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These Billionaires Got Taxpayer-Funded Stimulus Checks From Trump

These Billionaires Got Taxpayer-Funded Stimulus Checks From Trump

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Series: The Secret IRS Files

Inside the Tax Records of the .001 percent

In March 2020, as the first wave of coronavirus infections all but shut down the U.S. economy, Congress responded with rare speed, passing a $2.2 trillion relief package called the CARES Act. The centerpiece of the law was an emergency payment to over 150 million American households that needed help.

Congress used a simple filter to determine who was eligible for assistance: The full $1,200 was limited to single taxpayers who'd reported $75,000 a year or less in income on their previous tax return. Married couples got $2,400 if they had reported less than $150,000 in income. Money was sent automatically to those who qualified.

Ira Rennert, worth $3.7 billion according to Forbes, did not appear to need the cash infusion offered by the CARES Act. After all, his 62,000-square-foot Hamptons home is one of the largest in the country, so he was unlikely to get cabin fever during lockdown, let alone have trouble buying food. Nevertheless, Rennert, who made his fortune as a corporate raider in the '80s and '90s, got a $2,400 check from the government.

George Soros, the prominent hedge fund manager and philanthropist who's worth $8.6 billion, didn't need the CARES cash, either. Neither did his son, Robert, himself worth hundreds of millions. But they, too, both got checks. (Both returned the checks, according to their representatives.)

ProPublica, using its trove of IRS records, identified at least 18 billionaires who received stimulus payments, which were funded by U.S. taxpayers, in the spring of 2020. Hundreds of other ultrawealthy taxpayers also got checks.

The wealthy taxpayers who received the stimulus checks got them because they came in under the government's income threshold. In fact, they reported way less taxable income than that — even hundreds of millions less — after they used business write-offs to wipe out their gains.

ProPublica found 270 taxpayers who collectively disclosed $5.7 billion in income, according to their previous tax return, but who were able to deploy deductions at such a massive scale that they qualified for stimulus checks. All listed negative net incomes on tax returns.

Consider two stimulus recipients with similarly huge incomes in 2018. Timothy Headington is an oil mogul, real estate developer and executive producer of such films as “Argo" and “World War Z," and he's worth $1.4 billion. He had $62 million in income in 2018, but after $342 million in write-offs, his final result was negative $280 million. The same was true of Rennert, whose $64 million in income that year was erased by $355 million in deductions, for a final total of negative $291 million.

Figures like these reveal a basic truth about the U.S. income tax system. Most people earn the overwhelming majority of their income via wages and take deductions where they can. But the income of the ultrawealthy as revealed on their taxes tells, at best, a partial story. As ProPublica reported earlier this year, the wealthiest taxpayers often have great flexibility in when and how they take taxable income, allowing them to pay a minuscule portion of their wealth growth in taxes. For the ultrawealthy, wages are to be avoided, carrying as they do the burden of not only income tax but also of payroll taxes.

Wages rarely made up a significant portion of income for the 270 wealthy stimulus check recipients identified by ProPublica. In total, only $82 million, or 1.4 percent, of the $5.7 billion in income taken in by the group came in the form of wages.

The ultrawealthy have other tax advantages. Many can tap a particularly generous vein of deductions: businesses they own. These can wipe out all of their income, even for years to come, unlike other deductions, like those for charitable giving. Certain industries, like real estate or oil and gas, are a well-known source of tax benefits that can generate paper losses even for a successful business.

The amount of stimulus aid that went to ultrawealthy taxpayers was a negligible piece of the trillions spent via the CARES Act. But the fact that billionaires were able to qualify shows that when legislators rely on income tax returns to determine eligibility for aid, there can be surprising results. Asked what he thought about billionaires receiving stimulus checks, Senate Finance Committee chair Ron Wyden, D-Ore., responded, “The tax code is simply not equipped to tax billionaires fairly, or even ensure they pay anything at all."

ProPublica reached out to every stimulus-check recipient mentioned in this article. Rennert and Headington did not respond to requests for comment. A spokesman for George Soros, who has advocated for higher taxes for the wealthy, said, “George returned his stimulus check. He certainly didn't request one!" Robert Soros did the same, a spokesperson said. (The Soros-funded Open Society Foundations have donated to ProPublica.)

Billionaires often reap sizable tax deductions from owning sports teams, as a ProPublica story this year detailed. A number of sports team owners were among the recipients of stimulus payments. Terrence Pegula, who is worth $5.7 billion and owns both the NFL's Buffalo Bills and the NHL's Buffalo Sabres, was one. Also getting a check was Glen Taylor, worth $2.8 billion, who earlier this year struck a deal to sell Minnesota's NBA and WNBA teams for $1.5 billion. Pegula and Taylor did not respond to requests for comment.

Some taxpayers had enough in deductions to wipe out even hundreds of millions in income. Robert Dart is a scion of the Dart family, which owns Dart Container Corp., the maker of the iconic red Solo cup. In 2018, he reported income exceeding $300 million, but deductions left him with a final result of negative $39 million.

Dart and his brother renounced their U.S. citizenship decades ago to take advantage of a then-existing tax break available for expatriates. Dart filed his U.S. tax return from an address in the Cayman Islands, but got a stimulus payment just the same. (The IRS declined to comment.)

In response to questions, the general counsel for Dart Container wrote, “Mr. Dart believes that people in his position should not have received COVID stimulus funds. Mr. Dart did not request any COVID stimulus funds. Instead, those funds were directly deposited into his account by the U.S. Treasury without his consent as Congress determined that taxpayers with resident alien status were eligible for such payments. Mr. Dart has returned the COVID stimulus funds he received to the U.S. Treasury pursuant to instructions provided by the IRS."

Some of the ultrawealthy have received government benefits on more than one occasion. Take Joseph DiMenna, a partner in Zweig-DiMenna, a pioneering hedge fund. An art collector and polo aficionado, he owns a club that holds charity polo matches for anti-poverty causes. In 2017, he received a special payout from his fund of $1.1 billion. But in 2018, without such a massive payout, business deductions swung his income back to where it had been in the years before his big payday: less than $0. That entitled him to a stimulus check. In both 2015 and 2016, DiMenna's negative income also entitled him to $2,000 in refundable child tax credits, meant to support middle-class families with child care expenses. DiMenna did not respond to a request seeking comment.

Others among the superrich also received stimulus payments the last time Congress offered them when millions of Americans were struggling. The 2009 American Recovery and Reinvestment Act offered a $400 tax credit for individuals and $800 for married couples. It was called “Making Work Pay."

Forrest Preston, the founder of Life Care Centers of America, one of the largest long-term care companies in the U.S., is worth $1.2 billion. In 2009, he got his $400 boost. The next year, he posted an income of $112 million. By 2018, however, his income had gone negative again, entitling him to a $1,200 payment in 2020.

The same year he received his stimulus check, Preston's company successfully lobbied to win a tax break for the nursing home industry. Preston did not respond to a request for comment.

Taylor, the Minnesota Timberwolves owner, is another two-time stimulus recipient, in 2009 and again in 2020. So was Woodley Hunt, the senior chairman of Hunt Companies, a family-owned firm that is one of the country's largest owners of multifamily properties. Hunt did not respond to a request seeking comment.

For former Lehman Brothers CEO Richard Fuld, a big salary was a key part of the $400 million he earned in the five years before the firm's historic collapse in 2008. But in recent years, he's been running a company called Matrix Investment Partners that he set up to invest his own money. The tax losses generated by that company were one reason he got a stimulus check. Reached by phone and asked whether he wanted to comment, Fuld said, “I'm not interested. Thank you."

Another CARES Act beneficiary was Erik Prince, who, before deductions, had $5.3 million in income in 2018. Prince founded Blackwater, a private military company that received hundreds of millions in government contracts. He has denounced excess government spending, saying we are being “ bled dry by debt." Prince didn't respond to a request for comment.

A proposal in the Democrats' (once $3.5 trillion, now under $2 trillion) Build Back Better legislation, currently the subject of fevered negotiations, would curb the ability of wealthy taxpayers to report negative income. It would do so by restricting the ability to use business losses to wipe out other types of income, like capital gains or dividends. Instead, business deductions would only offset business income.

The idea, which builds on a provision of the 2017 Trump tax bill, is one of the few tax provisions to have survived the recent negotiations — at least, for now. First proposed by House Democrats in September, it was then projected to produce $167 billion in revenue over the next 10 years. The provision was also included in a version of the legislation released on Oct. 28.

Not included in last week's draft was a provision that would have directly affected the ability of billionaires to manipulate their incomes. A number of the billionaires who received stimulus checks were able to report negative incomes to the IRS despite getting richer. A “billionaire income tax" proposed by Wyden, would tax increases in wealth. Under the current system, gains are taxed only when they are “realized," such as when someone sells stock.

Sen. Elizabeth Warren

Warren And Whitehouse Demand Probe Of Tax Avoidance By Ultra-Wealthy

Reprinted with permission from ProPublica

Two prominent members of the Senate Finance Committee are calling for an investigation into tax avoidance by the ultrawealthy, citing ProPublica's "Secret IRS Files" series.

In a letter sent today, Elizabeth Warren (D-MA.) and Sheldon Whitehouse (D-RI) wrote to the committee's chairman, Ron Wyden (D-OR), that the "bombshell" and "deeply troubling" report requires an investigation into "how the nation's wealthiest individuals are using a series of legal tax loopholes to avoid paying their fair share of income taxes." The senators also requested that the Senate hold hearings and develop legislation to address the loopholes' "impact on the nation's finances and ability to pay for investments in infrastructure, health care, the economy, and the environment."

Last month ProPublica began publishing a series of stories about tax avoidance among the ultra-wealthy, based on a vast trove of tax data concerning thousands of the wealthiest American taxpayers and covering more than 15 years. ProPublica conducted an unprecedented analysis that compared the ultra-wealthy's taxes to the growth in their fortunes, calculating that the 25 richest Americans pay a "true tax rate" of just 3.4 percent.

The wealthy pay so little in taxes primarily because they keep their incomes low, the article explained, often borrowing against their fortunes to fund their lifestyles. Amazon's Jeff Bezos, Tesla's Elon Musk, Bloomberg L.P.'s Michael Bloomberg and other billionaires have each paid no federal income taxes in one or more recent years. The tax avoidance techniques described in "The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Taxes" are legal, and routine among the ultrawealthy.

In a subsequent article, ProPublica highlighted how some rich people, such as Peter Thiel, have been able to use Roth individual retirement accounts, intended as vehicles to bolster middle-class savings, to create vast untaxed fortunes. A third article showed how billionaires use a provision in the tax code to reduce their taxes after buying sports teams.

Banks and financial institutions are lending more to the rich than ever, according to a story in The Wall Street Journal last week. The senators called for an investigation of banks and wealth management firms to understand the techniques, strategies and products offered to the wealthy that enable them to avoid paying taxes. Morgan Stanley's wealth management clients have $68 billion worth of loans backed by securities and other investments, more than double the amount they had five years ago, and Bank of America has loans worth over $62 billion, the Journal reported.

In March, Warren introduced a bill, co-sponsored by Whitehouse, that would create a tax on the wealth of the richest Americans. Most Republicans and some Democrats oppose such a measure.

Update, July 14, 2021: In a statement, Wyden said that he agreed with the points raised by Warren and Whitehouse. "The country's wealthiest — who profited immensely during the pandemic — have not been paying their fair share," he said. "I've been working on a proposal to fix this broken system since 2019 and continue to work to get the bill ready for release. I'm also going to work with my colleagues on other ways the committee can tackle this issue."

Jeff Bezos

Secret IRS Files Reveal How Wealthiest Avoid Taxes

Reprinted with permission from ProPublica

In 2007, Jeff Bezos, then a multibillionaire and now the world's richest man, did not pay a penny in federal income taxes. He achieved the feat again in 2011. In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes.

Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros paid no federal income tax three years in a row.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation's wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America's titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.

Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

Many Americans live paycheck to paycheck, amassing little wealth and paying the federal government a percentage of their income that rises if they earn more. In recent years, the median American household earned about $70,000 annually and paid 14 percent in federal taxes. The highest income tax rate, 37 percent, kicked in this year, for couples, on earnings above $628,300.

The confidential tax records obtained by ProPublica show that the ultrarich effectively sidestep this system.

America's billionaires avail themselves of tax-avoidance strategies beyond the reach of ordinary people. Their wealth derives from the skyrocketing value of their assets, like stock and property. Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell.

To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.

We're going to call this their true tax rate.

The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That's a staggering sum, but it amounts to a true tax rate of only 3.4 percent.

It's a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.

The Ultrawealthy by the Numbers

Read our full methodology. Credit: Agnes Chang/ProPublica

No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire. That's perhaps surprising, given his public stance as an advocate of higher taxes for the rich. According to Forbes, his riches rose $24.3 billion between 2014 and 2018. Over those years, the data shows, Buffett reported paying $23.7 million in taxes.

That works out to a true tax rate of 0.1 percent, or less than 10 cents for every $100 he added to his wealth.

In the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors.

Experts have long understood the broad outlines of how little the wealthy are taxed in the United States, and many lay people have long suspected the same thing.

But few specifics about individuals ever emerge in public. Tax information is among the most zealously guarded secrets in the federal government. ProPublica has decided to reveal individual tax information of some of the wealthiest Americans because it is only by seeing specifics that the public can understand the realities of the country's tax system.

Consider Bezos' 2007, one of the years he paid zero in federal income taxes. Amazon's stock more than doubled. Bezos' fortune leapt $3.8 billion, according to Forbes, whose wealth estimates are widely cited. How did a person enjoying that sort of wealth explosion end up paying no income tax?

In that year, Bezos, who filed his taxes jointly with his then-wife, MacKenzie Scott, reported a paltry (for him) $46 million in income, largely from interest and dividend payments on outside investments. He was able to offset every penny he earned with losses from side investments and various deductions, like interest expenses on debts and the vague catchall category of "other expenses."

In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What's more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.

His tax avoidance is even more striking if you examine 2006 to 2018, a period for which ProPublica has complete data. Bezos' wealth increased by $127 billion, according to Forbes, but he reported a total of $6.5 billion in income. The $1.4 billion he paid in personal federal taxes is a massive number — yet it amounts to a 1.1 percent true tax rate on the rise in his fortune.

Compare Bezos' Financial Picture to a Typical American Household



Read our full methodology. Credit: Agnes Chang/ProPublica

The revelations provided by the IRS data come at a crucial moment. Wealth inequality has become one of the defining issues of our age. The president and Congress are considering the most ambitious tax increases in decades on those with high incomes. But the American tax conversation has been dominated by debate over incremental changes, such as whether the top tax rate should be 39.6 percent rather than 37 percent.

ProPublica's data shows that while some wealthy Americans, such as hedge fund managers, would pay more taxes under the current Biden administration proposals, the vast majority of the top 25 would see little change.

The tax data was provided to ProPublica after we published a series of articles scrutinizing the IRS. The articles exposed how years of budget cuts have hobbled the agency's ability to enforce the law and how the largest corporations and the rich have benefited from the IRS' weakness. They also showed how people in poor regions are now more likely to be audited than those in affluent areas.

ProPublica is not disclosing how it obtained the data, which was given to us in raw form, with no conditions or conclusions. ProPublica reporters spent months processing and analyzing the material to transform it into a usable database.

We then verified the information by comparing elements of it with dozens of already public tax details (in court documents, politicians' financial disclosures and news stories) as well as by vetting it with individuals whose tax information is contained in the trove. Every person whose tax information is described in this story was asked to comment. Those who responded, including Buffett, Bloomberg and Icahn, all said they had paid the taxes they owed.

