owns in Minnesota, where his home once stood, has been scheduled for auction to satisfy his mortage, althought the Star-Tribune reports “Prince contended Thursday afternoon that the ‘payment has been made’ for the full amount and was sent to the Bank of New York Mellon Trust Co. ‘about four or five days ago.’”  

So the big question is, will the bank even care?  Clearly for most Americans, they could care less.

For example, JPMorgan Chase just settled for $56 million a class action brought by 6,000 active-duty miliatary families, “who were overcharged on their mortgages.  [The bank also] cut interest rates on soldiers’ home loans and return homes that were wrongfully foreclosed upon.”

There is also an investigation by all 50 state Attorneys General of foreclosure scandals like “robo-signing,” where banks hired people to forge official names on documents so they could take away people’s homes without verifying any facts.  Iowa AG Tom Miller, who is in the midst of crafting a major settlement with the banks, has gotten into a bit of a campaign finance mess due to donations to him from “out-of-state lawyers who make a living representing big banks” but Miller objects strongly to the implication of a conflict.  At least he's trying to hold the banks accountable, so much so that “Oklahoma’s attorney general said he is prepared to break ranks” with the settlement that Miller and the Justice Department are crafting.  He doesn't like banks being forced “to pay at least $20 billion in fines and use the money to reduce the principal on mortgages of ‘underwater’ borrowers, who owe more on their loans than their homes are worth.  ‘I have asked my attorneys to prepare me for an option that does not require that,' he says."  Hope his constituents remember that.

And then there’s the heartwarming story of South Carolina’s Keith Gamble.  As the Richmond Post-Dispatch reports, what started as a hobby “is now a risky, exciting, full-time job: buying properties at the monthly foreclosure sale and flipping them."  He says, "Some people's bad fortune is other people's opportunity.  I know that sounds callous.” 

Honestly, when it comes to the foreclosure business, who isn’t?

Tort Lawsuits Dropping Like A Rock - Again!

Today’s post is about statistics.  Hey, wake up, these are important!

The National Center for State Courts has the best, most accurate state court statistics in America.  (That's where most lawsuits are brought.)  Gathering these are not so easy, since most states have very antiquated and inconsistent methods for tracking who sues and why.  But every year, NCSC does a phenomenal job tracking these and it recently released its most recent data, covering the year 2008.  Basically, tort case filings, including medical malpractice cases, are dropping like a rock.  But guess what are flooding the civil courts?  Debt collections.  Take a look:

"Contracts comprise an increasingly large share of civil caseloads" (p. 26)  (These cases are largely debt collections.)

• In 2008, monetary disputes (contract and small claims cases) accounted for 73 percent of civil cases in 7 states reporting (up 4 percent from 2007), while tort cases represented less than 5 percent of civil caseloads in those states. (p. 26)

"Contract caseloads continue to climb" (p. 27)

• Tort caseloads have continued to decrease, falling by 6 percent from 2007 to 2008 in 13 general jurisdiction courts reporting, whereas contract caseloads rose sharply, increasing by 27 percent in those courts over the same time period. (p. 27)

• From 1999 to 2008, tort caseloads in 13 general jurisdiction courts reporting decreased 25 percent, while contract caseloads grew 63 percent. (p. 27)

"Incoming contract cases are nine times that of torts" (p. 27)

• After examining incoming tort and contract rates in 11 states in 2008 the researchers found that "[w]hen tort and contract caseloads are examined side by side, contracts dominate in every jurisdiction.  With the overall and median proportion of contracts in these 11 states above 90 percent, and given their growing numbers, contract case processing is doubtless an increasing concern for all state courts." (p. 27)

Automobile cases comprise the majority of tort caseloads (p. 28)

• "Data from 17 unified and general jurisdiction courts indicate that automobile accident litigation generally comprises the majority of tort caseloads, with proportions ranging from 18 to 69 percent." (p. 28)

Some courts are struggling to clear their civil caseloads, apparently because of increasing numbers of contract cases (p. 29)

• "Increasing numbers of contract cases, already known to comprise the preponderance of civil caseloads, appear to be having a negative effect on some courts’ civil clearance rates.  Of the 28 unified and general jurisdiction courts shown below, only 7 have achieved rates at or above 100 percent."

