I’d like to thank Ted Frank for giving me the opportunity to blog this week on my book, The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance.
Nearly 80 years ago the Pecora hearings captivated the country. In the worst depths of the Great Depression, Pecora paraded a series of elite financiers before the Senate Banking and Currency Committee. The sensational disclosures of financial malfeasance galvanized public opinion for reform and led to passage of the first federal securities laws and the Glass-Steagall Act. The drafters of those laws were forthright in their gratitude for Pecora's meticulous investigation. “We built completely on his work,” one of them acknowledged.
The investigation was the crucial turning point in the relationship between Washington and Wall Street, but to many readers of this blog on the US litigation system it might seem a bit off topic. Let me try to link it up.
Until his death in 1982, Abraham Pomerantz was one of the leaders of the plaintiffs’ bar. He helped pioneer derivative suits brought by small shareholders against publicly traded corporations, and the law firm he founded remains a major player in the field. He and the partners in that firm today should also offer Pecora their thanks.
In 1932 Pomerantz, three other lawyers, and a stenographer were shoehorned into one small room trying to eke out a living. Clients were few and far between and most of the time they sat around playing knock-rummy. One day, Celia Gallin, the widow of a high school gym teacher walked in the door. Her husband had left Gallin 20 shares of stock in the National City Bank of New York (today’s Citigroup). During the heady days before the Great Crash, those shares had sold for $585 a share; now they were at $17. Wasn’t there someone she could sue? Pomerantz sent her on her way. There was, he told her, no law against losing money.
A few months later, Pecora took over as counsel for what had been, to that point, a bumbling Senate probe of the causes of the crash. Nearly everyone had written the investigation off as a failure and predicted that it would limp quietly off the stage, accomplishing nothing.
They were wrong. In just a few weeks Pecora turned the investigation around. His first target was City Bank and its Chairman, “Sunshine” Charlie Mitchell. After a whirlwind investigation, Pecora chronicled how Mitchell and the bank’s other executives had manipulated stocks, dodged taxes, ripped off their shareholders, and collected enormous bonuses for peddling shoddy securities to unsuspecting American investors.
Pomerantz quickly called Gallin. He still couldn’t get her money back, but he might be able to get her some retribution. If she agreed to bring a derivative suit against City Bank maybe the bank’s executives would be forced to pay their bonuses back to the bank. Pomerantz parroted the disclosures from the Pecora hearings and he won. The executives coughed up $1.8 million in bonuses and Pomerantz and the other lawyers split $450,000 in fees.
A few months later the pattern repeated. Pecora held hearings on Chase Manhattan Bank. Pomerantz found a shareholder to bring a derivative lawsuit alleging the same wrongdoing Pecora had revealed. This time the bank settled and Pomerantz had another big payday. It was at that moment that Abe Pomerantz decided to specialize in stockholder suits.
What is remarkable to me about this story is how little things have changed in nearly 80 years. Private lawsuits are supposed to provide a necessary supplement to public enforcement. Lawyers are given a stake in the case so they can ferret out wrongdoing that might otherwise go undetected. Ferreting out wrongdoing is, however, an expensive, high-risk proposition. It is much cheaper, easier, and more lucrative to mimic the allegations of wrongdoing that someone else has already brought to light. But how much should we pay lawyers to do that?