By Pam Martens: August 3, 2009
As the newly appointed Financial Crisis Inquiry Commission prioritizes its agenda to investigate how a 200-year old system conceived to establish fair pricing and trading of stocks and bonds morphed into a rigged backroom casino of craps tables piled high with triple-A rated junk that crippled the world’s largest economy, they must place Wall Street’s private justice system at the top of their list for subpoenas.
The rationale is as simple as this:
— there is only one industry in America bringing the country to its knees;
— there is only one industry in America which requires its workers to contractually relinquish their access to the courts as a condition of employment;
— look under that rock first for the thousands of industry whistleblowers who walked out of these kangaroo courts with gag orders, leaving behind their documents, placed under seal by colluding lawyers.
Here’s a sample of what the Financial Crisis Inquiry Commission will find when it looks at how corruption was kept in a black box by mandatory employment contracts on Wall Street. The following text comes from a major Wall Street firm’s contract with employees:
“The Policy makes arbitration the required and exclusive forum for the resolution of all employment disputes based on legally protected rights (i.e., statutory, contractual or common law rights) that may arise between an employee or former employee and the Corporate & Investment Bank or its current and former parents, subsidiaries and affiliates and its and their current and former officers, directors, employees and agents…the arbitrator shall be bound by applicable Firm policies and procedures and shall not have the authority to alter or otherwise modify the parties ‘at-will’ relationship or substitute his or her judgment for the lawful business judgment of Firm management.”
In other words, when you work for Wall Street you enter a twilight zone where the financial elite make their own laws and run their own private justice system to carry out those laws. (Arbitrators, even outside of Wall Street, are not required to follow the nation’s laws or legal precedent or write a reasoned decision based on those laws.)
Typically, Wall Street employee claims were arbitrated by the National Association of Securities Dealers (NASD), now known as FINRA, where current or former industry personnel routinely sit as judge and jury. In the above Wall Street employment contract, the American Arbitration Association (AAA) was designated to hear claims if NASD declined.
On November 6, 2000, myself and members of the National Organization for Women in New York City (NOW-NYC) protested in front of the AAA corporate offices on Madison Avenue. We distributed a flyer that read, in part:
“AAA injected itself via a ‘friend of the court’ brief into a critical case currently before the U.S. Supreme Court that would, if upheld, outlaw waiver of employees’ access to the courts as a condition of employment. While arguing in favor of more corporate kangaroo courts, AAA failed to disclose that it was performing arbitration services for Circuit City – the very corporation charged with violations of law in the U.S. Supreme Court case. AAA has an incestuous relationship with corporate America. According to its 1999 Annual Report, the following corporations are represented on its Board of Directors: Boeing, PetsMart, Prudential Property & Casualty Insurance, Sprint, AXA Financial, Monsanto, GE, McDonalds, Essex Boat Works, Walt Disney, General Mills, FedEx, Freddie Mac, Pfizer, BellSouth, Pitney Bowes, Waste Management, Goya Foods, Texaco, Kansas City Southern, Cushman & Wakefield, Cooper Industries, DaimlerChrysler, Dow Chemical, Commonwealth Edison, International Dairy Queen, Coors Brewing, Hallmark Cards, Hartford Financial.”
One month before this protest, NOW-NYC sent a letter to then Attorney General, Janet Reno, asking the Justice Department to investigate AAA’s false testimony to the Supreme Court that it was a “public service organization” and “not in support of either party” while failing to disclose that it had a financial conflict of interest aligned with the appellant, Circuit City, to whom it had provided arbitration services for at least the past two years.
NOW-NYC also advised Attorney General Reno as follows:
“…the neutrality of its arbitrators has been seriously called into question by a memo written January 14, 2000 by Paul L. Van Loon, Regional Vice President at the time of AAA. In this memo, Mr. Van Loon tells the very arbitrators who may be called upon to adjudicate claims: ‘Part of our marketing effort for 2000 will be to develop business contacts with corporations headquartered in Northern California. Meeting with corporate counsel and CEOs will allow us the opportunity to develop personal relationships and explore the use of ADR in their business. To accomplish this, I am asking for your help. If you have a contact with a corporation and you can make the introduction for us, please print your name next to the corporation listed…Allowing us to make a ‘warm’ call will make the connection more meaningful. If you would like to make the call with us, please indicate it on the sheet…”
We informed Attorney General Reno that AAA held an investment portfolio containing $21,894,000 in the stocks of American corporations and $10,743,000 in corporate bonds.
