Do Deutsche Bank’s ‘Prettier’ Women Get the Best?

This article originally appeared in Bloomberg View on May 5th, 2013.

Most big-name financial firms pay lip service to diversity, peppering their websites with smiling women and people of color who are in short supply in the mostly white-male trading rooms and executive offices of real life.

Amid the spin, though, there’s one bank that wins plaudits around the globe for its gender programs.

At Deutsche Bank AG, business conferences and seminars for women attracted 5,000 of the company’s employees and clients last year, according to the bank’s website. It has scored a spot on Working Mother magazine’s “100 Best Companies” list 13 times since 1996, and was named “Best in Financial Services Sector” by the U.K. charity Working Families, which does research on work-life issues.

Eileen Taylor, Deutsche Bank’s global head of diversity, said in an e-mailed statement that a program called Atlas, started in 2009, has helped push 50 percent of the women who have used it into broader roles.

So you have to wonder why the Frankfurt-based bank is spending so much of its time fending off lawsuits that accuse it of harassment, retaliation, gender bias and discrimination against pregnant women.

In a lawsuit filed Jan. 28 in New York State Supreme Court in Manhattan, Yosefa Shliselberg, a director in the global transaction banking group and 10-year Deutsche Bank veteran, said she was called into human resources one afternoon in 2011 and told, “The business has decided to exit you.” She says it happened two months after she complained to HR about gender discrimination and sexual harassment.

Performance Reviews

Shliselberg, whose performance evaluations cited her “remarkable analytic skills” and “deep understanding” of the bank’s products, told me during an interview last month at her lawyer’s office in New York that the bank had opened an investigation into her effort to start — I’m not kidding — a women’s initiative.

The probe found no wrongdoing, according to her complaint, which would hardly be a shock considering she says she received kudos for her project from everyone from her immediate boss to Deutsche Bank’s former chief executive officer of the Americas: “I’m very proud of you,” Seth Waugh wrote in an e-mail on Feb 11, 2011, that Shliselberg allowed me to review.

After that session in HR, Shliselberg was escorted to her desk, where boxes had already been delivered so she could pack and leave.

You almost wonder if there was something in the water at the bank that can’t do enough to advocate for women. Twelve days before Shliselberg filed her lawsuit, Deutsche Bank fired Heather Zhao, a vice president in Deutsche Bank’s global investment solutions group.

That axing came nine days before Zhao was scheduled to return from maternity leave, according to her complaint filed March 29 in the U.S. District Court for the Southern District of New York. Zhao’s suit says that after she learned she was pregnant in early 2012, she was blanketed with Neanderthal-style remarks from men at the bank. One highlight, according to her complaint: “Maybe I should get pregnant so I can work from home.”

Best place for mothers, indeed.

Deutsche Bank spokeswoman Michele Allison said the bank wouldn’t comment on pending litigation.

Not to pile on, but while we’re on the subject of pregnancy, another employee, Kelley Voelker, was fired from her job as a vice president on the securities-lending desk in September. She said in an amended complaint in U.S. District Court in October that after suing the bank for pregnancy discrimination in September 2011, Deutsche Bank retaliated by firing her. In a response, the bank denied it discriminated or retaliated against Voelker.

Class Act

Deutsche Bank is still in litigation with Voelker, but according to a transcript of a March 18 hearing in her case, two unidentified women who considered starting a class action reached settlements with the bank this year.

Another settlement: Latifa Bouabdillah, a former director in London who sued in May 2011 in the U.K. for sex discrimination. Her lawyer, Tim Johnson, said in an e-mail that the terms were confidential.

As for Shliselberg, I have to wonder if her sorry fate wasn’t somehow related to the dopey public statement of Deutsche Bank’s former CEO Josef Ackermann, who in February 2011 said that the bank’s executive committee would be “more colorful and prettier” once it added a woman or two. Ackermann’s words led to a media maelstrom just as Shliselberg was getting traction for her idea to start a nonprofit group to be called Women in Sovereign Entities.

By the time she was meeting with a bank steering committee in London in April 2011, she was hearing worries that had more than a hint of paranoia: Shliselberg told me one man at the meeting said he was afraid that her proposed group might host an event where women could “get out of control” and take over the agenda.

In its response to a parallel complaint Shliselberg filed with the Equal Employment Opportunity Commission, Deutsche Bank said she had misinterpreted management’s support for her proposal, and that she had raised her allegations of discrimination as leverage to negotiate a cushy exit package. Shliselberg “began neglecting her work” after she started to focus on creating the women’s organization, the bank said. Deutsche Bank’s decision not to sponsor her project was based on business concerns, not discrimination, according to the response.

It’s hard to buy the idea that the same woman who had been praised in performance evaluations as having “excellent communications skills” somehow went clueless when her bosses were trying to tell her that her project for women was a no-go. If this is the best that the “best” company for women can come up with, the banking industry is even more hopeless than I thought.

JPMorgan’s Teflon CEO Glides Past Reputation Hits

This article originally appeared in Bloomberg View on April 3rd, 2013.

JPMorgan Chase & Co. and its chief executive officer, Jamie Dimon, have been dealing with a blitz of bad news of late, but you wouldn’t know it from the accolades that keep getting heaped on them.

There was the $6.2 billion trading loss best known as the London Whale debacle that Dimon dismissed as a “tempest in a teapot”; the humiliating hearing before Senator Carl Levin’s Permanent Subcommittee on Investigations, where we learned that Dimon had played a role in managing the wrong-way trades; and, to top it off, the New York Times on March 26 reported that eight federal agencies were circling the bank with various probes.

Then there are the costs to settle regulatory cases and litigation. Joshua Rosner, an analyst at Graham Fisher & Co. in New York, estimated these have totaled as much as $8.5 billion since 2009 — and that doesn’t count any of the mortgage-related givebacks that came after the financial crisis.

That’s all serious stuff, you might be thinking. So why are investors and sycophantic media types still under the spell of JPMorgan and its top guy?

Even as the grim news was piling up for Dimon and his bank, Barron’s magazine last month honored him as one of the “World’s Best CEOs” — a short list of 30 international superstars.

Feeling Loved

JPMorgan, meanwhile, is feeling the love when it comes to its stakeholders. Steel City Re, a Pittsburgh-based firm that measures corporate reputations, ranks the bank in the 90th percentile among 50 financial conglomerates. Nir Kossovsky, a Steel City co-founder, says he calculates how stakeholders reward or punish companies through such things as sales volume, vendor terms and credit costs.

Little wonder, I suppose, that earlier this year, JPMorgan topped the Fortune magazine list of most-admired banks in the world for the second year in a row. Are the bank’s admirers living in some parallel universe where black marks just don’t register?

Joe Evangelisti, a spokesman for JPMorgan, declined to comment.

At least some of the goodwill toward JPMorgan exists because when it comes to controversy, the bank is a master at spin. At a black-tie gala at New York’s over-the-top restaurant Cipriani Wall Street on March 19, Dimon landed first prize for “Best IR by a CEO or chairman” at the IR Magazine Awards, aka “the industry’s most prestigious and coveted awards that honor leading companies and professionals in investor relations.” A second award to JPMorgan specifically cited the bank for its bang-up job at crisis management.

To win a prize for crisis management, of course, you need to be in a crisis, but that doesn’t seem to sway supporters of the bank or its CEO, who make what sounds like a reasonable argument: JPMorgan is making money, which makes shareholders happy and keeps the board off Dimon’s back. So what’s not to like?

Amar Bhide, a professor of international business at Tufts University’s Fletcher School of Law and Diplomacy, has done some thinking about that question, and said JPMorgan and its competitors are making too much of their money with taxpayer support.

“From the point of view of shareholders, Dimon is not doing a terrible job,” Bhide said. “One could take the extreme point of view and say that you want these people to gamble because they are gambling with the public’s money. If you are a stockholder, you get a nearly free ride, so why not?”

Taxpayer Backing

Banks and their investors know that there’s an implicit backstop — a taxpayer bailout — that will kick in during the worst-case scenario of a financial-system meltdown. Dimon actually endorses the idea of a resolution authority that would wind down failing banks, which sounds great as far as it goes.

But the “savvy leader of the world’s most important bank,” as Barron’s calls him, wants JPMorgan to be able to get bigger and to serve more global clients. How do you force countries outside of the U.S. to comply with another country’s resolution authority? In his letter to shareholders last year, Dimon said that close cooperation would be “required by multiple regulators.”

Sydney Finkelstein, a management professor at the Tuck School of Business at Dartmouth College, says a resolution plan isn’t enough and that banks need to be broken up. The U.S.’s biggest banks are too unwieldy for anyone to manage, he said.

Which takes us back to that $6.2 billion loss springing from the London Whale trades.

