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Michael Perino Archives

The Battle over the CFPB

Yesterday I tried to give some historical context to the continuing controversy over whether President Obama should nominate Elizabeth Warren to head the CFPB. I want to return to that subject today.

This morning’s New York Times has an article addressing the issue. Part of the objection to Warren is her outspoken criticism of the banking industry.  Bankers apparently feel that “she has unfairly accused them of exploiting consumers.”   This has become a familiar refrain of late in the financial community (see for example Jamie Dimon’s comments at Davos earlier this year).         

But such expressions have a much older lineage than that. In 1939, Ferdinand Pecora wrote Wall Street under Oath, his memoirs of the Senate investigation he led in 1933 and 1934. This quote is from his introduction.

Frequently we are told that regulation has been throttling the country’s prosperity. … That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt. Indeed, if you now hearken to the oracles of The Street, you will hear now and then that the money-changers have been much maligned. You will be told that a group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they … were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob blindly seeking victims.

A good deal of the New York Times article was devoted to chronicling attempts to weaken the agency. Warren described the efforts this way:

Every day, somebody’s got a plan to undercut this agency, to knock it down,” she said. “The conversation is effectively: ‘Oh, we’d really like to kill this thing but it might be too popular for that — that might cause too much blowback. So can we find a way to maim it?’ ”

In 1939, Pecora ended Wall Street under Oath this way:

When open mass resistance fails, there is still the opportunity for traps, stratagems, intrigues, undermining—all the resources of guerilla warfare. These laws are no panacea; nor are they self-executing. More than ever, we must maintain our vigilance. If we do not, Wall Street may yet prove to be not unlike that land, of which it has been said that no country is easier to overrun, or harder to subdue.

The more things change …

Over at the Baseline Scenario, Simon Johnson was kind enough to mention The Hellhound of Wall Street in his call for President Obama to nominate Elizabeth Warren for the top spot at the new Consumer Financial Protection Bureau. The continuing controversy over Warren calls to mind a similar battle waged in Washington exactly 77 years ago.

In May 1934, the Securities Exchange Act was finally making its way through Congress after a bitter lobbying campaign to defeat it. With passage now virtually certain, the predominant question was who would lead the new agency the law created, the Securities and Exchange Commission.

Most New Dealers wanted James Landis, the Harvard law professor who had been a primary architect of the federal securities laws and who was already in charge of the securities division at the Federal Trade Commission. Others wanted Ferdinand Pecora, the stalwart lawyer who led the investigation of Wall Street that was just then wrapping up. Bankers hated both ideas. They thought either man would push through regulations that were far too stringent.

With mid-term elections on the horizon and with hopes of jump starting a business recovery, President Roosevelt sought to make a “truce of God” with bankers. The rumor was that he would appoint as the new chairman Joseph P. Kennedy, a man who had made a substantial part of his fortune operating the very manipulative pools the Exchange Act sought to eliminate.

Word of Kennedy’s potential appointment reached future Supreme Court Justice Felix Frankfurter, who wrote to the President to lobby for his protégé, Landis. Frankfurter’s advice is just as salient today as it was then.

Legislation, Frankfurter wrote, means predominantly administration and less than vigorous administration would doom the new agency. Frankfurter pointed to the then well documented cases of public service commissions, which had been extremely weak-kneed in the face of lobbying from the utilities they oversaw. Securities regulation, Frankfurter warned, presented even graver dangers:

Now the administration of the Stock Exchange Act will, I am sure, be even more difficult and call for even greater skill, resourcefulness, firmness as well as fairness of temper, a will not worn down by fatigue, than has been the work of the older regulatory commissions. The problems are more subtle, the abuses less obvious, the public more misleadable [sic] and the consequences of non-action more far reaching. What will matter most to Wall Street indeed is what the Commission will refrain from doing, in view of what the law might enable a courageous and knowing commission to do. I don’t know, of course, what the final terms of the Act will be, but I do know that the extent and effectiveness of the powers conferred by the legislation will depend largely upon the understanding of the possibilities under the statute by those charged with its administration. … [Y]ou need administrators who are equipped to meet the best legal brains whom Wall Street always has at its disposal, who have stamina and do not weary of the fight, who are moved neither by blandishments nor fears, who in a word, unite public zeal with unusual capacity.

Roosevelt was unswayed. On July 2, 1934, Kennedy became the first chairman of the SEC. Perhaps the result will be different this time around.

Pecora the Prosecutor

Erwin Chemerinsky, the Dean at UC Irvine Law School, had a piece in the National Law Journal the other day about prosecutorial misconduct. We’ve all heard about the high profile cases involving the Duke lacrosse team and the late Alaska senator, Ted Stevens.  Chemerinsky’s article, citing evidence from an empirical study conducted by the Northern California Innocence Project at Santa Clara University School of Law, suggests that misconduct (which can run the gamut from outright corruption and malfeasance to simple negligence) might be more widespread than many people realize.

The article got me to thinking about what kind of prosecutor Ferdinand Pecora (the subject of my book The Hellhound of Wall Street) had been.

Pecora was appointed as a deputy assistant district attorney in Manhattan in 1918, and he eventually became the number-two man in the office. During his twelve-year prosecutorial career Pecora was, in the words of his boss, an idealist with “an inveterate passion for justice.”

In one of his earliest cases, the junior lawyer was asked to cover a simple, one-day robbery trial for a sick colleague.  Pecora easily won the conviction of a young black man named Malcolm Wright, but Wright continued to insist on his innocence. Most prosecutors probably would have ignored those claims, but Pecora had a “queer feeling” about the case. He investigated Wright’s arrest and uncovered blatant police misconduct. Pecora presented the evidence to the judge and asked him to set aside the conviction and to order a new trial, at which Wright was acquitted.

Pecora had no tolerance for prosecutorial misconduct either. Here's a brief excerpt from the book:

As a result of his work on the Wright case, Pecora was assigned to investigate another potential wrongful prosecution, this one involving a New York poultry dealer named Joseph Cohen, who’d been convicted of hiring assassins to kill his business rival, Barnett Baff. The murder and trial had been front-page news in all the city papers, and Cohen was on death row in Sing-Sing when the district attorney learned that some of the testimony at the Cohen trial might have been perjured. He set Pecora to investigate the matter. In the face of obstruction after obstruction thrown up by the attorney general’s office, which had originally tried Cohen and which seemed to be implicated in the perjured testimony, Pecora was relentless, spending almost all his time over the next two years tracking down evidence in the case. Thanks to Pecora’s efforts, Cohen was eventually released from prison. (His execution had earlier been stayed just seven minutes before he was scheduled to go to the electric chair.)

Pecora obtained a perjury conviction against one of the witnesses in the Cohen murder trial. The day after the lengthy trial ended was a Saturday, and Pecora went to his then quiet office to clean up some paperwork. There was a timid knock on the door. A small gray-haired woman dressed all in black demurely asked whether he was Mr. Pecora. When he said that he was, she responded, “I am Mrs. Joseph Cohen.” Mrs. Cohen clasped Pecora’s hands and fell at his feet. As she sobbed uncontrollably, the only words she managed to get out were, “I came to thank you for what you have done for my husband.” For the rest of his life, Pecora called it the biggest fee he ever received as a lawyer.

The Hellhound of Wall Street

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?



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.