A spokesman for Soros said in a statement: "Between 2016 and 2018 George Soros lost money on his investments, therefore he did not owe federal income taxes in those years. Mr. Soros has long supported higher taxes for wealthy Americans." Personal and corporate representatives of Bezos declined to receive detailed questions about the matter. ProPublica attempted to reach Scott through her divorce attorney, a personal representative and family members; she did not respond. Musk responded to an initial query with a lone punctuation mark: "?" After we sent detailed questions to him, he did not reply.

One of the billionaires mentioned in this article objected, arguing that publishing personal tax information is a violation of privacy. We have concluded that the public interest in knowing this information at this pivotal moment outweighs that legitimate concern.

The consequences of allowing the most prosperous to game the tax system have been profound. Federal budgets, apart from military spending, have been constrained for decades. Roads and bridges have crumbled, social services have withered and the solvency of Social Security and Medicare is perpetually in question.

There is an even more fundamental issue than which programs get funded or not: Taxes are a kind of collective sacrifice. No one loves giving their hard-earned money to the government. But the system works only as long as it's perceived to be fair.

Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become.

By the end of 2018, the 25 were worth $1.1 trillion.

For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth.

The personal federal tax bill for the top 25 in 2018: $1.9 billion.

The bill for the wage earners: $143 billion.

The idea of a regular tax on income, much less on wealth, does not appear in the country's founding documents. In fact, Article 1 of the U.S. Constitution explicitly prohibits "direct" taxes on citizens under most circumstances. This meant that for decades, the U.S. government mainly funded itself through "indirect" taxes: tariffs and levies on consumer goods like tobacco and alcohol.

With the costs of the Civil War looming, Congress imposed a national income tax in 1861. The wealthy helped force its repeal soon after the war ended. (Their pique could only have been exacerbated by the fact that the law required public disclosure. The annual income of the moguls of the day — $1.3 million for William Astor; $576,000 for Cornelius Vanderbilt — was listed in the pages of The New York Times in 1865.)

By the late 19th and early 20th century, wealth inequality was acute and the political climate was changing. The federal government began expanding, creating agencies to protect food, workers and more. It needed funding, but tariffs were pinching regular Americans more than the rich. The Supreme Court had rejected an 1894 law that would have created an income tax. So Congress moved to amend the Constitution. The 16th Amendment was ratified in 1913 and gave the government power "to lay and collect taxes on incomes, from whatever source derived."

In the early years, the personal income tax worked as Congress intended, falling squarely on the richest. In 1918, only 15 percent of American families owed any tax. The top one percent paid 80 percent of the revenue raised, according to historian W. Elliot Brownlee.

But a question remained: What would count as income and what wouldn't? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she'd gotten a bit richer, but she hadn't received any money. Therefore, she argued, she'd received no "income."

Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

Since then, the concept that income comes only from proceeds — when gains are "realized" — has been the bedrock of the U.S. tax system. Wages are taxed. Cash dividends are taxed. Gains from selling assets are taxed. But if a taxpayer hasn't sold anything, there is no income and therefore no tax.

Contemporary critics of Macomber were plentiful and prescient. Cordell Hull, the congressman known as the "father" of the income tax, assailed the decision, according to scholar Marjorie Kornhauser. Hull predicted that tax avoidance would become common. The ruling opened a gaping loophole, Hull warned, allowing industrialists to build a company and borrow against the stock to pay living expenses. Anyone could "live upon the value" of their company stock "without selling it, and of course, without ever paying" tax, he said.

Hull's prediction would reach full flower only decades later, spurred by a series of epochal economic, legal and cultural changes that began to gather momentum in the 1970s. Antitrust enforcers increasingly accepted mergers and stopped trying to break up huge corporations. For their part, companies came to obsess over the value of their stock to the exclusion of nearly everything else. That helped give rise in the last 40 years to a series of corporate monoliths — beginning with Microsoft and Oracle in the 1980s and 1990s and continuing to Amazon, Google, Facebook and Apple today — that often have concentrated ownership, high profit margins and rich share prices. The winner-take-all economy has created modern fortunes that by some measures eclipse those of John D. Rockefeller, J.P. Morgan and Andrew Carnegie.

In the here and now, the ultrawealthy use an array of techniques that aren't available to those of lesser means to get around the tax system.

Certainly, there are illegal tax evaders among them, but it turns out billionaires don't have to evade taxes exotically and illicitly — they can avoid them routinely and legally.

Most Americans have to work to live. When they do, they get paid — and they get taxed. The federal government considers almost every dollar workers earn to be "income," and employers take taxes directly out of their paychecks.

The Bezoses of the world have no need to be paid a salary. Bezos' Amazon wages have long been set at the middle-class level of around $80,000 a year.

For years, there's been something of a competition among elite founder-CEOs to go even lower. Steve Jobs took $1 in salary when he returned to Apple in the 1990s. Facebook's Zuckerberg, Oracle's Larry Ellison and Google's Larry Page have all done the same.

Yet this is not the self-effacing gesture it appears to be: Wages are taxed at a high rate. The top 25 wealthiest Americans reported $158 million in wages in 2018, according to the IRS data. That's a mere 1.1 percent of what they listed on their tax forms as their total reported income. The rest mostly came from dividends and the sale of stock, bonds or other investments, which are taxed at lower rates than wages.

As Congressman Hull envisioned long ago, the ultrawealthy typically hold fast to shares in the companies they've founded. Many titans of the 21st century sit on mountains of what are known as unrealized gains, the total size of which fluctuates each day as stock prices rise and fall. Of the $4.25 trillion in wealth held by U.S. billionaires, some $2.7 trillion is unrealized, according to Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley.

Buffett has famously held onto his stock in the company he founded, Berkshire Hathaway, the conglomerate that owns Geico, Duracell and significant stakes in American Express and Coca-Cola. That has allowed Buffett to largely avoid transforming his wealth into income. From 2015 through 2018, he reported annual income ranging from $11.6 million to $25 million. That may seem like a lot, but Buffett ranks as roughly the world's sixth-richest person — he's worth $110 billion as of Forbes' estimate in May 2021. At least 14,000 U.S. taxpayers in 2015 reported higher income than him, according to IRS data.

There's also a second strategy Buffett relies on that minimizes income, and therefore, taxes. Berkshire does not pay a dividend, the sum (a piece of the profits, in theory) that many companies pay each quarter to those who own their stock. Buffett has always argued that it is better to use that money to find investments for Berkshire that will further boost the value of shares held by him and other investors. If Berkshire had offered anywhere close to the average dividend in recent years, Buffett would have received over $1 billion in dividend income and owed hundreds of millions in taxes each year.

Many Silicon Valley and infotech companies have emulated Buffett's model, eschewing stock dividends, at least for a time. In the 1980s and 1990s, companies like Microsoft and Oracle offered shareholders rocketing growth and profits but did not pay dividends. Google, Facebook, Amazon and Tesla do not pay dividends.

In a detailed written response, Buffett defended his practices but did not directly address ProPublica's true tax rate calculation. "I continue to believe that the tax code should be changed substantially," he wrote, adding that he thought "huge dynastic wealth is not desirable for our society."

The decision not to have Berkshire pay dividends has been supported by the vast majority of his shareholders. "I can't think of any large public company with shareholders so united in their reinvestment beliefs," he wrote. And he pointed out that Berkshire Hathaway pays significant corporate taxes, accounting for 1.5 percentof total U.S. corporate taxes in 2019 and 2020.

Buffett reiterated that he has begun giving his enormous fortune away and ultimately plans to donate 99.5 percent of it to charity. "I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing U.S. debt," he wrote.

Buy, Borrow, Die: How America's Ultrawealthy Stay That Way

Buy, Borrow, Die: How America's Ultrawealthy Stay That Waywww.youtube.com

So how do megabillionaires pay their megabills while opting for $1 salaries and hanging onto their stock? According to public documents and experts, the answer for some is borrowing money — lots of it.

For regular people, borrowing money is often something done out of necessity, say for a car or a home. But for the ultrawealthy, it can be a way to access billions without producing income, and thus, income tax.

The tax math provides a clear incentive for this. If you own a company and take a huge salary, you'll pay 37 percent in income tax on the bulk of it. Sell stock and you'll pay 20 percent in capital gains tax — and lose some control over your company. But take out a loan, and these days you'll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn't consider them income. Banks typically require collateral, but the wealthy have plenty of that.

The vast majority of the ultra-wealthy's loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS. But occasionally, the loans are disclosed in securities filings. In 2014, for example, Oracle revealed that its CEO, Ellison, had a credit line secured by about $10 billion of his shares.

Last year Tesla reported that Musk had pledged some 92 million shares, which were worth about $57.7 billion as of May 29, 2021, as collateral for personal loans.

With the exception of one year when he exercised more than a billion dollars in stock options, Musk's tax bills in no way reflect the fortune he has at his disposal. In 2015, he paid $68,000 in federal income tax. In 2017, it was $65,000, and in 2018 he paid no federal income tax. Between 2014 and 2018, he had a true tax rate of 3.27 percent.

The IRS records provide glimpses of other massive loans. In both 2016 and 2017, investor Carl Icahn, who ranks as the 40th-wealthiest American on the Forbes list, paid no federal income taxes despite reporting a total of $544 million in adjusted gross income (which the IRS defines as earnings minus items like student loan interest payments or alimony). Icahn had an outstanding loan of $1.2 billion with Bank of America among other loans, according to the IRS data. It was technically a mortgage because it was secured, at least in part, by Manhattan penthouse apartments and other properties.

Borrowing offers multiple benefits to Icahn: He gets huge tranches of cash to turbocharge his investment returns. Then he gets to deduct the interest from his taxes. In an interview, Icahn explained that he reports the profits and losses of his business empire on his personal taxes.

Icahn acknowledged that he is a "big borrower. I do borrow a lot of money." Asked if he takes out loans also to lower his tax bill, Icahn said: "No, not at all. My borrowing is to win. I enjoy the competition. I enjoy winning."

He said adjusted gross income was a misleading figure for him. After taking hundreds of millions in deductions for the interest on his loans, he registered tax losses for both years, he said. "I didn't make money because, unfortunately for me, my interest was higher than my whole adjusted income."

Asked whether it was appropriate that he had paid no income tax in certain years, Icahn said he was perplexed by the question. "There's a reason it's called income tax," he said. "The reason is if, if you're a poor person, a rich person, if you are Apple — if you have no income, you don't pay taxes." He added: "Do you think a rich person should pay taxes no matter what? I don't think it's germane. How can you ask me that question?"

Skeptics might question our analysis of how little the superrich pay in taxes. For one, they might argue that owners of companies get hit by corporate taxes. They also might counter that some billionaires cannot avoid income — and therefore taxes. And after death, the common understanding goes, there's a final no-escape clause: the estate tax, which imposes a steep tax rate on sums over $11.7 million.

ProPublica found that none of these factors alter the fundamental picture.

Take corporate taxes. When companies pay them, economists say, these costs are passed on to the companies' owners, workers or even consumers. Models differ, but they generally assume big stockholders shoulder the lion's share.

Corporate taxes, however, have plummeted in recent decades in what has become a golden age of corporate tax avoidance. By sending profits abroad, companies like Google, Facebook, Microsoft and Apple have often paid little or no U.S. corporate tax.

For some of the nation's wealthiest people, particularly Bezos and Musk, adding corporate taxes to the equation would hardly change anything at all. Other companies like Berkshire Hathaway and Walmart do pay more, which means that for people like Buffett and the Waltons, corporate tax could add significantly to their burden.

It is also true that some billionaires don't avoid taxes by avoiding incomes. In 2018, nine of the 25 wealthiest Americans reported more than $500 million in income and three more than $1 billion.

In such cases, though, the data obtained by ProPublica shows billionaires have a palette of tax-avoidance options to offset their gains using credits, deductions (which can include charitable donations) or losses to lower or even zero out their tax bills. Some own sports teams that offer such lucrative write-offs that owners often end up paying far lower tax rates than their millionaire players. Others own commercial buildings that steadily rise in value but nevertheless can be used to throw off paper losses that offset income.

Michael Bloomberg, the 13th-richest American on the Forbes list, often reports high income because the profits of the private company he controls flow mainly to him.

In 2018, he reported income of $1.9 billion. When it came to his taxes, Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration, charitable donations of $968.3 million and credits for having paid foreign taxes. The end result was that he paid $70.7 million in income tax on that almost $2 billion in income. That amounts to just a 3.7 percent conventional income tax rate. Between 2014 and 2018, Bloomberg had a true tax rate of 1.30 percent.

In a statement, a spokesman for Bloomberg noted that as a candidate, Bloomberg had advocated for a variety of tax hikes on the wealthy. "Mike Bloomberg pays the maximum tax rate on all federal, state, local and international taxable income as prescribed by law," the spokesman wrote. And he cited Bloomberg's philanthropic giving, offering the calculation that "taken together, what Mike gives to charity and pays in taxes amounts to approximately 75 percent of his annual income."

The statement also noted: "The release of a private citizen's tax returns should raise real privacy concerns regardless of political affiliation or views on tax policy. In the United States no private citizen should fear the illegal release of their taxes. We intend to use all legal means at our disposal to determine which individual or government entity leaked these and ensure that they are held responsible."

Ultimately, after decades of wealth accumulation, the estate tax is supposed to serve as a backstop, allowing authorities an opportunity to finally take a piece of giant fortunes before they pass to a new generation. But in reality, preparing for death is more like the last stage of tax avoidance for the ultra-wealthy.

University of Southern California tax law professor Edward McCaffery has summarized the entire arc with the catchphrase "buy, borrow, die."

The notion of dying as a tax benefit seems paradoxical. Normally when someone sells an asset, even a minute before they die, they owe 20 percent capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The "step-up in basis" is widely recognized by experts across the political spectrum as a flaw in the code.

Then comes the estate tax, which, at 40 percent, is among the highest in the federal code. This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimes.

It's clear, though, from aggregate IRS data, tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates. Many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die.

Wealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes. The IRS data obtained by ProPublica gives some insight into the ultra-wealthy's estate planning, showing hundreds of these trusts.

The result is that large fortunes can pass largely intact from one generation to the next. Of the 25 richest people in America today, about a quarter are heirs: three are Waltons, two are scions of the Mars candy fortune and one is the son of Estée Lauder.

In the past year and a half, hundreds of thousands of Americans have died from COVID-19, while millions were thrown out of work. But one of the bleakest periods in American history turned out to be one of the most lucrative for billionaires. They added $1.2 trillion to their fortunes from January 2020 to the end of April of this year, according to Forbes.

That windfall is among the many factors that have led the country to an inflection point, one that traces back to a half-century of growing wealth inequality and the financial crisis of 2008, which left many with lasting economic damage. American history is rich with such turns. There have been famous acts of tax resistance, like the Boston Tea Party, countered by less well-known efforts to have the rich pay more.

One such incident, over half a century ago, appeared as if it might spark great change. President Lyndon Johnson's outgoing treasury secretary, Joseph Barr, shocked the nation when he revealed that 155 Americans making over $200,000 (about $1.6 million today) had paid no taxes. That group, he told the Senate, included 21 millionaires.

"We face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes," Barr said. Members of Congress received more furious letters about the tax scofflaws that year than they did about the Vietnam War.