Some of JPMorgan’s problems are a lot like the problems of its competitors. Banks are peddling products that sometimes are only understood by a small club of physicists who used to work at places such as NASA before rocket science became the new profit driver at banks.

But I digress. Our banks are selling stuff that top management can’t keep tabs on, and it’s putting the financial system at risk. Even Dimon showed he was at a loss to explain the Whale blowup when he made his reference to a tempest in a teapot.

JPMorgan’s CEO has another problem: that enormous tab the bank has run up to settle cases with regulators and litigants. In a March 12 report titled “JPMorgan Chase: Out of Control,” Rosner, the Graham Fisher analyst, wrote that he couldn’t find another U.S. bank with such big settlement outlays.

JPMorgan is a master at racking up PR points when it’s boasting about things such as its “fortress balance sheet.” But it has been able to dodge setbacks when it breaks the rules. You have to wonder whether, at some point, it might catch up with the world’s most-admired bank and its magazine-cover CEO.

Hate Follows When the Police Try to Do Their Job

This article originally appeared in Bloomberg View on March 7th, 2013.

It’s a lousier time than usual to be a lowly member of the investing public looking for protection from the sharks of finance.

Deep-pocketed banks are dominating the process of writing the new financial rules mandated by the Dodd-Frank Act, dwarfing the efforts of investor advocates looking to rein in the banks.

At the Securities and Exchange Commission, which is charged with protecting investors, lawbreakers can cut sweet deals for exemptions from punishments before the ink is dry on their settlement papers.

Efforts to help everyday investors, in the meantime, can wind up taking a back seat. Dodd-Frank, signed into law in July 2010, required the SEC to establish and staff an Office of the Investor Advocate. More than 2 1/2 years later, the project is stuck on the agency’s to-do list.

“There’s a basic resistance to seeing things from the investor point of view,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It all goes back to the same thing — the degree to which the industry dominates this whole conversation.”

It’s a cultural problem as Roper sees it: Regulators and the regulated operate in a setting where people with the same pedigree move back and forth between government and private-sector jobs and outside views carry little weight. SEC spokesman Kevin Callahan said in an e-mail that investor protection is at the core of all the agency’s actions, and that until an investor advocate is appointed, existing SEC offices are performing the roles required by Dodd-Frank.

Old Acquaintance

A study released last month by the Project on Government Oversight, a nonprofit watchdog group, stirred up a discussion about the revolving door of lawyers who alternate between government and industry, where they defend banks and brokers. Sorting through documents filed by 419 SEC alumni who had recently left the agency, the Project found 2,000 cases in which alumni planned to represent a client or an employer before the SEC between 2001 and 2010.

That’s a lot of meetings among lawyers who used to work down the hall from one another, but who now — officially, anyway — are adversaries. In the view of SEC critics, it is part of the clubby state of affairs that pushes government watchdogs and banks to see things the same way. Callahan said that the U.S. Government Accountability Office studied the revolving-door issue and concluded that the SEC’s controls were as strong as those of other government agencies. What a relief.

The public’s concern that regulators “are on the same team or focused in the same way as the entities they are supposed to be regulating” is a valid one, New York University Law School professor Rachel Barkow said on a panel at the New York City Bar Association last month. If more of an effort were made to have representatives of consumers at agencies, “you might have a more proactive movement right now to break some of the big banks up,” she said.

For now, the banks throw their weight around. To get an idea of just how much access bankers get to regulators, consider the calculations that Duke University law professor Kimberly Krawiec and Duke lecturing fellow Guangya Liu recently completed. Krawiec and Liu tallied up all the meetings that the Treasury Department, the Commodity Futures Trading Commission, the SEC, the Federal Reserve and the Federal Deposit Insurance Corp. had with various constituencies between October 2011 and December 2012 to discuss the Volcker rule.

Industry Outguns

Public interest groups such as Americans for Financial Reform and Better Markets had 64 meetings with the regulators. The financial industry and its representatives: 551.

Those sit-down meetings “are where the real work is taking place,” Krawiec says. “And the meetings were almost completely dominated by financial firms, their trade groups and their law firms.”

Regulators aren’t turning away public-interest groups that ask for meetings. It’s just that the financial industry has such vast resources that it overpowers the conversation. “Despite a significant expansion in the number of foot soldiers out there working in the public interest on these financial issues, we are still completely overwhelmed by the industry lobbyists,” said Dennis Kelleher, chief executive officer of Better Markets.

It won’t make it any easier to push for reform if the stock market keeps hitting new highs, which inevitably will cause memories of the crisis to fade.

NYU’s Barkow suggested that regulators seek out people from different backgrounds to fill consumer-advocate positions that would carry clout in policy disputes.

There actually is a government agency that has gone out of its way to get diverse views. It is reviled by the banking industry and is under attack by politicians who want to diminish its independence and prevent it from carrying out its mandate. The Consumer Financial Protection Bureau has a consumer advisory board that includes 13 female and 12 male members, four of whom are Hispanic. They have backgrounds in public policy, housing, retirement advocacy and academia.

Compare that to the SEC’s investor advisory committee, which does include Roper and other investor-friendly members but also has two hedge-fund officials, a private-equity executive, a venture capital guy and a director from the Bush Institute, a public policy research group founded by former President George W. Bush and his wife, Laura. The board of governors at the Financial Industry Regulatory Authority relegates two of its “public” seats to retired securities industry officials.

You don’t hear any drums beating to shut Finra or to reduce the SEC’s independence. Show me a financial regulator with real independence and input from diverse voices, and I’ll show you a sitting duck for vicious attacks.

Mary Jo White’s Past and the Future of the SEC

This article originally appeared in Bloomberg View on February 8th, 2013.

The sales pitch for President Barack Obama’s nominee to run the Securities and Exchange Commission goes something like this:

Mary Jo White was a tough U.S. attorney for the Southern District of New York who prosecuted mobsters and terrorists. She spent the past 10 years representing Wall Street, so she knows something about the legerdemain of banksters. And — insert violin solo here — she is a patriot, willing to give up millions of dollars in income as chairman of the litigation department at Debevoise & Plimpton LLP for a lousy government salary. (Although, with a little luck, she will make up for that once she adds “former SEC chairman” to her resume.)

The arguments in support of White are as old and tired as the government-to-private-practice hustle that they endorse.

Her supporters say she has the integrity to shift from Wall Street defender to champion of securities laws. But it’s hard to take seriously the notion that White will help crack complicated cases with her inside knowledge of how the bad guys work, an argument that often gets thrown around when Wall Street lawyers are tapped to be regulators. “People from the private sector know where the bodies are buried,” former SEC Chairman Mary Schapiro told the Washington Post after White’s nomination last month.

Top Spots

Maybe so, but the SEC and Justice Department have had former defense lawyers checking in and out of top spots for years, and it hasn’t led to any big-bank carnage among the people who orchestrated flakey derivatives, self-destructing collateralized-debt obligations or other outrages. When was the last time you saw anyone from a well-known bank doing a perp walk for his role in the financial crisis?

The Web pages of the best-known law firms give an idea of who the real winners are in the revolving door. Debevoise says it’s “the only law firm to have former U.S. and U.K. attorneys general as well as a Queen’s Counsel.” Cleary Gottlieb Stein & Hamilton LLP tallies 10 former federal prosecutors and three former SEC general counsels. At Covington & Burling LLP, they boast of having “convinced the SEC not to pursue an enforcement action” against one client, and that partner Bruce Baird, a former assistant U.S. attorney, persuaded regulators “not to proceed with cases on a significant number of occasions.”

It isn’t often we get an inside look at how onetime regulators work their disappearing-case magic, but a celebrated example that wound up under a microscope involved none other than White. When Morgan Stanley was considering hiring John Mack to be its chief executive officer in 2005, the securities firm’s board was concerned about an SEC investigation into possible insider trading involving Mack and Arthur Samberg, the former manager of the hedge fund Pequot Capital Management Inc.

The board retained White, who called SEC Enforcement Director Linda Thomsen on June 27, 2005, to get intelligence on Mack’s legal exposure. Three days later, White told Morgan Stanley’s board that she had seen “no evidence of any involvement by Mr. Mack in insider trading or other wrongdoing.”

Thomsen had let on to White that there was “smoke but not fire” in e-mails between Mack and Samberg, and privately worried that it could be disruptive to markets if Mack became CEO and then wound up as an SEC target. “It could have ripple effects that makes the markets go haywire,” Thomsen told a Senate committee — an overblown fear if ever there was one.

Wrongful Firing

Mack was never accused of wrongdoing. Gary Aguirre, an SEC lawyer who had been pushing to question Mack, was fired a few months after White’s call. He later won $775,000 from the SEC in a wrongful dismissal suit.

