From Tesla to Wells Fargo: Scandal, Success, and Accountability in Corporate America

From Tesla to Wells Fargo: Scandal, Success, and Accountability in Corporate America

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You. My. Name is Anathoth Matty and I am a professor of finance and economics and, the faculty director of the corporation's, of society initiative, Kassie, here. At the GSB. Engaging. The GSB community, and others, on, issues, we think are truly, important, is a key, mission of Kassie, so, I want to welcome all, of you and. Thank. You for joining us and I'd especially like to thank our. Panelists. Who flew in to, participate in this event I also, want to recognize and, thank Dean. John Levin for. Supporting, this initiative and, for being here today. We. And c-span, are videotaping. This, event so we, hope the conversation, will continue. Cathy, focuses, on governance, issues, as they pertain to corporations. How. Do we ensure that, corporations. Can be trusted, to. Benefit their, stakeholders. Ultimately, society, as a whole without. Mistreating. Deceiving. And harming. How. Do we ensure that governments. Write, appropriate. Rules and the, corporation's comply with, those rules and what. Are the roles of among others employees. Customers. Investors. Courts. And the media in shaping. Corporations. Their culture and their, impact, on all of us in. October we hosted. John, Kerry rue the, author of bad blood a book about fairness. Mr.. Kerew said, that, one of the grave errors, the Eternals, CEO, Elizabeth, Holmes made. Was. To channel the. Fake it til you make it culture, that, pervades, Silicon. Valley. But. We have many examples of. Faking it also. Known as fraud. In corporate. America. Whether. It takes the form of misleading, investors. Or customers about, your products, opening, checking accounts, for customers, who didn't ask for them or falsely. Tweeting, that. Funding, has been secured, for to, privatize, your company. If corporations. Have significant, power, over. Customers, or employees they. Can also harm without breaking, the law and if. They have political power they may be able to write the law or, get away with. Breaking it. Successful. Business leaders often set, lofty. Goals, but. We want them to establish and maintain a culture of honesty, including. When adversity and challenges arise. We. Also want them to define, success properly. And avoid blind. Spots by, doing so there, can, be better leaders and they. Will also likely prevent, legal troubles negative. Publicity, skeptical. Investors, and public. Anger. Previous. Cassie guest, Bethany. McLean who, wrote the. Definitive book, on Enron. Said. I think, most people in most companies are extremely well-intentioned, but there.

Is A capability, in any company, particularly. In a world with short-term oriented and, bottom-line driven, to, go wrong. Some. Of the subject of today's conversations. Have provided almost weekly. Examples. Of how things can go wrong and with, Tesla, reporting, earnings its, CFO, departing, and Wells, Fargo releasing. A report on its reform, process. This, week was no exception, they. Shoes are on cooperation society, are complex, we're. Fortunate to have, panelists. With us today panelists, with us today with, amazingly, rich and varied experiences. And expertise. To provide, us with some. Insight. Fahmy. Kadir is, a chief investment, officer, of, SEF, ket capital. A, short. Only hedge fund based in New York and founded in 2017. Ms Kadir was featured on the Netflix series dirty, money for. Her bet against, the, troubled. Drug company, valiant, in as an, equity. Analyst at a hedge fund KREM savage, asset, manager management, more. Recently she. Has taken a short position in Tesla among others. Emily. Glazier. Is. A reporter, for The Wall Street Journal, where she, now covers Wells Fargo, and JP Morgan Chase from New York and Los. Angeles her. Reporting on West Fargo, has contributed to public, and political. Backlash against. The bank remedial. Actions, by regulators, in numerous, executive, departures, and changes in business practices the. Bank has launched multiple publicity. Campaigns, to. Regain the public trust. The. Honorable, Jed. Rakoff has. Been a federal judge in the US District. Court for the Southern District, of New York for more than 22 years prior. To joining the federal bench Judge. Rakoff was, a federal, prosecutor in, the US Attorney's Office for the Southern District. Of New York for, seven years and then spent 16. Years as a white-collar criminal, defense, lawyers at two large. New York firms, he. Has been unusually. Outspoken. For a judge and achieved, fame for example, when he rejected the settlement between, the SEC and Citigroup, and when. He called the settlement between the SEC, and Bank of America. Half-baked. Justice. Following. This conversation will, continue engagement. Taking, questions, from our, audience. Now. Please join me in thanking again and welcoming our distinguished. Panelists. I'm. Gonna start by engaging with the panelists, and then we'll open it up, so. I'm going to ask them each a, question, maybe I'll get to the second one and then maybe all of them a question we'll see how far we get depends. On the length of the answers which I hope will be short, and. To the point. Miss. Kadir we. Teach our students, that managers. Must focus on maximizing their, company's stock price and, also, that, public folk, up for public cooperation the, stock price provides good, signals, of the, true value of the corporation, equity, as a, short, seller, you, obviously trade on negative information that others may ignore. With. Executives, wanting to present the rosiest, possible, picture disclosures, and statements. How does an investor, uncover, information, that the corporation, wants, to obscure, and what, beyond, trading, do you do with, such information, thank. You or not so the, perennial, dilemma of the short seller is that the same body of evidence the publicly available information, that, management will use to create that rosy narrative is the same information that I as a short seller have, to use to, disprove. The fundamentals, of the company or, show, that there is evidence of fraud so, that's, the starting point so how do we use that information in, a different way and ultimately. For. Any investor, particularly. The skeptical, investor it comes down to asking, the right questions, that's, really where it all begins, so we're prevent presented, with the same exact information but we are looking. At it with a different point of view and asking the critical questions so every investor, whether, it's a short seller or a journalist, or a skeptical. Sell-side analysts you should really listen to those who are asking the challenging, questions because, that will help us see between, the lines of the narrative. That management is trying to create, to. Get more into the details I typically. Avoid earnings. Reports I like, to review, the balance sheet because understanding.

