First, losses are expected to ultimately exceed $3 BBBBillion.

Second, the feds are involved, as in the FBI (guns, badges, sunglasses, and yes handcuffs).  Ouccchhh.  I hate when that happens.  Add the SEC and a team of federal prosecutors and someone is going down hard.

Third, oh did I mention those guys on Capitol Hill are also making noises: surely looking for a photo op as the election cycle heats up.

Fourth, and this will get the Dimon gang’s attention: there are whispers and discussions from regulators throwing around the word “clawback”; as in the salary of certain executives.  ”Sorry honeeey, no new house on Nantucket.”

So, Dimon and Company are circling the wagons.  JPMorgan has fired Ina Drew, the executive in charge of the offending department.  Yesterday, DealBook announced that Bruno Iksil, who worked in Ms. Drew’s office and was at the center of the trades, will also leave JPMorgan.  In this game of “pink slip duck-duck-goose,” are we a tap away from the headliner becoming former CEO Jamie Dimon?

In this climate — $2 billion in risky positions is an unforgivable error.  Where is the judgment?  Where are the grown ups?

Oh, Paul Volcker, he’s in some little office in Manhattan with pal Richard Ravitch—perhaps he should walk Mr. Dimon out and restore some sanity.  (I know, it will never happen.)

He continued to live out his enthusiasm for criminal procedure for the next three and a half years in the Bronx DA’s office.  True to the role of a prosecutor as one empowered not to win, but to do justice, Seth’s most memorable case was one in which he decided not to prosecute.  When facts and witness stories about a murder investigation just weren’t adding up, he made the tough decision to hold off prosecuting the person arrested by the police for the crime.  He was rewarded a couple weeks later when police arrested a man wearing a bullet-proof vest passed out in the back of a livery cab, who also happened to have a gun on him whose ballistics matched those from the earlier murder investigation and whom witnesses identified as the murderer.

Seth began practicing consumer protection law with Seeger Weiss and currently is a shareholder at Burg Simpson, focusing primarily upon complex and class action litigation on behalf of aggrieved consumers, corporate shareholders, and property owners.  Today, he focuses upon pharmaceutical mass tort litigation on behalf of those injured as a result of their ingestion of prescription medications.

An Uphill Journey: Advice to Consumers

Over the past decade, Seth has seen it become increasingly difficult to defend consumer rights in court.  He finds the judiciary is taking an increasingly hostile view toward class action suits and related litigation.  He believes that while the Concepcion decision, which denies people access to the courthouse, is only a year old, the shift against consumer legal rights began long before.  In the future, he hopes that we can work together to find a way to swing the pendulum back and get consumers back into the courthouse, holding corporations accountable.

Until then, Seth wants to tell consumers: “Don’t give up, fight for your rights.”  Consumers can do this by finding others who have been aggrieved in the same way and then working to find lawyers that will take on the cause.  Most importantly, he reminds everyone to make sure that their politicians are willing to fight for their right to have access to the legal system.  Seth encourages all citizens to “call, email, and text local and federal government legislators to make sure that they are willing to fight and stand up to ensure that all Americans have access to the court system.”

JPMorgan Chase executives, never at a loss for words, had little explanation this go-around.  CEO Jamie Dimon blamed the execution of the hedging, which is supposed to minimize risk against shifts in the market, rather than hedging as a practice.  In reality, there is no “safe hedging;” it is every bit as risky *cough* twobilliondollars *cough* as the position it purports to “hedge against.”

Mr. Dimon and his phalanx of lobbyists have spent millions arguing that the Volcker Rule, which ideally will outlaw risky positions such as the one that caused the $2 billon loss, will cost a fortune to implement.  The restriction on what has become commonplace bank activity—betting huge amounts of money in hopes of doubling or tripling it—will cost us even more, poor (rich) Mr. Dimon wails.

That would be moderately compelling were Mr. Dimon not ultimately backed by the American taxpayer, which we learned is the case a few years ago.  I can go to Vegas and bet the house on my beloved and star-crossed Cubs to win the World Series, because when I lose, I pay (and I will lose).  When JPMorgan makes the wrong bets, taxpayers pay.  In economics, it’s called moral hazard—there is incentive to taking risky actions, but no disincentive should that risk fail.  That’s why it’s fair that we regulate what kind of bets banks can make.