Congress did pass some reforms, but the long-term trend was a revolt in the opposite direction, which then accelerated with the election of Ronald Reagan in 1980. Since then, through a combination of political donations, lobbying, charitable giving and even direct bids for political office, the ultrawealthy have helped shape the debate about taxation in their favor.

One apparent exception: Buffett, who broke ranks with his billionaire cohort to call for higher taxes on the rich. In a famous New York Times op-ed in 2011, Buffett wrote, "My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice."

Buffett did something in that article that few Americans do: He publicly revealed how much he had paid in personal federal taxes the previous year ($6.9 million). Separately, Forbes estimated his fortune had risen $3 billion that year. Using that information, an observer could have calculated his true tax rate; it was 0.2 percent. But then, as now, the discussion that ensued on taxes was centered on the traditional income tax rate.

In 2011, President Barack Obama proposed legislation, known as the Buffett Rule. It would have raised income tax rates on people reporting over a million dollars a year. It didn't pass. Even if it had, however, the Buffett Rule wouldn't have raised Buffett's taxes significantly. If you can avoid income, you can avoid taxes.

Today, just a few years after Republicans passed a massive tax cut that disproportionately benefited the wealthy, the country may be facing another swing of the pendulum, back toward a popular demand to raise taxes on the wealthy. In the face of growing inequality and with spending ambitions that rival those of Franklin D. Roosevelt or Johnson, the Biden administration has proposed a slate of changes. These include raising the tax rates on people making over $400,000 and bumping the top income tax rate from 37 percent to 39.6 percent, with a top rate for long-term capital gains to match that. The administration also wants to up the corporate tax rate and to increase the IRS' budget.

Some Democrats have gone further, floating ideas that challenge the tax structure as it's existed for the last century. Oregon Sen. Ron Wyden, the chairman of the Senate Finance Committee, has proposed taxing unrealized capital gains, a shot through the heart of Macomber. Sens. Elizabeth Warren and Bernie Sanders have proposed wealth taxes.

Aggressive new laws would likely inspire new, sophisticated avoidance techniques. A few countries, including Switzerland and Spain, have wealth taxes on a small scale. Several, most recently France, have abandoned them as unworkable. Opponents contend that they are complicated to administer, as it is hard to value assets, particularly of private companies and property.

What it would take for a fundamental overhaul of the U.S. tax system is not clear. But the IRS data obtained by ProPublica illuminates that all of these conversations have been taking place in a vacuum. Neither political leaders nor the public have ever had an accurate picture of how comprehensively the wealthiest Americans avoid paying taxes.

Buffett and his fellow billionaires have known this secret for a long time. As Buffett put it in 2011: "There's been class warfare going on for the last 20 years, and my class has won."

Doris Burke, Carson Kessler and Ellis Simani contributed reporting.

Walmart Supercenter

Justice Department Sues Walmart Over Allegations Of Illegal Opioid Sales

Reprinted with permission from ProPublica

More than two years after the federal government was preparing to indict Walmart on charges of illegally dispensing opioids, the U.S. Department of Justice is finally taking action. But it's seeking a financial penalty, not the criminal sanction prosecutors had pushed for.

On Tuesday, the Department of Justice brought a civil suit against Walmart in U.S. District Court in Delaware, accusing the retailing behemoth of illegally dispensing and distributing opioids, helping to fuel a health crisis that has led to the deaths of around half a million Americans since 1999.

The government accuses the company, which operates one of the biggest pharmacy chains in the country, of knowingly filling thousands of invalid opioid prescriptions, failing to alert the government to dangerous or excessive prescriptions, and pushing pharmacists to work faster and look the other way in order to boost corporate profits.

By law, pharmacists are prohibited from filling prescriptions they know are not for legitimate medical needs. "Walmart was well aware of these rules, but made little effort to ensure that it complied with them," the government said in its suit.

Walmart applied "enormous pressure" on pharmacists to fill prescriptions as fast as they could, while preventing them from halting prescriptions they knew came from bad doctors, the government said. When Walmart pharmacists warned headquarters in Bentonville, Arkansas, about doctors who operated "known pill mills," did "not practice real medicine" and had "horrendous prescribing practices," headquarters ignored their pleas, the lawsuit asserts.

Walmart denounced the suit. "The Justice Department's investigation is tainted by historical ethics violations, and this lawsuit invents a legal theory that unlawfully forces pharmacists to come between patients and their doctors, and is riddled with factual inaccuracies and cherry-picked documents taken out of context," the company said in a statement. In October, aware that a government suit was likely, Walmart took the highly unusual step of preemptively suing the Justice Department. The company argued that it did nothing wrong and, there, too, accused the government of acting unethically. According to Walmart, the federal prosecutors used the threat of a criminal case to try to negotiate higher civil penalties. (Prosecutors deny that claim.)

The case against Walmart originated in the summer of 2016, with an investigation of two Texas doctors, Howard Diamond and Randall Wade, who were prescribing opioids on a vast scale. Federal prosecutors in the Eastern District of Texas eventually brought cases against the pair, accusing them of contributing to multiple deaths. The doctors were subsequently convicted of illegal distribution of opioids, with Wade sentenced to 10 years in prison and Diamond to 20 years. That case uncovered evidence that led prosecutors to investigate Walmart itself.

In 2018, Joe Brown, the Trump-appointed U.S. attorney in the Eastern District of Texas, sought to criminally indict the company over its opioid practices, as detailed in a ProPublica story in March. During this period, as Walmart tried to fend off a criminal case, its lawyers expressed willingness to discuss a civil settlement. The company "stands ready to engage in a principled and reasoned dialogue concerning any potential conduct of its employees that merits a civil penalty," Jones Day partner Karen Hewitt wrote in August 2018 to the head of the criminal division of the Justice Department.

The Texas prosecutors were unswayed by Walmart's arguments. Joined by the head of the Drug Enforcement Administration, Brown's team traveled to Justice Department headquarters in Washington to make an impassioned plea to bring the criminal case.

But Trump appointees at the highest levels of the department — including the deputy attorneys general at different times, Rod Rosenstein and Jeffrey Rosen — stymied the attempt, dictating that Walmart could not be indicted. (Rosen recently was named acting attorney general.) When prosecutors sought to criminally prosecute a Walmart manager, top officials in the Trump Justice Department prevented that, too.

The Justice Department then dragged out civil settlement negotiations. The delays prompted Josh Russ, the head of the civil division in the Eastern District of Texas who had urged bringing a civil suit years ago, to resign in protest. "Corporations cannot poison Americans with impunity. Good sense dictates stern and swift action when Americans die," Russ wrote in his resignation letter in October 2019.

This week's suit largely echoes the allegations that the Eastern District of Texas had made in seeking a criminal case. Legal officials can in some circumstances pursue the same allegations either criminally or civilly, with a higher burden of proof for prosecutors and stiffer potential penalties for defendants when it comes to criminal cases.

In the new suit, prosecutors said Walmart pharmacists routinely filled prescriptions from known "pill mill" doctors. Sometimes those doctors explicitly told their patients to go to Walmart pharmacies, the complaint alleges. Walmart filled prescriptions from doctors even when its pharmacists knew that other pharmacies had stopped filling prescriptions from those doctors.

The suit also details that Walmart's compliance unit based out of its headquarters collected "voluminous" information that its pharmacists were regularly being served invalid prescriptions, but "for years withheld that information" from its pharmacists.

In fact, the compliance department often sent the opposite message. When a regional manager received a list of troubling prescriptions from headquarters, he asked, "Does your team pull out any insights from these we need to highlight?"

In an email cited in the suit, which was first reported by ProPublica, a director of Health and Wellness Practice Compliance at Walmart, responded, "Driving sales and patient awareness is a far better use of our Market Directors and Market manager's time."

Walmart headquarters regularly put pressure on pharmacists to work faster. Managers pushed pharmacists because "shorter wait times keep patients in store," that this was a "battle of seconds" and that "wait times are our Achilles heel!" according to the suit. Pharmacists said the pressure and Walmart's thin staffing "doesn't allow time for individual evaluation of prescriptions," the suit says.

In May, two months after ProPublica published its story, Brown, the U.S. attorney who had pushed for criminal prosecution of Walmart, left his job abruptly. His resignation letter cited the need to "win the fight against opioid abuse in order to save our country" and added that "players both big and small must meet equal justice under the law." Brown did not return a call seeking comment.

Doris Burke contributed reporting.

Budget Cuts Hobble IRS Pursuit Of Wealthy Tax Cheats

Budget Cuts Hobble IRS Pursuit Of Wealthy Tax Cheats

Reprinted with permission from ProPublica.

 

Tax evasion is at the center of the criminal cases against two associates of the president, Paul Manafort and Michael Cohen. The sheer scale of their efforts to avoid paying the government has given rise to a head-scratching question: How were they able to cheat the Internal Revenue Service for so many years?

The answer, researchers and former government auditors say, is simple. The IRS pursues fewer cases of tax evasion than it did less than 10 years ago. Provided you’re not a close associate of President Donald Trump, there may never be a better time to be a tax cheat.

Last year, the IRS’s criminal division brought 795 cases in which tax fraud was the primary crime, a decline of almost a quarter since 2010. “That is a startling number,” Don Fort, the chief of criminal investigations for the IRS, acknowledged at an NYU tax conference in June.

Bringing cases against people who evade taxes on legal income is central to the revenue service’s mission. In addition to recouping lost revenue, such cases are supposed “to influence taxpayer behavior for the hundreds of millions of American citizens filing tax returns,” Fort said. With fewer cases, experts fear, Americans will get the message that it’s all right to break the law.

Starting in 2011, Republicans in Congress repeatedly cut the IRS’s budget, forcing the agency to reduce its enforcement staff by a third. But that drop doesn’t entirely explain the reduction in tax fraud cases.

Over time, crimes only tangentially related to taxes, such as drug trafficking and money laundering, have come to account for most of the agency’s cases.

“Due to budget cuts, attrition and a shift in focus, there’s been a collapse in the commitment to take on tax fraud,” said Chuck Pine, who used to be the third-ranking criminal enforcement officer at the IRS and is now a managing director at BDO Consulting. “I believe there are thousands of individuals who have U.S. tax obligations and are not complying with U.S. tax laws.”

The result is huge losses for the government. Business owners don’t pay $125 billion in taxes each year that they owe, according to IRS estimates. That’s enough to finance the departments of State, Energy and Homeland Security, with NASA tossed in for good measure. Unlike wage earners who have their income separately reported to the IRS, business owners are often on the honor system.

The IRS declined to comment on its enforcement efforts.

Cohen’s and Manafort’s cases illustrate different but common types of tax cheating, and how the IRS has struggled to enforce the law. Cohen failed to report income from domestic businesses. Manafort used exotic foreign locales and shell corporations to hide his money.

Cohen’s tax evasion schemes were straightforward. Besides paying off a pornographic movie star and a former Playboy model in violation of campaign finance laws, he pleaded guilty to lying on his tax return. Whether it was income from his business owning taxi medallions, millions of dollars in interest payments on a loan he’d made to another taxi operator or the $30,000 he made by brokering the sale of a luxury handbag, Mr. Cohen simply hid the money from his accountant and the government. Over five years, he didn’t disclose $4.1 million, saving himself $1.5 million in taxes.

The IRS typically catches such evasion by auditing taxpayers. Theoretically, evidence picked up in audits can be used to start criminal cases.

But the rate at which the agency audits tax returns has plummeted by 42 percent since the budget cuts started. Criminal referrals were always rare and are becoming rarer still, dropping from 589 referrals in 2012 to 328 in 2016. With the government conducting 1.2 million audits in 2016, that’s one criminal referral for roughly every 3,600 audits.

“The focus of auditors and tax collectors is not to identify fraud, it’s to collect tax,” said a special agent, who spoke on the condition of anonymity because he was not authorized to speak to the media. Management has set other priorities, he says. “So by default, the employees are not doing it.”

In addition, current and former IRS agents say that audits are not as intensive as they used to be. Because the IRS pushes agents to close audits more quickly, they make fewer requests for records and interviews.

“The quality of those referrals was also down,” said Marie Allen, a recently retired auditor who worked at the IRS for more than 30 years conducting complex financial investigations. “That is what people popularly think we should be doing, and I’m trying to say it ain’t so.”

Budget cuts have diminished the criminal investigation division, trimming the number of agents by a fifth since 2010. Recently, the IRS closed four of its 25 field offices, according to Fort. In New York state, home of the country’s financial industry, the revenue service is down to 161 agents, about a hundred fewer than it had 15 years ago.

It doesn’t help that many agents prefer chasing flashier crimes than tax evasion. Rob Warren, a research associate at Catholic University who previously spent a quarter century at the IRS, interviewed 30 former special agents. He asked each agent which of their cases had been their favorite. The answers, Warren said, typically were only tangentially related to taxes.

“It was usually narcotics, Ponzi schemes, some public corruption,” Warren said. “Agents loved Ponzi cases because there was a real victim, an old lady or something like that.”

Federal prosecutors seek out special agents for these cases because they are skilled financial investigators. And tax crimes, like failing to declare illegal income from, say, a bribe or cocaine sales, can be easier to prove than bribery or selling drugs.

In recent years, the IRS has also been pulled away from classic tax dodging cases by soaring rates of identity theft. IRS management assigned scores of agents to chase perpetrators who used stolen identities to collect tax refunds.

One tax fraud hotbed that has been a clear priority of both the IRS and the Justice Department is going after money Americans stashed overseas without reporting it to the federal government. But there are clear reasons that Manafort, who hid his money in places like Cyprus and St. Vincent and the Grenadines, might still have escaped detection.

Switzerland has been the Justice Department’s primary target over the past 10 years, an effort that has resulted in settlements with the giant Swiss banks UBS and Credit Suisse, and dozens of smaller institutions.

The IRS allowed Americans with foreign accounts to voluntarily disclose them and pay a smaller penalty than they would have had they been caught hiding the information. Some 56,000 people participated, netting the government $11.1 billion. The IRS’s criminal division also brought several cases against people for concealing accounts.

For all this success, there has been little change in the amount of wealth stashed overseas. Americans have about $1.2 trillion of personal assets in tax havens, according to data compiled by Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley, and two colleagues. It’s unclear what portion has been disclosed to the IRS.

“What has happened over the last 10 years is real progress,” Zucman said. “But what the data suggest is that it has not had a dramatic effect on the amount of offshore wealth.” Money has flowed out of Switzerland and into Asian tax havens like Hong Kong and Singapore.

Moreover, the IRS has made little use of new weapons in the fight against wealth hidden overseas. In 2010, President Barack Obama signed a law that was supposed to provide a crucial tool for government auditors and prosecutors. That law, the Foreign Account Tax Compliance Act, required banks with American account holders to report information to the United States. Like employers filing W-2 forms about their workers, these reports would force account holders to come clean.

Eight years later, the program is still getting off the ground. Countries around the world have signed agreements, and more than 100,000 foreign banks have sent information to the United States. But “there is no ongoing compliance impact of the FATCA at this time,” according to a report this year by the inspector general for the IRS.

The report found serious problems with the millions of records collected so far. About half of the records, for example, didn’t include identification numbers for the taxpayers, making it difficult to match the accounts with specific individuals. The IRS hadn’t set up a process for using the records. The agency said it was working on such a system.

Here, too, the cuts to the IRS’s budget have had an impact. During the Obama administration, the IRS asked Congress for hundreds of millions of dollars to carry out the program, but received nothing. Since Trump took office, the revenue service has stopped asking.