The Assets and liabilities that's. Really, what's real about the business and what we can kind of follow the money trail, but. Earnings, earnings. And you know the income statement the cash flow statement is subject to a lot of manipulation, so, we. Can we can use that but again it's it's not gonna provide, the kind of context, that we need to understand what's really going on within, the business and, then. As a short fund, short. Fund with not that much capital we, need to be creative, about how we use this information and, how we access. Data, and what kind of data we access so at. Any point in time we can assume that there are billion-dollar, funds that have access. To all of the data they can pay whatever they want to get the credit card data the satellite data so what can I do that. Is different well, I can get away from my computer and I can go out into the world and I can do real-life shoe-leather type, work field work I can engage with the, customers, of the businesses that I'm looking at former, employees, and most, critically, whistleblowers, again. It's about being creative and gain, that informational, edge because you assume that everyone else has the quantitative. Data so. It's about concatenating. Your. Not understanding. What management, is doing but, also how they behave how they're responding to those questions and, putting, that all together and, when, we collect, that body of evidence that gives us some conviction, that there's potentially, fraud occurring what, do we do with it well as short-sellers we can't simply, sit, on that information, because markets. As much as we would like to think are not particularly, efficient, so sitting, on undated. Is. Critical. To the price discovery, of the stock is not. It could lead to me be going insolvent, I could, definitely, lose money as the stocks will continue to go up as the markets, will not realize the fraud so I have to be creative about disseminating, that information. So. We'll engage with, journalists. Activists, short sellers, and. Regulators. In order to get. The questions out there so investors can think to themselves. This. Glaser, corporations. Often punish explicitly. Or implicitly, all those, who question their desired narrative. Journalists. Have a key role in exposing, gaps, between companies, cultivated. Image and reality. How. Do you know when to ask more questions and, how do you get answers, and how, difficult is it to uncover, what's. Going on and publish material, that powerful corporations. And their leaders, do not want published, what. Role is the, need for access play. Does the need for access play so. There was a lot that was said that I would agree with in terms of journalism, I always. Ask the follow-up question there. Are no, stupid questions as, much as in my head I think they are, always. Better to ask them and access. Depends. On the situation so let's. Take, Wells Fargo, similarly. I public. Information, while very important, and it's extremely, important for me to understand, earnings reports, I'm, not doing my job if I am sitting in the office I'm, constantly, out we call it sourcing, and journalism, meeting, people that the company does not really want me to meet with I certainly, take, meetings. That are offered to me and that's where the access, part comes in it, helps working at the Wall Street Journal, because we regularly, are meeting with CEOs, and other executives, and I, have that attached, to my name however. The, real goods as we like to call it and when I do my job well is writing, about something that nobody else knows and we. Call that scoops. Scoops. Are what I live, and die by in many ways and that is through current, and former employees. Shareholders. A whole variety of them. Consultants. Advisers. Regulators. There are so many different types of people that I need to talk to to get a very clear picture of what's going on because. A company, especially. On, the communications, team they're trying, to paint the most positive picture I think you said rosy narrative, that's, a great way to describe it but if I'm doing my job as, a journalist, I need to understand, everything, that's, going on and there's often quite a bit but a company might not want us to know about the. Other thing that we need to be wary of especially, with Wells Fargo is that. When someone reaches, out to me as a journalist, it's usually extremes, it's, like a bad game of telephone sometimes.

They. Either love, the company, or they hate the company and I need to make sure that I can gut check that with people that I trust so, so much of the reporting, with Wells Fargo has. Been about cultivating. Sources, over, time, figuring. Out who I can gut-check with who has a more moderate, fair, opinion, I hope, that my sources will say that's not true that's going too far and it really makes me rethink the information, that I'm gathering so that we can put it out in a fair objective and, accurate way. Judge. Rakoff, you. Have prosecuted. Defended. And judged individuals. And corporations, on, business, and securities, fraud, cases. How. Well does our justice, system work in a corporate context, where we administer. Justice to corporations. That produce products, we buy and employ many people, there. Are laws enable. Holding, executives, properly, accountable, for conduct, given. The level of control they have and how much deniability, especially. Of intent they can claim in. So. First. I want to say it's. A real pleasure to be here, it was hard tearing, myself away, from the four. Degree above zero weather in New York, but. Here we are. The. I'm. Sorry, to have to say that in my view. The. Prosecution. Of, corporate. Crime, has. Significantly. Deteriorated, in. The United States over the last 20 years I. Start. With the rather. Obvious, point. That. Inanimate. Entities. Like corporations, though, themselves. Commit. Crimes, and his individuals. Within the corporation, who. Make the decisions, that lead to. Criminal. Conduct, and. In. The, period before 2000. The. Policy, the Department, of Justice, was. To, try to discover. Exactly. Who those people were. At. The highest possible level levels. Of responsibility. And. That was very time-consuming. Required. A lot of resources, but. Frankly, was quite successful, and so you had the. Successful. Prosecution, of, mr.. Skilling. At Enron. And mr., Evers the CEO, of worldcom. And. Michael, Milken in the junk, bond scandal. And. Over. 800 people, in the, Savings. And Loan scandal. Going all the way up to the top guy Charles. Pedic. Around. 2000. Or so the. Justice. Department's, view changed. The. Nominal. Reason, that they gave for. The change which, was to go after, companies. And not after individuals. Was. That. Certain. Companies had. Overly aggressive. Kind. Of culture. And that if, we really wanted to deter, widespread. White-collar. Corporate. Crime in the long run we needed to change the, culture of these companies. Through. Compliance. Measures, and, the like. Even. On its face I think that was misguided, and. Professor. Brandon Garrett who has done, the definitive, study of. All. The corporate prosecutions. Between. 1996. And 2014.

