Wall Street’s Kangaroo Courts Perpetuate a Business Model of Fraud

By Pam Martens: May 2, 2016

Susan Antilla

Susan Antilla

Speaking of the Wall Street and global banks that populate London’s financial district, John Mann, a Member of Parliament, asked the rhetorical question at a Treasury Select Committee hearing on February 4, 2014: “Have we or have we not just had the biggest series of quantifiable wrongdoing in the history of our financial services industry?…Is there any other industry in recorded history in this country who’s had a comparable level of quantifiable wrongdoing to your knowledge?”

The answer, of course, is that there is no other industry on either side of the pond that has inflicted as much economic pain as Wall Street through “quantifiable wrongdoing.” And yet, the U.S. government continues to allow this serially crime-infested industry to run its own private justice system where both its customers and its employees are barred from taking their lawsuits into a court of law so that the public and the press can monitor the proceedings and have future access to the detailed court records to analyze patterns of crimes or recidivism.

Depending on which side you’re on, this private justice system on Wall Street has various monikers. Wall Street firms and their lawyers call it “mandatory arbitration” or “pre-dispute arbitration agreements” and say it is fair and fast. Many plaintiffs who have been through the system call it “a kangaroo court.” The plaintiffs’ bar has in the past produced evidence of an intentionally rigged system. Feminist Gloria Steinem once dubbed it “McJustice.”

One veteran Wall Street reporter, Susan Antilla, has spent two decades chronicling the abuses occurring under Wall Street’s private justice system while also writing on the myriad other ways Wall Street has tilted the playing field. In her 2002 book, Tales from the Boom Boom Room: Women vs Wall Street, published by Bloomberg Press, Antilla devoted a full chapter to the “No-Court System.” The award winning book traversed a pitched five-year Federal court battle in which I and other Wall Street women sued the retail brokerage firm, Smith Barney, the New York Stock Exchange and the National Association of Securities Dealers (NASD) for effectively voiding the nation’s civil rights statutes by forcing these employee claims into an industry-run arbitration forum. The lawsuit documented that serious sexual assaults were occurring, as well as an enshrined system of sexual harassment, because Wall Street correctly perceived it had built an impregnable wall of immunity around itself. Wall Street had not only masterminded a “No-Court System,” it had carved out a no-law-zone for the financial securities industry.

Just where this kind of no-law system can lead has found a textbook case in the corrupted culture and collapse of Smith Barney’s parent, Citigroup, during the 2007-2010 financial crisis. To stay alive, Citigroup was propped up with the largest taxpayer bailout in U.S. history, including a $45 billion equity infusion; over $300 billion in asset guarantees; and more than $2 trillion in initially secret, low-cost loans from the Federal Reserve. Its thank you to the U.S. taxpayer was to be charged with, and admit to, a criminal felony on May 20, 2015 for rigging U.S. foreign currency markets. According to the details in the felony charge brought by the U.S. Justice Department, Citigroup’s illegal behavior in the foreign currency rigging matter spanned a period from December 2007 through January 2013. Outrageously, that includes the period after 2008 when Citigroup was being kept alive with taxpayer money. (See Citigroup’s broader rap sheet here.)

The arbitration issues exposed by Antilla should have shamed the U.S. into legislative action. But as a testament to the power and money of Wall Street in Congress, bills to overturn Wall Street’s no-court system have failed to make it out of committee for decades. In her 2002 book, Antilla provides specifics on how a female broker and a female sales assistant were sexually assaulted by the same male broker in a branch office of Smith Barney. In advance of the arbitration, Smith Barney “forced the two women to undergo examinations by a psychiatrist of the brokerage firm’s choosing,” writes Antilla. The female broker was “subjected to a grilling by Smith Barney’s consultant that included questions about her sex life, the opening of her gynecological records, and queries about her menstrual periods, her marital counseling and her divorce.” The female assistant, continues Antilla “was placed in a chair in the middle of a room, was similarly grilled with two-and-a-half hours of questions that ranged from her sexual experience to her childhood.” Antilla adds that “in an utterly bizarre moment, he asked her to recite the names of all the U.S. presidents in reverse order,” causing her to finally break down in tears.

In 2013, Antilla reported in an article at the New York Times that looking at the outcome in seven months of arbitration awards on Wall Street, “arbitrators granted awards to only 39 percent of claimants, the lowest win rate in five and a half years…” Earlier that year, Antilla had explained to Times readers how Finra, the industry’s self-regulator that oversees arbitration claims, could magically make charges against brokers by customers disappear from their official records at BrokerCheck, a database operated by Finra where customers can check on the background of their broker or a broker they’re considering to handle their investments.