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Why Manafort And Cohen Thought They’d Get Away With It

Why Manafort And Cohen Thought They’d Get Away With It

Reprinted with permission from ProPublica.

 

Oh, the audacity of dopes. The crimes of Paul Manafort and Michael Cohen are notable not just for how blatant they were but also for their lack of sophistication. The two men did little to hide their lying to banks and the Internal Revenue Service. One can almost sympathize with them: If it wasn’t for their decision to attach themselves to the most unlikely president in modern history, there’s every reason to think they might be still working their frauds today.

But how anomalous are Mssrs. Manafort and Cohen? Are there legions of K Street big shots working for foreign despots and parking their riches in Cypriot bank accounts to avoid the IRS? Are many political campaigns walking felonies waiting to be exposed? What about the world of luxury residential building in which Cohen plied his trade with the Trump Organization?

The answer is more disturbing than the questions: We don’t know. We don’t know because the cops aren’t on the beat. Resources have been stripped from white-collar enforcement. The FBI shifted agents to work on international terror in the wake of 9/11. White-collar cases made up about one-tenth of the Justice Department’s cases in recent years, compared with one-fifth in the early 1990s. The IRS’ criminal enforcement capabilities have been decimated by years of budget cuts and attrition. The Federal Election Commission is a toothless organization that is widely flouted.

No wonder Cohen and Manafort were so brazen. They must have felt they had impunity.

How could they not? Any person in any bar in America can tell you who was held accountable for the biggest financial crisis since the Great Depression, which peaked 10 years ago next month: No one. No top officer from any major bank went to prison.

But the problem goes beyond big banks. The Department of Justice — in both Democratic and Republican administrations — has lost the will and ability to prosecute top executives across corporate America, at large industrial firms, tech giants, retailers, drug makers and so on. Instead the Department of Justice reaches settlements with corporations, which pay in dollars instead of the liberty of their top officers and directors.

Beginning with a charge to investigate Russian interference in the 2016 election, special counsel Robert Mueller has fallen upon a rash of other crimes. In doing so, he has exposed how widespread and serious our white-collar fraud problem really is, and how lax enforcement has been for years.

At least he is also showing a way out of the problem. He and his team are demonstrating that the proper attention, resources, technique and experience can go a long way to rectify the white-collar prosecution crisis.

What’s Mueller’s secret? For one thing, he has a focus. He and his team have sufficient resources to go after a discrete set of investigations. In the early 2000s, the Justice Department had similar success setting up the Enron Task Force, a special SWAT team of government lawyers that prosecuted top executives of the failed Texas energy trader. That contrasts with the financial crisis, when the Justice Department never created a similar task force. No single department official was responsible for the prosecutions of bankers after the global meltdown.

The investigation’s techniques are also instructive. The Southern District of New York, which was referred the Cohen case by Mueller, raided President Trump’s former attorney’s offices and fought for access to the materials, even as Cohen asserted attorney-client privilege. When federal prosecutors investigate large companies, out of custom and deference they rarely use such aggressive tactics. They place few wiretaps, conduct almost no undercover operations and do almost no raids. Instead government attorneys reach carefully negotiated agreements about which documents they can review, the product of many hours of discussion with high-powered law firms on behalf of their clients. All the battles over privileged materials happen behind closed doors and without the benefit of a disinterested special master, as the Cohen case had.

Indeed it’s worse than that. The government has essentially privatized corporate law enforcement. The government effectively outsources the investigations to the companies themselves. The companies, typically trying to appear cooperative or to forestall government action, hire law firms to do internal investigations. Imagine if Mueller relied on Trump to investigate whether he colluded with the Russians or violated any other laws, and Trump hired Rudy Giuliani’s firm to do the probe.

The aggressive Mueller techniques have yielded the most crucial element for white-collar cases: flippers; i.e., wrongdoers who agree to testify against their co-conspirators. Rick Gates, the Manafort protégé, helped tighten his mentor’s noose. We are going to see in the next few months how many people flip and what they will say. No wonder President Trump mused that flipping “almost ought to be illegal.”

Mueller’s experience has given him the courage to take cases to trial, where juries are mercurial and the federal bench has turned hostile. Mueller’s prosecutors tried a “thin case” against Manafort, as the expression goes, boiling their evidence down to a few elements that the jury could absorb easily. They even managed to overcome the open hostility of U.S. District Court Judge T.S. Ellis. Good prosecutors are used to that in white-collar cases. Judges and justices have not looked favorably upon white-collar prosecutions for more than a decade now, overturning verdicts and narrowing statutes. But with well-marshaled evidence and clear presentation, prosecutors can surmount the difficulties.

Moreover, Mueller isn’t looking to go soft in order to preserve his professional viability. I’m assuming that at age 74, he’s not going to go through the revolving door after this. That hasn’t been true for most top Justice Department officials in recent years. Many of them come from the defense bar and when they leave government they go back to defending large corporations. The same goes with the younger prosecutors who negotiate those corporate settlements. Almost all go on to become corporate defense attorneys. In those negotiations, they are auditioning for their next jobs, wanting to display their dazzling smarts but also eventually needing to appear like reasonable people and avoid being depicted by the white-collar bar as cowboys unworthy of a prestigious partnership.

Of course, we don’t know whether Mueller can go all the way to the top. The big issue in white-collar crime is whether the Justice Department can prosecute CEOs. Sure, it occasionally brings charges against lower-level executives of major corporations, but hasn’t held the chief of a Fortune 500 company accountable in more than a decade. While most observers believe Mueller will adhere to policy and not indict the president, will his report to Congress implicate the chief executive of the United States, if the evidence warrants it?

One man cannot fix the large problem on his own, however. “For these individual episodic financial crimes, the government can muster the capacity and courage to investigate and prosecute,” says Paul Pelletier, a former federal prosecutor who recently ran for Congress in a Democratic primary. “The real question is whether, in the context of a national economic crisis, the Department of Justice has sufficient experience, resources and leadership to effectively tackle it. I’d argue that it’s pretty obvious it does not.”

For that, the Justice Department requires more resources and bodies than the government devotes to white-collar crime today, and probably some changes in the law.

Nevertheless, this should be a moment of reflection for white-collar prosecutors. It should not take a special counsel to uncover millions in bank fraud, money laundering and tax evasion. Using proper techniques, prioritizing crimes that can harm millions of people and stiffening their obsequious posture toward corporate executives will go a ways to remedying the situation.

Here’s the bad news, which will be the least surprising thing you’ll read today: the Trump administration is moving in the opposite direction. Its law enforcement agencies are engaged in something of a regulatory strike, especially when it comes to white-collar enforcement. Regulators are not policing companies or industries and are not referring cases to the Justice Department. The number of white-collar cases filed against individuals is lower than at any time in more than 20 years, according to research done by Syracuse University. The Justice Department’s fines against companies fell 90 percent during Trump’s first year in office, compared with in Obama’s last year in office, according to Public Citizen.

That must be sweet music to not just to other Manaforts and Cohens but also any corporate malefactors out there.

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New Commissioner Urges FTC To Get Tough On Rogue Corporations

New Commissioner Urges FTC To Get Tough On Rogue Corporations

Reprinted with permission from ProPublica.

 

 

New Commissioner Says FTC Should Get Tough on Companies Like Facebook and Google

Declaring that “the credibility of law enforcement and regulatory agencies has been undermined by the real or perceived lax treatment of repeat offenders,” newly installed Democratic Federal Trade Commissioner Rohit Chopra is calling for much more serious penalties for repeat corporate offenders.

“FTC orders are not suggestions,” he wrote in his first official statement, which was released today.

Many giant companies, including Facebook and Google, are under FTC consent orders for various alleged transgressions (such as, in Facebook’s case, not keeping its promises to protect the privacy of its users’ data). Typically, a first FTC action essentially amounts to a warning not to do it again. The second carries potential penalties that are more serious.

Some critics charge that that approach has encouraged companies to treat FTC and other regulatory orders casually, often violating their terms. They also say the FTC and other regulators and law enforcers have gone easy on corporate recidivists.

In 2012, a Republican FTC commissioner, J. Thomas Rosch, dissented from an agency agreement with Google that fined the company $22.5 million for violations of a previous order even as it denied liability. Rosch wrote, “There is no question in my mind that there is ‘reason to believe’ that Google is in contempt of a prior Commission order.” He objected to allowing the company to deny its culpability while accepting a fine.

Chopra’s memo signals a tough stance from Democratic watchdogs — albeit a largely symbolic one, given the fact that Republicans have a 3-2 majority on the FTC — as the Trump administration pursues a wide-ranging deregulatory agenda. Agencies such as the Environmental Protection Agency and the Department of Interior are rolling back rules, while enforcement actions from the Securities and Exchange Commission and the Department of Justice are at multiyear lows.

Chopra, 36, is an ally of Elizabeth Warren and a former assistant director of the Consumer Financial Protection Bureau. President Donald Trump nominated him to his post in October, and he was confirmed last month. The FTC is led by a five-person commission, with a chairman from the president’s party.

The Chopra memo is also a tacit criticism of enforcement in the Obama years. Chopra cites the SEC’s practice of giving waivers to banks that have been sanctioned by the Department of Justice or regulators allowing them to continue to receive preferential access to capital markets. The habitual waivers drew criticism from a Democratic commissioner on the SEC, Kara Stein. Chopra contends in his memo that regulators treated both Wells Fargo and the giant British bank HSBC too lightly after repeated misconduct.

“When companies violate orders, this is usually the result of serious management dysfunction, a calculated risk that the payoff of skirting the law is worth the expected consequences, or both,” he wrote. Both require more serious, structural remedies, rather than small fines.

The repeated bad behavior and soft penalties “undermine the rule of law,” he argued.

Chopra called for the FTC to use more aggressive tools: referring criminal matters to the Department of Justice; holding individual executives accountable, even if they weren’t named in the initial complaint; and “meaningful” civil penalties.

The FTC used such aggressive tactics in going after Kevin Trudeau, infomercial marketer of miracle treatments for bodily ailments. Chopra implied that the commission does not treat corporate recidivists with the same toughness. “Regardless of their size and clout, these offenders, too, should be stopped cold,” he writes.

Chopra also suggested other remedies. He called for the FTC to consider banning companies from engaging in certain business practices; requiring that they close or divest the offending business unit or subsidiary; requiring the dismissal of senior executives; and clawing back executive compensation, among other forceful measures.

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Trump Appointees Scuttle Rule To Protect Against Carbon Monoxide Poisoning

Trump Appointees Scuttle Rule To Protect Against Carbon Monoxide Poisoning

Reprinted with permission from ProPublica.

This story was co-published with The Atlantic.

After Hurricane Irma hit three months ago in Orlando, Florida, the local police got a desperate 911 call from a 12-year-old boy reporting that his mother and siblings were unconscious. Fumes overcame the first deputy who rushed to the scene. After the police arrived at the property, they found Jan Lebron Diaz, age 13, Jan’s older sister Kiara, 16, and their mother Desiree, 34, lying dead, poisoned from carbon monoxide emitted by their portable generator. Four others in the house went to the hospital. If 12-year-old Louis hadn’t made that call, they might have died, too.

Portable generators release more carbon monoxide — which is particularly dangerous because it is odorless and invisible — than most cars. As a result, the devices can kill efficiently and quickly, though accidentally. The Diaz family usually placed the generator properly, outside the house, a neighbor told local reporters. But for some reason, they had brought it into their garage. From there, the generator’s murderous byproduct spread silently through the house.

During hurricanes, floods, and nor’easters, portable generators save lives — except when they take them. Irma, Harvey, and Maria all left thousands without power and reliant on their portable generators. The government has not yet done its official count, but 11 people using these generators died just from Irma, according to preliminary government estimates. Many more died from Harvey and Maria, experts say, especially in Puerto Rico, which has been without a functioning power grid for months.

These deaths rarely merit more than short stories on local news sites. Civil servants then accumulate the statistics into dry reports that end up buried somewhere on .gov websites. The latest of these shows that portable generators have killed on average 70 people a year since 2005. That’s a small fraction of the toll from car accidents. Still, generators rank as one of the deadliest consumer products on the market. A further 2,800 people a year suffer from carbon monoxide poisoning caused by the equipment.

Portable generator deaths are preventable, and for the past 16-plus years, the United States government has tried to do just that. The job has fallen to the Consumer Product Safety Commission, which, with its $126 million budget and 520 employees, oversees almost every product Americans use in their home, office, or out in the yard, save for food, drugs, and cars. The CPSC, based in Bethesda, Maryland, is tiny, especially compared to many of the corporations it regulates, and hamstrung by Congressional rules that require it to seek voluntary standards before attempting to impose mandatory ones.

But the problem of portable generators was so obvious that the little agency felt it needed to make a stand. They were one of the “persistent deadly hazards we felt we had to address,” says Elliot Kaye, who was the chairman of the CPSC from 2014 to February of this year and remains a commissioner. (The CPSC has five commissioners who vote on agency measures; the party that controls the White House tends to have the majority.)

Throughout the 16 years the CPSC has been pushing the issue, the portable-generator industry fended off regulations that would have required it to reduce the carbon monoxide emissions of its devices. The companies argued such changes would be too costly, and that they lacked the technology to make the machines safer. The industry lobbied hard, and also wielded an arsenal of delaying measures and misdirection, not to mention occasional strong-arm tactics to enforce industry discipline, its critics say.

But in early November 2016, during the final months of the Obama administration, the CPSC took one of the most significant steps it can take: The commission voted in favor of a rule to force manufacturers to lower their generators’ carbon monoxide emissions. The vote was 4 to 1, with one Republican joining the majority of Democrats.

Donald Trump was elected a week later. In January, he elevated the only commissioner to vote against the rule — Ann Marie Buerkle, a 66-year-old former Republican congresswoman from upstate New York — to be the acting chair of the CPSC, and she took on the role in February. (She awaits Senate confirmation to become the chair.) The administration has nominated, as a potential commissioner, a lawyer from the corporate firm Jones Day who specializes in defending companies from product-liability cases; one other vacancy remains. So Buerkle will likely soon have new allies.

Self-effacing and warm, Buerkle wins universal praise from agency employees and fellow commissioners as a pleasant colleague. Even the Democratic appointees feel she listens to them. Indeed, the CPSC took pride that it wasn’t riven by the partisan rancor that infects so much of Washington. Kaye, a Democrat, brought his family to visit fellow commissioner Buerkle and her family when they vacationed in upstate New York.

Buerkle’s gentle personality, however, belies hardline views on regulation. Buerkle has never, in her fellow commissioners’ recollection, advocated for the agency to regulate a product that the CPSC staff thinks is unsafe. She is a government regulator who doesn’t appear to believe in government regulation.

Voluntary standards are “a better way to go,” Buerkle told ProPublica. “They are quick to complete. There’s much more efficiency in implementation. And there’s much more buy-in from stakeholders.” Never mind that in this instance it took more than a decade, and ongoing government prodding, for companies to get close to adopting a voluntary standard of its own. Pressed on which product hazards are her priorities, Buerkle says: “Fidget spinners are a big deal.” (They should not be placed in the mouth, the commission warns.) She also mentions children’s products and toys, pool safety, and portable generators.

Among her first actions as chair, Buerkle did two things. She sent a letter in August to Scott Pruitt, the head of the Environmental Protection Agency, agreeing with his assertion that the CPSC does not have the legal authority to make a rule about carbon monoxide emissions from portable generators.