Has. Concluded. That there was a high rate of recidivism. And. Much, less change in corporate culture on, the part of those corporations. Most, needing change, and. It, was hypothesized. Would. Occur but. I think, really. The reason, the Department, of Justice, changed, its policy, was. Political. And also. Resource, management. They. When, you bring a case against. A company, under, federal. Law you. Can, invoke what's called the doctrine, of respondeat, superior which, means that. The crime of even the, lowest level. Individual. Done, on behalf of the corporation, can. Be imputed, to the corporation. And so. Corporations. In the typical. Case are. Dead in the water to begin with they're going to have to come to a settlement they're, going to have to pay big fines to the government, they're, going to have to. With. A lot of hoopla say, we'll, never do it again and the reason is we've put all this, compliance. Measures into, place, and. That's, also politically. Attractive. And you, don't have to spend. Much of resources. And all to, realize. That. Result. In, theory. You. Could both go after the corporation. And after, the individuals, in practice. That doesn't, happen because. It would be a much more arduous lengthy. Process. To go after the individuals, and the parkin feels it, could achieve enough. I would. Say politically, they might say in terms of deterrence by. Going after just. The companies I think this is a, seriously. Misguided policy. Ms. Khedira. And. On CEO skilling. Famously, used profanity. When. He was challenged, by short seller on an analyst core lehman, brothers CEO. Dick. Fall blamed, short sellers for his bank's failure, in ellen masks, most recently called, short sellers value, destroyers, and criticized. Skeptical, analysts, bonehead, questions. How. Does this kept achill investor deal with the hostility from the company, and its cheerleaders. Well. First. And foremost when. I see company, management going, after, journalists, or short sellers or anyone asking the difficult questions that's, a red flag and I'm going to be digging in so.

Just Don't do it. But. I, think. What's most alarming, over the past several. Years and it's become progressively, more obvious, is that, the, investment community and, that those, who are going long stocks are increasingly. Prone, to deifying. Company, management and they can do no wrong so if you ask the CEO have. You committed fraud and he, tells you no I have not you, believe them you don't ask any further questions, you don't even, consider, the evidence that is put in front of you because we've, our decision-making. Has become so dictated, by the. Stock market, and what, prices are doing and we've. Been in a ten-year bull market, and the prices have just been going up so we feel that our thesis is being validated by the price action and typically. Yes when you make money you, can say you're right but, in this case the, the real asset value is not really, reflected, in the price movement, so we can't consider that to be validation, so when we have short sellers or other skeptics coming forward and asking, questions then, we should be listening because, at some point if you, are a true fiduciary. You want to ask responsibly. With your capital, or the capital of others then you need to consider, when is the judicious, time to sell and when. Someone's asking those tough questions and you really need to think to yourself is that almost that time to, sell so. Just. To put this in context, of an anecdote I was i I'm still am short a short, term health insurer, and I. Had made about 50%. On the position, already last year and I, attended. Their Investor. Day at the end of last year to assess. Whether it was time for me to cover my position I've made significant. Profit, it, seemed almost cheap, on. An. Earnings basis, so you know maybe it was time to walk. Away so. I was the only short, seller that was apparently there it. Was difficult to find out the location, of this, investor, day because it wasn't disclosed, to anyone who was asking any, questions, even, the full full investment, community itself, and. Then when I was there I asked, is this, investor. Event being webcast for, the purposes of full, disclosure and. They. Said no it, is not so, I took out my phone and I was recording the event so we have a record and I can distribute that to investors, as they needed the information and that, phone was yeah. I was warned several times, aggressively. That I was, not allowed to record and that, phone was nearly taken away from me and, then periodically. Throughout, that entire investor, day even though I was sitting quietly in the back of the room not asking questions not creating a fuss the, CEO, of the company was.

