Better Markets continues to watch for decisions in several important pending cases as well as track key issues in the courts:
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A case before the Supreme Court (Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System) in which shareholders are seeking compensation for Goldman Sachs role in the 2008 financial crisis. The Supreme Court heard oral argument in the case late last month. Read our amicus brief.
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Why this matters. A group of Goldman shareholders, including pension funds, are seeking to hold the bank accountable for its misrepresentations through a class action. What’s at stake in this case is whether Goldman Sachs’ shareholders will be able to join together in a class action and press their case against the bank for one of the most shameless frauds in the history of the 2008 financial crisis.
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The case raises technical legal issues surrounding class actions, but the bottom line is that if the Supreme Court rules against the shareholders, they won’t be certified as a class under the rules and won’t even be allowed to present their case on the merits to the trial court. The courthouse door will be slammed shut to Main Street investors.
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A recent lawsuit filed against the SEC’s flawed whistleblower rule enacted by the Trump administration, which threatens to reduce incentives for whistleblowers to come forward with critical evidence of securities law violations.
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Why this matters. The Dodd-Frank Act set up a strong whistleblower program at the SEC to encourage people, particularly insiders at financial firms, to come forward with often difficult to obtain evidence of illegal conduct. The program entitles whistleblowers to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.
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This program has proven to be an enormous success, helping the SEC recover billions of dollars in penalties and hundreds of millions of dollars in disgorgement for the benefit of injured investors. In fact, we called it “A $2 Billion Success Story” in a White Paper. Unfortunately, last year, the SEC weakened the program by issuing a rule that gave the agency broad discretion to limit the size of awards. It also created new hurdles for whistleblowers seeking awards where their evidence helped another agency bring a successful enforcement action, in violation of the law as we have pointed out here.
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That’s why we applauded a whistleblower advocate lawsuit to overturn the deeply flawed and legally baseless rule.
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Attempts to force public company shareholders into mandatory arbitration, a biased, secretive, and anti-consumer forum.
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Why this matters? Mandatory or forced arbitration takes away the rights of consumers and investors to seek relief in court when they are ripped off by banks and corporations. It forces them instead into secret, unfair and biased arbitrations. Those proceedings are run by an industry self-regulatory organization which, no surprise, is often biased and consistently favors the industry. Even when investors and consumers take their complaints to those forced arbitrations, they rarely result in meaningful recovery for consumers and investors.
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A court will decide if a public company can be forced to impose mandatory arbitration not just on its customers but also on any shareholders with claims against the company for fraud, mismanagement or other breaches of duty. If the court gets this wrong and allows this dramatic—and dramatically bad—legal development, then the toxic effects of mandatory arbitration will be further broadened, likely incentivizing lawbreaking while at the same time taking away the legal rights of investors to stop it.
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Given that shareholders are the owners of public companies and they rely on legal actions as one important way to protect their investments and police management, such a decision would have a significant and adverse impact on capital formation and allocation.
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Challenges to banking rules that will facilitate improper use of the national bank charter to insulate nonbank financial firms, including payday lenders, from important consumer protections under state law.
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Why this matters? Under the doctrine of preemption, certain state laws do not apply to national banks because federal financial regulators are supposed to supervise them. But recent OCC and FDIC rules seek to stretch preemption beyond its intended scope and nullify important state investor and consumer protection laws. If left intact, these rules will help promote “rent-a-bank” schemes that allow all sorts of nonbank lenders to partner with national banks for the purpose of—or that will result in—avoiding important consumer protections under state law.
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Chief among those protections are state usury laws, which—unless preempted—prohibit lenders from gouging consumers with sky-high interest rates and fees. If these pro-predatory rules are struck down in court, it will be a huge and critically important win for tens of millions of consumers who need and deserve credit on fair terms.
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Challenges to the CFPB’s harmful rule that rescinded the underwriting requirements for payday lenders, a commonsense provision that required those lenders to determine whether borrowers could afford to repay their short-term loans. That’s right: the rule merely required lenders to determine at the time a loan was issued that the borrower could afford to repay it. It’s a basic, commonsense, and relatively simple process—unless, of course, the financial firm (i.e., predator) doesn’t want to make loans that are repaid but instead seeks the legal right to trap desperate borrowers in a never-ending cycle of debt with more and bigger fees and higher interest rates, what we call a “debtor’s prison without walls.”
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Why this matters? Under the Obama administration, after years of substantive and robust analysis, the CFPB crafted important protections for consumers who need short-term or “payday” loans. Among them was the requirement that payday lenders determine a borrower’s ability to repay a loan before extending credit. The purpose was to prevent those lenders from deliberately trapping desperate borrowers in endless cycles of unaffordable debt that saddle them with huge interest payments and fees.
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Under the Trump administration, the CFPB nullified those underwriting requirements in a deplorable example of baseless rulemaking plainly designed to accommodate the payday lending industry and in response to relentless industry lobbying (and, reportedly, campaign contributions). Now a court will have the opportunity to nullify the Trump rule and restore the underwriting requirements for the benefit of millions of vulnerable borrowers living on the economic edge.
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