In a second move, Buerkle appointed Patricia Hanz to be her general counsel. Hanz comes from Briggs & Stratton, a manufacturer of engines in Wauwautosa, Wisconsin, where she was the assistant general counsel. Briggs & Stratton, which brings in $1.8 billion a year, happens to be one of the biggest portable-generator manufacturers in the world. Hanz also served as the vice president of the portable-generator trade group.

The rise of Hanz and Buerkle — and the issue of portable generators — has injected a new contentiousness into the CPSC. In an impassioned speech in October, decrying the future of her agency, CPSC commissioner Marietta Robinson called Hanz “the one person who fought the hardest against any safety measures” for portable generators.

Hanz declined to comment on a detailed list of questions. In a statement from the CPSC’s public-affairs office attributed to Hanz, she said she has recused herself. “Under the Trump Administration Ethics Pledge I cannot have any involvement with my former employer, nor with PGMA (Portable Generator Manufacturers Association) for two years, including contracts and regulations. In addition, to avoid any appearance of partiality, I will have no involvement in matters related to any PGMA members,” she wrote in an email. Briggs & Stratton also declined to respond to detailed questions. The company said in a statement it “is and has always been committed to safe operation of generators.”

While Trump has achieved few of his legislative priorities, his administration is succeeding in broadly eroding federal regulation. Having fought the long war, the portable generator industry is now poised to benefit from the president’s success. The government’s portable-generator rule has not been finalized — and now with Buerkle at the helm, it probably will never be.

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What Robert Mueller Learned From Investigating Enron

What Robert Mueller Learned From Investigating Enron

Reprinted with permission fromProPublica.

This story was co-published withThe New York Times.

It seems safe to assume that nobody read Donald Trump Jr.’s damning emails with a Kremlin-connected lawyer more closely than Robert Mueller.

Mueller, the special counsel investigating possible ties between the Trump campaign and Russian officials, will surely be making calls to everyone involved in the now infamous meeting, including the president’s son; the president’s son-in-law, Jared Kushner; and his campaign chairman at the time, Paul Manafort.

As he does, the question is whether Mueller will be able to build a case that goes all the way to the top.

That could depend on what lessons he learned from overseeing the task force that investigated one of the biggest fraud cases in American history: the collapse of the energy giant Enron.

In December 2001, Enron filed what was then the largest corporate bankruptcy in American history. Just weeks later, Mueller, then the FBI director; Deputy Attorney General Larry Thompson; and the assistant attorney general for the criminal division, Michael Chertoff, formed the Enron Task Force, an elite team of FBI agents and federal prosecutors assigned to investigate and prosecute crimes related to the Houston-based energy trader. Andrew Weissmann, who recently joined Mueller’s Russia team, later led the task force.

The Enron team was patient and learned from its investigative and trial mistakes. After its yearslong run, it set a high-water mark for complex, high-profile financial inquiries, successfully indicting and imprisoning almost all of the company’s top executives.

Early on, the Enron team also won a jury conviction of the Arthur Andersen accounting firm, Enron’s auditor, on an obstruction-of-justice charge. That experience could prove valuable as the Russia team investigates — among many possible routes — whether President Trump obstructed justice when he fired James Comey, the FBI director.

Prosecuting the Enron executives went slowly. Not until 2006 did a jury find the former chief executive, Jeffrey K. Skilling, and the former chairman and chief executive, Kenneth L. Lay, guilty. (Lay died before sentencing.)

The frauds Enron was accused of were audacious. The company had hidden debt in a complex web of off-the-books companies and had faked its profits. Yet prosecutorial success was not inevitable. Skilling and Lay pleaded ignorance, blaming lower-level employees and arguing they had relied on the advice of their attorneys and auditors. The government did not have damning emails or wiretap evidence from either man. Prosecutors may face a similar challenge with Trump, who tweets but reportedly does not use email.

The Enron team got off to an auspicious start, with the Department of Justice providing adequate prosecutorial resources. Mueller helped recruit talented prosecutors and investigators from around the county and then got out of their way.

He and other top Justice Department officials then gave their team political cover. Enron and its executives were particularly close to the Bush family and top Republican officials. Early on, the team interviewed White House officials about their recollections. Republican political operatives voiced displeasure, but the team persisted.

The task force conducted its investigations effectively, flipping lower-level employees to build cases against the top bad actors. The Enron team made aggressive and risky moves. For example, it shocked Houston high society by charging the wife of Andrew Fastow, the chief financial officer, with tax evasion to put pressure on him. It worked. Fastow began to cooperate with the government. (His wife pleaded guilty.) Every prosecutor knows this strategy works, but for various reasons today, few put in the painstaking work needed to penetrate the sophisticated legal defenses of highly paid executives.

As it proceeded, the task force weathered relentless attacks. First, critics charged it was moving too slowly. Later, white-collar defense lawyers accused the team of intimidating witnesses and overzealously charging executives. The legal establishment particularly criticized the prosecution of Arthur Andersen. The government won at trial in 2002, but the Supreme Court overturned the verdict three years later on a narrow issue involving jury instructions.

Despite its successes, the Enron Task Force emerged with a mixed legacy thanks to its trial losses and reversals from higher courts. Among them, the Supreme Court reversed part of the Skilling verdict.

Today, many Justice Department officials have learned the wrong lessons from the Enron experience, accepting the idea that the task force was overzealous. Even Democratic appointees like Mary Jo White, President Obama’s chairwoman of the Securities and Exchange Commission, and Lanny Breuer, his assistant attorney general for the criminal division, came to believe the prosecution of Andersen had been a mistake.

Drawing the wrong lessons has consequences. In subsequent years, the Justice Department did not assign prosecutors to work solely on financial crisis cases. While the Bush Justice Department had acted quickly to create the Enron Task Force, the Obama department allowed plans to create a similar task force, after the banking collapse of 2008, to die amid bureaucratic infighting.

It was no surprise, then, that the Justice Department never put any top bankers from the biggest banks in prison after the financial crisis. Forgetting what went right with the Enron prosecutions has contributed to a problem that still plagues the Justice Department: It has lost the will and ability to prosecute top corporate executives from the largest corporations.

Today Mueller’s team is operating in an even hotter kitchen than the Enron Task Force did. The president has repeatedly called the investigation “a witch hunt,” and rumors abound that he could fire Mueller any day. A Trump ally, former House Speaker Newt Gingrich, has grumbled conspiratorially that the former FBI director was the “tip of the deep state spear” aimed at the president.

But the Enron Task Force may have given Mueller a hide thick enough to protect him from those attacks. More than that, Enron honed skills he’ll need now in the Russia investigation, which may well touch on money laundering, secrecy havens, complex accounting maneuvers, campaign finance violations — and multiple lies.

As I talked with Mueller’s former Enron Task Force colleagues in recent weeks, it became clear to me that he believes the Enron team was successful — and understands why. That means his special counsel team will probably move more slowly than people anticipate. But it might also shock people with its aggressive investigative and prosecutorial tactics. If Trump and his advisers committed crimes, Mueller will find them.

Jesse Eisinger is the author of The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives.

A Federal Regulator Is Probing Wells Fargo’s Mortgage Practices

A Federal Regulator Is Probing Wells Fargo’s Mortgage Practices

Reprinted with permission from ProPublica.
by Jesse Eisinger

The Consumer Financial Protection Bureau is conducting an investigation into alleged improprieties in Wells Fargo’s mortgage fee practices.

The CFPB is looking into allegations, first reported by ProPublica in January, that the bank inappropriately charged customers fees to extend their promised interest rates when their paperwork was delayed. The CFPB probe is in its early stages, according to a person familiar with it, and there is no certainty that the agency will take action. The CFPB has the power to levy fines and seek restitution if it finds a financial firm has violated the law. A CFPB spokesperson declined to comment.

Wells Fargo is also conducting its own internal review, overseen by the law firm Winston & Strawn. The inquiry was initially limited to the Los Angeles area, but has since widened. In a sign of its escalating scope and seriousness, Wells Fargo let three top mortgages executives go last week, including Greg Gwizdz, a 25-year veteran of the bank who most recently was the head of its retail sales division. Gwizdz oversaw the bank’s more than 7,900 loan officers.

The bank also dismissed Drew Collins, the manager of the Pacific division, and Sandy Streator, the regional sales manager for Nevada and Oregon. Previously the bank parted ways with Tom Swanson, the Los Angeles County regional sales manager. Gwizdz, Collins and Streator did not respond to requests for comment.

The decision to let the executives go was a result of “some of the things we found as part of” the internal review, said bank spokesman Tom Goyda, though he added that “no single issue or situation” led to the departures. Goyda declined to comment on the CFPB probe.

ProPublica reported Wells Fargo mortgages routinely bogged down in paperwork delays. When that occurred, supervisors instructed loan officers to blame and charge the customers, even when the problems were the fault of the bank, according to current and former Wells Fargo employees. Customers were charged fees of $1,000 to $1,500 or more, depending on the size of the loan, to extend, or lock in, their interest rates. The practice of shunting the fees onto the customers was particularly common in the Los Angeles County and Oregon regions.

In Oregon, part of Streator’s territory as regional sales manager, two former loan officers and one former branch officer told ProPublica in February they were instructed to charge customers for mortgage lock extensions even when the bank was responsible. The former branch officer estimated that in 2015 and 2016 he oversaw 350 mortgages that needed lock extensions. He said the bank only paid the fee twice.

Wells has been reshuffling management elsewhere within the organization as part of the fallout into an earlier and separate scandal. Last September, the bank was fined $185 million for illegally opening as many as 2 million deposit and credit card accounts without customers’ knowledge. In February, it fired four senior managers connected to that wrongdoing.

In April, the board of directors issued a report excoriating the bank’s top-level management for its high-pressure sales culture.

The CFPB probe comes at a time when the 6-year-old agency’s own future is uncertain under the Trump administration. Banks, financial firms and the Republican Party have opposed the agency and its sweeping powers to oversee consumer finance. Consumer advocates and the CFPB’s adversaries await a decision from the U.S. Court of Appeals for the District of Columbia about the constitutionality of the agency. Adding to the uncertainty, Richard Cordray, the director of the agency, is expected to be leaving his post sometime this summer, though his term does not expire until July 2018.

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Why Deutsche Bank Remains Trump’s Biggest Conflict Of Interest

Why Deutsche Bank Remains Trump’s Biggest Conflict Of Interest

Reprinted with permission from ProPublica.

If you measure President Donald Trump’s conflicts of interest by the amount of money at stake, or the variety of dicey interactions with government regulators, one dwarfs any other: his relationship with Deutsche Bank.

In recent weeks, Deutsche Bank has scrambled to reach agreements with American regulators over a host of alleged misdeeds. But because the president has not sold his company, the bank remains a central arena for potential conflicts between his family’s business interests and the actions of officials in his administration.

“Deutsche poses the biggest conflict that we know about in terms of dollar amounts and the scale of legal exposures,” says Brandon Garrett, a University of Virginia law professor and author of Too Big To Fail: How Prosecutors Compromise with Corporations. In trying to clear up its outstanding regulatory troubles, the bank “may have tried to do its best to avoid the appearance of impropriety but it may be impossible for them to do so.”

Deutsche is Trump’s major creditor, having lent billions to the president since the late 1990s even as other American banks abandoned Trump, who frequently bankrupted his businesses. While the president hasn’t released his tax returns, he has made public some information about his debts. According to these incomplete disclosures and reports, the Trump Organization has roughly $300 million in loans outstanding from the bank. Trump continues to own the business, although he has turned over day-to-day management to his sons.

At the same time that it is Trump’s biggest known creditor, Deutsche is in frequent contact with multiple federal regulators. While the bank agreed last week to pay $630 million to settle charges by New York state’s top financial regulator as well as the U.K.’s Financial Conduct Authority that it had aided Russian money-laundering, it’s still undergoing a related federal investigation into those activities, which it is also trying to settle. That will be an early big test of the Justice Department under Attorney General Jeff Sessions. The Justice Department also has an ongoing probe of foreign exchange manipulation by several banks, including Deutsche Bank.

Even if the bank clears up the ongoing federal cases, it will remain weighed down by past transgressions. During the housing bubble, Deutsche Bank misled buyers about the quality of its mortgage securities and omitted important information. In 2015, its London subsidiary pleaded guilty in connection with the multi-bank conspiracy to manipulate global interest rates and paid $775 million in criminal penalties.

Deutsche will soon have an astonishing six independent monitors monitoring its conduct — the most ever for one company, according to Garrett. Drawn from the ranks of consultancies and law firms, these overseers make sure Deutsche complies with previous state and federal settlements and regulations relating to its foreign exchange manipulations, global interest rate fraud, sales of dodgy mortgage securities, derivatives trading, and sanctions evasion.

Indeed, the independent monitor of Deutsche’s derivatives reporting, Paul Atkins from Patomak Partners, has his own conflict of interest. Atkins served on Trump’s transition team and played a role in appointing federal financial regulators. He is now monitoring whether Trump’s business partner complies with the terms of a settlement with the Commodity Futures Trading Commission on derivatives reporting.

A Patomak spokeswoman declined to comment.

Meanwhile, the Federal Reserve has regulators sitting in Deutsche’s offices, as it does with every big bank, keeping a watchful eye on the firm’s safety and soundness. Last year, the Fed failed Deutsche Bank during its annual stress test, finding that it had insufficient capital and could not withstand another financial crisis. And the Securities and Exchange Commission and the CFTC regulate its investment banking and trading activities.

A Deutsche Bank spokeswoman declined to comment. The White House did not return an email seeking comment.

The Trump Organization’s wide-ranging business dealings could raise quandaries for an array of government agencies, from the Department of Labor, which regulates the company’s employment practices, to the General Services Administration, which leases Trump his hotel in Washington, D.C. “Just about everything that every branch, every type of enforcement, every action from every agency could touch on Trump’s conflicts. There is no end to the corruption and ethics concerns,” Garrett says.

But the potential conflicts may be most acute at the Justice Department. Whether the Justice Department walks away from an investigation or takes a hard line against Deutsche Bank, its every move will be scrutinized as either too tough or too weak.

With new management, Deutsche Bank has embarked on an effort to rebuild its reputation. Deutsche CEO John Cyran has conducted an apology tour for the bank’s multiple and serial misdeeds. The money-laundering settlement isn’t Deutsche’s only recent move to close out government probes. In January, it agreed to pay $95 million to end a tax fraud investigation by the U.S. Attorney for the Southern District of New York. And in December, it became one of the last of the global banks to resolve civil charges over the creation and sale of misleading mortgages investments, agreeing to pay a penalty of $3.1 billion.

In these agreements, Deutsche capitalized on the Obama Department of Justice’s eagerness to settle, according to defense attorneys who don’t represent the bank but are familiar with the cases. Outgoing administrations desire to wrap investigations up so departing prosecutors may shine their resumes on the way out the door.

The Obama administration had an added incentive to reach settlements because it worried the Trump administration Justice Department might seek smaller penalties or otherwise go soft on corporations. That helps explain why Deutsche Bank’s mortgage securities settlement, which included $4.1 billion in credit for consumer aid in addition to the penalty, was far below the $14 billion figure reported in the fall as Justice’s opening bid. While most observers expected that figure to come down sharply, Deutsche’s terms were still widely considered favorable.

Even so, Deutsche’s share price remains depressed as investors worry about the bank’s future payouts and ongoing fragility. The bank faces class action suits alleging efforts to manipulate interest rates and the currency markets.