As far as I am aware, the Justice Department took no action against AAA. However, eight months later, on June 15, 2001, the Florida Bar News reported that “…Janet Reno has been elected to the board of directors of the American Arbitration Association.” In subsequent years, Ms. Reno went on to serve on AAA’s Executive Committee where, by 2006, she was sitting alongside former FBI and CIA Director William Webster.
Ms. Reno showed an early affinity for private justice systems. On April 30, 1998, the Attorney General held a national news conference to announce that in celebration of Law Day, she was, effectively, encouraging lawyers not to overuse the laws.
“Here at the Justice Department, I have instructed every attorney to consider using ADR (alternative dispute resolution) as part of their regular practice. And in the last 3 years, we have quadrupled the number of cases where ADR has been used. But we have to do more. And that is why I urge Congress to pass legislation, pending in the Senate, that would require every Federal district court to establish an ADR program. Every litigant deserves an alternative to expensive, burdensome and all too often unsatisfying litigation.”
It was not just Attorneys General and FBI Directors that private justice systems wanted to add to their stable of luminaries. Sitting judges were wooed as well. In October 2001, Reynolds Holding penned a devastating three part series for the San Francisco Chronicle on the systemic rigging of these systems:
“Today, the American Arbitration Association, JAMS and several other arbitration providers compete to hire the biggest names on the bench… The attractions for judges are obvious. A Superior Court judge earns $133,055 a year, while top arbitrators can make $10,000 or more a day, in addition to retirement pay… No one has accused judges of issuing favorable rulings to impress arbitration firms. But critics say judges undermine the judiciary’s credibility by joining the firms shortly after issuing opinions that uphold controversial arbitration clauses, particularly when those opinions are reversed on appeal…On March 13, 1997, for example, U.S. District Judge Eugene Lynch ruled that securities broker Tonyja Duffield must go to arbitration with the sexual discrimination and harassment claim she had filed against her employer. Duffield argued that she had not agreed to arbitration ‘knowingly,’ which the U.S. Court of Appeals had determined was a requirement for enforcing such agreements against employees. Lynch ruled against her anyway.
“Less than four months later, JAMS announced that Lynch was joining its panel of arbitrators…
“In a September 1999 decision, state Court of Appeal Justice William Masterson and two colleagues ruled that a law firm could fire legal secretary Donald Lagatree for refusing to sign a mandatory arbitration agreement more than three years after he was hired.
“…Masterson retired to become a private judge in June 2000 — five months before a federal judge barred Lagatree’s former law firm from imposing arbitration on its employees. The law firm has appealed the decision. Last August, Masterson joined JAMS…
“In 1999…Justice Christopher Cottle and two colleagues on the state Court of Appeal in San Jose ruled that San Diego’s Technology Integration Group could force administrative assistant Amanda Lee to arbitrate her stalking and sexual discrimination suit — even though Lee didn’t know she had waived her constitutional right to a jury trial…Earlier this year, Cottle retired from the bench and announced that he was discussing a job with JAMS. He has since decided to practice arbitration independently.”
For most of the decade of the 90s, JAMS (formerly named Judicial Arbitration and Mediation Services) was owned by Warburg Pincus, a private equity firm with extensive investment banking ties to Wall Street. The private investors who own it now constitute a black hole worthy of a subpoena from the Financial Crisis Inquiry Commission.
To perpetuate and expand the privatization of the nation’s court system, JAMS asks its stable of retired judges and lawyers to kick in part of their pay to the JAMS Foundation. Its web site provides a list, dated June 1, 2009, of more than 150 of its “neutrals and associates” who are kicking in at least 1 percent of their monthly pay.
On July 14, 2009 Minnesota Attorney General Lori Swanson charged one of the private justice providers, the National Arbitration Forum (NAF) with consumer fraud, deceptive trade practices, and false advertising, effectively working “alongside creditors behind the scenes – against the interest of consumers.” Ms. Swanson had obtained documents proving cross ownership of NAF and the law firms representing the bank lenders. (See Judicial Apartheid, Part I, for the detailed charges brought against NAF.) Since then, the heretofore impenetrable fortress of crony justice has been blowing up faster than a clay pigeon at a skeet shoot.