Repeatedly, Coming back to me and taunting, me bullying, me in. An investor on the board, had. Was passing, notes to the CEO giving. Him things to say to me including. An. Invitation. To come to the stage in order, to engage in, some sort of rap. Battle I'm not really sure. But. Throughout. The course of this I'm thinking to myself okay I didn't, realize it was this bad so maybe it's not time to cover maybe it's time to double down. So. Really. And in the face if. If, yeah you have to think to yourself if you are an invested, in a company and the executive, team decides, the best course of action is to humiliate. And engage, in ad hominem, attacks against. Those asking questions then, even. If the the, skeptic is incorrect, in their assertions, is it, really a good sign is a good character. To. Be engaging in those types of attacks is that the kind of person you want running your business and being, you know that the, safeguard, of your capital I think not so, I think investors, who are long have, an obligation, to. Engage, with the skeptics and put pressure on management they. Have their voting rights as a short seller I don't have voting rights in a company but shareholders, do so. When those questions come forward I think investors need to be much. More. Cognizant. Of the questions being asked and and put much more pressure on management. Thank. You miss Glaser. We, take this issue very seriously has. Almost become a cliche in corporate. Public Relation. To. Respond, to reports. About scandals, scan some--some yet often, they change little we heard from. The judge, without. Pressure from the outside. West, Fargo is now moving to its second post crisis. Rebranding. Instead. Of, reestablished. We now have this as Wells Fargo. How. Seriously, think the issue is, of executives. And boards miss. Diagnosing. Diagnosing. Problems. Thinking. Of them is just public, relations, problem. And. That. That's what it's all about and, then how do you as an outside investors, sort, of know whether they actually are just making, cosmetic, changes are really sort, of changing, first. I just wanted to address something that Judge, Rakoff mentioned. In. Terms of sometimes the settlements. And how things shake out and and what happens from there it, reminded, me of covering, big banks during a large foreign, exchange settlement, in 2015. When, they finally pleaded, guilty and, the stock prices, went up so. Just, wanted to mention that. So. Culture. It's, this very amorphous, topic, and when a company. Says we're changing our culture we're doing this we're doing that we have new ad campaigns, it's. Very hard for journalists it's really difficult to write about something like culture that doesn't have metrics, attached to it all the time. So. What I try to look for our specifics. That are actually. Show. Change, now. One, of the things that I noticed with Wells Fargo was right from the start and for several months after their top executives, said we do not have a culture problem everything, is great here it's a certain part of the bank they're, different our CEO is from, the wholesale, part of the bank's you never touch retail, bank that, was the new person they brought in to change and from. There we saw problem. After problem after. Problem, I. Thought, my job would calm down after a little while in fact when I started covering big, banks JP Morgan Chase and Wells Fargo I was told focus 70ish, percent on JP Morgan 30%, ashore so on Wells Fargo that obviously was changed, dramatically, and. I thought things would calm down you know the September, 2016, scandal. Reported. Non-stop, for a couple months and then we thought okay we're coming out of the woods but, then more and more and more happened, and that leads you to question what is going on with the culture what. I can say is right now I, do. Listen to what the executives, say and a big big comment, coming, from the CEO timothy sloan of wells fargo and the, chief financial officer john Shrewsbury is that these are legacy. Problems. When. The federal reserve slapped. Wells Fargo with an unprecedented, enforcement. Action tapping the banks growth in February, actually. Was a year, ago how time flies in February 2018. The. Bank made it very clear these, are old issues, nothing, is new same happen when the OCC, the, Office of the Comptroller of the currency and the Consumer Financial Protection Bureau.

Had. A settlement with the bank for 1 billion dollars, nothing, is new these are old legacy problems, I did. Make a little cheat sheet of some new problems, that I've written about that happened, in 2017. And 2018, and, so I'm constantly. During our these, old problems. Employees. Added, Social. Security numbers and other customer. Financial, personal. Information, when, they were doing anti money laundering. Controls, and checks that, happen in 2017. And 2018. We. Just heard about a regulatory, warning, to the bank about their technology oversight. For more. Than two dozen open, regulatory, warnings known as matters requiring attention that's from 2018. Their. Wealth management problems, which we wrote about definitely. Cover 2017. That investigation, is also still open, I should, add the Department, of Justice is investigating the AML issues OCC, mtech. Foreign. Exchange problems, that happen through 2017. So I could. Keep going but that all leads me to think how much is the culture changing, what, is new and what is old why, are the scripted responses, still the same and for a journalist, it makes me want to keep probing, and keep asking the questions, and. When. They say they're taking the issue seriously I, just look, at the facts. Right. Judge, Rakoff. Lawyers. And consultants, now seem to have taken responsibility to, investigate diagnose, problems and. Propose remedies, these are in the private, sector you describe the ecosystem. As an attempt to rehabilitate, the, company's, culture, the. Investigations. And reports by Wells Fargo Bank one example. And. Overseeing, settlements, also outsource to. Lawyers. And consultants, what's your view of how, well this system of corporations, investigating, and rehabilitating. Themselves, work, does, this process serve, the interests of shareholders and, the broader goal of justice. In a corporate context. So. I first want to say that. I. Do not want to comment about Wells Fargo, and nothing I say should be taken. As. Reflective. Of that, under. Federal law precluded. From commenting, on any matter that is still. In any respect ongoing. And. In any event with. Emily here I don't need to comment. The. The. Corporate, prosecution. Approach. That I described, before. Has. Proven, very. Lucrative to. Certain. Institutions. Or organizations. All. Of course at the expense, of. Shareholders. Who virtually, always have nothing to do with the underlying misconduct. So. Whereas. In the. Old days. Prosecutors. And, people. At the SEC and so forth would undertake, arduous. Lengthy, difficult.