Given the government’s responsibilities, Trump’s regulators face a fraught and sensitive task of proving their independence and fair-mindedness when it comes to Deutsche Bank. Prior White Houses have taken great care to avoid interfering in Justice Department investigations and prosecutions. Despite his early support for Trump’s campaign and their personal friendship, Sessions has said he will not recuse himself from any Justice Department probe into the president, the Trump family or any of his political advisors.

The relationship Deutsche Bank has with the president cuts two ways, defense lawyers and former prosecutors say. It might be advantageous to be in business with a president who appears to regard the office as an opportunity for brand enhancement and enrichment. The bank might hope for leniency from the president’s regulators because of its business ties to him.

There are signs that Deutsche’s new management is not eager to continue serving as Trump’s financier. Trump sued the bank in 2008 to avoid paying a loan for a Trump hotel in Chicago. The parties settled, but lawsuits have a way of fraying friendships. A former top executive at Deutsche Bank says the current top management does not like the real estate developer. “They don’t want to do business with him anymore,” he says.

Given the tension, Deutsche may worry about the mercurial president. The bank’s concern is that the Trump administration could use its regulatory powers to secure better business terms. Nationalist strains course through his inner circle. A top Trump economic advisor recently accused Germany of currency manipulation. Trump, some observers fear, may seek to boost American financial institutions over foreign ones like Deutsche.

In recent months, Deutsche has also sought to renegotiate its loans with Trump, according to a Bloomberg report, in an effort to reduce its exposure to the president. The bank hoped to eliminate the president’s personal guarantee on loans. But such a move would not eliminate the conflict of interest, since the president’s company, which Trump still owns, would remain on the hook to pay back the loans.

IMAGE: Deutsche Bank CEO John Cryan addresses the bank’s annual general meeting in Frankfurt, Germany, May 19, 2016. REUTERS/Kai Pfaffenbach 

Here’s Another Disgraceful Way Wells Fargo Took Advantage Of Its Customers

Here’s Another Disgraceful Way Wells Fargo Took Advantage Of Its Customers

Reprinted with permission from ProPublica.

Wells Fargo, the largest mortgage lender in the country, portrays itself as a stalwart bank that puts customers first. That reputation shattered in September, when it was fined $185 million for illegally opening as many as 2 million deposit and credit-card accounts without customers’ knowledge.

Now four former Wells Fargo employees in the Los Angeles region say the bank had another way of chiseling clients: Improperly charging them to extend their promised interest rate when their mortgage paperwork was delayed. The employees say the delays were usually the bank’s fault but that management forced them to blame the customers.

The new allegations could exacerbate the lingering damage to the bank’s reputation from the fictitious accounts scandal. Last week, Wells Fargo reported declining earnings. In the fourth quarter, new credit card applications tumbled 43 percent from a year earlier, while new checking accounts fell 40 percent.

“I believe the damage done to Wells Fargo mortgage customers in this case is much, much more egregious,” than from the sham accounts, a former Wells Fargo loan officer named Frank Chavez wrote in a November letter to Congress that has not previously been made public. “We are talking about millions of dollars, in just the Los Angeles area alone, which were wrongly paid by borrowers/customers instead of Wells Fargo.” Chavez, a 10-year Wells Fargo veteran, resigned from his job in the Beverly Hills private mortgage group last April. Chavez sent his letter to the Senate banking committee and the House financial services committee in November. He never got a reply.

Three other former employees of Wells Fargo’s residential mortgage business in the Los Angeles area confirmed Chavez’s account. Tom Swanson, the Wells Fargo executive in charge of the region, directed the policy, they say.

In response to ProPublica’s questions, Wells Fargo spokesman Tom Goyda wrote in an email, “We are reviewing these questions about the implementation of our mortgage rate-lock extension fee policies. Our goal is always to work efficiently, correctly and in the best interests of our customers and we will do a thorough evaluation to ensure that’s consistently true of the way we manage our rate-lock extensions.” Through the spokesman, Swanson declined a request for an interview.

Wells Fargo’s practice of shunting interest rate extension fees for which it was at fault onto the customer appears to have been limited to the Los Angeles region. Two of the former employees say other Wells Fargo employees from different regions told them the bank did not charge the extension fees to customers as a matter of routine.

Three of the former employees, who now work for other banks, say their new employers do not engage in such practices.

Here’s how the process works: A loan officer starts a loan application for a client. That entails gathering documents, such as tax returns and bank statements from the customer, as well as getting the title to the property. The loan officer then prepares a credit memo to submit the entire file to the processing department and underwriting department for review. The process should not take more than 60 or 90 days, depending on what kind of loan the customer sought. During this period, the bank allows customers to “lock in” the quoted interest rate on the mortgage, protecting them from rising rates. If the deadline is missed, and rates have gone up, the borrower can extend the initial low rate for a fee, typically about $1,000 to $1,500, depending on the size of the loan.

Wells Fargo’s policy is to pay extension fees when it’s at fault for delays, according to Goyda. Yet in the Los Angeles region, the former employees say, Wells Fargo made customers pay for its failures to meet deadlines. The former employees attributed the delays to the inexperience and low pay of the processing and underwriting staff. In addition, to keep costs down, the bank understaffed the offices, they say.

“The reason we were not closing on time was predominantly lender related,” said a former Wells Fargo employee. When a loan officer asked the bank to pick up the extension fee, “it didn’t make a difference if” the written request “was a one-liner or the next War and Peace,” said the former employee. “The answer was always the same: No. Declined. ‘Borrower paid,’ never ‘Lender paid.’”

Anticipating that it couldn’t close on time, the bank adopted a variety of strategies to shift responsibility to customers. The “most blatant methods of attempting to transfer blame onto customers for past and expected future delays,” Chavez wrote, included having loan processors flag “the file for ‘missing’ customer documentation or information that had already been provided by the borrower.” The customers would have to refile, blowing the deadline.

Sometimes loan officers would ask customers to submit extra documents that Wells Fargo did not need for its initial assessments, burdening them with paperwork to ensure they wouldn’t meet the deadline. On occasion, employees built in a cushion, quoting a higher fee at the beginning. That way, they didn’t have to go back to tell the customer about the extra fee at the end.

One employee says he complained to Swanson’s boss about the situation but upper management referred the problem back to Swanson. The employee’s immediate manager then scolded him.

Swanson told co-workers that he personally took a hit if the bank paid out too many extension fees, two of the former employees recall. “Swanson would be very upfront that his bonus is tied to extension fees,” says one. The other former loan officer says, “During meetings, the branch was told extensions were costing the branch money.”

Swanson, an 18 year veteran of the bank, has faced criticism before that he sought profits at the expense of customers. In 2005, customers in Los Angeles sued Wells Fargo for racial discrimination. They contended that Swanson prohibited loan officers in minority neighborhoods from using a software program that gave them the ability to offer borrowers discounted fees. He allowed loan officers to use the same program in white neighborhoods, where residents paid lower fees as a result. Believing that minority borrowers did not shop around for mortgages, Swanson contended Wells Fargo did not need to offer the discounts in their neighborhoods since the bank faced less competition, according to witness testimony at trial.

In 2011, a Los Angeles Superior Court jury found that Wells Fargo intentionally discriminated on a portion of the loans in question and awarded plaintiffs $3.5 million, a decision that was upheld on appeal. With interest, the payout rose to just under $6 million. “The verdict in the case was not in line with the law and the facts, and there was no evidence that class members paid a higher price than other similarly situated borrowers,” Goyda said. Nevertheless, he added, the bank decided to pay the judgment rather than pursue additional appeals.

“Swanson runs that place,” said Barry Cappello, who co-tried the case against Wells Fargo with his partner Leila Noël. “He is the man. They do what he wants done. Despite the lawsuit and the millions they paid out, the guy is still there.”

Shifting extension fees onto borrowers may amount to just poor customer service, rather than a regulatory violation. Still, if it is widespread and systematic, the bank could be running afoul of banking laws that ban unfair or deceptive practices, regulators say.

For a couple of years around 2011, when Wells Fargo was originating a heavy volume of mortgages, the bank made a decision to pay all the extension fees, spokesman Goyda said. But, around 2014, it reverted back to its traditional policy of paying fees only when it’s at fault.

Chavez says that the problems began in earnest that year and persisted as of the time he left last April. The precise value of the improperly assigned extension fees in the Los Angeles region is unclear. Chavez and another employee estimate they ran into the millions. One of the former employees estimates a quarter of the mortgages at his branch had to be extended. By that measure, if a loan officer did $100 million in loans in a year, those mortgages would rack up about $62,000 in extension fees. The Beverly Hills office alone did around $800 million to $1 billion in underlying mortgages, generating at least half a million dollars in extension fees, the employee estimates. Swanson’s region has 19 branches.

Some customers resented having to pay the extension fees, and took their business elsewhere. After one mortgage application faced a delay, a Wells Fargo assistant vice president in Brentwood named Joshua Oleesky called to tell the customer that he had to pay an interest rate lock extension fee. The customer balked, blaming the bank for missing the deadline. Oleesky “started interrogating me on why Wells Fargo was responsible for the delay,” the customer wrote in a June 29, 2015, letter of complaint to Michael Heid, then president of Wells Fargo Home Lending. (He cc’d John Stumpf, Wells Fargo’s former CEO, who was ousted after the fictitious accounts scandal.) The customer went with another bank for the mortgage. Through the Wells Fargo spokesman, Oleesky declined comment.

According to the customer, Heid didn’t answer the letter.

IMAGE: A Wells Fargo branch is seen in the Chicago suburb of Evanston, Illinois, February 10, 2015. REUTERS/Jim Young

Puerto Rico Turns To Lewandowski To Lobby Trump On Debt

Puerto Rico Turns To Lewandowski To Lobby Trump On Debt

Reprinted with permission from ProPublica.

The hedge funds and insurance companies that want financially strapped Puerto Rico to pay them back in full may have found a new ally: Donald Trump’s former campaign manager, Corey Lewandowski.

The newly elected governor of Puerto Rico is in discussions to hire Lewandowski’s lobbying firm, at a time when the island’s creditors are hoping that the incoming Trump administration will be more sympathetic to them than the Obama administration has been. Such a shift would add to concerns that the new administration’s tight ties to banks and investment funds could tilt its policies in favor of Wall Street.

“There’s no contract, but we have active talks” with the governor, says Barry Bennett, who recently formed Avenue Strategies with Lewandowski.

The governor wants Avenue to lobby the new administration regarding Puerto Rico’s fiscal crisis, though it’s too early to say exactly what steps the firm would push for, Bennett said. He denied a report by Caribbean Business that Lewandowski recently arranged a get-together between the new governor, Ricardo Rosselló, and Trump. “There was no meeting with Trump,” he said. A spokesman for Rosselló confirmed that the governor did not meet with Trump.

A Trump transition team spokeswoman did not respond to requests for comment.

Lewandowski gained a bulldog reputation as Trump’s campaign manager. He was charged with battery for grabbing Michelle Fields, a Breitbart News reporter, after a Trump press conference. Prosecutors later dropped the charges. After being ousted from the campaign, but while receiving severance pay, Lewandowski became a CNN commenter and remained close with the incoming president.

Mired in a yearslong depression, Puerto Rico faces a fiscal crisis, with over $72 billion in debt that it cannot afford, and about $43 billion in unfunded pension liabilities. Its creditors consist mainly of insurance companies that specialize in backing municipal debt; hedge funds, which mainly have positions in the island’s general obligation bonds; and mutual funds, which own bonds backed by sales taxes.

Puerto Rico, a commonwealth, is a territory of the United States. Puerto Ricans do not vote in presidential elections but send a delegate to Congress who has limited voting rights. For years, Puerto Rico’s creditors have battled the island’s government and each other in a high stakes negotiating and lobbying campaign. Now, they’re seeking to salvage their investment as Puerto Rico’s financial picture worsens.

Until last year, under its constitution, Puerto Rico could not file for bankruptcy, unlike states and municipalities in the rest of the United States. Last June, Congress passed a law, called Promesa, allowing Puerto Rico to file for a type of bankruptcy if necessary. Bondholders could lose out in a bankruptcy, as the island’s entire debt would be restructured.

Promesa allowed Puerto Rico to temporarily stop making payments on its general obligation debts, primarily held by hedge funds and other financial companies. The island continued to make payments on the debt backed by sales taxes, known as Cofina. Since the general obligation debt is protected by the Puerto Rico constitution, the general obligation holders argue that it’s illegal to allow payment to the Cofina debtholders.

The law also established an oversight board to oversee Puerto Rico’s affairs, putting the island under more direct federal rule. The board is made up of appointees chosen by both American political parties and has a Republican majority.

During the campaign for governor, Rosselló, a 37-year-old biomedical engineer and neurobiologist and son of a former governor, called for negotiations with creditors. A member of the New Progressive party, which advocates Puerto Rican statehood, Rosselló claimed during the campaign that Puerto Rico could pay its debts in full. Creditors view him as more sympathetic than the outgoing governor, Alejandro García Padilla, who refused to negotiate with them. Rosselló is expected to hold talks with creditors through the first part of the year, seeking to strike a deal and avoid bankruptcy, according to people familiar with the matter.

Hedge funds with investments in Puerto Rican bonds include Aurelius Capital Management and Monarch Alternative Capital. John Paulson, the hedge fund manager who backed Trump’s campaign, owned Puerto Rico debt at one point and has substantial real estate on the island. He appears not to own bonds anymore, according to people involved in the negotiations. A spokesperson for Paulson did not respond to a request for comment.

Trump has appointed several high-profile investors and Goldman Sachs bankers to key cabinet and advisory positions. Trump’s choice for treasury secretary, Steven Mnuchin, is himself a hedge fund manager, though he does not appear to have investments in Puerto Rico debt.

The Obama administration pushed for the Promesa law and antagonized the bondholders, particularly the hedge funds. They contend that the outgoing administration ignored their financial interests in favor of seeking to protect the pensions of public employees and create a model for other municipalities facing similar fiscal crises.

Now with a new governor and a new American president, some of the bondholders believe their negotiating position has improved. Trump “can’t be as bad as what we had,” says one bondholder, who requested anonymity. “I don’t believe they will hold Puerto Rico hostage to try to create a mold that they hope will someday help with Chicago, New Jersey or wherever.”

Update, Jan. 12, 2017: After this story was published, a spokesman for Rosselló confirmed that the governor did not meet with Trump.

IMAGE: Corey Lewandowski, campaign manager for Republican U.S. presidential candidate Donald Trump, exits following a meeting of Trump’s national finance team at the Four Seasons Hotel in New York City, U.S. on June 9, 2016.  REUTERS/Brendan McDermid/File Photo

Trump’s Treasury Secretary Pick Is A Very ‘Lucky’ Man

Trump’s Treasury Secretary Pick Is A Very ‘Lucky’ Man

Reprinted with permission from ProPublica. 

Steven Mnuchin has made a career out of being lucky.

The former Goldman Sachs banker nominated to become Donald Trump’s treasury secretary had the perspicacity to purchase a collapsed subprime mortgage lender soon after the financial crisis, getting a sweet deal from the Federal Deposit Insurance Corporation. Now, if he’s confirmed, he will likely be able to take advantage of a tax perk given to government officials.

Mnuchin was born into a family of Wall Street royalty. His father was an investment banker at Goldman Sachs for 30 years, serving in top management. He and his brother landed at the powerful firm, too. After making millions in mortgage trading, Mnuchin struck out on his own, creating a hedge fund and building a record of smart and well-timed investment moves.

