Remarks as prepared for delivery
Thank you for that kind introduction. We at the Justice Department’s Consumer Protection Branch are proud of work with the Consumer Federation of America (CFA). In recent years, we have made it a point to better communicate with consumer organizations, like CFA. Among other things, we have regular meetings where we exchange information, ideas, and – let’s be frank – some critiques. That communication is vital for us at the department as we try to figure out the best way for us to use our resources in addressing the many issues that consumers face.
I am pleased to be here with you today. I see this visit as part of the ongoing dialogue that we at the department want to have – really, needed to have – with consumer organizations, industry and other stakeholders concerned about consumer issues. Looking over the agenda of the conference, it is clear that such issues abound.
And we are only talking about financial services matters.
The variety, complexity and sheer number of financial services issues consumers confront can seem overwhelming. It is quite a challenge to sort through these issues in any meaningful way. That is why a conference like this one is so important.
No one here has a monopoly on creative solutions to the problems consumers face every day.
No one here can really identify all of the problems that consumers actually face today, let alone tomorrow.
Together, though, we can.
That is the real value of this conference. Share ideas – their successes and failures. Share information – look for trends. Share contacts – stay in touch.
All of this is to say that the biggest challenge that we have faced and that we will always face is trying to figure out what the biggest challenge really is. Where should we focus our resources? Where will we have the biggest impact? Where are we really needed?
We at the Consumer Protection Branch ask those questions every day. What I would like to do today is give you a sense of how we go about trying to answer them. I will do that in three stages.
First, you need to know what the Consumer Protection Branch is and what we do. Second, I will outline a few of the department’s civil cases that grew out of the recent financial crisis. And, third, I will describe some of the lessons we have learned from all of these cases and how we are, in response, changing the way we do business.
Let me start with the Consumer Protection Branch itself. We are an office of approximately 85 people right now, though we are growing. About half of us are Trial Attorneys. The other half is comprised of investigators, analysts, paralegals and administrative support. Although situated in the Department’s Civil Division, we do criminal and civil cases. Our work is nationwide. We also defend decisions, in court, of the government’s consumer protection agencies.
Our mandate is broad and varied. We do food and drug safety. We do financial fraud. We do consumer product safety. We even do odometer roll-back cases.
Our closest agency partners are the U.S. Food and Drug Administration (FDA), the Federal Trade Commission (FTC), and the Consumer Product Safety Commission (CPSC).
Just to give you a sense of the kinds of cases we do, here are some – but not all – of the trials we have scheduled beginning in January:
The largest Do Not Call case in the history of the program;
A criminal case against a medical device manufacturer and its CEO for selling an unapproved device; and
A criminal case against a debt relief company
To give you more of a sense of the kinds of cases we do – and to really highlight what consumers face every day – let me talk about a few more in depth: a food case; a telemarketing fraud case; and a series of dietary supplement cases.
I suspect that many of you know who Stuart Parnell is. For those of you who don’t, he ran a company called the Peanut Corporation of America (PCA). PCA, as it was known, made peanut butter, among other things, and sold it to food manufacturers all over the country. The problem was that there was salmonella in PCA’s peanut butter.
The principals of PCA, Stuart Parnell among them, knew of that problem. Tests of their product were coming back presumptively positive for pathogens. But, they sold the product anyway, shipping it out to their customers with falsified paperwork – called Certificates of Analysis – stating that the peanut butter was free of contaminants. They were putting people at risk every day, a risk that no consumer picking up a jar of peanut butter or a package of peanut butter crackers would be aware of, let alone would guard against. Ultimately, thousands of people were sickened in 46 states; nine died.
Stuart Parnell is in prison now. He was sentenced to 28 years.
I suspect that many of you order products online. I also suspect that many of you get hounded, once in a while, by those online retailers calling you to sell you more products. I doubt, however, that you’ve been threatened with deportation if you don’t pay for goods that you never ordered. But that’s what happened to the thousands of victims of Juan Alejandro Rodriguez Cuya.
Rodriguez Cuya ran a call center in Peru. People working for Rodriquez Cuya called Spanish-speaking consumers in the United States and claimed that they owed money for products they never ordered. The consumers were told that that, if they didn’t pay a “settlement fee,” they would face arrest, seizure of property and even deportation. Rodriguez Cuya was playing on the particular fears of a particular community. Victims were so afraid of these threats that many paid.