White declined to comment, said Debevoise spokeswoman Gabriella Schoff.

A revamp at the SEC that included improved policies for handling complaints and tips was supposed to boost morale. Yet the SEC’s ranking in an annual employee survey of “Best Places to Work in the Federal Government” has dropped steadily since 2007, with the SEC placing 19th of 22 midsized federal agencies last year. SEC workers’ view of the leadership of the most senior staff was worst among the categories they were asked about.

That makes sense considering some of the private conversations that became public about their bosses. The SEC’s own general counsel (now at Cleary Gottlieb), David Becker, e-mailed former SEC Commissioner Annette Nazareth in 2009 after she had left for Davis Polk & Wardwell LLP and referred to “the inanity” of the idea of having an investor advocate at the agency, according to a Bloomberg News article last year.

It would be nice if White turned out to have what it takes to pump up morale and turn the SEC into a place where inspired investor advocates get the top jobs, but there are reasons to be doubtful. White is worried about being too hard on corporate criminals. She told the newsletter Corporate Crime Reporter in 2005 that prosecutors considering criminal charges should be “very concerned about the impact on the innocent employees or shareholders.”

White won’t play a direct role in prosecuting companies at the SEC, of course. But given her views on indictments, it’s hard to imagine she will encourage her staff to refer cases against companies to criminal authorities.

It’s also a worry that she knows too much about the career perils of being aggressive as a regulator. In talking about one of Debevoise’s hires from the SEC, she testified in a 2007 deposition that she needed to check whether the candidate had been so tough as a regulator that it would hurt his ability “to function well in the private sector.” Commitment to the job and mission is a good thing in government, she said, or at least it is “to a point.”

If we’re lucky, White, 65, will decide that a do-gooder legacy is more important than the next multimillion-dollar job.

Top Stock Picks of 2013 Lose Out to Honey Boo Boo

This article originally appeared in Bloomberg View on January 3rd, 2013.

I have the ultimate hot tip if you’re obsessing over what to do with your portfolio in 2013: Ignore all the “How to Invest in 2013” nonsense that you see in magazines, blogs and on business television this time of year.

My advice? When you see one of those how-to articles, retreat to the kitchen for what’s left of the holiday eggnog and shut off the computer. If some TV stock jock is interviewing a Wall Street star about a best pick for the year ahead, grab the remote and surf for a rerun of “Here Comes Honey Boo Boo.” At least it won’t be you who is being exploited.

There is a good chance that you will lose money if you follow the 2013 top stock recommendations. And the grander the promise of profits, the more you should worry about getting burned.

Personal-finance news became a growing subgenre of business journalism in the 1970s, after companies started dropping defined-benefit retirement plans and the public “was thrown into this system and forced to make their way” says Dean Starkman, who runs a business-journalism blog at Columbia Journalism School. The resulting coverage to help the public manage its own money “perpetuates the idea that individuals can beat the market,” he says, “and that’s just not true.”

An army of commentators, many with abysmal track records, helps spread the useless predictions. You will see them quoted, photographed for magazine cover stories and trotted out for appearances at investor conferences.

“The entire conversation is corrupt,” says Starkman, who sees much of personal-finance writing as marketing material for the investment industry.

Few Exceptions

With a smattering of exceptions, even the best of the annual how-to-invest offerings will leave you winning about half the time, which of course means losing half the time. And what’s the point of paying commissions to end up where you started? Smart Money’s “Where to Invest 2012,” for example, picked six winners and four losers. The “Guru Round Up: Best Investment Ideas for 2012” that ran in Forbes magazine on Jan. 4, 2012, had three winners and four losers.

Even when a best-stocks list manages to keep up with the stock-market averages, which you can do in an index fund, it doesn’t necessarily help actual investors. My guess is that investors in real life don’t have the resources to buy more than one or two of the recommendations on any given tout list. Buy the wrong one, and it doesn’t matter if the list’s author is taking a bow for outperforming the Standard & Poor’s 500.

Along with the year-ahead coverage, be wary of the ambitious journalistic efforts that purport to impart brilliant investment ideas for the long term. Fortune magazine’s August 2000 list of “10 Stocks to Last the Decade” included Enron Corp. (which failed), Nokia Oyj (which fell from $43 to $9.63 during the next 10 years), Nortel Networks Corp. (which filed for bankruptcy protection in 2009) and Broadcom Corp. (which fell from $143 to $36 during the decade after the article).

In case no one has let you in on the secret, it’s old news that money managers rarely beat the stock-market indexes. So why pay attention when some journalist under orders to interview those managers woos you with headlines that promise a winning list of investments for the year ahead?

Ditto for the usefulness of predictions as to which way the markets and the economy are headed. Beneath the headline “Little Enthusiasm for Equities Among Advisers,” Investment News, a newsletter that caters to investment advisers, said on Jan. 1, 2012, that only 43 percent of advisers planned to increase their clients’ equity holdings, down from 63 percent in 2011. The S&P 500, of course, proceeded to go up 13 percent in 2012, the year advisers were more negative. It was little changed in 2011, the year they expected significant gains.

And then there was arguably the worst market call of the year, made Jan. 23, 2012, by newsletter writer Joseph Granville. He told Bloomberg Television that day that the Dow Jones Industrial Average would decline 4,000 points by year-end. The Dow wound up rising 887 points.

Terrible predictions ought to be career killers, but they aren’t. “There is no prediction so stupid you won’t be invited back,” Starkman says. Apparently so. Donald Luskin, the Trend Macrolytics LLC chief investment officer who is a contributor to CNBC, wrote in the Washington Post on Sept. 14, 2008, that doomsayers on the economy had it all wrong. The facts suggested that we were not on the brink of a recession, but of “accelerating prosperity,” he wrote. Lehman Brothers Holdings Inc., of course, collapsed the next day, shifting the financial catastrophe of 2008 into overdrive.

‘Batting Average’

Myron Kandel, founding financial editor at CNN, says there is a way to raise standards. Qualified professionals should be used as sources, Kandel says, and the public should be told how the person’s past predictions have fared. Otherwise, it’s “like evaluating a baseball player without mentioning his batting average,” he says.

That sort of policy might not sit well in a personal-finance industry where everybody except the small investor seems to profit from the status quo. Barry Ritholtz, the chief executive officer of Fusion IQ, said he once had the temerity to ask a magazine editor if he could contribute an item about the foolishness of financial forecasting after having been invited to write a forecast for the 2004 stock market. The editor advised Ritholtz that it was a big double-issue that sold a lot of advertising, and the format wasn’t going to change. “So do you want to be in it or not?” the editor asked. Ritholtz dutifully wrote up his prediction of a year-end Dow close of 10,403 (it ended the year at 10,783).

I can, with confidence, pass on this one prediction for 2013: A lot more experts will dole out financial advice. Few will say anything worth listening to.

Every Mistress Needs Someone to Play Sugar Daddy

This article originally appeared in Bloomberg View on December 3rd, 2012.

I know we’re just settling in with our popcorn for the scene where the lawyers and PR handlers transform disgrace into opportunity for the players in the David Petraeus story.

Already Petraeus is on the contrition circuit, saying last week he “screwed up royally.” Why next thing you know, he will be nominated to replace Hillary Clinton at the State Department.

But before we move on to “Act II: The Image Rehab,” could we clear up this business about how women get depicted when the stuff hits the fan in a scandal?

Some of you are feeling sad that Petraeus, the retired four-star U.S. Army general who had an affair with the author of his biography “All In: The Education of General David Petraeus,” had to quit his job as Central Intelligence Agency director last month after admitting to an extramarital affair. “They threw this poor fellow to the wolves,” celebrity divorce lawyer Raoul Felder told the Daily Beast’s “Beast TV.”

Poor fellow, indeed, getting his reputation tarnished for engaging in indiscretions with Paula Broadwell, a married woman who surely must be responsible for the fall of our military hero, considering media commentary that dubbed her a slut and a cunning seductress.

How could this bad result have come to such a good guy?

“From what we know now, he wasn’t an alcoholic or a drug addict — something that might impair his thinking,” wrote columnist Susan Reimer in the Baltimore Sun. In fact, “he did nothing truly weird, like Rep. Anthony Weiner, who sent those cell-phone pictures of his crotch to random women.”

Behold Man

He probably wasn’t a bank robber or an animal abuser or an inside trader, either, and from what I can tell, the only things he is guilty of are cheating on his wife and a surfeit of professional preening.

But there is something a little bit off when one party to a sex scandal is congratulated for the sins he managed not to commit while the other gets attacked as “a shameless, self promoting prom queen,” which is the way Broadwell was described by an unidentified military officer in the blog Business Insider. (Memo to Mr. Unidentified Military Officer: Next time you get on the phone for a media interview, show a little military-style courage and attach your name to those smears.)