In June 2015, a report from Antilla appeared at TheStreet.com, showing that Finra had allowed an imposter posing as a lawyer to “participate in 38 arbitrations over a 15-year period,” before it caught on. In another case, an arbitrator had been indicted by a grand jury. And in yet another situation, an arbitrator “had been accused of judicial misconduct and had been arrested for voyeurism.”

In October of last year, Antilla was back in the New York Times with an article describing how Morgan Stanley (which purchased the Smith Barney brokerage firm outright in 2013 following a joint venture in 2009) had instituted a policy going forward where “court will be eliminated as an option for all workplace claims and employees will be barred from taking part in class-action lawsuits.” Class action claims brought in court, where broad based discovery and depositions are allowed, can show an entrenched pattern of fraud, or in civil rights matters, how the same conduct is condoned in coast to coast offices of the firm, buttressing claims of management-authorized practices. It’s clear why Wall Street would want to gut these court protections from workers.

Antilla’s broadly based knowledge of the underbelly of Wall Street brings little applause from its privileged elite. Her writing has, however, been recognized regularly by fellow journalists. Antilla will receive an Excellence in Journalism Award at the Society of the Silurians’ annual dinner on May 18 in Manhattan. She was also recognized with a 2016 first place award from the Connecticut Press Club and her commentary in 2015 at TheStreet.com garnered an award from the Society of American Business Editors and Writers.

Antilla is not the only one to consistently raise alarms about this crony system of justice. On July 20, 2000, the Public Investors Arbitration Bar Association (PIABA) accused the National Association of Securities Dealers (NASD), the industry’s self-regulator and predecessor to Finra, with rigging its computerized system that selected arbitrators. PIABA wrote in a statement it released to the public: “In direct and flagrant violation of federal law, the NASD systematically evaded the Securities and Exchange Commission approved ‘Neutral List Selection System’ arbitration rule requiring arbitrators to be selected on a rotating basis. Instead, the NASD secretly programmed its computers to select some arbitrators on a seniority basis – just what the rule was designed to prevent.”

Selecting arbitrators from a limited pool of well-paid repeat players stands in stark contrast to the jury pool selection process in court where potential jury members are randomly selected from tens of thousands of citizens.

PIABA discovered the manipulation when its attorneys attempted to test the arbitrator selection system at a conference in Chicago on June 27, 2000.  PIABA said in their statement that “this rule violation tainted hundreds or even thousands of compulsory securities arbitrations – many still ongoing.  In every such instance, the substantive rights of public investors to a neutral panel have been cynically violated,” wrote PIABA, adding that “Many public investors were thus twice cheated: first, by an NASD member firm that fraudulently conned them out of their life’s savings, and second by the NASD Arbitration Department’s rigged panels.”

On July 21, 2010, when President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, it failed to extinguish this thoroughly discredited private justice system run by the most corrupt industry in America — which just two years prior had crashed the entire economy in the worst collapse since the Great Depression.

As a gesture to those demanding reform, Congress threw a few crumbs. It created the Consumer Financial Protection Bureau (CFPB) and authorized it to study mandatory arbitration for non securities-related financial products like credit cards, checking accounts, student loans, payday loans, etc. The CFPB was also given authority to “prohibit or impose conditions or limitations” on pre-dispute mandatory arbitration clauses in these non securities-related areas if it felt it to be in the public interest.

The CFPB released its extensive study on March 10, 2015. In October of last year, CFPB released a statement indicating it is proposing to ban financial firms from barring class action claims from proceeding to court. Richard Cordray, Director of the CFPB, said at the time: “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card. Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

The CFPB also announced two other proposals to make arbitration more transparent: requiring that companies that choose to use arbitration clauses for individual disputes provide the CFPB with the details of the arbitration claims filed and awards issued so it can function as a monitor. It is also considering publishing the claims and awards on its website so the public has access to them.

The CFPB also agreed with the premise that the private justice system in the financial industry is perpetuating a culture of fraud, writing: “Arbitration clauses enable companies to avoid being held accountable for their conduct; that makes companies more likely to engage in conduct that could violate consumer protection laws or their contracts with customers. When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly.”

The CFPB’s aggressive posture in this area is why Republicans in Congress and Wall Street lobbyists are treating it like a rabid dog and attempting to remove its independence.

While the CFPB has done yeoman’s work in a short period of time in the arbitration arena, the Securities and Exchange Commission (SEC), which was given sole authority under Dodd-Frank’s Section 921 to “prohibit, or impose conditions or limitations” on mandatory arbitration contracts in the securities industry, where tens of billions of dollars of frauds occur on a regular basis, has done nothing since Dodd-Frank’s enactment in 2010 regarding mandatory arbitration but to take public comments and tinker a little around the edges while also maintaining a shroud of secrecy concerning its oversight of Finra’s arbitration processes and how it selects its arbitrators.

