Legal Briefing: Banks Rake in Big Profits as Wall Street Probes Spread
Investigations of Wall Street Proliferate
The big banks have been having a tough quarter in every respect except profits -- they just ran up a 61 day streak of profitable days. Since profits are what they're all about, perhaps they don't mind that the financial reform lobbying battle is trending against them -- with Senator Byron Dorgan (D-N.D.) the latest to call for getting even tougher.
Maybe their huge profits will also distract them from the fact that Goldman Sachs is under siege, or that JPMorgan Chase's silver traders face both civil and criminal investigations, or that the Securities and Exchange Commission has just broadened its collateralized debt obligation investigation from Goldman Sachs to many of its peers, including Citi (C), JPMorgan Chase (JPM), UBS (UBS) and Deutsche Bank (DB).
Now, New York Attorney General Andrew Cuomo, perhaps hoping to become the second Sheriff of Wall Street after Eliot Spitzer (and follow those footsteps to the governor's mansion), is investigating whether many of the banks duped the ratings agencies. According to investigations and hearings so far, the ratings agencies seem complicit in inflating ratings to make the banks happy, but maybe Cuomo's on to something. If he is, it's sure to help plaintiffs in lawsuits claiming banks knew the underlying securities weren't worth their AAA ratings. Perhaps many more such suits will be filed.
Five years or so from now, we should have a good sense of how all the investigations, litigation and regulation play out. What will Wall Street look like then? A handful of towering giants, swaggering because they've emerged relatively unscathed? Or will the Street be strewn with rubble, populated by small groups of survivors and eager carpetbaggers, coming out of the shadows as the smoke clears? One thing's for sure: Some will survive, and they'll be making lots of money.
Law Firm Sued as Part of Ponzi Scheme
Greenberg Traurig and Quarles & Brady were added as defendants in lawsuit over an Arizona real estate-based Ponzi scheme. This type of potential liability -- aiding and abetting liability in financial fraud -- was thought gone after the U.S. Supreme Court decided the Stoneridge Investment Partners v. Scientific-Atlanta case. Congress may overturn that case as part of financial reform, if Senator Arlen Spector (D-Penn.) gets his way. In the meantime, if this suit is successful, plaintiffs will look to state securities laws to avoid the Stoneridge problem, as this lawsuit tries to.
Banker Fired for Doing the Right Thing?
The New York Times reports that a former JPMorgan Chase private banker (i.e. a banker who works only for the firm's very wealthy clients) filed suit against her former employer charging that she was fired for recommending the bank drop a profitable but potentially criminal customer.
Ms. Jennifer Sharkey inherited the client, an Israeli with a 20 year relationship with the bank, and shortly thereafter was alerted by JPMorgan Chase's compliance and risk management team that the customer's accounts reflected "irregularities" that might reflect "money laundering, mail fraud, wire fraud and potential violations of federal securities laws." Accordingly, Ms. Sharkey initiated a "know-your-customer" review and, based on that review, recommended that the bank drop the client. Instead, she was fired six days later.
And in the business of law...
Orrick, Herrington & Sutcliffe has decided to stop reporting the law firm world's equivalent of baseball's batting average -- "profits per partner" (PPP). As Orrick explained to Above the Law, it wants to measure itself the way clients do, and clients don't care how much individual partners make on average. Apparently they care about the depth of their relationship with the law firm, the firm's effectiveness in bringing together diverse resources, and the firm's expense control. In addition, Orrick wants to track revenue growth.
Baseball's venerable batting average stat has diminished in importance lately, as people have figured out that on-base percentage more accurately measures a player's performance. Will the same thing happen to PPP? If so, what will be the law firm on-base percentage? That is, how do you actually measure the stuff Orrick's talking about?