Archive for the ‘Ethics’ Category

Disclosures from a sick Wells Fargo obviously soil the efforts of deregulators on many issues. One of these is the very issue of disclosure.

In the Wells Fargo scandal, more than 5,300 employees created more than 2 million accounts unsolicited accounts for their customers.

Photo courtesy J B/Flickr, CC BY 2.0.

Photo courtesy J B/Flickr, CC BY 2.0.

First, the Wells Fargo employees faked the accounts to avoid being fired for failing an account creation quota.  Then, their bosses pressured them to meet quota because the bosses got bonuses based on quotas. And finally, their bosses and bosses’ bosses all the way to the CEO got bonuses when investors drove up the stock price as those investors figured those ever expanding account creation numbers demonstrated exceptional management.

Twelve times in the last half decade, CEO John Stumpf made reference to those account numbers on the quarter calls with Wall Street analysts.

The very core of this pathology involves disclosure.  In this case, both non-disclosure and fake disclosure.

Yet at this very time, Chair White’s Securities and Exchange Commission is railroading through a monster rule designed explicitly to reduce disclosure. Keeping with the tradition of misdirection, this reduction is misnamed the “Disclosure Update and Simplification.”

As Wells Fargo was diligent in reporting rigidly account sales figures, here are simply a few of the inconvenient items that are obviously material to how an investor values this stock that Wells Fargo elected not to disclose.

  • In 2009, Wells Fargo executives recognized that certain ambitious sales programs – such as “Jump into January” – were generating fraudulent accounts. This was not disclosed.
  • In February 2011, Chairman and CEO John Stumpf reportedly received an email from a 22 year veteran of the company explaining how the appearance of growth in new accounts could be faked; this employee was subsequently terminated. This was never disclosed.
  • In 2011, employee satisfaction surveys reportedly found that bank employees were uncomfortable with instructions from management to push customers to buy products. This was not disclosed.
  • In 2012 the community banking unit began to investigate suspicious practices in areas with high levels of customer complaints, such as Southern California. These investigations reportedly led to the firing of 200 employees in February 2013. This was not disclosed.
  • In 2013 and 2014, the board and management took action in response to these signals and at the behest of regulators— including increased risk management standards in the community banking divisions, modification of some sales goals, and an internal investigation by Accenture and Skadden, Arps on which the board was reportedly updated. This was not disclosed.
  • The Consumer Financial Protection Bureau began its investigation in 2013. This was not disclosed.
  • Wells Fargo employees delivered petitions with more than 10,000 signatures to the board at both the 2014 and 2015 annual meetings that urged the board to recognize the link between Wells Fargo’s high-pressure sales quotas and the fraudulent opening of accounts without customer permission. These petitions called on Wells Fargo to cease using these high-pressure quotas. This was not disclosed.
  • The New York Times reports that even after the company began to recognize the problem and provide ethics training that warned against creating false accounts, the continued sales pressure from management overwhelmed the ethical training. When employees either refused to sell customers products they did not want, or reported fraudulent account creation to the Wells Fargo ethics line, they were subject to discipline including termination. This was not disclosed.

While viewing this perfect example of non-disclosure, Chair White has been speeding through her SEC a major proposal to gut disclosure rules. The bewilderment of changes includes gutting disclosure on executive compensation.

The Agency proposes to delete its requirement that CEO and other senior officer pay be disaggregated. Disaggregation allows investors to see what in the pay package is cash, stock, options, etc. Had it been clear to investors that the millions in bonuses for the top brass stemmed from line salespeople (paid $25,000 a year) to open an absurdly high eight accounts per customer,[1] or be fired, or cheat and try not to get caught, then this runaway fraud might have lasted two years, instead of a possible two decades.

In addition,  White plans to reduce what firms using repurchase agreements (repo) for loans must disclose. Repo is like a pawn shop, where you deposit a watch worth $1,000 and get $900 for a day, then you buy back the watch for $1,100, which you agreed to from the outset. (You need to do well at the horse race track in the interim for this to work out for you.)  The financial crisis demonstrated that firms such as Lehman had grown addicted to repo, and had manipulated tax and other rules to enable its dependency. In fact, repo disclosure should be enhanced, not deleted.

There are a number of other disclosure rules that Chair White wants to white out.