Petraeus is no stranger to self-promotion himself, and several writers have called him out both for his assiduous courting of the reporters who covered him and for his tacky decision to adorn his civilian clothes with military medals for a recent speech in Washington.

But that self-promotion hasn’t led to any portrayals of Petraeus as “a shameless self promoting prom king.”

I have, though, seen a lot of stories that referred to Broadwell as Petraeus’s mistress. And so has J. Nathan Matias, a research assistant at the MIT Center for Civic Media who studies gender representation in the media. Matias used a news database called Media Cloud to get an idea of how Petraeus and Broadwell were being depicted in mainstream media and in blogs, and noticed that the word “mistress” was being used in such varied places as USA Today, Newsweek and Bloomberg View and Bloomberg Businessweek have also referred to Broadwell as his mistress.

“If I were trying to write a piece, I wouldn’t refer to her in that kind of possessive way,” Matias told me. “I’d try to find language where I’d say they were having an affair, and identify her in terms of who she is in society, just as they are identifying Petraeus.”

Readers coming across the word “mistress” tend to visualize a woman who provides sex in exchange for cushy, rent-free living and a lot of high-end shopping, Matias said. That label is “kind of demeaning” in any event, he said, but doesn’t even apply in the case of Broadwell, a lieutenant colonel in the U.S. Army Reserve, a West Point graduate and recipient of two master’s degrees.

Lost Virtue

“She is getting the typical response to the scarlet letter woman — he is a man, so he’s weak, but she is crazy, demonic and a threat to national security,” said Victoria Pynchon, a blogger on negotiation and women’s issues at “He’s mostly getting a pass, and the women in this story are getting no pass.” Equal treatment in the media would at least make Petraeus the sugar daddy to Broadwell’s mistress, wouldn’t you think?

In a blog post that managed to squeeze in the word “slut” four times, the conservative commentator Robert McCain noted that Broadwell had conducted interviews with Petraeus while the two were jogging, which apparently is reason to conclude “the slut was very cunning in her seduction.” Even the Washington Post found a way to present her as conniving, noting that she was “willing to take full advantage of her special access” to Petraeus while researching her book.

Petraeus, meanwhile, was described by an unnamed friend (does anyone talk for the record on this story?) as being “vulnerable” after leaving the camaraderie of the military to take the CIA post.

In the Baltimore Sun story, the author suggested “we need to learn to get past these bimbo eruptions.” Bimbo, from, is “an attractive but stupid young woman, especially one with loose morals.” What we really need to work on is getting journalism schools to teach students the apparently lost art of looking up words in the dictionary.

There’s No Business Like the Brokerage Business

This article originally appeared in Bloomberg View on November 1st, 2012.

If regulators and brokerage firms are serious about restoring public confidence in the markets, they will have to do better than they did in the pathetic case of Mark C. Hotton.

Hotton is the 46-year-old former stockbroker who allegedly duped the producers of the Broadway musical “Rebecca” into believing he had lined up $4.5 million in financing. According to law enforcement officials, he even concocted a fictitious Australian guy, Paul Abrams, who would have been good for $2 million if only he hadn’t keeled over from malaria when it was time to write his check. While the clueless backers fell for his stories, Hotton pocketed finder’s fees. “Rebecca” has been “postponed indefinitely,” according to the show’s website.

It’s distressing, but it shouldn’t have come as much of a surprise from a man whose brokerage industry records since 1993 reveal a stolen-property charge, 16 customer disputes, a firing, a lien and a bankruptcy.

The real disgrace here isn’t Hotton, who is being held without bail after his arrest on two counts of fraud last month. The bigger scandal is trumped-up claims like this one:

“Ultimately, Hotton’s imagination was no match for the FBI, which uncovered, with lightning speed, his alleged financial misdeeds,” said Manhattan U.S. Attorney Preet Bharara in an Oct. 15 press release.

Lightning speed? Now that is what I would call a real whopper.

First Queries

I first began to contact Hotton’s lawyers a year ago this month when I saw that Hotton continued to work as a broker after filing for Chapter 7 bankruptcy, but they weren’t very talkative. Michael S. Finkelstein, a lawyer on Long Island, told me to call him back at 4 p.m. on Nov. 22, but didn’t answer that day, and never responded to voicemails. Similarly, voicemails and e-mails that I left with three other Hotton lawyers since Oct. 8 after the “Rebecca” flap erupted have gone unanswered. I couldn’t reach Hotton for comment.

Hotton has faced allegations of financial misdeeds as far back as 1990, yet moved on to work at six brokerage firms, including Ladenburg, Thalmann & Co. and Oppenheimer & Co. He was accused of fraud in multimillion-dollar lawsuits filed before anyone involved in “Rebecca” had ever heard of him. But there was nothing speedy about law enforcement’s response until the victims were attention-grabbing show-business types.

Hotton got a modest $60,000 from the producers of “Rebecca,” according to the U.S. attorney, and I suppose the crack investigators at the Federal Bureau of Investigation deserve credit for getting to the bottom of one of his punier swindles.

Anyone truly interested in watching out for the public might have started paying attention after Hotton bounced a check for $31,550 to Vilsmeier Auction Co. in Montgomeryville, Pennsylvania, on April 25, 1990. Hotton took possession of a 1985 Ford van and three other vehicles, thanks partly to a forged letter from a Westminster Bank officer assuring that his account had sufficient funds. Four months later, the real manager at the bank said in an affidavit that the letter was bogus and signed by a person who didn’t exist.

People who bounce checks and forge documents don’t belong in the securities business, but Hotton, who pleaded not guilty to two fraud counts last month, managed to get a broker’s license three years later anyway.

I asked Michelle Ong, a spokeswoman for the Financial Industry Regulatory Authority, how a broker like Hotton could stay in the business as long as he had. She said that before 2009, the complaints against Hotton had either been denied by his employers, or “settled for little money.” She says Finra began to investigate Hotton in 2009. That’s nice, I suppose, but three years later, Finra still has not announced any sanctions.

Finra Knew

Ong said that Finra knew Hotton had been convicted of criminal possession of stolen property, which apparently isn’t enough to convince regulators that a broker shouldn’t be in charge of other people’s money.

In the securities business, there is this brilliant idea that firms have a self-interest in tossing out bad guys. So I checked in with two firms that employed Hotton. I sent a list of 11 questions about Hotton’s criminal record and customer complaints to Paul Caminiti, a spokesman for Ladenburg, and all he had to say was that Hotton left the firm in 2005 to join Oppenheimer.

It gets worse.

On Oct. 15, the day Hotton was arrested, I called Noah Sorkin, a securities lawyer who worked at Oppenheimer when Hotton was there. Today, Sorkin is general counsel in New York at AIG Advisor Group, a network of independent brokers. “Lemme do this if it’s OK with you,” he said when I began to ask about Hotton. Sorkin said he would be happy to chat with me, but would first have to talk with lawyers at Oppenheimer. I’m still waiting for that call back.

An Oppenheimer spokesman, Brian Maddox, said this: “Investigations were conducted by both Oppenheimer and a securities regulator and no evidence of misconduct was uncovered. Any claims involving Mr. Hotton’s activities came to Oppenheimer’s attention after he left Oppenheimer.” He added that Oppenheimer employees who hired Hotton are no longer with the firm.

That probably would come as a surprise to Philip R. Schatz, a lawyer who filed an affirmation on June 25, 2010, in a multimillion-dollar lawsuit against Hotton while he was working at Oppenheimer, which wasn’t named as a defendant. Schatz said that, in previous lawsuits he had been involved with, Hotton’s actions at Oppenheimer and Ladenburg left him with serious reservations about the broker. In fact, he wrote that he had urged Sorkin in 2006 to investigate Hotton. “I told Mr. Sorkin that if I were in his position, as a matter of prudence, I would conduct a thorough review” of Hotton’s history, he wrote.

Yet for almost three more years, Hotton worked at Oppenheimer before moving to another firm. His story is but the latest example of the joke that securities regulation has become.

‘Dumb Money’ Is Staring Most of Us in the Face

This article originally appeared in Bloomberg View on October 4th, 2012.

Financial pros have a long history of sneering at mom and pop investors as “the dumb money,” all the while cashing in on commissions each time a sucker sells at the bottom or buys at the top.

Now the U.S. Securities and Exchange Commission has made it official: The investing public doesn’t know what it is doing.

It took an act of Congress and 182 pages for the SEC in August to publish its “Study Regarding Financial Literacy Among Investors,” an exercise mandated by the Dodd-Frank Act of 2010. The study’s grim statistics showed that about half the investing public can’t read a stock trade confirmation and two-thirds can’t figure out how much their adviser would pocket on the sale of mutual-fund shares. After being shown documents for an account in which a customer’s broker used an outside custodial firm to hold the securities and issue the account statements, only a quarter could identify the custodian. There is more where that came from, but you get the idea.