Investigations. Of alleged. Corporate. Malfeasance. Now. What happens, is that. The. Prosecutor. Will. Lay. A subpoena, on the. Company. Having. Heard about some, problem. And the. Company will have a. Outside. Counsel, almost, always a, former. Prosecutor from, the very same office. Come. Visit. And say. We're. Prepared, to, investigate, this we, want to do the right thing we want to cooperate. Don't, feel. You need to spend any time or. Money on this we will get, you the answers we'll do a thorough, investigation. And. Report back to you in six, or nine months with. The results, and. It's very hard for the prosecutor, to say no. To that offer, those. Are very, lucrative. Assignments. I'm. Told, that in the Siemens case. The. Total investigation. Netted. Fees. To. De. Boys and plimpton of, three. Billion. Dollars. The. If. You want to know why they hire Mary Jo white now you know. They. But. That's just the start. Because. After. The. Council, comes back and says. Oh we've cleaned up our act. Council. Will almost always, propose, a bunch, of new compliance, measures to create a better culture, and. Make sure that this never happens, again. And. The. Government, will maybe up, the ante and say no that's not enough we need still, further compliance, measures. And. That's a very. Expensive. Proposition it, typically. Exists, over several. Years. Involves. People. Both hired. By the company, and people from, outside who the company has to pay for, and. All, of this again comes out of the, pockets. Of the innocent, shareholders. So. There. Is a strong. Economic. Motive. Pushing. This kind of approach, and yet. To, repeat what I mentioned, earlier. The. All. The most careful studies suggest, that it doesn't accomplish, that. Much, there are cases Pfizer. Is the sort of poster child here. Pfizer. Went, through four. Different. Deferred. Prosecution. Agreements. And broke each one of them each. Time announcing, that oh today we put in place, compliance. Measures that will prevent us from ever doing anything wrong again and. When. Finally. The. Government had no choice but to bring a full-fledged, prosecution. They. Rightly were concerned, about the fact that they didn't want to put Pfizer out of business which would have been very unfair, to not only the shareholders, but to the many employees who had nothing to do with the misconduct. And. So the, actual. Guilty. Plea was entered by a, shell. Subsidiary. Of Pfizer. That only the shell was put out of business and not the company as a whole and. These. Are the kinds of. Dilemmas. You face when you go down this, road. As, opposed, to if. You, were going after a, high-level, executive. No. Company, is going to fold, because a. High-level. Executive was, prosecuted. And went to jail, and, yet the deterrent, effect on, other high-level executives. Of. His, or her going to jail is in my view quite. Substantial. I'm. Gonna ask just a couple more questions of, of. The whole panel, anybody who wants, to respond. Wells. Fargo's board report, described, former, CEO John Stumpf. Is it by nature, and optimistic, executive. And Ken. Lay from Enron was also described as optimistic. Attack. What's, the line between naive. Optimism, and willful, blindness, the. Desire by executives, not to see or hear, about problems, just if that's, conveying, an implicit. Message. That. People. Should cover up problems. And not bring him up so, how do people then in watchdogs and.

Board. Some of this was covered by your previous answer. Struck. The right balance between, skepticism, and this optimism. I don't. Think that skepticism, and, optimism, are, two. Different sides of the coin I think they're they're the exact same thing if in order to believe, in the long-term prospects. Of a company you need to be skeptical about, what management is doing and I think we, at, this point in history, face. This problem where investors, seem to equate the success, of the business to, the success, of the executive, and we, are too dependent on the. CEO. Founders, I think this is probably due to the rise of technology, companies in Silicon Valley where. We expect that that CEO founder to have all of the power within the company as far as dis making the decisions and there are no checks and balances and we, applaud those executives, when they surround themselves with. Employees. That are yes men with boards, that are yes men and no, one really wants to take accountability anymore, it's really down to you know whatever the executive, wants because he or she is a genius that. They are the best suited to make decisions, for a publicly, traded organization. Which i think is terribly, unwise so I think we need to return, to a time where. All of those individuals, whether the the auditors the members, of the board the, investors, they all need to realize what are their separate duties in. This financial system, and and they need to to, not act as, pawns. Of the executive, management but really they need to act independently and, take, accountability. For the decisions, that are made because ultimately if the executive makes, fraudulent. Decisions then everyone's going down I would. Just add two quick points to that I think experience. Is necessary, but. When you surround yourselves with the same people year, in and year out whether management, or the board you're not getting fresh perspective. I'll. Bring it back to Wells Fargo so. Did. A little math on the train ride over here or. Looked at some numbers on the proxy I should say and they're. 2016. Proxy, which covered the 2015. Year there, were nine directors on, their board that served between five and fifteen, years that's. A very long tenure, you, need to have a lot of they. Call you know fresh blood on the board and the bank has since added I believe six, new directors since the scandal, kind, of became, public. They also touted and a lot of companies do this as well I shouldn't just say Wells Fargo. Covered. Procter & Gamble when an activist, investor came in Herbalife what an activist investor came in some, other companies, this, insular culture of Management that have served 20 plus years together and grown up together and if you aren't bringing in outsiders, who are really questioning, the status quo and you, have what turns into yes-man without even realizing, it that's. When these problems can just continue, growing, even. Without people noticing it. So. I'm. Not sure it's. A question of optimism. Or pessimism as. A, American. I am of course a born optimist, as, a Jew, I am of course a born pessimist. But. The. Doctrine. The legal, doctrine, of, conscious. Disregard willful. Disregard. Requires. That, you intentionally. Close. Your eyes to, what is there to be seen, it's. Not just. That you're, often. A cloud. And and. You. Should be more down-to-earth. It. Requires. That. You, purposely. Say. I don't want to hear that or. Joe. You take care of that don't tell me about it. The. My. Experience. As a. Prosecutor. Was. That, this was extremely common. At high levels, in. Certain, areas a lot. Of accounting, fraud. I, think, fits that kind of situation. But. That's, what's required and the government, cannot either. Criminally, or even civilly, succeed. On a willful, disregard. Conscious. Disregard, theory. Unless they can show that you purposely, turned. Your self. Away from what was there clearly, to be seen. My. Final question to the whole panel. It, was the LA Times, and not any regulator, a prosecutor, that broke the Wells Fargo, account. Scandals, the Federal Reserve took almost 17, months after the full scope of the scandal. Became public, to take any action, and that's a key regulator, for, bank holding companies, for Tesla alone Musk has repeatedly. Insulted the SEC, both. Before and after settling, securities, fraud charges with them, various. Media reports, about unsafe. Working, conditions in, Tesla. Just. Recently resulted, in California, issuing six citations, for fine, of. $30,000. Our. Regulator, is doing their jobs, what. Messages, are these agencies, sending, to the market and to the public with these action, or lack. Of action. Well. It's increasingly. Alarming, that we live in a world where, regulations.