If you hold your hand out to the American taxpayer, if you hold yourself out as too big to fail, don’t come crying when we regulate what constitutes improper risktaking in your industry.

Assisted by David T. Martin

Mark Twain condemned statistics as worse than both lies and damned lies.  Well yes, he is Mark Twain, but statistics may in some cases—gasp—actually tell the truth.  The PEW Center recently released the following results from its May 2012 Overdraft America study:

• Nine of every ten Americans have a checking account, and 18% have overdrafted in the past year.  Over half of those overdrafters were unaware or did not think they had opted into the coverage, yet they were left paying a fee that averages $35 per overdraft.
• More than three in five overdrafters feel that overdraft protection mostly hurts those it purports to protect.
• Fully three quarters of overdrafters would prefer that their transaction be declined.
• Almost a quarter of overdrafters did not pay off their overdrafting fee on time—many because they were unaware they had the “coverage” and thus were unaware of the fee—and as a result incurred additional “extended overdraft fees.”
• Overdraft fees adversely impact young and low income consumers.  Over half of overdrafters are under 34, and almost two thirds make less than $30,000 per year.
• Many overdrafters do not find out about the fee until reviewing checking their bank account statement, which is twice as common as any other method of notification.

All due respect to Mark Twain, these numbers don’t lie.  They belie a lucrative industry (tens of billions of dollars in overdraft fees alone) that takes advantage of confused customers, most of whom don’t even realize they have the service.  “Hey, it’s a debit card, if I don’t have money on it my transaction will just be rejected.”  Not so much.

Whatever failsafes are currently in place, they have clearly failed to educate an American populace that is largely opposed to overdraft protection, especially at a going rate of $35.  (Perhaps more egregious than overdraft protection, which is covered by the bank itself, is the $10 average charge for overdraft transfers, which move the accountholder’s own money from another account to her checking account to cover the transaction.  “Wait…  You’re charging me to pay my bills with my own money?”)  Yet banks continue to rake in profits from unsuspecting consumers.

As with any consumer issue, some of the burden rests on our shoulders to more diligently manage finances and monitor the terms of our accounts.  But PEW also looks to the Consumer Financial Protection Bureau to establish rules limiting fees and regulating disclosures to consumers, and I second that thought.  Fees for “services” like overdraft protection should be neatly laid out on one matrix that accountholders can reference (rather than five or six, many of which still simply reference other contract information).  Moreover, the default should not be enrollment; rather, banks should be required to “offer” the so-called service to customers, who can then choose to enroll if it’s worth being charged $35 every overdraft.

Again, the statistics show that at least three quarters of overdrafters would not choose to enroll in overdraft protection—little wonder the banks haven’t made more of an effort at honesty, huh?  Those tens of billions might dry up pretty darn quickly.

I guess these days, there are lies, damned lies, and the things your bank tells you.

Assisted by David T. Martin

Despite her heroism and courage, Ms. Jenkins was fired by the EPA.  Last week, the Federal Merit Systems Protection Board, a little-known Washington, DC agency that has jurisdiction over the rights of federal employees,  found that the EPA had violated Ms. Jenkins’ due process rights by failing to inform her of all of the reasons for her discharge.  According to the EPA, Ms. Jenkins was fired for threatening a supervisor.  Ms. Jenkins, on the other hand, asserts that she was fired for blowing the whistle on the dangers of dust following the 9-11 terror attacks.

The Merits Systems Protection Board’s decision did not turn on Ms. Jenkins’ rights as a whistleblower – focusing instead on her due process right to be informed of the reason for her termination.  But any reasonable observer (Ms. Jenkins’ attorney, Paula Dinerstein, included) can see that the ruling is a boon to whistleblowers everywhere.  No more sweeping under the rug claims that are embarrassing, controversial and fail to neatly put to bed issues brought by whistleblowers in good faith.  Ms. Jenkins deserves more as do all whistleblowers.