Consider the profile of the 4,800 investors surveyed for the report, which concluded that they “lack basic financial literacy.” More than half had full-time jobs, 11 percent had part-time jobs, 70 percent had at least a two-year college degree and 63 percent had annual income of more than $50,000. We’re not talking about Mitt Romney’s indolent moochers here. The dumb money could be your neighbor. Or you.

Getting Taken

Of course, there’s ample evidence by now that you didn’t have to be Uncle Charlie in the nursing home to wind up parking your money with Bernard Madoff, or to sign up for designed-to-fail collateralized-debt obligations from Goldman Sachs. Smart money can be clueless, too.

For the moment though, let’s stick with investors who don’t work on Wall Street and don’t have an inkling that the worthwhile initial public offering is the one they will never be able to buy. So we have this new information about the public’s failure to understand finance. What do we do with it?

The report has been a jumping-off point for a lot of feel-good proposals that, sadly, are dead on arrival. The SEC says it got “many comment letters” advocating a “comprehensive financial literacy program in the United States that starts in elementary school.” Hey, a new education program sounds great. But try that one out on your strapped local school principal.

And maybe ask those principals how just plain old, non-financial literacy is working out. On Sept. 24, the College Board said reading scores on the SAT were the lowest in four decades. How do you teach people to read prospectuses when they have trouble reading at all?

The weird thing about the SEC’s comprehensive look at the failings of U.S. investors is that the effort comes even as a new law is about to unleash a flood of fresh hazards on the public. On April 5, President Barack Obama signed the Jumpstart Our Business Startups Act, a stunning piece of deregulation that will relax disclosure rules for some public companies and allow Internet stock offerings through what is known as crowd-funding.

So even as we learn that investors need more education about basics, we set them up as prey for a whole new genre of rip-offs.

There are some solutions here, and the quickest fixes are the ones that make investors smarter about fraud, not about computation of mutual fund fees:

Brokerages should be required to give customers a copy of an adviser’s regulatory record before they can open an account. Along with that, firms should reveal the number of times a broker has had a case expunged from his or her record (I’d look for a new broker if that number was more than one) and send a recap of every bankruptcy filing, every sanction by a professional organization and every lawsuit filed against the broker in state or federal court.

Head Scratching

I was heartened to see that 37 percent of the investors in the SEC study said they actually checked a broker’s records, but it was a head-scratcher that 21 percent didn’t consider “allegations or findings of serious misconduct” to be important. Get these facts under customers’ noses and make it hard for them to avoid considering them.

Firms also should explain in writing the terms of the relationship to new customers. I don’t mean boilerplate disclosures about the odious policy of mandatory arbitration that lets firms avoid court. There should be a statement in plain English saying what the firm promises. “Dear Mrs. Smith: We may say in our glossy ads that you are a valued customer, but we don’t have to put your interest before ours, and if you want to sue us, you will have to prove that we sold you something that wasn’t suitable, which is a lot harder than proving we weren’t working in your best interest.” OK, so the wording could be more delicate, but either way investors should get the broker’s commitment in writing.

Lazy investors (like the one who told the SEC, “If you can’t put it on a 4 x 5 card, I don’t want to deal with it”) should at least take smart shortcuts: First, go through the indecipherable documents your broker sent you and read the footnotes, which will at the very least arm you with material for your next cocktail party. After that, look for these words or terms: “certain proceedings,” “conflict of interest,” “fraud,” “Wells notice,” “litigation,” “Securities and Exchange Commission,” “cease and desist” and “not FDIC.” You will find all of them in the sections the smart money hopes you never read.

Wall Street Finds Friends Can Help Scrub Records

This article originally appeared in Bloomberg View on September 6th, 2012.

If there’s one thing we learned from Bernie Madoff, Allen Stanford and the countless perpetrators of the financial crisis, it’s that nobody’s word is worth trusting.

The parade of Ponzi guys and unindicted bankers of recent years has inspired a new enthusiasm for sleuthing by the public. There’s even a cottage industry of vetters willing to size up a broker if you aren’t inclined to do the work yourself.

The catch is, for all the new willingness of investors to ask questions before they hand over control of their nest eggs, what you discover in regulatory records may tell less than the whole story. As for the commercial websites that purport to know which advisers are good or bad, let’s put it this way: Most are free to investors, and there’s that issue of getting what you paid for.

Some investors go the do-it-yourself route and access BrokerCheck, a database operated by the Financial Industry Regulatory Authority, known as Finra, a self-regulatory organization financed by Wall Street. Others check websites with names like and that offer reviews of brokers and their firms., introduced in May, says its users “avoid costly mistakes, identify problems sooner and select advisors with the best qualifications.” says it “takes on Wall Street by empowering investors and allowing them to rate and monitor their financial advisors.”

Freebie Sleuths

Rely on the freebie sleuths at your own risk. If it were my money, I would be gathering facts from court and regulatory records, including Finra’s database. I will get back to those problematic broker-vetting websites in a bit. But it’s worth explaining that even BrokerCheck has shortcomings.

Finra does require disclosure of some red flags about a broker’s finances — liens and bankruptcies, for example.

It doesn’t, however, demand that brokers disclose if they were sued in a matter that isn’t investment-related. Thus, although 253 former brokers from the bankrupt Stanford Financial Group Co. — yes, that Stanford — have been sued by a court-appointed receiver, they have no obligation to report that to Finra.

Ralph Janvey, the receiver in the 2009 fraud case brought by the Securities and Exchange Commission, is trying to recoup money those brokers made while they peddled Stanford’s securities. If you were thinking about hiring one of the former Stanford guys, you might like to know if they are on Janvey’s list: The broker on the receiving end of a big court judgment might have a lot of motivation to raid your account.

Robert Cornish, a Washington attorney who represents four Stanford victims, analyzed records of all 253 brokers and discovered that only 18 disclosed the lawsuit, which seeks to collect about $177 million from the group Cornish checked.

So BrokerCheck paints only a partial picture of a broker’s record. But it offers more than some of the vetting Web pages.

Consider, run by former broker Jack Waymire in Lincoln, California. I was curious that investorwatchdog says it could help investors pick financial advisers “with the best qualifications” while cautioning in the fine print that it doesn’t review compliance records. So I queried Waymire by e-mail. He responded that the terms of service I had read the previous day had “out-of-date information.” Sure enough, after getting his response, I saw that investorwatchdog’s terms of service were changed from the printout I had made of its disclosures.

Waymire says advisers — who pay to be featured — have to get a score of 90 or better on his proprietary algorithm before they can be featured, though he sometimes makes exceptions for advisers who he says have been subject to “frivolous” complaints. It is worth noting that he is willing to lose business from risky advisers: He says he kicked a guy off his site on Aug. 30 for having huge tax liens.

Background Checks

I noticed that the site featured a California broker whose record included a fine by a state insurance department, a customer complaint and a termination. Waymire responded that the adviser had acknowledged his mistake and reimbursed an investor in one instance 30 years ago, and hadn’t hurt investors in the two others. Personally, I would pass on someone like that.

BrightScope Advisor Pages, which says it helps consumers “conduct due diligence,” also gets revenue from financial advisers who pay to be highlighted. When I asked Mike Alfred, the firm’s chief executive officer, about a featured broker who had a criminal record, he said in an e-mail that BrightScope was in the business of making information easier to find and use, but that “We are not in the verification business.”

The operators of these sites themselves have blots on their records, ranging from a failure to meet a state’s net capital rules at a brokerage firm a quarter-century ago (Waymire); to two customer settlements, one for $35,000 and one that was confidential, for Shawn Tierney, founder of

Waymire said his firm ultimately met Florida’s requirements. Tierney said he was no longer handling the account in question when one of the complaints was filed, and that an investigation in the other determined he had done nothing wrong.

Then there is the million-dollar claim against Alfred, his brother Ryan, the president of BrightScope, and Axa Advisors LLC, one of their former employers. In a BrightScope blog posting on May 16, 2011, Ryan Alfred said “we were not required to pay any of the settlement.” Finra records for each Alfred, though, describe an “individual contribution amount” of $30,000 to the $135,000 agreement.

It took a world-rocking financial crisis to get the public to be more serious about checking the claims of brokers. Four years after the crisis began, there still is no substitute for using BrokerCheck or state regulatory records; Finra’s arbitration database; lawsuits and liens on; and LexisNexis’s SmartLinx for state courthouse actions. If that sounds like too much work and too much financial outlay — pacer and Lexis aren’t free — go ahead and peruse the new sleuthing sites. But don’t kid yourself about who their customers are.