In two weeks time, NAF has announced that it will no longer adjudicate consumer cases; AAA has announced that it has ceased accepting new consumer debt cases; JPMorgan Chase & Co. confirmed in an emailed response: “…As a result of recent events, we are taking swift and appropriate action: Chase is no longer filing any new consumer credit card arbitration claims. Chase is continuing to evaluate the inclusion of an arbitration provision in its consumer contracts.”
What has these immovable powerhouses on the run? On April 25, 2008 the U.S. Court of Appeals for the Second Circuit sent a chill down the spine of every current and former general counsel of every major Wall Street bank and brokerage firm. The court ordered that Ross v. Bank of America be reinstated in the District Court. The lawsuit charged collusion between Bank of America, Capital One, JPMorgan Chase, Citigroup (and its siblings Citibank, Citicorp Diners Club Inc.), HSBC Finance Corp., MBNA, Providian Financial Corp and related subsidiaries. American Express Travel Related Services Company had been named in an earlier, related suit and was listed here as an interested party.
Imagine this scenario: documents surface showing that the private justice system used by the biggest banks in the country has been rigged in hundreds of thousands of cases. Next, evidence surfaces that conclusively shows that the general counsels of these very same banks have huddled together in one room to draft a uniform mandatory arbitration clause banning class action lawsuits in their credit card contracts and shared strategies on its implementation, effectively locking the courthouse doors to every credit card holder in America.
Next consider that many of these were the same Wall Street banks who shackled their stockbrokers to mandatory arbitration clauses and used at least one of these compromised arbitration forums when employees blew the whistle; were the same investment firms that forced their investing customers into mandatory arbitration forums as a condition of opening a brokerage account; and most were the very same banks who had received hundreds of billions of dollars of public funds in order to survive heavy losses of their own making, then paid out billions of dollars to top executives in bonuses, including potentially some who engaged in collusion.
It’s not hard to see that there is a public relations nightmare looming large and RICO charges not far behind.
In their appellate brief, lawyers for Robert Ross and the other plaintiff-appellants, advised the court as follows:
“Defendants initiated their conspiracy – the self-proclaimed ‘Arbitration Coalition’ – in late 1998 or early 1999, when Defendants (and their co-conspirators) began communicating about the use of arbitration clauses. A preliminary meeting convened on May 25, 1999, in Washington, D.C. The agenda for this conference of senior in-house counsel of the credit card issuers included a planned discussion about arbitration clauses and their utility. In the beginning, only First USA (now part of Chase) and American Express had acted to impose arbitration clauses containing class action bans (Bank of America had an arbitration clause but it did not contain the ban).
“Following this preliminary meeting and other communications, Defendants formally organized the ‘Arbitration Coalition’ to recruit all Defendants into promulgating arbitration clauses with class action bans…Over a four-year period, the Arbitration Coalition held at least nineteen meetings or conference calls…Through the Arbitration Coalition, Defendants created and availed themselves of the opportunity to collusively plan the adoption and use of arbitration clauses as a means for eliminating class actions on an industry-wide basis.
“The Arbitration Coalition’s intense preoccupation with negating class actions led to the formation of two additional groups. The first group, called the ‘Consumer Class Action Working Group,’ held only two known meetings…Defendants (and co-conspirator American Express), however, formed another, more clandestine group, which consisted exclusively of in-house counsel (with the specific exclusion of outside counsel). This so-called ‘In-House Counsel Working Group’ was created by credit card issuers so that credit card issuers could meet to discuss issues of concern only to credit card issuers. This group offered Defendants further opportunities to share (and agree on) their business practices and strategies regarding arbitration clauses…
“Defendants’ conspiracy was intended to, and did, inhibit competition and create a non-price trade advantage over cardholders that enabled Defendants to reap supra-competitive profits from Plaintiffs. Defendants’ conspiracy suppressed, if not eliminated, competition with respect to arbitration clauses and clauses barring participation in class action litigation, even as an absent class member. By eliminating consumer class actions, Defendants effectively immunized themselves from the full enforcement of consumer protection and antitrust laws and the economic consequences of their misdeeds, whether intentional or inadvertent…
“Further, Defendants’ conspiracy removed virtually all non-arbitration credit cards from the market.”
Where did the information about these colluding, clandestine meetings come from? From a class action lawsuit, of course. It is noteworthy that it did not originate from the thousands of arbitrations against these firms where discovery is limited and frequently abused. In fact, the tip off here came from a lawyer at JPMorgan Chase who, wittingly or unwittingly, disclosed one of these meetings to plaintiffs’ lawyers in discovery and opened the floodgates to discovery of the additional meetings. One suspects that this lawyer is not among the 1,626 JPMorgan Chase personnel who received million dollar (and up) bonuses in 2008.