Assisted by Zachary A. Kady

The case is AT&T v. Concepcion.  Heard of it?  Didn’t think so.  Well, a show of hands out there in blog land, “Who has a cell phone?”  How ’bout, “Have you ever purchased anything on the internet?”  Okay for the few readers that haven’t yet raised your hands, “Who has a bank account?”

For all of you who have raised your hands (I’m guessing that’s all of you), if you haven’t already been impacted: be prepared.  No matter what evidence of cheating or being “ripped off” you have; how inexplicable that mysterious fee is; the misrepresentation about a product’s usefulness; or the complete inoperability of a purchased item, the Supreme Court has said—like the Soup Nazi of Seinfeld fame—“No Court for you.”

In one of the biggest pro-business decision of the last hundred years, the Court told consumers they will be limited to “arbitration”  of any claims they have against a company.  This means companies can legally say no class actions and no stepping—even with your baby toe—into Federal Court.  Take that, consumers.  Sure, when times are tough we may ask you to increase your spending to save the economy; or, if banks are drunk from a credit binge and need bailing out, we look to you for the trillions of dollars we need to save the financial system from ruin.  But if you want the right to go to court to resolve a dispute with a vendor, forgetaboutit!

Consumers can still file claims in what is called arbitration, but that limited right is problematic for a host of reasons, most importantly, you will be required to go it alone.  (Oh and did I mention the corporation you are arbitrating “against” might have invented the rules?)  What does that mean?

Let’s say one million Comcast customers have a claim against the company over a disputed charge.  Let’s call it an excise tax for watching too many hours of sports.  The tax is $30.  Would you hire a lawyer for a $30 claim?  Of course not; that’s where the class action mechanism used to serve its role, binding the million customers with $30 claims into one “class” with $30 million in claims.  But as a practical matter—and this is the big enchilada—you can now forget trying to band together as a class.  That kind of populism and effort to “level the playing field” is banned, done, history.  You can thank the Supreme Court.

Thank you Mr. Segal for shining a light on this issue.  It is certainly a continuing and big story.

At least that’s what an article by Ben Protess and Peter Eavis predicts, citing anonymous sources with knowledge of the issue (a journalist’s best friend).  The Dodd-Frank Bill initially set a deadline of July 2012, but there has been a major push to bump that back into 2013 (and beyond into the next millenium if banks have their way).  Those all-powerful (“highly paid”) banking lobbyists have put the rule under siege.  Make it complicated, cry foul, introduce studies claiming the Rule will destroy democracy and capitalism as we know it.  Every delay they cause makes it more likely—in their minds at least—that the Rule won’t be passed in 2012, which would allow for the ouster in the interim of a Democrat-controlled Senate and President.

Like the old Four Corners offense, sometimes you have to play the clock to your advantage.  But on the bright side, it seems officials are attuned to the implications of a delay.  The Treasury Department meets weekly to discuss the Rule’s progression, and is currently ironing out several key aspects of the rule.  For instance, banks worry—or purport to worry—about what will be forbidden as “speculative trading.”  Will a vague definition of what is banned stop them from simple and legal “market-making,” an important liquidity-generating function of banks?  On the flip side, if “proprietary trading” is defined too narrowly, it will allow banks to proceed at status quo, under the guise of “market-making.”

It is an important distinction, but not one worth damming up the entire rulemaking process—which is exactly what banks seek.  Fortunately, regulators are aware of these definitional concerns.  They’re wading through a flood of comment letters designed, for the most part, just to slow them down.  But these recent comments from an “anonymous source” gives hope that officials have their eyes on the prize, and continue to push forward to have something finalized in early fall.

Fall, as great a time as any here in Washington.

Assisted by David T. Martin

Wal-Mart’s decision to bribe its way into ownership of over 2,000 stores in Mexico, at a cost of $24 million, was decidedly not legal.  “But Wal-Mart’s corruption largely arose from its Mexican subsidiary, Wal-Mart de Mexico, which maneuvered to hide its corrupt activities from Wal-Mart the parent.”  I don’t buy it.

