Victims or fraudsters?: Telling them apart in the wake of the subprime mortgage crisis

That's the name of this post published by Daniel Colbert in the American Criminal Law Review. Colbert's piece examines United States v. Phillips, a recent en banc decision from the Seventh Circuit that deals with the intersection of criminal law and mortgage fraud. Here's the piece:

  By Daniel Colbert, ACLR Featured Blogger        

            Lacey Phillips and Erin Hall were two of millions of Americans who received subprime loans from unscrupulous lenders in the years leading up to the financial crisis.[i] In 2006, the couple applied for a loan from a reputable bank and were turned down.[ii] A short time later, they found a mortgage broker – Brian Bowling – who directed them to Fremont Investment & Loan.[iii] There is no indication the couple knew that Bowling had a history of producing fraudulent loan documents or that Fremont was a disreputable institution that would soon face prosecution for its predatory practices.[iv] Fremont specialized in “stated income” loans – known in the industry as “liar’s loans” because they required no proof of the borrower’s income – which it quickly repackaged into mortgage-backed securities and sold, turning a profit despite the high risk of default.[v] Phillips and Hall applied for and received a loan, purchased the house, and soon lost it when they defaulted on the mortgage.[vi]

            Phillips and Hall were convicted of violating 18 U.S.C. §1014, which makes it a crime to “knowingly make[] any false statement . . . for the purpose of influencing in any way the action of” a federally insured bank like Fremont.[vii] The couple had made several false statements on their loan application, including inflating their income and misrepresenting Hall’s job title.[viii] They appealed, arguing that the trial judge erred when she refused to allow the defendants to testify that Bowling had told them they should combine their incomes on the application.[ix] A panel of the Seventh Circuit upheld the decision, with Judge Easterbrook writing for the majority and Judge Posner dissenting.[x] The Seventh Circuit then granted a rehearing en banc, in which Posner carried the day and Easterbrook dissented.[xi]

Jon Stewart on the JP Morgan mortgage securities fraud settlement

Last week, we posted about JP Morgan's tentative agreement with the federal government to pay $13 billion to settle claims that it knowingly sold faulty mortgage securities that contributed to the financial crisis. The Wall Street Journal's editorial page and other members of the conservative press responded to the agreement by calling it a shakedown by the White House against poor JP Morgan. Watch Jon Stewart's hilarious and pointed response to the shakedown argument here or by clicking on the embedded video below. His use of clips featuring CNBC stock market "analyst" Jim Cramer are particularly entertaining.

The Daily Show
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Is it worse to be called “the Government” than “the State of Tennessee?

by Paul Alan Levy

In this motion a prosecutor asked a trial judge to order a particular defense lawyer to stop referring to her during jury trials as “the Government” on the ground that jurors would likely take this as a derogatory reference “and is meant to make the State’s attorneys seem oppressive and to inflame the jury,” and thus affecting jurors’ ability to be impartial. (She was willing to be called “General Rettig, the Assistant Attorney General, Mrs. Rettig, or the State of Tennessee”). The defense lawyer responded that the First Amendment protected his right to use a truthful term to describe his adversary, but in the alternative proposed some labels that might be required when referring to himself and his client.

I am advised that the motion was denied.

"Company Doe" case before Fourth Circuit tomorrow; crucial consumer and First Amendment implications

We've blogged before about the "Company Doe" case, in which a company sued to block the inclusion of a product report in the Consumer Product Safety Commission's publicly available, web-accessible database about potentially dangerous products. The district court permitted the company to litigate in secret and under the pseudonym "Company Doe," and a coalition of consumer groups (led by Public Citizen) appealed.

Tomorrow the U.S. Court of Appeals for the Fourth Circuit in Richmond will hear oral argument in the case. In two years of litigation, this will be the first public hearing in the entire case, which was decided at the district court based on nine months' worth of secret proceedings and which produced a 73-page judicial decision with the facts, name of the company, names of certain witnesses, and evidence blacked out.

The case is important for at least two reasons. First, this is the first challenge to the congressionally-mandated CPSC database. It's important to know how the district court applied the law to learn how the database will operate going forward. If companies can challenge reports in the database in secret, Congress's goal of informing the public will be undermined by years' worth of secret litigation during which the public will be oblivious to potential hazards.

Second, this case tests the judiciary's commitment to the First Amendment right of access to court proceedings, which enables public oversight of the working of government and facilitates public participation. If -- as the district court novelly held -- a corporate reputational interest justifies secret litigation or the use of a pseudonym, one can a imagine a lot of companies stepping forward to seek secrecy. Companies sued for fraud, pollution, discrimination, and (of course) making dangerous products could all claim they ought to be allowed to litigate in secret under this view. Let's hope the Fourth Circuit rejects it and sends a powerful message about the importance of court openness in a democracy.