On many items, White says the SEC won’t require a disclosure if GAAP requires it. GAAP may stand for “generally accepted accounting principles,” but that must be an inside joke since they’re not generally accepted. U.S. GAAP differs from accounting standards in other countries (an acute problem given that many public companies operate in multiple nations). And it can change, regardless of what the SEC does. As with many other proposals, the Agency is ceding its responsibility to safeguard disclosure.

That’s not a very cheery pep talk to write comment for the Nov. 2 deadline. So, Citizens, just try this:

Write Ms. White at regulations@sec.gov, put this in the subject line:  Re: “Disclosure Update and Simplification,” Proposed Rule; File No. S7-15-16; RIN 3235-AL82, and write something like: “Chair White,  Wells Fargo shows that all’s not well that ends well short of full disclosure. Wells Fargo shows that your disclosure idea goes in the opposite direction. Investors want to know.  Sincerely, your name.”

(Oh, and white-out apparently doesn’t work on computer screens, which is double-entendre.)

wellsgraph2The Fair Arbitration Now coalition strongly denounces Wells Fargo and its CEO, John Stumpf, for refusing to end the bank’s practice of preventing defrauded customers from suing in court. At a hearing held in the U.S. House of Representatives Committee on Financial Services yesterday, Stumpf stated unequivocally that Wells Fargo will continue to force consumer disputes into secret individual arbitration. The hearing examined Wells Fargo’s massive scheme to fraudulently open accounts in his its customers’ names.

The FAN Coalition is disappointed, but not surprised, that the CEO of a powerful financial institution would publicly champion forced arbitration.  In 2015, the Consumer Financial Protection Bureau (CFPB) released a comprehensive study on forced arbitration, which found that it is heavily rigged in favor of financial institutions. Among other things, the CFPB found that in forced arbitration, consumers bringing claims against corporations won only 9 percent of the time. However, when corporations sued their customers, the corporation won in 93 percent of arbitrations. Additionally, arbitration proceedings are completely confidential, which allows which allows corporations like Wells Fargo to hide widespread wrongdoing, as was the case with their fraudulent account cross-selling scheme.

Yesterday, Stumpf was asked by Rep. Brad Sherman (D-CA) whether his bank would continue to invoke forced arbitration clauses buried in the fine print of its customer contracts to prevent customers from holding the bank accountable for its illegal activities. Stumpf refused to end the practice, stating that he “believes in arbitration.” Stumpf previously declined to restore his customers rights last week when asked by Sen. Sherrod Brown (D-OH) during a hearing held by the U.S. Senate Banking Committee. At the same Senate hearing, Sen. Elizabeth Warren (D-MA) stated that the bank’s use of forced arbitration allowed them to cover up their patterns of abusive conduct, noting that “[i]f we had class actions on thisback in 2010, 2009, 2008, then this problem never would have gotten so out of hand.”.

The CFPB recently proposed a rule to restore consumers’ right to join together in class actions. More than 280 consumer, civil rights, and small business advocacy groups and over 100,000 individuals commended the CFPB for taking this crucial step to limit big banks’ and other financial companies’ efforts to escape accountability for breaking the law, and urged the agency to use the full force of its authority to restore consumers’ right to choose how to resolve disputes with financial institutions.

497px-edward_snowden-2Oliver Stone’s 2016 film Snowden debuted at the height of a controversy over whether or not President Obama should pardon Edward Snowden. His defenders argue that his disclosures prompted important legal and policy changes, while his opponents argue that he’s a criminal who should come back to the United States to stand trial.

The film itself paints a portrait of Snowden as a young conservative from a military background. He begins his career with the Central Intelligence Agency (CIA) with a loyalty to the United States and a desire to serve his country. As he transitions through different positions with private contractors in the intelligence community, he becomes increasingly disturbed by the breadth of government mass surveillance systems. What he witnesses at work haunts him – he develops an aversion to being photographed – and plagues his relationship with his girlfriend. Eventually, it leads him to flee to a hotel room in Hong Kong where he works in secret with The Guardian’s Glenn Greenwald and Ewen MacAskill and documentary filmmaker Laura Poitras. They race against the clock to make his story public before the government can arrest him.

The rest, as they say, is history.

It’s easy to get lost in the controversy of Snowden’s disclosures, but it’s important to remember the context of his decision to go public. Snowden was familiar with the whistleblowers in the intelligence community who came before him. Despite making their own disclosures through designated channels within the government, these workers had no safeguards against the severe retaliation they faced.