Did anyone at Wal-Mart headquarters say, “Hey everyone, these profits are too good to be true.  Maybe we should figure out what is going on?”  Or perhaps, “This type of growth is unrealistic, what is making it possible?”  Nope, it’s the all-too-familiar “wink and nod,” let’s look the other way.  In the end it took a courageous executive-turned-whistleblower coming forward after the fact to truly focus attention on the issue.  Individual integrity strikes again.

Comparing these two recent examples of corporate overreaching (one legal, one not so legal) reemphasizes something I’ve been saying for a long time: We must work to hold corporations to a higher standard.  Why can’t ethics trump revenues?  It’s sad and misses the point when Wal-Mart put in an SEC filing, “We do not believe that these matters will have a material adverse effect on our business.”  I guess they are right.  At the end of the day, the reputation and brand of a company matters, but cold hard cash matters more.  And Wal-Mart has plenty of cash.

How can we begin to expect the same level of integrity from corporations as we currently do from individuals?  Either the public must be outraged by scandals like the one facing Wal-Mart and punish Wal-Mart by boycotting their stores (not going to happen), or the government must increase penalties and/or oversight so that it is simply too much of a financial risk to engage in such behavior.  We’ve seen time and again that public outrage about cheating doesn’t do the trick—just ask all the Yankees fans who continue to root for A-Rod.  So my eyes are on the government cracking the whip.  Only through increased enforcement, regulation, and a clearly defined set of deterrents will corporate integrity be promoted, incentivized and ultimately strengthened.

Senator Grassley, who has served on the U.S. Senate for more than three decades, has been an outspoken and courageous proponent of the benefit of whistleblowers.  As a conservative, fiscally responsible public servant he understands the tremendous value—return on investment—of whistleblowers.  They only get paid if they collect money, and even without much of an infrastructure  to support them (read: none), they have helped the government collect billions and as a deterrent to fraudulent conduct, save countless more.

The most recent institution to draw Senator Grassley’s ire?  The IRS.  Yes, that IRS.  Specifically its Whistleblower Office, which continues to evaluate claims at a glacial pace.  (Is there a word meaning “slower than glacial”?  It seems that my beloved Chicago Cubs win the World Series at about the same pace—once every 100 years, give or take a decade or two.)  What’s got the Senator so worked up?  Its been reported that nineteen IRS employees, including the Director of the IRS Whistleblower Office and two members of his staff, are currently playing 18 at Doral basking in the Florida sun attending the “Offshore Alert Conference” in Miami Beach. 

As Senator Grassley points out in his aggressive, take-no-prisoners letter regarding the Whistleblower Office, the Conference is of dubious relation to the goals and needs of the Whistleblower Office.  You see, the conference’s focus is on methods to acquire whistleblowers.  The IRS has plenty—thousands, more than likely.  Their problem is they are sitting on them.  Yep, just dragging those big bureaucratic feet.  It’s one excuse after another.

Hopefully Senator Grassley’s letter has lit a fire under Director Stephen A. Whitlock’s desk chair (or golf cart).  It demands numerous reports and responses dealing with the Whistleblower Office’s schedule, budgeting, and progression of claims.  Here are a few choice quotes from the Senator’s letter:

• “Since last writing to Commissioner Shulman, I have received even more correspondence from whistleblowers whose claims are not progressing at the IRS…  The lack of progress is demoralizing whistleblowers so that I am now concerned that whistleblowers will stop coming forward.”
• “In my September, 2011, letter to Commissioner Shulman, I requested that the IRS implement the GAO’s recommendations as well as a few others before the IRS submitted its next whistleblower report to Congress.  The IRS response to the GAO indicated that IRS did not have the resources to implement those recommendations.  As I stated in my letter, the money recovered from whistleblowers should more than cover the costs of implementing those recommendations.”
• “To date, the Deputy Commissioner has responded to my letters to each of you.  Given my concerns that the IRS Whistleblower program does not have your support, I ask that any response to this letter be under your signature.  I appreciate your prompt response.  If you have any questions, please do not hesitate to contact my staff.”