"Contract clearance rates are consistently lower than those for tort caseloads" (p. 30)

• "Examination of two of the aforementioned components of civil caseloads—contract and tort cases—confirms that increasing contract caseloads may be hampering courts’ efforts to clear civil cases.  The median clearance rates for the larger contract caseloads in 13 unified and general jurisdiction courts are under 100 percent (99% and 96%, respectively) while both types of courts were more successful clearing the smaller (although sometimes more complex) tort caseloads, with medians above 100 percent." (p. 30)

"Like other torts, medical malpractice claims continue to decline" (p. 31)

• "Just as torts typically represent a single-digit proportion of civil caseloads, medical malpractice cases comprise a similar proportion of torts.  Despite their continued notoriety, rarely does a
  medical malpractice caseload exceed a few hundred cases in any one state in one year." (p. 31)

• "As was seen in Mississippi in 2003, the enactment of tort reform legislation can profoundly affect the filing patterns of medical malpractice caseloads.  However, medical malpractice caseloads are often so small that a change of as few as 50 or 100 filings can create a similar effect." (p. 31)

• Long-term data show a 15 percent decline in medical malpractice filings in general jurisdiction courts in seven states from 1999 to 2008. (p. 31)

So, where exactly is this lawsuit crisis?

State Attorneys General Come Out Swingin’

Super duper shout out today to the New York Times and their knockout front page business section story called (in the print edition, at least), The States vs. Wall St. 

It’s all about how state Attorneys General, like Ohio’s Richard Cordray, are squaring off against Wall Street.  They are using the civil justice system to help people when federal regulators, well, throw in the towel.  Noting his “willingness to sue early and often,” the article talks about the hundreds of millions, even billions of dollars, Cordray has recovered for “investors, pension funds, schools and cities” in cases “against global financial houses, rating agencies, subprime lenders and foreclosure scammers."

And he’s not alone.  Martha Coakley of Massachusetts, Lisa Madigan of Illinois, Andrew Cuomo of New York, Tom Miller of Iowa and Roy Cooper of North Carolina, are doing equally great work and are mentioned in the article.  We’ve covered some of this before (like here, here).

Said Coakley, “We were the first to go after predatory loans — we’re not waiting for federal agencies to act.”

Thank goodness.  It's The States vs. Wall St. – and the gloves are off!

Financial Reform Gives State Attorneys General New “Kick Butt” Powers –CJ&D Interns Discuss!

One of the financial reform stories not receiving all that much attention (except, we imagine, at U.S. Chamber of Commerce headquarters) is the grant of new authority to state Attorneys General to enforce parts of the new financial protection law.  (House Report 111-517, Section 1042 of the bill.) 

Of course, what Congress giveth, it also sometimes taketh away, adding, “Except as permitted under subparagraph(B), the attorney general (or equivalent thereof) of any State may not bring a civil action in the name of such State against a national bank or Federal savings association to enforce a provision of this title.”  And so on.)

But generally, the new enforcement powers are a great thing, and AGs think so too.   And we’re lucky to have anything, given that Sen. Tom Carper (D-DE) originally tried to wipe out these AG powers altogether.

Today, the Center for Justice & Democracy’s three summer interns talk about this whole deal – and more- with CJ&D’s Communications Director Alicia Young.  The interns are working on a groundbreaking new study examining federal consumer protection laws that grant state AGs enforcement power. They also discuss the importance of private counsel to aide the work of AG offices.  Check it out!

(Photo, L to R: Allie Curreri, Alicia Young, Warren Allen, Jacob Agron)