Take the case of Ed Loomis, a former National Security Agency employee and contractor within the intelligence community. After he reported an ineffective and wasteful surveillance program through a designated government hotline, the government responded by revoking his Top Secret security clearance, rendering him unable to work in the intelligence community. The Federal Bureau of Investigation (FBI) also raided his home for five hours. He and his wife watched as agents in Kevlar vests confiscated their possessions.

Contractors in the intelligence community deserve better than what happened to Ed Loomis. Public Citizen and many other organizations committed to open and transparent government support extending protections to contractors who blow the whistle on waste, fraud, and abuse in the intelligence community.  Without safeguards against employer retaliation, whistleblowers may either stay silent about government wrongdoing or make disclosures through the media.

Lawmakers recognize the urgent need for reform, but change has been slow. In 2015, Sen. Claire McCaskill (D-Mo.) introduced a bill to extend whistleblower protections to contractors in the intelligence community. In theory, this bill should not be contentious. Certain intelligence community contractors had access to such protections for a limited time without any evidence of negative consequences to national security. But, lawmakers controversially revoked these rights in 2012. So far, Congress has failed to take action on Sen. McCaskill’s critical measure.

Snowden ends with familiar audio clips from the 2016 presidential primary debates where the candidates voiced their opinions about his actions. Their reactions are mixed, but frustratingly, there is no discussion of the much-needed whistleblower protection reforms like those in Sen. McCaskill’s bill.

The controversy over Snowden and his 2013 disclosures is unlikely to end anytime soon. However, if policymakers want to prevent future national security leaks, they should make whistleblowing safe for all intelligence community workers – including contractors. Congress should enact Sen. McCaskill’s bill to protect these individuals who bravely risk so much in serving the public good.

IRS Commissioner John Koskinen’s appearance in front of the House Judiciary Committee on Wednesday was a missed opportunity to advance an important discussion about nonprofit governance. Members of the committee from both parties chose to create a political spectacle rather than talk about real solutions for problems with the definition of political activity for tax-exempt organizations.

Republicans proceeded as though the hearing was a genuine impeachment hearing, while denying Commissioner Koskinen any kind of due process –including the rights to have counsel present and to call and cross-examine witnesses.

John Koskinen

IRS Commissioner John Koskinen, courtesy of Brookings Institution/Flickr

On the other side of the aisle, many Democrats chose to question the Commissioner about Donald Trump’s unreleased tax returns and the Donald J. Trump Foundation’s alleged self-dealing. Some Democrats did defend the Commissioner and labeled the proceeding a “sham” and a “farce.”  Even though Koskinen made it evident early in the hearing that he could not comment on particular taxpayer situations, a number of Democrats asked again and again about thinly veiled hypotheticals relating to Trump’s tax situation.

It is understandable that Democrats would not ask Koskinen questions related to the impeachment attempt by the House Freedom Caucus, given that the impeachment is doomed to fail and is merely designed to make headlines. Democrats could have used the opportunity to show the American public that they are serious about creating clearer rules for tax-exempt organizations rather than respond to a political attack with a political attack of their own.

In fact, members of both parties could have used this as a chance to confront the dysfunction and disunity that has plagued Congress. Instead of asking the Commissioner questions he has already answered and accusing the Commissioner of nefarious acts of which the Treasury Department’s independent Inspector General and the Department of Justice have cleared him, members should have asked substantive questions on topics that can move the government forward.

For example, members of the committee could have used the opportunity to ask Koskinen about the negative effects that the current vague rules have on nonprofits – especially 501(c)(3) organizations. They could have asked about the effects of the Congressional prohibition on the IRS’s ability to engage in rulemaking activities for 501(c)(4)s. Or, they could have asked about how to improve the current tax regime for non-profit organizations moving forward.

Without clearer rules to define political activity, risk averse 501(c)(3)s will be forced to refrain from civic activities that should be permissible because they do not want to jeopardize their tax-exempt status. In addition, bad rules cloud the waters when it comes to responding to an attack on an organization’s core mission. When someone close to a political candidate compares refugees to skittles, how can a refugee-focused 501(c)(3) respond without violating the (c)(3) ban on political activity? There are nonpartisan ways to respond, but because the rules are so unclear, most would choose to remain silent rather than take any risk they could accidentally stray over the line.