No Big Boy Pants for Banks That Whine Over Rules

This article originally appeared in Bloomberg View on August 2nd, 2012.

Let’s imagine the customers of a financial firm get word that more than a billion dollars of their money is missing. Then, less than a year later, customers of another firm learn that $200 million of their money is gone, too.

If such a sequence of events occurred, it’s likely that leaders from the industry would be called to appear before a government committee. And they would probably say something like:

Sorry, folks. But don’t try to slap us with expensive new rules.

Welcome to the era of financial regulation, cost-benefit style — emphasis on the costs, not the benefits.

Although it seems to have escaped the memories of the people in charge on Wall Street, the economy just about collapsed in 2008, and a lot of bad things followed. Credit froze, financial firms went under, and millions of people were thrown out of work as business owners lost their financing and their confidence.

Then, last October, that billion-dollars-gone-missing scenario came to pass. The commodities firm MF Global Holdings Ltd. declared bankruptcy after customer money got transferred to a corporate account and then disappeared. Last month, customers of an Iowa futures trading firm, Peregrine Financial Group Inc., found out they had lost $200 million after the firm’s chief executive officer said in a suicide note that he had been running a Ponzi scheme for 20 years.

Government Obligations

Which brings us to the obligatory government hearing.

Last month, the House Committee on Agriculture explored what it cryptically referred to as “Recent Events (that would be the lost customer money) and Impending Regulatory Reforms (which better not be too expensive).” Among those testifying were two futures industry leaders: Terrence A. Duffy, president of CME Group Inc., the world’s largest futures market, and Walter L. Lukken, CEO of the Futures Industry Association, a Washington-based trade group.

The two men made the requisite noises about ramping up the industry’s vigilance against fraud. Then both took the opportunity to get it on the record that there’s a more important agenda.

Duffy: “I would hate to see us get over-regulated to a point or have rules put upon us that put us in a very — a place that is very anti-competitive.” At a Senate hearing yesterday, he said he wasn’t opposed to an insurance fund for fraud victims “if people want to pay for it.”

Lukken: “It would be wise to carefully weigh the costs of any new regulatory mandates.” Some of the rules being proposed by the Commodity Futures Trading Commission could lead to market disruption, the exit of futures brokers from the business, and – - as if it were the customer we really cared about here — the limiting of customer choice, Lukken said.

There was a glimmer of hope after passage of the Dodd-Frank Act two years ago that lawmakers had put some measures in place to avert another financial disaster. To get the reforms up and running, though, government agencies first had to write rules that would execute the law’s objectives.

The financial industry has used many tactics to derail this process, but its standout victory was a 2010 lawsuit by the Business Roundtable and the U.S. Chamber of Commerce against the Securities and Exchange Commission, which had proposed a rule to make it easier for investors to oust corporate directors. The U.S. Court of Appeals in Washington said last July that the SEC hadn’t properly assessed the rule’s costs and benefits. It was “an aggressive stretch of the law” in the view of John Coffee, a securities law professor at Columbia University.

Getting Stuck

A stretch or not, it is what the SEC is stuck with for the moment, and it’s become “the cornerstone of the attack of regulatory reform in the courts,” according to an 82-page report released three days ago by the investor advocacy group Better Markets. Dodd-Frank was passed “to stop Wall Street from crashing the world again,” Dennis Kelleher, the group’s president, said in a telephone interview. “Now they’re saying they can’t do it if it costs them too much money.”

To get an idea of who has the upper hand in this fight, consider what it entails to be the chump who has to explain the “benefits” side of financial regulation. Costs can be easy to figure out. Say there’s a regulation that requires new compliance officers. Tally up the salaries. If there’s an assortment of new software you need to comply with Dodd-Frank’s reporting requirements, you call the computer vendors and get the numbers.

But how do you measure benefits, like the frauds that never happen because stricter rules are in place? Is there a dollar figure we can put on credit markets that don’t collapse? Or the elderly who don’t lose their life savings because regulators have cracked down on rip-off artists who troll retirement villages?

Those are important questions, but they aren’t the ones being asked at Washington hearings that have titles like “The SEC’s Aversion to Cost-Benefit Analysis,” which took place April 17 before the House Committee on Oversight and Government Reform.

One witness that day from the Cambridge, Massachusetts-based research group Committee on Capital Markets Regulation had this suggestion for financial regulators looking to get the cost-benefit equation right: If a regulator isn’t able to develop data for its cost-benefit analysis internally, it should get the numbers from third parties such as trade organizations. If that doesn’t work, the agency should try to get the information directly from the firms that will be affected by the regulations. (Whom I’m sure will be anxious to help the SEC get a new rule in place.) Inconveniencing financial firms with such requests, though, could be burdensome for the firms, the witness said, so overseers should make data requests “with an eye to minimizing the imposition on and disruption to” the firms they regulate.

See? Easy!

The object of this exercise, of course, is to swamp regulators with so much cost-benefit work that rule-making will be impossible.

To keep the SEC busy, one proponent of cost-benefit analysis showed up at that House Oversight hearing in April with a nifty checklist for the SEC. J.W. Verret, an assistant professor at George Mason University’s law school, said in his testimony that when the SEC proposes a rule, it should estimate the impact on job creation. And gross domestic product. And whether U.S. stock exchanges will lose listings to overseas rivals. While we’re at it, let’s just have the SEC “retract and re-propose” the Dodd-Frank rules the agency has completed, and start all over again with a new cost analysis, he said.

By the time the SEC is done with that, it should be time for a flash crash, a couple of London whale copycats, maybe another MF Global or two. Then we can start the whole re-regulation argument all over again, if there’s anything left to argue about.

Rich Guys Facing Jail Time Can Still Win a Break

This article originally appeared in Bloomberg View on July 5th, 2012.

Rajat Gupta, the former McKinsey & Co. chief and pal of imprisoned inside trader Raj Rajaratnam, has one goal after being convicted last month of securities fraud: To convince federal Judge Jed Rakoff that he deserves minimal jail time.

There is a compelling public interest, after all, in keeping white-collar criminals on the street. The financial markets need liquidity, as any summer intern at a Washington lobbying firm can tell you, and we would be facing dark days if we lost our best talent at leaking confidential information. What good is a tipster in a place where high-frequency trading means swapping cigarettes for a batch of washed and folded laundry?

I don’t mean to suggest that his lawyers and throng of big-name business friends aren’t already doing a serviceable job of portraying Gupta as an honorable man who doesn’t belong in jail. Gupta’s lawyer, Gary P. Naftalis, pushed so hard to be allowed to tell the jurors about Gupta’s philanthropy that Rakoff had to offer a reminder: Even Mother Teresa would be judged on the evidence — but presumably not her saintliness — if charged with robbing a bank. And on the website, a collection of supporters cite everything from Gupta’s role as a founding board member of the Global Fund for AIDS, malaria and tuberculosis to his selfless offer to pay for a friend’s son to go to college.

Going Far

The effort to tout his charity and good heart is a respectable start for the former Goldman Sachs Group Inc. director. But it doesn’t go far enough.

With the sentencing slated for Oct. 18, there’s no harm in maxing out on every possible pitch as to why the man found guilty of leaking confidential information to Rajaratnam should get a break. The community-service alternatives alone are boundless. A not-for-profit to wage war on bullying of school-bus monitors comes to mind. Or maybe a faux-feminist foundation that cranks out op-ed articles on why it’s bad for women to receive equal pay to men.

Speaking of op-eds, it wouldn’t be the worst idea for him to get his worker bees cracking on a competition among news media outlets for first dibs on a Gupta byline. If Gupta’s lawyers balk, at least the public-relations people could ghostwrite a sermon on Gupta’s finer points, and hunt down a big name in business willing to put his or her name on it. You know, the types who are on important corporate boards and maybe even run global management-consulting firms.

White-collar defendants with bottomless checkbooks have been known to make colossal efforts to paint themselves as philanthropic pillars of the community. Sometimes that charity begins right around the time investigators deliver their first subpoena. Other times, as in the case of Gupta, magnanimity is a long-established practice.

You might wonder who would care if a rich person found guilty of a crime has sprinkled a few crumbs among the little people — and juries often wonder the same thing. Experts in selecting and analyzing juries say that jurors in mock trials and focus groups get turned off when there’s too much talk about a defendant’s good works. Philip K. Anthony, the director of jury consulting at DecisionQuest Inc. in Los Angeles, says jurors often mention that wealthy defendants derive benefits from their largess, including tax write-offs and goodwill from business associates and the community.

Paul Neale, the chief executive officer of Doar Litigation Consulting — the Lynbrook, New York-based firm that worked on the Gupta case — declined to comment on the trial. But he did say he has never seen philanthropy as a “definitive factor” in 23 years of mock trials that his firm has conducted.