He dodged disaster when he inherited his mother’s portfolio. She was a longtime investor with Bernie Madoff, the largest Ponzi schemer in American history. After she died in early 2005, Mnuchin and his brother quickly liquidated her investments, making $3.2 million. The Madoff trustee, Irving Picard, sued to retrieve the money from the Mnuchins, as he did from other Ponzi scheme winners, contending that they were fake gains. A court ruled that Picard could only claw back money from those who had cashed out within two years before the collapse. The Mnuchins, having pulled out roughly three years before, got to keep their Madoff money. That something was dodgy about Madoff was an open secret on Wall Street.

After the financial crisis, the FDIC seized IndyMac, whose irresponsible mortgage loans failed as the housing bubble burst. Desperate to offload the bank, the FDIC subsidized the takeover by sheltering Mnuchin and his team of investors, including hedge fund managers John Paulson and George Soros, from losses. The investors injected $1.55 billion into the bank in 2009. They changed the name to OneWest and five years later, sold it to lender CIT for more than $3 billion, doubling their investment.

Mnuchin also benefited from what may have been a nice fluke a little later. He served as the co-chair of Relativity Media, a film and entertainment company, for about eight months until May 2015. Relativity filed for Chapter 11 bankruptcy in July 2015. Just before it collapsed, Relativity paid off a $50 million loan to Mnuchin’s bank, OneWest, in full.

Paying off one creditor in full just before filing for bankruptcy looks questionable, especially when there is the appearance that such a deal isn’t at arm’s length. One Relativity investor cried fraud and sued in 2015, contending that Relativity used its loans for improper purposes, including to make payments to OneWest. Mnuchin’s lawyer called the claims preposterous and the suit was initially thrown out. A lawyer for the investor, a film financing company, told the Los Angeles Times that it planned to refile.

Mnuchin was blessed again when the Obama administration did not crack down harder on foreclosure abuses. OneWest got a reputation among activists and borrowers as one of the more feckless banks, accused of throwing borrowers out of their homes, denying mortgage modifications, and targeting the elderly with reverse mortgages. The Office of the Comptroller of the Currency settled with OneWest, and over a dozen other banks and mortgage servicers, over its robosigning practices in 2011. That regulatory settlement, called the Independent Foreclosure Review, was an utter debacle, as ProPublica has detailed. Regulators set up a process for consultants to review how the servicers had handled modification reviews, which meant in effect that the banks were monitoring themselves. The regulators did not punish any top financial executives over foreclosure mistreatment. In a happy circumstance for Mnuchin, the Department of Justice and state attorneys general did not include OneWest in their subsequent and more punitive settlement over foreclosure bad behavior.

Mnuchin was fortunate once more to pick the right candidate, Trump, early; most of Wall Street assumed that Hillary Clinton would win and bet accordingly with its political donations.

What good happenstance, then, that Trump didn’t mean what he said about Wall Street on the campaign trail.

On the stump, Trump said, “We will never be able to fix a rigged system by counting on the people who rigged it in the first place.” He attacked Goldman Sachs by name, saying that the bank “owns” Ted Cruz, whose wife worked at the firm. “I know the guys at Goldman Sachs,” he said, “They have total, total control over [Cruz]. Just like they have total control over Hillary Clinton.” Trump put an image of Goldman CEO and chairman Lloyd Blankfein, along with other Jewish figures in finance like George Soros and Janet Yellen, in a commercial late in the campaign that was widely decried as anti-Semitic.

Trump did not feel such a strong antipathy for Goldman that he passed over a firm veteran to be his treasury secretary.

Mnuchin still owned $97 million of CIT stock as of last February. The Treasury Department will likely require him to sell those shares, since it poses a conflict of interest for the treasury secretary to own a stake in a financial institution. But therein lies a final good break for Mnuchin: According to a provision of the tax code, he can defer taxes, as long as he complies with certain conditions. That benefit, available to all officials who are required to sell investments upon taking a government job, could be worth millions to Mnuchin.

If you have any information on Trump’s business or his incoming administration, please contact Jesse Eisinger at jesse@propublica.org.

IMAGE: Steven Mnuchin, U.S. President-elect Donald Trump’s reported choice for U.S. Treasury Secretary, speaks to members of the news media upon his arrival at Trump Tower in New York, U.S. November 30, 2016. REUTERS/Mike Segar

Swamp-Dweller: Trump’s Financial Policy Advisor A Longtime Lobbyist

Swamp-Dweller: Trump’s Financial Policy Advisor A Longtime Lobbyist

Reprinted with permission from ProPublica.

President-elect Donald Trump’s transition-team adviser on financial policies and appointments, Paul Atkins, has been depicted as an ideological advocate of small government. But the ways that the Trump administration and Congressional Republicans are likely to approach financial deregulation could serve Atkins’ wallet as well as his political agenda. Like Trump himself, Atkins himself faces potential conflicts between his business dealings and his public role.

In 2009, a year after he finished his term as a Republican member of the Securities and Exchange Commission, Atkins formed Patomak Global Partners, a consulting firm headquartered on 17th Street, nestled blocks from the Hay-Adams Hotel and the south lawn of the White House. While Trump promised to “drain the swamp” of Washington, Atkins’ environs could not get any swampier. Patomak’s president is Daniel Gallagher, also a right-leaning former SEC commissioner who might be a candidate for SEC chairman under Trump. Former high-level government officials populate Patomak’s ranks.

Patomak has thrived as financial firms tried to navigate the new world of post-crisis regulations. Patomak and its counterparts, like Promontory Financial Group, are not technically lobbyists, but they exploit their connections to regulators to help their clients — banks and other financial institutions — navigate the rules. (Such consulting firms say they help clients comply with, not circumvent, the rules. A Patomak spokeswoman did not respond to a request for comment.)

The firms stand as emblems of the Washington revolving door. Banks pay a premium to former high-level regulators, valuing them for their contacts at the regulatory agencies. Stacked with Republicans, Patomak is well positioned to benefit from the new power structure in Washington. “They have better lines of communications with those in power. They are better able to see and understand what is coming down the pike,” says one former high-ranking regulator who now works for a hedge fund.

Under a court order last month, Atkins and his firm are now monitoring Deutsche Bank’s agreement with the Commodities Futures Trading Commission to properly oversee and disclose its derivatives trading. Separately, Deutsche Bank is negotiating with the Department of Justice over the size of its fine to settle mortgage related misdeeds. Donald Trump has outstanding loans from Deutsche Bank. These inter-connections raise a host of conflict of interest issues. Will Patomak monitor Deutsche Bank vigilantly? Will financial regulators, perhaps appointed by Trump on Atkins’ recommendation, be inclined to soften their regulatory stance on Deutsche Bank in exchange for business favors to the Trump empire?

Wall Street is thrilled about the incoming Trump administration. Bank stocks are soaring. Atkins, who is overseeing the appointees to the independent financial regulators like the SEC and the Federal Deposit Insurance Corporation, will be able to help shape the Trump Administration approach to financial regulation. But just what does that vision entail? Or, among the disparate groups vying for influence, whose ideas will win out?

There seem to be three tribes in the Trump financial regulatory coalition: ideologues, Wall Streeters and populists.

Atkins belongs to the first tribe. “I think of him as more libertarian than conservative,” says Simon Lorne, the former general counsel for the SEC, who worked with Atkins in the Clinton Administration.

In testimony last year to the House Financial Services Committee, Atkins opened by approvingly quoting Friedrich Hayek, the Austrian economist and philosopher beloved by libertarians. Hayek, Atkins explained, identified the “fatal conceit”: the idea that “man is able to shape the world around him according to his wishes.”

Governments, in Atkins’ view, share this hubristic notion. When they try to corral capital markets to prevent exploitative or risky behavior, they end up hurting the economy. Since the financial crisis, Atkins has been a part of the steady assault on Dodd Frank.

“The real tragedy — or inconvenient truth — behind Dodd-Frank and the hundreds of other rules flowing from Washington every year is that consumers, investors, and small business are harmed the most,” he told Congress in May.

But as the existence of Patomak demonstrates, even ideologues find the regulatory state lucrative.

Meanwhile, the Wall Street crowd appears to have a seat at the table. Steve Mnuchin, the former Goldman Sachs partner who was the Trump campaign’s national finance chairman, is a possible Treasury secretary.

The third tribe, in theory, is the populists. Trump campaigned with a populist message but they have no representatives on regulatory transition team or among the rumored appointees. Steve Bannon, Trump’s chief political strategist and a former Goldman Sachs partner, has criticized the 2008 bank bail-out, and the Republican platform called for breaking up the big banks. But few expect anything resembling that.

Experts say the GOP isn’t likely to repeal Dodd Frank wholesale. Instead, they will likely chip away at it, opening up loopholes. Some changes will come from Congress, others from inside the regulatory bodies themselves. Many “elements can be dismantled in back rooms,” says Marcus Stanley, policy director of the consumer group Americans for Financial Reform.

Instead of shuttering the Consumer Financial Protection Bureau, the GOP-controlled Congress may change its leadership structure, shift its source of funding, and shave its budget. Instead of repealing the Volcker Rule, which prohibits banks from trading for their own account, regulators may widen the number of trades that fall outside the definition. Legislators have floated proposals to loosen derivatives trading rules. They aspire to weaken the Financial Stability Oversight Council. Congress will likely continue to trim the budgets for the SEC and the CFTC and reverse rules extending fiduciary standards to new classes of financial advisors.

Such moves diminish Republican vulnerability to Democratic attacks that a repeal of Dodd Frank is a gift to Wall Street. Maintaining a sprawling kudzu of arcane rules and regulations preserves the necessity of specialists in the art of navigating the bramble of the swamp. Including firms like Patomak.

IMAGE: U.S. Securities and Exchange Commissioner Paul Atkins speaks during an interview with Reuters at the U.S. Embassy in central London March 10, 2008. REUTERS/Alessia Pierdomenico/File Photo

Why Freddie Mac Resisted Refis

by Jesse Eisinger, ProPublica.

Freddie Mac, the taxpayer-owned mortgage giant, made it harder for millions of Americans to refinance their high-interest-rate mortgages for fear it would cut into company profits, present and former Freddie Mac officials disclosed in recent interviews.

In closed-door meetings, two Republican-leaning board members and at least one executive resisted a mass refi policy for an additional reason, according to the interviews: They regarded it as a backdoor economic stimulus.

Freddie’s policy was financially brutal: During the worst years of the Great Recession, when homeowners most needed the savings they could have gotten from refinancing to lower interest rates, Freddie helped keep millions of borrowers locked in high-interest-rate mortgages.

A more aggressive refi program by both Freddie and its sister company Fannie Mae would have helped an additional nine million homeowners to refinance, saving them nearly $75 billion in interest payments to date, Columbia University housing economist Christopher Mayer estimates. In addition, it would have prevented hundreds of thousands of delinquencies and foreclosures, he says.

Freddie’s resistance to refis highlights a central conflict of interest that plagues both Freddie and Fannie. That conflict is even more pronounced now that they are owned by taxpayers. The companies, which own or back about 60 percent of U.S. home mortgages, have a mandate to help expand homeownership and also to generate profits. These goals can work at cross purposes.

Freddie and Fannie maintained and erected barriers to refinancings when the Obama administration launched a program in early 2009 specifically designed to make refinancing more accessible — the Home Affordable Refinance Program, or HARP. Freddie continued to hinder refinancings through a late 2011 relaunch of HARP designed to further slash refi costs and paperwork. At that point, Fannie began opening its gates more widely, but Freddie still kept barriers in place.

Only in the last few months, under a new chief executive, has Freddie loosened many of its restrictions on refinancing.

“Almost immediately after taxpayers bailed them out, Fannie and Freddie imposed unprecedented restrictions on refinancing, preventing millions of people from saving money on their mortgages and leaving hundreds of thousands of people to lose their homes unnecessarily,” says Mayer. Then after the 2011 HARP relaunch, “Freddie was worse” than Fannie, he said.

The Internal Debate

Now, interviews with former board members and an executive have revealed two reasons why Freddie dragged its feet.

According to interviews, these officials feared that mass refinancing would hurt the company’s bottom line and therefore its ability to repay taxpayers, who had bailed out Freddie and Fannie in 2008 to the current tune of almost $142 billion. Fears that borrowers who got refis would suffer high rates of default anyway, costing Freddie, have not been borne out.

Internally, Freddie debated its compliance with HARP for years. Robert Glauber, who left Freddie’s board in March, contended in board meetings that aspects of the refinancing program were “designed to be a stimulus” for the economy, said John Koskinen, who served as Freddie Mac’s chairman from 2008 to 2011, during which time he also served briefly as its interim chief executive.

Glauber, director Linda Bammann and head of risk management Paige Wisdom resisted mass refis. One executive viewed their objections as colored by partisan unwillingness to help the economy recover, something that would benefit President Obama.

But Koskinen did not regard the discussion as partisan. “I don’t think we ever had a discussion of whether this was good for a Democratic administration.”

Glauber was a Republican appointee to the Treasury Department under President George H. W. Bush and has had a career in various Wall Street roles. In a brief email to ProPublica, he disputed a quotation attributed to him but did not comment on the substance of the internal debates. He wrote that “it is an outrage that what claim to be confidential discussions in the board room are aired in your publication.”

Bammann, who donated $250 to the National Republican Congressional Committee this year, declined to comment. Wisdom did not respond to requests for comment.

Freddie Mac declined to make an executive available. The company is “always trying to find a balance to stimulate borrowing on responsible terms at prices that protect us from risk,” a spokesman said. The new CEO, Donald Layton, has made it clear that making changes to the company’s refi program is “a major priority,” the spokesman said. And he pointed out that Freddie has streamlined its refi process outside of the HARP program as well.

The spokesman declined to comment on Freddie’s internal discussions.

HARP was intended to lower barriers to refinancing for borrowers, especially for those who have high loan balances or owe more than their homes are worth, known as being underwater. But HARP has disappointed in part because of Freddie and Fannie’s restrictive refi rules.

When the program was overhauled late last year, Freddie retained more restrictions than Fannie, puzzling many housing experts.

Still, after the HARP overhaul, refis have risen. Freddie Mac has done more than 284,000 HARP refis this year through August, compared with 185,000 for all of last year. Fannie has done 334,000 in the same period, compared with 215,000 last year. In all, the two companies have done more than 1.6 million refis under the program. The administration’s initial goal was to help four to five million.

Concerns about providing a stimulus were not the only reason for Freddie’s restrictions. Several company executives and board members worried that doing mass refis would hurt Freddie Mac’s bottom line.

To appreciate this concern, it’s crucial to understand Freddie’s and Fannie’s business. The companies are two-headed beasts: One part is an insurance company with a public mission to help the housing market and the other is an investment fund that generates profits by trading mortgage investments. The investment side existed originally to keep the mortgage securities markets flowing. But as the portfolios grew in the years leading up to the financial crisis, the tail began to wag the dog. The huge profits from the portfolios inflated executives’ pay packages and began to overshadow the public mission of helping homeowners, critics say.

Refinancings can hurt the value of those portfolios. When a new, lower-rate mortgage is issued, the old loan is paid off. The ultimate backer of that original loan — in this case Freddie or Fannie — takes a loss because the loan was “pre-paid,” meaning it was paid off earlier than expected. Mortgage securities make money from interest rates paid over time, so they decline in value if the flow of interest payments gets cut off, such as when a refi allows the original loan to get paid off early.

Glauber was concerned about Freddie incurring such losses, because taxpayers were ultimately on the hook. “Bob’s position would have been if it has a cost, it is not consistent with conservatorship,” Koskinen said.