But those pesky plaintiffs’ lawyers suspect that the defendants are holding out on them. They told the lower court in a brief this past June that this is an ongoing conspiracy and they believe additional meetings were held and the facts of those meetings are being obfuscated on the basis of attorney-client privilege.
All of this has such a familiar ring. It was just a decade ago that the Securities and Exchange Commission (SEC) charged JPMorgan (now JPMorgan Chase & Co.), Citigroup’s Salomon Smith Barney, Merrill Lynch (now part of Bank of America) and 25 other Wall Street firms with price fixing on Nasdaq. Acknowledging that the firms had cheated investors out of billions, the SEC let all the firms off the hook for a total of $26 million in fines. (That’s about 25 percent of what Citigroup wants to pay one oil trader this year despite the fact that it is still being resuscitated with public funds.)
In typical fashion, the SEC let the firms settle without denying or admitting guilt. Also typical of the SEC, it didn’t root out the fraud; two college professors ferreted it out and issued a report that forced the SEC’s hand.
Wall Street clearly understands that corruption and collusion are actual profit centers inside the firms. Steal a billion, pay back a few million, and never admit or deny guilt. There’s only one catch: you have to keep the court house doors closed to whistleblowers, customers that you’ve defrauded, and those prying eyes of plaintiffs’ lawyers who have the audacity to ask about your clandestine meetings with competitors.
One of the more intriguing strategies dreamed up by the conspirators, according to the Second Amended Complaint in Ross v. Bank of America filed in the District Court in June of this year, was a “manifesto,” which included such tactics as “filing countersuits against class action lawyers and suits for abuse of process.”
Although it may appear to the general public that no one launched any counter offensive to put this mad private justice genie back in the bottle before it morphed into a monster, there are a number of individuals who have worked doggedly over the past decade. Standouts that come to mind include: San Francisco attorney Cliff Palefsky; attorney Paul Bland with the advocacy group, Public Justice; Jackson Williams and his colleagues who authored the April 2002 report for Public Citizen, “The Costs of Arbitration”; John O’Donnell and his colleagues at Public Citizen for authoring the September 2007 report “The Arbitration Trap”; Senator Russ Feingold, Congressmen Dennis Kucinich and Ed Markey who attempted to move legislation forward to curtail mandatory arbitration in employment contracts in session after session; Susan Antilla, columnist for Bloomberg News, who exposed the underbelly of mandatory arbitration in countless articles over the past decade; and the courageous women of Wall Street who rose up to fight mandatory arbitration only to find that the Federal court in Wall Street’s stomping ground in the Southern District of New York was only too willing to wrap its arms around the Wall Street colluders.
There are two extremely welcome thoughts that arise from the June 5, 2009 filing by attorneys for the plaintiffs in Ross v. Bank America. First, “Defendants’ collusion to impose and maintain arbitration clauses, in violation of the Sherman Act, renders the clauses void and unenforceable. Accordingly, valid and binding agreements were never formed.”
Secondly, “That defendants be required to notify all courts and arbitration forums which have enforced their respective arbitration clauses during the course of the conspiracy as to their illegal conduct in implementing these clauses.” Just imagine these Wall Street Armani suits asking to approach the bench and breathlessly admitting to a Federal judge that when they told him arbitration was fast and fair, they really meant to say rigged and the product of collusion.
At her press conference honoring Law Day in 1998, Janet Reno invoked Abraham Lincoln. Quoting from a note he penned for a potential law lecture, she read: “Discourage litigation. The nominal winner is often a real loser, in fees, expenses and waste of time.”
Lincoln’s quote actually read as follows: “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.”
Lincoln was clearly suggesting that lawyers not stir up litigation unnecessarily. He wasn’t suggesting that a consumer enter a star chamber tribunal against an international bank who has colluded with other international banks to make this star chamber their only option.
What the Attorney General also didn’t share with her audience was that in those same notes President Lincoln added: “…if in your own judgment you cannot be an honest lawyer, resolve to be honest without being a lawyer. Choose some other occupation, rather than one in the choosing of which you do, in advance, consent to be a knave.”
This article originally appeared at www.CounterPunch.org.