We arrested Rodriguez Cuya when he came into the United States for a visit. He will be here for a while. He is now serving a prison sentence of more than 17 years.
Many of you take some kind of dietary supplement. Am I right? A vitamin, a probiotic perhaps. I am assuming that you do so as part of your effort to lead a healthy lifestyle. I am also assuming that, when you choose a supplement, you want something that is natural. You likely go to a reputable retail store or pharmacy. Maybe you ask a salesperson for help.
Unfortunately, that may not be enough. A few weeks ago, in November, we announced a dietary supplement sweep. Over the course of the sweep – which we announced with the FDA, the FTC, the U.S. Postal Inspection Service, the Department of Defense and the U.S. Anti-Doping Agency – the government pursued civil and criminal cases against 117 individuals and entities.
Many of those cases involved dietary supplements that made unsupported treatment claims. Others involved dietary supplements whose labeling was false, incomplete, or misleading. At least one case involved allegations of outright fraud.
Some people taking these products got ill – very ill.
Let me read to you two emails that were included in an indictment against the maker of some of the best-selling, most popular workout supplements. A bit of context is in order. The supplements at issue were advertised as natural. They weren’t. They contained synthetic stimulants manufactured in Chinese chemical factories.
I quote from one internal email, in which defendants spoke about their product: “lol stuff is completely 100% synthethic [sic]”
And, as we allege, the defendants were shipping the product with false paperwork. The paper work was, among other things, Certificates of Analysis or COA’s, which were meant to certify what a product really is. Another email: “Please ship 6 Bromo by DHL to address we ship Geranium to. Please use fake COA.” This was an email about shipping instructions for an ingredient the defendants were testing.
I mention these cases just to give you an idea of what the Department’s Consumer Protection Branch generally pursues.
We do more. We – and by that I mean the Civil Division – were at the forefront of the matters the Department of Justice brought in response to the financial crisis. I note here three types of matters.
First, the record-breaking cases involving the packaging and sale of residential mortgage backed securities (RMBS). As you are likely aware – perhaps painfully so – RMBS was at the heart of the recent financial crisis. These securities, somewhat complex, are essentially bonds backed by packages of mortgages. The lust for these securities – selling them made a lot of money for a lot people – drove a corresponding lust for the mortgages that made them up. This lust drove financial institutions to originate more and more mortgages for more and more people until just about anyone could get a mortgage to buy just about any kind of house.
As we learned and should have known, this structure was bound to collapse. And collapse it did, causing a worldwide financial crisis that we are still struggling to fully pull out of.
As it turned out, to sell RMBS, financial institutions made numerous misrepresentations about what they were. Among these misrepresentations were statements about the value of the mortgages underlying the securities.
The department brought several civil cases to address those misrepresentations. The results were enforcement actions of staggering proportions: Bank of America paid $16.65 billion; JP Morgan paid $13 billion; Citigroup paid $7 billion. Those are just three examples. A total of about $37 billion. More than the GDP of Jordan.
The relevant point here is not the results. The point for today is the process. These cases began with subpoenas issued by the Civil Division in Washington. The subpoenas were issued pursuant to the Financial Institutions Reform, Recovery and Enforcement Act – FIRREA. We sent subpoenas to institutions that sold particular RMBS that failed miserably; we learned of those institutions in consultation with the SEC. The cases were investigated and brought by U.S. Attorney’s Offices nationwide, including those that were far from financial centers. Sacramento? I don’t think investment banking MBA’s are flocking to Sacramento.
It is hard to overstate the creativity of this effort. A loosely centralized effort, employing civil penalty statutory provisions, involving close cooperation with regulatory experts and leveraging resources from the entire country. Any one of those characteristics would have made the work unusual. Pulling it all together was almost unique.
I say almost because the Civil Division has shown the wherewithal to use this model more and more. Take the series of cases that the department has brought against the lenders for alleged violations of the False Claims Act and common law with respect to the origination and underwriting of single family residential mortgage loans insured by the Federal Housing Administration. This is the second type of case I want to mention. $968 million from SunTrust Mortgage; $212 million from First Tennessee; $200 million from U.S. Bank. Again, these are just examples.