Reality Play

Reality, though, can play out differently. Richard M. Scrushy, the former CEO of HealthSouth Corp., was acquitted by a jury in 2005 on charges he directed an accounting fraud. The Birmingham, Alabama, community got a heavy dose of his pious side even during the trial. Scrushy delivered a lecture and donated $5,000 to a church attended by one of the jurors. He and his wife hosted a Bible show that aired five days a week on local TV during the months before the trial began.

Even Rajaratnam benefited from hundreds of supportive letters to the court. Federal Judge Richard Holwell acknowledged Rajaratnam’s “very significant dedication to others” at sentencing, giving him 11 years even though sentencing guidelines called for as much as 24 1/2 years.

Maybe it wouldn’t hurt for Gupta to consider the example of Ronald Ferguson, the former CEO of General Reinsurance Corp. who faced a potential life sentence for helping American International Group Inc. deceive shareholders. Part of his pitch to the judge at sentencing was that he wanted to get back to his seminary education “and live my purpose to serve others.” Though his conviction was reversed on appeal and then settled in June in advance of a retrial, U.S. District Judge Christopher Droney sentenced him to only two years back in 2008. “We will never know why such a good man did such a bad thing,” Droney said. Ferguson’s supporters flooded the court with 379 letters.

A seminary stint may not be in Gupta’s future, but perhaps he could catch a break if he winds up filing an appeal and selects a new legal team with the magic touch.

In one of the most famous insider-trading cases of the late 1980s, Martin Siegel faced as much as 10 years in prison and a $260,000 fine. He had sold inside information in return for suitcases full of cash. Despite his crime, he spent only two months in prison, five years of probation, and received no fine.

It’s a pity that Gupta won’t have a shot at hiring the lawyer who shepherded Siegel to his propitious outcome. Siegel used Jed Rakoff, the guy who will decide what sentence suits Gupta’s crimes.

Women Kill the Buzz for Guys Who Hire, Fire Them

This article originally appeared in Bloomberg View on June 7th, 2012.

We’ve seen this movie before and the ending still stinks.

The sex-discrimination lawsuit by Ellen Pao against the Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers may be the gender and workplace story of the moment. But let’s get one thing straight: This doesn’t describe anything that’s new. It seems to happen routinely. Just yesterday, at a hearing in London, a lawyer for Latifa Bouabdillah, a former Deutsche Bank AG director, said the woman’s male colleagues were paid bonuses “double or triple that of the claimant” for the same work.

Swap out Pao for Pamela Martens, who led the class-action “Boom-Boom Room” lawsuit against Smith Barney in the 1990s, or Allison Schieffelin, who sued Morgan Stanley in 2001, or Carla Ingraham, who sued UBS AG in 2009, and you wind up with some combination of the same old complaints: coworker come-ons, power meetings for guys only, higher pay for men and retaliation against the uppity women who have the nerve to complain.

In the venture-capital world, where you get more than the usual share of people who are prone to thinking their every experience is novel, there is shock over news that a highly qualified woman has filed a suit against a celebrity firm. But sex discrimination isn’t the iPad, folks. It’s more like the electric typewriter.

Only a week before Pao filed her lawsuit on May 10, Jack Welch, the former General Electric Co. boss, told a gathering at a Dow Jones “Women in the Economy” conference that women who wanted to advance just needed to work harder. “Over-deliver,” he counseled — advice that would strike a lot of glass-ceiling casualties as exactly what they had been doing their entire careers.

Getting Tired

I don’t know about you, but I got tired of this very predictable narrative about 20 years ago.

I have no idea if Pao’s allegations, filed last month in San Francisco Superior Court, are true. But they sure sound familiar. Pao alleges in her complaint that one male coworker gave her a book with sexual drawings and poems on Valentine’s Day and another cut her out of business meetings after she terminated a brief relationship with him. In her 2007 performance review, she was labeled “the top performer of the junior partners,” according to the suit. After that, Pao says she complained about discrimination. Then things changed, with two subsequent reviews citing her “issues and clashes” with other partners, the lawsuit says.

Pao’s San Francisco lawyer, Alan B. Exelrod, declined to comment. Kleiner Perkins said in an e-mail that the suit “is without merit” and will vigorously defend itself. Kleiner general partner John Doerr, whose name is frequently decorated with the phrase “legendary venture capitalist,” said in a statement posted on the firm’s website May 30 that it all amounted to “false allegations” against his firm, which has “the most” women of any leading venture-capital firm.

Twelve of Kleiner’s 49 partners are women, and in the venture-capital business, that’s considered very, very good.

How is it that 20 years after Anita Hill broke the silence about gender discrimination and harassment at work, there are still companies that can take a bow for being gender-equality heroes when 75 percent of their leaders are men?

There are many excuses used to explain away the snail’s pace progress for women at work, but the two most popular go something like this: It takes time to get women in the pipeline with education and experience. Or — don’t you hate when this happens? — those ungrateful women get jobs only to bail out because they can’t take the stress, want more free time for Pilates or miss staying home with the kids.

Let’s take that last one first.

New York-based Catalyst Inc., which does research on women in business, started tracking the progress of 4,100 full-time Master of Business Administration graduates around the world in 2007, homing in on those it identified as “high-potential employees.” No matter how Catalyst sliced the data in its four reports on “high potentials” since 2009, men started with higher salaries — a pay gap of $4,600 in the first job out of school — and enjoyed larger increases each year.

Dropping Out

To address the argument that women are dropping out of corporations because they want more personal time or less stress, Catalyst teased out just the men and women who aspired to be senior officers or chief executives of for-profit companies. They also compared only men and women who had no children to address the “mommy wants to be home with the kids” argument. In each case, men started out making more and advanced more quickly.

So much for the girls-can’t-handle-it argument. As for the pipeline argument, consider Pao. She had seven years of business experience, an electrical-engineering degree from Princeton University, and a law degree and MBA from Harvard by the time she landed at Kleiner in 2005. She’s had a lot of female company accumulating the right pedigrees for years, too.

Women earned only 10 percent of undergraduate business degrees back in 1971, receiving 10,460 degrees compared with 104,936 by men. By 1985, women had increased that number tenfold; in 2002, women received more degrees than men. That doesn’t sound like an empty pipeline to me.

It’s time to shift the focus from trying to “fix” women, to trying to understand the subtle forces in organizations that may be holding women back, Christine Silva, a senior director of research at Catalyst, told me in a telephone interview.

Good idea. But part of the issue isn’t subtle at all.

Some employers just don’t want to hire women. Period. The biggest eye-opener I’ve seen in academic research to support that idea was a study in 2000 that tracked 26 years of auditions and hiring statistics for symphony orchestras.

Orchestras had come under pressure in the late 1960s to hire musicians in an unbiased manner, and began to conduct “blind auditions” where judges couldn’t see the person trying out. They literally performed behind a screen. In the end, professors Claudia Goldin of Harvard University and Cecilia Rouse of Princeton University found that a woman’s chance of being hired increased by 25 percent when juries were clueless about a tryout’s gender.

Standard Attack

We could benefit from a corporate version of that blind-audition idea. Until someone figures out how that would work, my guess is we will keep rolling through lawsuit cycles of predictable allegations and ugly revenge strategies. Comb through the reader comments at the end of articles about Pao, and you will see that she is already getting a blast of a tried-and-true “nuts or sluts” attack that deems women who sue as either crazy or a little loose.

Pao herself reveals in the lawsuit that after a peer badgered her, she had sex with him two or three times, which is enough for some of her critics to conclude that she has no case at all.

Her foes are also anxious to get the word out that her husband, hedge-fund manager Alphonse Fletcher Jr., is black, litigious and unconventional. Don’t be surprised to see reporters put more energy into investigating Fletcher than they do probing Pao’s allegations. Fletcher does indeed have what can only be described as an unusual biography. He has sued an employer for discrimination, has himself been sued for sexual harassment of two men and lived with a male partner in New York’s famous Dakota building (which he sued for racial bias) before marrying Pao. His spokesman, Stefan Friedman, said he would ask Fletcher for a comment, but he never got back to me.

Fletcher’s history is an open invitation for guilt-by-association coverage that already is distracting from his wife’s allegations. It has nothing to do, though, with an office culture where, as Pao describes it, women were barred from power dinners with important clients because their presence would “kill the buzz.”

Back in 1987, a Smith Barney office manager in Garden City, New York, sent out an invitation to “All Garden City Brokers” for a day of golf and dinner at his country club. When several of the women tried to RSVP, the message came back that women weren’t invited. Presumably they, too, would have killed the boys’ club buzz. For too many women at work, 25 years later, this bad workplace act is still in reruns.