So whistleblowers fear not.  Grassley will stay on the IRS in a loud, public way.  And he will not go away.  Heck, if Theo Epstein doesn’t turn the Cubs around, I may be calling for Senator G to take over as General Manager when his Senate days are over.

Assisted by David T. Martin

On the one hand, they aren’t doing anything illegal.  They are being smart.  Just like they are smart in designing and marketing a new product.  So I begrudgingly applaud their acumen.  That acumen is demonstrated by Apple’s establishment of Braeburn Capital in Reno, Nevada to collect and invest its profits.  Moving profits away from its California headquarters reduces state corporate tax from 8.84% in California to 0% in Nevada.  What’s more, Nevada has no corporate gains tax, sheltering Apple from taxes on more than $2.5 billion earned on its cash reserves.  Additionally, Apple filters profits earned abroad through tax shelters like Ireland, the Netherlands, Luxembourg, and The British Virgin Islands—always avoiding high tax jurisdictions, regardless of the origin of a consumer’s purchase.

What’s wrong with all that maneuvering?  Indeed, they have a duty to their shareholders.  Management is merely the stewards of the great wealth created by the company and they would not be good managers if they paid billions in taxes that they could rightfully avoid.  I would expect nothing less from one of- (okay)- the world’s greatest consumer products companies.

On the other hand, if Apple doesn’t pay taxes, where does government get the money to pay for roads and schools and health care for the poor and elderly?  It’s a zero sum game folks and for every dollar Apple saves, someone else has to pay—or worse, the services aren’t provided.  Roads and bridges aren’t fixed, schools crumble and health care is reduced for the poor.  Now it’s not all on Apple for sure, but don’t they have some civic responsibility?  And even if not, as the biggest of the big boys, aren’t they benefited from a healthy state economy?  (Folks have more money to buy iPhones and download every season of The Wire on iTunes.)

So, when the largest corporation in the history of the nation is paying less in taxes than the average citizen, who is to blame?  Although I would like to see Apple be less strategic when it comes to taxes (save that creativity for the iPad 4), the ultimate problem is the U.S. Tax Code.  A tax system designed for an industrial world simply can’t work in the modern age of e-commerce.

When you go to the hardware store in Pennsylvania to buy a hammer and you hand over your $10 bill, the local merchant can’t pretend he received that money in Nevada—thus avoiding state corporate taxes.  However, when you buy a song on iTunes, the server processing your request could be located in any number of states.  Thus, there will always be a state (think Nevada, Delaware, North Dakota, North Carolina) willing to accommodate businesses like Apple.

The only reasonable solution is a federal one.  And it makes sense.  Consumer monies are traveling across state lines in interstate commerce only to be kept from the tax authorities at the expense of the rest of us.  That’s right.  We can’t forget that when Apple (as well as other companies) doesn’t pay its share, it’s the rest of us who suffer either in the form of higher taxes or less effective government services.  Have you noticed all those post-winter potholes popping up?

I’ll concede that, depending on how you look at it, American corporations are taxed at the highest rate in the world (counting both state and federal taxes).  However, the argument that Congress therefore cannot raise corporate taxes is simply wrong.  First of all, as demonstrated by Apple’s conduct, American corporations do not pay such high taxes.  Second, closing loopholes in the current federal system will not ameliorate the problems of tax forum shopping.  Third, capitulating to corporate demands of a “repatriation holiday” where foreign profits can be brought back home tax free is not advisable.  If corporations refuse to bring the money home, simply reconfigure the tax laws to include certain profits held abroad in the definition of profits “earned” in the U.S.  Finally, regardless of changes in corporate taxes, neither large nor small corporations will flee our shores for less expensive pastures.  The small companies can’t afford such a change and the large ones, even if they could afford it, could not practically accomplish it.  Is it any wonder that top executives of American corporations all live in the U.S., that they are mostly educated in the U.S., and that the best young talent still comes from American schools?  No.  A fear that higher, effective, and just taxes will scare companies away surely belies any professed belief that America (for reasons beyond its tax code) is the best place on earth for companies to build the economy.

Our reliance on an outdated tax system is costing tax payers—folks on Main Street—millions of dollars.  Congress, it’s time to act.