Jeffrey Joseph Op-Ed: Consumer Protection Bureau Bad for Business

by Jeff Sovern

In the Detroit News. Professor Joseph refers to the Consumer Financial Protection Bureau as "purposefully-misnamed," as if members of Congress sat around saying "let's create an agency that will hurt consumers but give it a name that suggests it will protect them." So what does he think is wrong with the Bureau? He cites a report that says it is insufficiently transparent and doesn't do enough to protect consumer data. He also states "recently the bureau has been seeking to eliminate dealer-negotiated car financing and replace it with a flat fee method of compensation. According to one analysis, such a move would eliminate a key source of price competition between auto dealers — the ability to vary interest rates — and ultimately result in restricting consumer choice." But he neglects to mention that such car financing has led to discriminatory lending. He does mention some praise for the Bureau in the report, but also claims that "taxpayers have good reason to be scared" of the Bureau and calls for it to be subjected to "a little more heat."  Oh, and the Bureau's actual accomplishments for consumers? Its enforcement actions and rules?  They somehow were omitted from the op-ed. Unfortunately, Professor Joseph's op-ed followed his recommendation for more heat, but casts little light.

NSA Compounds Its Assaults on Privacy by Attacking Critical Speech

by Paul Alan Levy

Over the years I have blogged several times about corporate abuses of trademark law to use litigation, or the threat of litigation to block criticism.  Because they have so many other tools to deploy against citizens, government agencies usually do not stoop to this level – the City of Memphis aside – but we have today filed suit against two government agencies, whose abuses of the public are in the news for other reasons, for using that tactic against a critic. 

Dan McCall, a Minnesota man who creates politically-relevant designs for imprinting on Tshirts, mugs and other paraphernalia, was inspired to play with the official seals of the National Security Agency and the Department of Homeland Security to express his critical views about them.  One design juxtaposed the official seal of the NSA with the words “Spying on You Since 1952”;

 

another altered the seal to add the words, “Peeping While Your Sleeping,” while placing this legend below the seal: “The NSA: the only part of government that actually listens.”  Still a third design replaced the name of the DHS in its official seal with the name “Department of Homeland Stupidity.”

Same Judges, Two Different Outcomes

Yesterday, consumers, employees, and others who are subject to mandatory arbitration agreements that inhibit their ability to present their claims got a big win and a big loss in the U.S. Court of Appeals for the Ninth Circuit—from the very same panel. The same three judges, Richard Clifton, Richard Tallman, and Consuelo Callahan, in cases argued and decided on the same day, issued major decisions that both enhanced and limited the ability of plaintiffs to avoid arbitration proceedings that do not adequately protect their rights. Judge Clifton wrote the opinions in both cases—Chavarria v. Ralphs Grocery and Ferguson v. Corinthian Colleges.

In Chavarria, the court held that an arbitration agreement was unconscionable and unenforceable under California law because an employer effectively forced employees to sign it; it gave the employer the ability to hand-pick the arbitrator anytime an employee brought a claim against it; it required the employee to bear half of the arbitrator's fees unless the U.S. Supreme Court specifically said otherwise, and it allowed the employer to change the rules of arbitration at any time. Among other things, the court noted that the fact that the employer said "please" when asking employees to sign the agreement—which explicitly said it was enforceable whether or not the employee signed—did nothing to make the agreement any fairer. And, the court held, the application of California law to strike down such an unfairly one-sided agreement was not preempted by the Federal Arbitration Act (FAA).

In Ferguson, however, the same judges held that another principle of California law is preempted by the FAA—namely, the so-called "Broughton-Cruz rule," under which California courts have held that claims for injunctive relief for the public's benefit cannot be subjected to mandatory arbitration. Ferguson was a case brought by former students at for-profit educational institutions who claimed they'd been misled into incurring large student loans they'd be unlikely to be able to pay off once they graduated. They sought not only damages, but also injunctions against the defendant under California's consumer protection laws.

The district court held those claims for injunctions couldn't be forced into arbitration under the Broughton-Cruz rule, but the court of appeals held otherwise. The Ninth Circuit had previously ducked the Broughton-Cruz issue in a case called Kilgore v. Keybank, but this time there was no avoiding it, and the court held that it ran directly contrary to recent Supreme Court authority stating that the FAA preempts a state-law rule that "prohibits outright the arbitration of a particular type of claim." The panel saw no way around that principle, not even the argument that compelling arbitration would prevent the plaintiffs (and the public) from vindicating their rights under state law. 

On the latter point, the panel relied heavily on Justice Kagan's terrible statement in her dissenting opinion in American Express v. Italian Colors Restaurant that "[w]e have no earthly interest (quite the contrary) in vindicating" rights under state law. I expect the court would have reached the same result in Ferguson even without that quotation, but it didn't help matters, and it may do more mischief in years to come.