The public comments that have been received at the SEC regarding mandatory arbitration include one dated February 4, 2016 from retired trial lawyer, David Noble. He told the SEC that he has had “numerous experiences with arbitration and none of them have been at all satisfactory.” Noble adds: “There might as well be a provision to settle disputes by throwing darts as to have an arbitration.”

Timothy Heilig wrote the following to the SEC in a November 14, 2014 letter:

“With mandatory binding arbitration, the consumer has no access to the public courts no matter what crimes a financial firm may have committed against him. I have seen cases of fraud, forgery, and other laws broken, and the consumer still has no right to have his claims heard by a jury of peers. Instead, the victim of the bankers crimes is forced to submit his claim to a biased forum controlled by the financial industry itself. How is that in any way fair?”

Jeffrey R. Sonn, a Florida attorney, wrote an impassioned appeal to the SEC on December 3, 2010. Sonn raised the constitutional issue, writing:

“…today virtually every brokerage firm in America includes a mandatory arbitration provision in its new account documentation for every type of account. Practically speaking, the provisions are non-negotiable. The result is that if customers want to buy a stock or a bond or seek to participate in the capital markets in America, they must give up their Constitutional right to a jury trial by an independent and impartial judiciary and agree to mandatory arbitration.”

Sonn also warned the SEC that mandatory arbitration is undermining trust in the securities industry. He noted in his public comment letter the following:

“In 2005, amid concerns about the fairness of the arbitration process, the Securities Industry Conference on Arbitration (‘SICA’) conducted a study of perceived fairness in the arbitration process. It consisted of a survey that was sent to over 30,000 participants with questions assessing perception of the arbitration process…Over sixty percent of customers perceived the process as unfair, with nearly half perceiving arbitral panels as being biased. And, most significantly, three out of every four customers found securities arbitration to be ‘very unfair’ or ‘somewhat unfair’ when compared with the judicial system.”

One of the key reasons that participants in Finra arbitrations view the process as unfair is because it is, literally, a lawless system. Arbitrators are instructed that they do not have to rely on case law or legal precedent as courts do. Instead, they can simply follow their gut instincts as to what would be an equitable solution. Detailed written decisions, as a plaintiff would have in court, are rarely provided to explain the arbitrators’ rationale. Melinda Steuer, an attorney from Sacramento, California told the SEC in her comment letter of August 18, 2010 the following in this regard:

“Arbitrators do not have to follow the law, and often do not, to the detriment of the customer. For example, in California, financial advisors owe a strict fiduciary duty. Because arbitrators do not have to follow this law, this fiduciary standard is often ignored in arbitration, and brokers and broker-dealers are able to get away with arguments and defenses which would not pass muster if the case was in court.”

Appeals to a court after an arbitration are almost impossible, leading Steuer to remind the SEC that “the fact that a judge has an appellate court looking over its shoulder usually prevents the worst abuses. There are no such checks and balances in arbitration.”

This same lack of checks and balances could also be said of the SEC. From the Bernie Madoff Ponzi scheme, to the epic securitization of toxic subprime debt that was allowed to be peddled to investors with triple-AAA ratings, to the accounting frauds at Enron, WorldCom and Tyco, to the current unchecked wave of high frequency traders effectively gaming every market that trades today, to the $163 trillion in derivatives that sits on the books today of the four largest banks on Wall Street – who exactly is it that’s looking over the shoulder of the SEC? Who exactly is it that authorized this failed regulator with its crony ties to Wall Street to be the overseer of a private justice system that looks increasingly like an institutionalized wealth transfer system from the middle class to the one percent.

Tragically, the SEC’s overseer is Congress – a body whose disapproval rating among the American public is 79 percent according to an April 6-10 Gallup poll.

As American voters assess the anti-establishment mood in the country heading into the general election, they might want to think about this: the Declaration of Independence on which this nation was founded specifically cited the tyranny of King George III and his own no-court system. The founding fathers wrote in that historic document that King George III “has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries” and, furthermore, he was “depriving us in many cases, of the benefits of Trial by Jury.”

Not only is mandatory arbitration a travesty against the very taxpayers who fund our nation’s courts while finding themselves increasingly locked out of them, and a travesty against the idea of equal justice under law – but mandatory arbitration has gutted the Seventh Amendment to our nation’s Bill of Rights, which guarantees: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.”

A bloody revolution finally settled the grievances against King George III. Let’s hope that today, a political revolution comes in its place.

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