Are Being rolled, back key. Organizations. That protect consumers and, the public are being disarmed. And investors. Are sort of just standing by and allowing it to occur and regulators. Again, are almost, rolling over there they're under-resourced, and they're there's so much fraud in the markets how do you even, have. The time to. Spend to prosecute, and do you have enough evidence to, be able to prosecute for criminal. Corporate, behavior and. It's a it's an increasingly. Difficult job, so, nothing, is more effective, than the court of public opinion, and as. A short seller you know I found we, interact, with regulators, but it'll often take years, for them to even initiate, investigations and, they will. Send all of our work and they'll collect thousands. And thousands of pages of documents. Evidencing. Crime, and, potential. Fraud. But, they, can't do anything and I'm not sure whether it's because they, simply, can't or if there's some element of regulatory capture but, at least with journalists, you can publicly shame these, companies and. Objectively. Inaccurately. And. Then. The the average person, who's reading these articles is then better, aware investors, are better aware and they can make more. Judicious. Financial, decisions, and consumer. Decisions, but. But just, this week so. So we are short, a company called wire card based out of Germany, and the Financial, Times has come out with a series of incredible. Investigative, reports this week indicating. Fraud, and criminal, money-laundering. At this German. Bank wire card and within. Minutes, of the. Publications. Coming out the. Company itself comes out saying that the reports, are defamatory denying. All claims and then, within, less than a day of those reports coming out the German public prosecutor, comes out and says that they, don't believe there to be any wrongdoing. Occurring, at what at, this company wire card and then, shortly, after that boffin, the German securities, regulator says they are launching. A market. Manipulation, probe into, the trading, around wirecolor. So. In. The US I think we haven't reached that point of, regulatory, capture but, I think there needs to be faith restored in, our, regulation, and, the corporate system because, we, just simply aren't seeing corporate, prosecutions, anymore and there's no moment, of comeuppance where, these, these executives. Are engaged in such high levels of crime investors. Aren't holding them to account the. Justice, system isn't holding to the account so who is I. Would. Just add a couple quick points I'm feeling. You might want to respond, to that but um our. Regulators, doing their jobs yes, they still are I think sometimes, the amounts, of the fines especially. Over the years can, really. Dictate, how much attention is, given when. Bank of America, paid a sixteen, point six five billion, dollar fine it was the largest of the time related. To crisis era problems, that kind of set this number.

With. Wells Fargo they've. Paid about four billion so, far collectively. Till since 2016. Are their, problems better, or worse than Bank of America, and the mortgage crisis, I'll. Let you guys decide I mean my job is presenting, the information and, doing. It in a fair and accurate way, however. What I will say is there are a lot of outstanding, issues I think you mentioned before how long some of these investigations. Take Tesla. For instance is still under criminal investigation so. While there was a thirty thousand dollar settlement pennies. To these, companies I'm curious, what might happen with the criminal investigation, with, Wells Fargo there's, still an open and pretty multifaceted, Department, of Justice and SEC. Separate. Investigations. Going going. On so we have to wonder okay, what will happen there and, I think sometimes. Regulators. Try to self-correct, a little bit when. You mentioned the sizer example, before Judge Rakoff it, did remind me a little bit of Wells Fargo which. Had this ongoing dialogue, with the Fed and the OCC, about fixing. Its risk management, system which is how it's supposed to find and prevent. Problems. They, kept, going back and forth again and again extended, deadlines submit extended, deadlines oh we're, not going to fail you but we're giving you language that might make you realize, that you need to resubmit the risk framework this has gone on and on and on. The. Risk framework is still not approved by the way this is many, years later so it's not quite the same as a deferred prosecution agreement. But how much give-and-take is there the, Fed finally had, this unprecedented enforcement. Action and really. Showed its. Strength there right, on Janet yellen's last day so I think we have to give the regulator's credit, it's, how long it takes what. Happens and sometimes, the amount of the fine that helps us understand, the context, around it. So. I had a, conversation. About. A, week ago with. Jeff. Berman the US Attorney for the Southern District, of New York he. Probably thought this was a private, conversation, but. In the confidence. Of the c-span, broadcast. I. Will, relay, it. He. Was. Complaining. That. He. That, the US, Attorney's Office was receiving. Fewer, criminal, referrals, from, the SEC than, in prior years by. The way both he and I have a great respect, for the SEC, and there, are a hundred different reasons this might have. Occurred. So. I don't, want to make too much out of it but I said to him well. What, are you going to do about it he said oh I've already taken a step I. Have, arranged. For each member of the fraud unit that's the unit that prosecutes, these matters. To receive each morning, a copy, of The Wall Street Journal. So. I. Did not give that Judge, Rakoff any financial, an. Exchange. In this panel. Okay. I. Wanted our leave time 15, minutes or a little more than that to audience, questions so, please raise your hand unfortunately we do not need mics so you can just go ahead and speak but, spirit please my, name is mike mizrahi GSB, students here in the MSX program.