U.S. consumers often pay more for Internet services than their foreign counterparts -- and get an inferior product

That's the finding of this study from the New America Foundation. Here's the Foundation's data summary:

Last year, the New America Foundation’s Open Technology Institute published The Cost of Connectivity, a first-of-its-kind study of the cost of consumer broadband services in 22 cities around the world. The results showed that, in comparison to their international peers, Americans in major cities such as New York, Los Angeles, and Washington, DC are paying higher prices for slower Internet service. While the plans and prices have been updated in the intervening year, the 2013 data shows little progress, reflecting remarkably similar trends to what we observed in 2012.

Oh, and if you are interested in fast Internet service in the U.S. that rivals the best in the world, move to (or stay in) Chattanooga.

What's going on with the U.S.'s 70,000 metric tons of nuclear waste?

That's how much nuclear waste is hanging around the U.S. -- a good bit of it in Illinois -- with no feasible solution in sight that would provide long-term (or even middle-term), safe storage. The waste is comprised of spent fuel from nuclear reactors. As this report by Brian Wingfield explains:

With no place to send their waste, power plants in 30 states -- which generate about 20 percent of the nation’s electricity -- are doubling as dumps for spent fuel that remains dangerous for thousands of years. Another four states without operating reactors store spent fuel at closed plants. It is an expensive and, according to some critics, unsafe practice for which the plants weren’t designed and that may end up costing taxpayers billions of dollars.

It's not a good situation. Read the whole story.

Mount Holly and the future of disparate impact: history, deference, and constitutional avoidance

by Deepak Gupta 

On April 4, 1968, Dr. Martin Luther King Jr. was assassinated as he stood on the balcony of the Lorraine Motel in Memphis. His killing sparked a fresh round of riots in cities nationwide. Nearly two dozen representatives immediately changed positions and urged passage of the Fair Housing Act. Within a week, with armed National Guardsmen still quartered in the basement of the Capitol to protect it from surrounding violence, the House passed the Act and President Johnson signed it into law. The legislators who voted for the Act sought to combat the “practical effect" of facially neutral policies (not just overt discrimination) that resulted in residential segregation in American cities.

Mount Holly, a major civil rights case now before the U.S. Supreme Court, has big implications for whether the intent of those legislators will continue to govern discrimination in housing and lending. Today, my colleague Jon Taylor and I filed a brief on behalf of current and former members of Congress, including Senator Edward Brooke—one of the two key sponsors of the Fair Housing Act of 1968. You can find the rest of the papers in the case here.

The Fair Housing Act broadly prohibits discrimination in the sale or rental of housing and in housing-related brokerage and loan services. The Equal Credit Opportunity Act provides parallel protection in the consumer credit context. The question in Mount Holly is whether the FHA prohibits policies and practices that have a discriminatory effect—i.e., a “disparate impact” on a protected class—in addition to instances of intentional bias (“disparate treatment”). For years, the federal government and private parties have used disparate-impact theory to challenge discriminatory rental, sale, and lending policies. HUD recently issued regulations embracing disparate impact. The CFPB has embraced it as well. And every federal court of appeals to consider the issue (11 out of 11) has endorsed disparate impact as a valid means of enforcing the Fair Housing Act’s promise of equal housing opportunity. At issue in Mount Holly is continued vitality of this key enforcement tool. 

Our brief focuses on history. We demonstrate that the Act, understood in its proper historical context, was intended to allow disparate-impact claims. That was true when the Act was first enacted in 1968 and it was even more apparent in 1988, when Congress revised the Act. By that point, the strong and uniform consensus in the courts of appeals was that disparate impact claims are cognizable. That was also HUD's position. The main effect of the 1988 legislation was to delegate considerably more enforcement authority to HUD. If Congress didn't want to continue allowing disparate-impact claims, it would have been very strange to give the agency far more authority without altering the scope of substantive liability. Congress also added new language that presupposed the existence of disparate-impact liability and repeatedly rejected attempts to introduce an intent requirement. 

The brief also touches on a difficult question lurking behind the case: What role, if any, should the constitutional-avoidance canon play?  And how does it intersect with ordinary principles of agency deference? The petitioner, the Township of Mount Holly, raises constititional objections based on the Equal Protection Clause and the Tenth Amendment. But those constitutional challenges aren't actually presented in the case and nobody has raised them in other cases. Should the Court nevertheless interpret the statute narrowly to "avoid" those issues? Does that mean that Chevron deference goes out the window?  

Here's our take in the brief: Constitutional avoidance is supposed to show judicial restraint and respect for Congress. But applying the constitutional-avoidance canon in Mount Holly—where no constitutional claims have been presented, no similar claims have ever been asserted, and Congress has expressly stated that the Act’s remedial scope fully extends to constitutional limits—would show disrespect for Congress. The upshot of doing so (no disparate-impact claims ever) would be the same as reaching the potential constitutional issues not presented and prematurely resolving them against disparate impact in all cases. That's the opposite of judicial restraint.