Whistle-blower’s Grim Tale:
Naughty Boys on Wall Street

Antilla’s meticulously researched book … throws a
light on how, as a Minneapolis civil-rights lawyer puts it,
“Wall Street is thirty years behind every other industry or profession” when it comes to women.

Tales from the Boom-Boom Room: Women vs. Wall Street, by Susan Antilla. Bloomberg Press, 384 pages, $26.95.

Back in 1984, a young woman walked into the Garden City, N.Y., branch of Shearson / American Express, looking for a job as a stockbroker. Her first interview was so lavishly abusive that she thought it must be a put-on, but her second seemed normal enough-until she noticed her would-be boss sporting a handgun in an ankle holster, buddy-cop style. Read Entire Review

JPMorgan’s Dimon Goes From ‘Least-Hated’ to ‘Most-Embarrassed’

To a lot of writers, JPMorgan Chase CEO Jamie Dimon has been a rock star. To me, he’s always seemed more like a very proficient plumber.

I don’t mean that in a bad way. Plumbers can be useful technicians when you need an expert who knows how keep the toilet from backing up. Dimon made his way to the top, in part, because he was a guy who did his homework, crunched the numbers, and made it his business to understand, well, the pipes and connections inside a securities firm. [...] Read article

Wall Street’s Legal Magic Ends an American Right

This article originally appeared in Bloomberg View on May 4th, 2012.

American business entered its Teflon era on a spring day 25 years ago.

Lawyer Madelaine Eppenstein had taken the morning off from work for a parent-teacher event at her 5-year-old’s elementary school on June 8, 1987, when she was summoned to the principal’s office for an urgent call. Her husband and law partner, Theodore Eppenstein, told her they lost the Supreme Court case he had argued two months before on behalf of a couple trying to sue their stockbroker for fraud.

“I felt like I got punched in the face,” she told me in an interview late last month.

If Eppenstein was punched, the investing public was mauled. The case known as Shearson v. McMahon would wind up locking investors out of U.S. courts any time they tried to sue a broker. A tiny clause in customer agreements turned out to be Wall Street’s magic formula to keep its transgressions out of sight. The agreement that Eugene and Julia McMahon signed said that any dispute between them and their broker at Shearson/American Express Inc. — a trusted fellow parishioner at their church –“shall be settled by arbitration” in a Wall Street forum. Investors since then have either had to agree to similar terms, or forget about having a securities account.

“If you get screwed,” Theodore Eppenstein says, “now you have no place to go.”

Looking for Luxuries

No place to go, that is, if you’re looking for luxuries like publicly filed documents, juries that hear the facts and judges that preside over open proceedings.

The McMahon decision was damaging enough for the impact it had on individual brokerage customers, who tell their stories about fraud, misrepresentation and churning behind closed doors where the public — including reporters — isn’t welcome. Perhaps worse is what happens when a powerful industry gets accustomed to keeping its squabbles quiet: Wrongdoers are inclined to relax, sending ethics to ever-lower lows.

“It means that all sorts of scams against individuals, however large, are very unlikely to come to the attention of the media and the public,” says F. Paul Bland Jr., a senior attorney at the public-interest law firm Public Justice in Washington.

Wall Street may have been first to catch on to the benefits of mandatory arbitration, but Bland worries that the closed-door trials are spreading to industries from retailing to homebuilding. “The silence and secrecy that surrounds arbitration is extremely harmful to the country,” he says.

These days, employers — Manpower Inc. and Nordstrom Inc. among them — require new hires to give up their rights to court before a fresh-faced recruit can check in for orientation. And consumers can forget about opening a Netflix account, signing a mobile-phone contract, or putting a loved one into most big-name nursing homes unless they are willing to give up their rights to go to court. Buying a Starbucks gift card? You are agreeing to mandatory arbitration of any fraud or misrepresentation by the company.

The results can be chilling. After watching his father die from sepsis of the blood caused by infections from 13 bedsores in 2005, David W. Kurth of Burlington, Wisconsin, tried to sue the nursing home whose staff he claimed had left his father’s wounds covered in excrement and urine for days at a time. Though the death of his father would have been shocking enough, Kurth told a Congressional subcommittee in 2008 that the “most shocking” part of his family’s ordeal was this: They wouldn’t be able to sue for the alleged neglect because the deceased man’s wife had signed admissions documents that had a mandatory-arbitration agreement.

“How can anyone in good conscience argue that it should be perfectly legal to trick frail, elderly, infirm senior citizens experiencing the most stressful time in their lives into waiving their legal rights?” Kurth asked.

Free Phones

Conscience, of course, plays no role when companies demand arbitration. But Supreme Court decisions do. In April 2011, the court dealt a new blow to consumers and employees in a case known as AT&T Mobility v. Concepcion. AT&T had pitched a deal to woo new mobile-phone customers by offering free phones, but it turned out the freebie came with a $30.22 bill for “taxes.” Vincent and Liza Concepcion tried to bring a class-action lawsuit on behalf of all the other consumers who took AT&T’s deal. But the court said that when the couple signed the customer agreement, they gave up their right not only to sue, but also to a class action even in arbitration.

In the year since the Concepcion decision, lower courts have trashed dozens of cases in which consumers or employees were trying to sue as a group. The National Labor Relations Board pushed back against the impact the Concepcion decision might have on employment class actions, ruling in January that it’s a violation of federal labor law to make workers give up the right to pursue group claims. That decision probably will be challenged in court.

About 25 percent of U.S. employees are covered by mandatory-arbitration clauses, says Alexander J.S. Colvin, an associate professor of labor relations and conflict resolution at Cornell University. He figures the number will grow as a result of the Concepcion case.

If you are wondering just how bad arbitration can be, the examples are many. When I wrote my book about sexual harassment on Wall Street, “Tales From the Boom-Boom Room,” I was aghast at the things brokerage firms could do that would never be allowed in court. In the weeks before one woman’s arbitration hearing was set to begin, her former employer hired a psychiatrist who questioned about her sex life and her menstrual cycle. She had alleged that a man in the office had followed her into a stock room and grabbed her breasts. Another woman, who said the same man had accosted her, was directed by the consultant-shrink to sit in a chair in the middle of a room and recite the names of all the U.S. presidents — in reverse order.

Both women bailed out and settled, having seen enough of arbitration’s downside before the hearings even started.

Get There Early

In October, a doctor who was fired from her job by a physicians’ group in suburban Philadelphia told the tale of her arbitration to the Senate Judiciary Committee. Deborah Pierce would have preferred to sue the partnership (17 men, one woman at the time) that fired her, but her employment agreement tied her to arbitration run by the American Health Lawyers Association. One morning, she arrived early to her hearing at a law office in Wayne, Pennsylvania, to see one of her former bosses strolling out of the arbitrator’s office carrying a cup of coffee. That sort of encounter is known as an ex-parte meeting between a judge and a party to a case. It isn’t allowed in court proceedings.

To pay for her case, which included her half of the arbitrator’s $117,042 fee, Pierce took out a home-equity loan that she and her husband are still paying off three years later. Her consolation prize: the arbitrator at one point ordered her adversaries to pay her $1,000 in sanctions for destroying documents and delaying the proceedings. And then, he billed her $2,000 for the time he spent deciding whether he should impose the fine. She lost.

It’s an open secret in legal circles that arbitrators are more worried about alienating the corporations who give them regular business than they are about one-shot plaintiffs. “Arbitrators who ding a major firm know they’re going to be blackballed,” says Timothy J. Dennin, a New York lawyer who represents aggrieved investors.

There are upsides to arbitration, if only the public had a chance to consider it as an alternative to court instead of a mandate. Investors whose losses are too small to be attractive to lawyers, for example, can often navigate securities arbitration more easily than a court case. And arbitration can be faster than court.

“Do some cases fare better in arbitration? Definitely,” says Ryan K. Bakhtiari, the president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors. He says arbitration should be at the choice of the investor, not mandatory.

Bad Behavior

The more cases we relegate to arbitration, the more we fail to hold companies accountable for bad behavior.

Frank Partnoy, the author of “Infectious Greed: How Deceit and Risk Corrupted the Financial Markets,” says that even if an arbitrator decides a business is guilty of fraud, a company “can write a check and not worry about creating a dangerous precedent.”

That case by the McMahons never got to arbitration after the Supreme Court said the couple couldn’t go to court. Regulatory records for their former broker show they settled for $700,000. Christine Hines, the consumer and civil-justice counsel in Public Citizen’s Congress Watch unit, says groups such as hers would simply have no material to work with if bad products and practices were all relegated to private justice.

“There is no way we, as advocates, would know what’s going on,” she says.

Twenty-five years after the McMahons lost their fight for a public hearing, it’s hard not to conclude that’s precisely what business is counting on.