But, I wanted to ask you this, question and it's, more of a system questioners, this, is the possibility. Of getting us a, settlement, with. The SEC without without admitting or, denying guilt, incentivize. The companies to sort of make it in as cost of doing business. So. This. Policy. Goes back to the 1970s. I think, it's a misguided, policy, but. Let, me tell you what its rationale, is. The. It. Arose. In the context, of the Foreign Corrupt Practices. Act problem. Before, there was a statute. Most, American, are many American, companies we're paying bribes and. The. SEC, said, we. Think that was a violation, of the securities, laws because. You didn't disclose it so there was a failure to disclose, but. We will we. Sort of understand, that, Congress, had not yet acted, at the time you did this so. We will allow, you to settle, without admitting or denying, and the. Reason, that was important, to the company and the reason it's still important, to company is class actions, they. Do, not want to be in the position, of, having. Admitted something. That will then lead to. Their. Being as we say in the law collaterally, estopped from. Denying. It in the, corresponding. Class action, so it's all about, class. Actions, and, the. Very, large exposure, that they typically, will, find. In a class action, the. SEC, goes along with it because it makes. Settlements. So much easier. And. So it's just a again. A resource. Saving. Mechanism, for them the. Problem I have with it is that no one ever knows the truth. So. Here, you have, the. SEC, and their complaint, saying they, did all sorts of bad things here. You have the company. Not. Omitting. Or denying, in the. Old days the next day they would issue a, press. Release saying, we deny but, we were going we set because it was a cost of doing business, the. Sec then put. In a gag. Rule which. I've also criticises. I think perhaps, violative. Of the First Amendment. Where. You can, no longer. If. You're the company. You. Don't have to admit anything but, you can't deny it after, you sign these deals. So. I'm. Told, I don't know if this is true that what company, now do does. Is they leak. The denial to the Wall Street Journal. But. The. The. Public in, these, very important, cases. Has. An interest, they knowing what the truth is and the. Effect of these settlements. Is that. You never know what the truth is now. Settlements. Are a good thing in as a general, matter but, there. Are cases in cases and. The. When, an important. Claim. Is made by, a government, agency, that you. Committed. Massive. Fraud that has costs. Investors. And the public generally, millions. Even billions of dollars, and, the. Public never knows, whether, that was a fair accusation. Or an unfair accusation, that. I think is not a good way to proceed. Whether. Executive. Compensation, and, the nature of it the size of it see the. Methodology. Of it at whether it's formulaic, or not is. A huge. Early, warning, signal. And the. Sorts, of problems of fraud and misrepresentation, and. Destruction, of value that you talk about I'll, take a first stab at that I think it's a great question. What we've seen and this really goes back to corporate governance and the role of the board in many cases, because they are dictating, how management top management, are paid and at, large companies that's millions. If not tens of millions of dollars, what. We've seen especially in the banking industry, is that there are more and more often. CEOs. Or c-level, executives. Are paid in performance, shares, that vest over time usually, a couple of years at least. What I've seen with Wells Fargo and I do want to give them credit where credit is due it came up in the report that was more than a hundred pages released. Earlier this week is that they have significantly. Changed how they compensate, executives. Clawbacks. Are also key, with companies, sometimes. They're public, sometimes they're private, I love. Writing about them when they're private I think it's very interesting, to find out how, much money was clawed back from executives, that happened with JPMorgan Chase in the London whale the, head of the Investment, Office was.

Clawed Back significant, amounts of her compensation, at. Wells Fargo they've, had I. Want, to get this number right tens. Of millions of dollars I'll be on the safe side in, clawbacks, but I know there, are more private ones that I'm still trying to figure out and, another. Way that compensation, has also changed. Comes. Back to companies. Adding, a risk management, component. In performance. Evaluations, I think this is key because a lot of times these. Scandals. As you, know the media likes to call them but these are very serious issues sometimes fraudulent. Will come up and an executive has already been paid and then retires, it, just leaves and so, we did notice that with Wells Fargo as well and in part because of the regulator the Office of the Comptroller of, the currency. There. Has been a limitation, on golden parachutes so if you just retire. And leave, and if you haven't been fired you can't just get millions, and millions of dollars anymore I. Would. Only add one thing, which is. While. You are right the compensation. Is a, major. Component. Of this mix. Other. Changes. Can often, be. Equally. Or of. Greater significance for, example, when. I was a kid bankers. Were. Sort. Of, you. Know the sleepy eyed people of the of the. World. Very. Conservative. And. Then glass-steagall, was, repealed. And. The, bankers, became, as a class, much, more aggressive, because they, were really, in a different kind of business, so. The changes like that could also be, important. Following. Up on the last question. Harkening. Back to the Disney case when Michael, Eisner fired, Michael, Ovitz for, very. Poor performance over, the course of a year and he, walked away with 140, million dollars, in severance which, 20 years ago was actually big money. And. And. The, case were led, to a, suit. In the Delaware. Chancery Court. And, I want to ask about the role of the judge, if. He's in, these types of litigation, because the judge there wrote. An opinion saying well, Eisner. Has come forward and said there was no basis, for denying. Him the compensation. Because. We could the fire him for cause, even. Though there was spectacular evidence. In the trial that obits. Had repeatedly, lies of, documentary, evidence and, Sid Bassett was a 25%. Shareholder, of Disney. At the time, rehearsed. Many of these lies and the judge ignored it all had said, you. Know Eisner has come forward and said there was no basis for, termination. For cause and that's. How the case then and then a. Different. Judge I think would, have at least highlighted. All of the evidence of. Dishonesty. And, I think sending. A message to the corporate world that dishonestly, will be disregarded as a dangerous, message. Well, I certainly don't. Want to comment on whether the judge got it right or wrong in that case.