The time has come to stop using the IRS to further partisan political goals and instead acknowledge the important nonpartisan role it plays in governing tax-exempt organizations and the critical responsibility it has in maintaining American democracy.

This article was originally published on The Hill.

Wells Fargo’s scandalous practice of secretly opening more than 2 million sham deposit and credit card accounts dragged on for at least five years.

How did Wells Fargo get away with it for so long?

stagecoach-5106_640A big part of the story: Wells Fargo contract provisions blocked consumers from suing the bank in court. It’s past time to prohibit the “ripoff clauses” that prevent consumers from enforcing their most basic legal rights.

Like most big banks and many other corporations, Wells Fargo buries ripoff clauses in the fine print of its customer contracts. These provisions, also known as “forced arbitration” clauses, prevent consumers from suing over wrongdoing in court and prohibit consumers from banding together in class actions. Instead, ripoff clauses force consumers to seek redress in private arbitration, on an individual basis.

So when lots of consumers have suffered small harms — as was the case with Wells Fargo — there’s nothing they can do. It’s generally not worth the time and money to bring a case individually, and there’s a disincentive to proceed in arbitration, where claims are decided by a private firm handpicked and paid by the corporation rather than a judge or jury. Effectively, banks and other corporations are free to rip off their consumers without fear of being held accountable in court.

The problem isn’t just that aggrieved consumers don’t have access to a remedy. Keeping cases out of court means abuses are kept out of the spotlight.

That’s exactly what happened with Wells Fargo, and why the abuses could go on so long.

Indeed, more than three years ago, a Wells Fargo customer named David Douglas sued in California, contending that the bank’s employees and branch managers “routinely use the account information, date of birth, and Social Security and taxpayer identification numbers … and existing bank customers’ money to open additional accounts.” Douglas alleged that branch managers opened at least eight accounts in his name and created fake business accounts under his name without his knowledge.

This case should have gone to court but was blocked by a ripoff clause. Douglas’s lawyers argued that an arbitration provision in a legitimate account agreement should not bar him from suing over a sham account he never agreed to open. However, citing recent 5-4 U.S. Supreme Court decisions, the judge held that the ripoff clause in the original agreement blocked him from suing Wells Fargo.

In 2015, another Wells Fargo customer, Shahriar Jabbari, tried to file a class action against the bank, claiming that employees hid fees, refused to close accounts on request, and forged signatures and addresses. Wells Fargo publicly denied these allegations. Again, the judge ruled that the ripoff clause in the original account agreement forced any unresolved disagreement into arbitration, and Jabbari’s class action was kicked out of court.

Had these early cases been allowed to proceed, others almost certainly would have followed, and Wells Fargo may have ended these pervasive abuses years ago.

Instead, it took until last week for the practices to be halted, and then only thanks to the efforts of the new Consumer Financial Protection Bureau (CFPB), the agency devised by Sen. Elizabeth Warren (D-Mass.) and adopted as part of the 2010 Dodd-Frank financial reform bill. State and federal regulators had notice of the problem at least as far back as 2013, when the Los Angeles Times first reported on Wells Fargo’s fraudulent accounts. Front-line Wells Fargo workers had drawn attention to the problem, too; in April 2015, at the bank’s annual shareholder meeting, Wells Fargo employees with the Committee for Better Banks submitted an 11,000-signature petition calling for an end to sales quotas that fueled fraud.

Private enforcement – individual lawsuits and class actions brought by harmed consumers — not only is a necessary complement to agency efforts, but it also often alerts agencies to the need for action.

Governmental agencies don’t have the resources to police every instance of fraud. And these agencies frequently face industry smears and congressional posturing that halts or slows their ability to act.

When consumers are blocked from suing, it takes longer for agencies to become aware of a problem and is much more difficult for them to gather evidence and build a case — particularly when companies use forced arbitration to keep victims silent.

The solution: Do away with ripoff clauses. The CFPB has proposed a rule that would end the worst ripoff clauses in the financial arena, restoring consumers’ right to join together in class actions to hold banks accountable for predatory behavior.

The big banks are trying to block the rule, but the Wells Fargo scandal shows exactly why the CFPB should prevail.

Weissman is president of Public Citizen. Donner is executive director of Americans for Financial Reform.

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