Bammann, a former executive of JPMorgan Chase, and Wisdom voiced similar objections. Wisdom criticized the refi program, saying that it was “policy, not business,” according to the executive.

Board member Nicolas Retsinas, who served in various housing policy positions for the Clinton administration, argued consistently for an expansive refinancing policy, according to people familiar with the meetings. He argued that in calculating the costs of the refi program, Freddie should take into account the benefit from lowering defaults and foreclosures and the improved housing market and stronger economy that would come from refinancings.

Retsinas declined to comment.

Koskinen, a Democrat who served in the Clinton administration, said it was prudent for the board to discuss the costs of a refi program. “The board’s view was you could decide to categorize it or ignore it but couldn’t say it didn’t exist. The intellectually honest thing was to say, ‘How large was that cost?'” he said.

Freddie Frustrates Its Regulator

Early in the Great Recession, support for a mass refi program was bipartisan. Refis help borrowers who are current on their loans, scoring them prevailing rates.

Columbia economist Glenn Hubbard, now an economic advisor to Republican presidential nominee Mitt Romney, co-authored op-eds in the Wall Street Journal and later in The New York Times with his colleague Mayer, proposing a mass refi program. Many congressional Republicans supported it.

But The Wall Street Journaleditorialized against it in February 2009, arguing a mass refi program amounted to undue government interference with the marketplace and would cause huge losses for taxpayers. Republicans turned against it.

The Obama administration and the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, didn’t fix HARP for years.

Under conservatorship, the FHFA has the responsibility to regulate the companies and to approve their major business decisions. Ed DeMarco, the acting head of the agency, has become a political lightning rod, criticized for having been too timid in helping the housing market. Critics contend he underestimated how much such an overall improvement would eventually help Fannie and Freddie’s bottom lines.

At the same time, DeMarco has been frustrated by Freddie Mac, according to people who are familiar with his tenure.

“Freddie is the party of ‘no.’ Fannie is the party of ‘let’s make it work,'” said a person familiar with DeMarco and the FHFA.

The FHFA was frustrated when Freddie Mac announced its guidelines in November 2011 because they restricted refis more tightly than Fannie’s did.

One example: Freddie was not going to allow certain well-situated borrowers into HARP, borrowers with a “loan-to-value” ratio of 80 or below. In other words, if a borrower had a $100,000 home and had a mortgage loan of $80,000 or less, he or she would not be eligible.

That wasn’t the only restriction. Freddie sometimes required properties to be re-appraised, which added cost and delay. And it hindered the ability for borrowers to get a refi from a new bank rather than from the one that had given them the original loan. “We were adding barriers to the homeowner,” says the Freddie executive.

Freddie’s risk management operation, the division in charge of making sure Freddie doesn’t take decisions likely to incur heavy losses, was particularly active in raising concerns over allowing more refis. For example, when Freddie insures a mortgage, it retains the right to void its guarantee and force the bank that made the loan to be responsible for it under certain circumstances, such as if the bank had done poor underwriting and the borrower’s income was misrepresented. Facilitating refis under HARP could require giving up those rights. Wisdom, the risk officer, argued that Freddie should not give up such rights lightly, because surrendering them could cost Freddie dearly.

But since many borrowers on these Freddie-backed loans had been making regular payments for a number of years, others argued there would likely be only a relatively small number of cases in which Freddie would need to force banks to take back loans. Thus, Freddie wouldn’t be giving up anything of much value.

Freddie Mac produced a memo in the fall of 2011, which was described to ProPublica, estimating that HARP would cause hundreds of millions of dollars in losses. The memo estimated big losses on the portfolio as well as from giving up the rights to return the loans. It minimized the benefits to Freddie’s insurance business from an improved housing market and improved economy. It also minimized the costs to the company of trapping homeowners in mortgages with interest rates so high they would eventually default.

That analysis appears to have been overly cautious. A recent New York Federal Reserve study estimated how much refinancings can help reduce future defaults and found that the benefits were greater than expected. “We were too conservative and that’s been subsequently borne out,” says the Freddie executive.

DeMarco has said he instructed Freddie and Fannie not to take into consideration portfolio losses. In a letter to Sen. Robert Menendez (D-NJ) in May, DeMarco wrote that “FHFA specifically directed both [Fannie and Freddie] to exclude from consideration changes in their own investment income as part of the HARP evaluation process.”

The existence of the memo raises a question of whether Freddie ignored that instruction from its regulator. It also raises the question of why FHFA did not act immediately to prevent Freddie from imposing its tighter rules.

DeMarco and the FHFA did not respond to requests for comment.

Freddie’s 80 percent loan-to-value barrier had spillover effects. Mortgage experts say it led banks to reject out of hand borrowers who were close to that threshold. If a borrower initially appeared to qualify for a refi, but then the appraisal of the home pushed him below the barrier, Freddie would reject the refi and the mortgage company would have wasted time and money. So banks avoided a wide swath of homeowners whose loan-to-value ratio was near 80 percent.

At the FHFA, “nobody was happy with Freddie under 80 percent but we decided to deal with it later. And we dealt with it,” says a person familiar with the FHFA’s efforts.

Today, more refis are being done under HARP and the barriers at Freddie have started to come down. The new CEO, Donald Layton, deserves some credit, says the Freddie executive: “Don made important changes in the program and is willing to override narrow risk management. He took a broader view of the benefits and wasn’t focused wholly on the costs.”

 

Finders Weepers: Early Bain Disputes Cast New Light on Its Business

Finders Weepers: Early Bain Disputes Cast New Light on Its Business

by Jesse Eisinger, ProPublica.

It was one of the “quickest big hits in Wall Street history,” as the Wall Street Journal put it at the time.

In 1996, an investment group including Bain Capital, the firm then run by Republican presidential candidate Mitt Romney, sold the consumer credit information business Experian to a British retailer, making a $500 million profit. Bain and the other investors who reaped that windfall had closed the acquisition a mere seven weeks earlier, stunning the investing world.

Another party was stunned by the deal, but for a different reason. James McCall Springer believed that he had brought the idea to buy Experian to Bain in the first place.

Springer sued to get what he contended was his rightful finder’s fee, eventually settling. And he wasn’t the only one. At least three other parties had similar legal disputes with Bain during the early 1990s, when Romney led the company, raising questions of how rough-and-tumble the company could be. The suits also shed light on how Bain actually operated, complicating one of the main narratives Bain, the Romney campaign, and many commentators have used to describe the private equity firm.

The Romney campaign declined to respond to a request for comment on the lawsuits. Bain did not respond to a request for comment. And, of course, disputes about finder’s fees are not uncommon; large sums are at stake for little work, a situation ripe for claims of aggrandized roles.

Most accounts of Bain characterize the firm as full of hard-working young men who sought to find troubled companies, invest in them and turn them around. Romney’s presidential campaign website says that “under his leadership, Bain Capital helped to launch or rebuild over one hundred companies.” Romney campaigns have embraced his reputation as a turnaround artist, as he has run on his private equity record and his overhaul of the 2002 Salt Lake City Olympics. He even titled his 2004 book “Turnaround,” a memoir and account of the 2002 Salt Lake City Olympics.

But as the disputes illuminate, the reality of Bain’s business in the early years is more complicated.

Often, Bain wasn’t finding companies on its own. Finders and middlemen were more common in the early days of private equity than they are now. Smaller firms would seek out acquisition targets and bring them to the big buyout firms.

More significantly, Romney’s firm wasn’t always looking for startups or troubled companies that it could turn around.

Private equity companies conduct a variety of transactions other than buying startups with growth potential or troubled firms ripe for a turnaround. Some seek out family-run operations under the theory that those typically have a lot of fat to cut. Some like “roll-ups,” buying up a bunch of small operations in one industry and combining them into a powerhouse with economies of scale. Firms buy divisions of large corporations that are trying to streamline their operations. Some acquisitions fit more than one of these descriptions. The constant is debt, and plenty of it. Private equity firms use such borrowed money to maximize their gains.

The Romney campaign says Bain did various types of deals. And it celebrates that Bain helped launch or rebuild some American corporate stalwarts, like Staples, Bright Horizons and Sports Authority.

Yet in addition, under Romney’s tenure, Bain often sought out solid businesses that didn’t need to be turned around. The reason: Such companies could operate under the burden of the enormous debt that Bain would layer on them.

“They always told us day one: They wanted profitable companies that are doing OK, and they pay what they needed to pay,” says Phillip Roman, who heads up an eponymous mergers and acquisitions firm that was involved in a legal dispute with Bain in the 1990s similar to McCall Springer’s. “There are companies that like turnarounds,” referring to other private equity firms. “That’s another business” from the one Bain was in.

Bain in the 1990s was “doing more [of] the usual leveraged buyout: Buy with a lot of debt, try to increase earnings and sell as soon as possible,” says Ludovic Phalippou, an expert on private equity at the University of Oxford in England. The firm was seeking “mature companies with high cash flow,” he says, with sufficiently stable earnings “to be able to leverage a lot.”

Financial data on many of Bain’s acquisitions are not available, since they were private transactions. But there are several examples of companies that Bain took over that were established and seem to have had enough revenue to support leverage. Bain and another firm bought what they would name Masland Holdings, a maker of automobile carpeting and insulation, from Burlington Industries in 1991. Masland had $305 million in sales that year, according to Dun & Bradstreet. The firms took it public in 1993. Duane Reade was a successful family-run business with revenue of $225 million when Bain bought it in 1992, according to the Wall Street Journal, and sold it five years later.

Early on, in 1986, Bain formed Accuride to purchase the wheel-making division of Firestone Tire & Rubber, with some executives from the company. Bain structured the deal to have 40-to-1 leverage, according to the Los Angeles Times, meaning Bain and its co-investors put an enormous amount of debt on Accuride for every dollar they invested. Accuride had sales of $215 million in its fiscal 1986, according to the Wall Street Journal. Accuride was sold within a year and a half, earning Bain more than 20 times its original investment, according to the Times. (Bain revamped production and restructured executive compensation at the company, according to a case study by a Bain partner, cited by the Boston Globe.)

“I didn’t want to invest in start-ups where the success of the enterprise depended upon something that was out of our control,” Romney was quoted as saying in the Boston Globe in 2007.

The Wall Street Journal found that many of the businesses Bain bought went bust, even when Bain reaped big financial wins. The paper analyzed 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, finding that 22 percent either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested. An additional 8 percent ran into so much trouble that all of the money Bain invested was lost. But overall, the hits more than made up for the losses, and Bain recorded 50 percent to 80 percent annual gains in the period, the paper found.

For a private equity firm, choosing the right company to buy is critical, which is where firms such as McCall Springer came in.

In February 1996, Springer, who runs a small investment firm in Los Angeles, woke up to press accounts that Bain and another Boston-based private-equity company, Thomas H. Lee & Co., were in talks to acquire the business that today is known as Experian. Alarmed, he fired off a letter to Adam Kirsch, a managing director of Bain Capital. “As you are aware,” Springer wrote on Feb. 9, 1996, his firm “brought each of you the idea and reasons for acquiring TRW ISS/REDI,” as Experian was then called.

“We provided you detailed business and strategic plans, company organization and cost structures, management tendencies and requirements, competitive and customer market investigations, emerging market opportunities, new or improved product and service opportunities,” Springer wrote in a letter that is an exhibit in a legal fight from that time.

Springer followed up that on Feb. 12, with a second letter to top officials of Bain and Thomas H. Lee. The top addressee: Mitt Romney.

Springer reminded Bain, as well as others involved in the deal, that McCall Springer had written agreements with each party, which he claimed acknowledged that Springer had brought the idea to them a couple of years earlier.

Instead of paying up, Bain brought legal action against McCall Springer. Romney’s private equity firm sought a declaratory judgment, a legal strategy to seek a quick resolution of a matter, often in a jurisdiction of your choosing. McCall Springer countersued, alleging it was owed equity and management rights in the deal and seeking punitive damages. In the end, Bain entered into an undisclosed settlement.

During the period that Mitt Romney was actively running Bain during the 1990s, Bain had at least three other legal disputes that were similar to the fight with McCall Springer. In each case, a party claimed it was owed money for having brought Bain an idea for an acquisition. When Bain carried out the acquisition, the firm didn’t pay the contractually obligated fee, according to the claims.

Bain fought each in court, arguing that the agreements it had with the parties didn’t cover the specific circumstances of the deals.

The Experian deal was a headline grabbing success for Bain, which was formed in 1984. Great Universal Stores, the British retailer, agreed in November 1996 to buy Experian for $1.7 billion. Bain and Thomas H. Lee had agreed to pay just over $1 billion in February, but had only closed the deal in September.

Private equity firms often claim that they develop companies, helping them to grow more quickly and professionally. The added value that the private equity owners contributed to Experian in a mere seven weeks, however, was minimal.

Bain and Thomas H. Lee turned their $100 million investments into $300 million each, a spectacular return in such a short period. (The rest of the profit went to other investors, including Experian management and TRW for its remaining stake.)

Eventually, Bain settled with Springer. Brokers and finders learned to craft their agreements more stringently, they say. “If you don’t have a really good agreement, you will be eviscerated in some shape or form,” a person familiar with the dispute says.

Phillip Roman had a similar dispute with Bain in the early 1990s.

In September 1994, Phillip Roman & Co. took Bain to court in the Commonwealth of Massachusetts, filing a complaint for declaratory and injunctive relief. Roman claimed Bain had failed to pay it a finder’s fee of $4.3 million for Bain’s takeover of Weider Health and Fitness, a health food and fitness equipment business.

The M&A firm claimed in its suit that it had signed an agreement with Bain in 1990 and brought Weider to the attention of Bain partner Geoffrey Rehnert in January 1993. Bain eventually bought Weider for $390 million. The problem for Roman was that Bain had thrown it over for another finder firm, according to the complaint.

The firms settled the case in December of the same year.

Asked if he felt angry with Bain about the dispute, he said: “At that moment I did. Everybody feels that way when they think they’ve been screwed.”

But his firm worked with Bain subsequently on deals and received fees without issue. Today, “I have no ill feeling at all, not even close,” he says.

Roman added that he had great respect for Bain and its high standards. The companies the firm bought “had to be like nuns,” he said.

In a third case, in November 1992, John Ewing, who had a firm called J.G. Ewing & Associates, approached Bain to pitch it an acquisition of the engineering and design firm Professional Service Industries, Inc. The two sides made an agreement with each other.

Shortly after, PSI’s parent hired the investment bank PaineWebber to auction off the company.

About a year later, Bain bought PSI, but didn’t pay Ewing. Ewing read about the pending deal in the newspaper. His lawyer contacted Bain, arguing that the firm wouldn’t have known about the company if Ewing hadn’t introduced it to the private equity firm, and pointing out that the parties had an agreement with each other.

Bain partner Rehnert wrote to John Ewing, saying it wouldn’t pay the fee. Bain is “not willing to pay a fee to a broker when an investment bank has been engaged to conduct an auction since bringing such a deal to our attention creates no value,” the Bain partner wrote to Ewing, according to a letter from Ewing’s lawyer to Bain.

Bain sued Ewing in U.S District Court in Massachusetts, seeking declaratory judgment. Ewing countersued for $1.4 million. The case was dismissed voluntarily in February 1995, an outcome that generally indicates the parties settled.

In the final instance, the son of the owner of Anthony Crane, a crane company that Bain took over, claimed that he had brought Bain information that another crane company was willing to sell itself to Bain. He claimed a finder’s fee, which Bain disputed. That case too appears to have been settled.

Paul Kiel contributed to this story.