The. The. Court of Dylan. Recorder of Chancery, a very important. Court in corporate matters. Is. Unusual. In the anglo-american, setup, because it's not a jury, situation. It's a it's a judge who's making most of the factual, determinations. Whereas. In most cases. In. Most courts of the United States it's the jury that makes the final. Determinations. Also. Something. That is, somewhat. Unique to the. Anglo-american. System. Which is that. Factual. Findings. Are. Subject. To very limited, review, on appeal. For. They can only be reversed for clear error. Whereas. In, most European, systems, a. Higher. Court, can say we've, looked at the record and we. Just don't agree and. And, we come out this all. The facts, differently, than, the lower court. So. I, think there is built, into our system perhaps. Too. Much deference, to the district, courts of the lower courts I say that of course the. Big exception, being my decisions. But. I think that there is a little bit of an institutional, problem there but I can't comment on the specific, case. Chancery costs $20, just a source for a case I'll get a document which. I realize is not your court, but. What. Can actually, be, done in. The. Southern District of New York today, right, now to. Start to reverse that trend is. There anything are there any pilot projects, because I. Look. I don't see a whole lot going on and, we all, kind of know, the. Situation, that we're in but. It, seems. What. Is going on. Well. I think you're raising more, than one question there. If. Your. Assertion. Is that, the courts, are, biased. In favor, of companies. I actually, don't think that's true. But. If what you're talking, about is, access, to. The courts. That's. A huge, problem, but. It's much more a problem on for everyday folks having everyday legal problems. The, the, problem here. Is that the legal profession. Which. We, call it a profession, but it's actually economically a cartel. Has. Priced. Itself. Out. Of the price, range that most Americans, can afford and.

The, Statistics, are really quite shocking. In. Family. Court in the housing, court which are the two courts that everyday Americans, most get. Involved. In sooner or later. Over. Two-thirds, of the. Individuals. Are not represented, by lawyers at all they're they make enough so that they can be. Given appointed, lawyers but. They don't make enough to actually afford a lawyer. They. Lose. Cases. In. Those two courts at a 500, percent greater, rate that people who are represented, by lawyers, so, it makes its, case, is positive, in most cases. My. Own I. Think. There are two solutions. For certain basic, legal things I think, online. Legal services, is is definitely a, something. That can, improve. This situation, I, would. Like to see in the legal profession. What. Are the equivalent, in the medical area, of nurse practitioners. Legal. Technicians. Who, wouldn't require three, years of law school I don't think you need three years of law school anyway. And. But. Would have a certain amount of training and, a certain apprenticeship. And. Then could. Do basic. Skills, like go into Family Court and to house, in court I represent, them that's a different point than what you're talking, about but, it is I think. Maybe. This one. Of the single, greatest legal. Problems in the United States one. Last question. Worked. At the CFPB as, well as for a bunch of large. Financial players and so, my question is some of the stories that we probably don't, hear about are those situations, where these, types of scandals, and difficult decisions we learn about in the classroom are actually handled well and, I'm wondering if from your perspectives, and you. Have any examples, of where executives. Are actually, approaching. These from what you think are particularly, responsible. Actions. In the face of very difficult, decisions, and those are, stories we have seen or those that don't, come up that we don't get to see I'll. Use Wells Fargo as an example because. There have been a number of different problems. That have come open in different ways and I think in the two years and roughly four months since the. Sales practice those problems occurred they have changed. The way that they acknowledge problems. Come forth with what they are are not doing and engage and, are. Trying to be more transparent. So I think you can see companies evolve, over time especially when, they're on the hot seat I. Have. To keep thinking about companies, that have done very well I'll. Come back to you on that I don't know if either of you can weigh in. Well. I, want. To say a more general thing which is I. Think is beyond. That. American. Business, people as a whole are, far. More artists. Than in. A great many countries, in the world, and. I. Just, had a case that settled, a. Few. Months ago called in Ray Petrobras. Which was a class. Action, based. On what, had occurred in Brazil and the. Corruption. There was just endemic, throughout. Not, just the, company, itself but other companies. Who were suppliers, the, government, of Brazil the. Whole thing was, just. Totally. Corrupt. From top to bottom you. Don't see that in. The United States thank God, so. We. Have lots of problems which we've been discussing but I don't want to, neglect. To put this in the broader perspective. That. American, Bisset people as a whole I, think, have much to be proud of and, to follow on the judges comments I think a lot of that has to do with corporate, transparency in the United States I think the reporting, requirements, in the u.s. is much more stringent, than outside of the u.s. at least at the public company level but. There there have been movements, now within the SEC to question, whether or not we need quarterly, reporting but I think investors need to really. Press and and ask. Ask, the companies that they're invested with for more information, and when questions, do arise. Judicious. Companies and they they do exist some you know not, all companies that commit fraud are doing so intentionally sometimes. You're between a rock and a hard place your fundamentals, are deteriorating. You're in the business you know a difficult business cycle, so you'll, bring in outsiders, to investigate. The company and then you you, actually, will make that report. Public to your investors so, they can then assess whether or not the, problems are resolved, so again, it really comes down to transparency. In the United States which is again much. Greater than the rest of the world I, want. To thank you all for being here thanks. For the panel. Thank. You.

2019-02-11 17:23

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