And, again, the point here is the process. The Civil Division initiated these cases in partnership with numerous U.S. Attorney’s Offices, the Department of Housing and Urban Development (HUD) and HUD’s Office of Inspector General.
These types of coordinated efforts help us to break new ground. Take our case against Standard & Poor’s (S&P), the third type of case I want to mention. S&P issued ratings for the RMBS I mentioned above. It also issued ratings for other types of complex financial instruments, like Collateralized Debt Obligations, which were, to over simplify, RMBS of RMBS. These ratings were supposed to tell investors how safe – or risky – these financial instruments were. They were, therefore, a key, if not the key, to the sale of such instruments. If an instrument was deemed safe by S&P, investors would buy it.
In our case against S&P, we alleged that the company engaged in fraud when it issued these ratings. Put another way, we alleged that S&P knew that it was inflating the ratings, thereby misleading investors into buying overly risky securities. S&P could have calmed the fervor that drove the sale of RMBS and CDO’s; instead, we alleged, it heightened it.
Our case against S&P was extremely hard fought and for understandable reasons. We were bringing a first-of-its-kind case against a ratings agency. We were challenging S&P’s core business model, its existential being.
Achieving the result that we did – a $1.375 billion settlement – required a massive, coordinated effort. We pulled together various components of the Civil Division, the U.S. Attorney’s Office in Los Angeles and a number of states – not to mention the many government agencies drawn into the fray by the litigation itself – to do what we did. I still marvel at the effort that the Department of Justice attorneys put in.
These are merely examples. They are interesting in themselves. The cases were impactful. They got a lot of attention. Now what?
These cases, though unique in their own ways, had commonalities. Here are a few, in no particular order.
First, these cases involved complex facts. Getting up to speed on those facts – and the context in which they operated – took considerable work.
Second, these cases involved careful analysis of massive amounts of data and information largely produced by the financial institutions at issue. Put aside the financial data, which alone was considerable. We pored over years’ worth of company emails, memoranda and notes. To give you an idea of scale, according to my Internet research – and if it’s on the web it must be true – one terabyte of information is equivalent to about four-and-a-half million books. So, the Library of Congress, with about 37 million books, has about eight terabytes worth of books. In the S&P case, the Department, in litigation, produced 60 terabytes of information – a rough estimate.
Third, these cases involved multiple department components, all over the nation. The financial crisis was a national problem. The department addressed it as such.
Can we learn from these commonalities? We can, and we did.
The Civil Division, along with the U.S. Attorney’s Offices, has taken a hard look at the cases that grew out of the financial crisis. We had one overarching question in mind – what can we do to be proactive about financial fraud? We came up with some answers.
Looking back on the lessons of our response to the financial crisis, we instituted a number of changes, all of them, in one way or another is us looking forward.
The Civil Division created a specialized unit to gather information about and otherwise monitor financial markets. There will be a similar unit in the Criminal Division. Among other things, the professionals in this unit will analyze data, reach out to experts inside and outside the government and coordinate information sharing between and among department components. Major goals of the unit include understanding the complexities of our financial markets well enough to identify problems before they become catastrophes, being nimble enough to put resources towards addressing those problems and enlisting the talents of prosecutors, investigators and others – nationwide – as needed to bring cases.
We have improved our data analytical capabilities. We are setting up computer labs, in the Civil Division generally and in my Branch specially, that are to be staffed with information technology experts who are dedicated to ensuring that our prosecutors and investigators use the analytical tools that are best suited to the investigative problem at hand. Not all data is the same. Big data is not just big data. For us to put our resources to the most efficient use, we need to understand technology and use it wisely.
We are modernizing Consumer Sentinel. I assume you know what Consumer Sentinel is. It is the FTC-run consumer complaint database. It is massive. In technology terms, though and especially with respect to its search capabilities, it is primitive. We are changing that. We are investing several million dollars into integrating cutting edge data analytics into the system. This advancement will mean that Sentinel will become more of an early warning system, identifying trends in the marketplace as they are happening.
We are refining our hiring philosophy, certainly in my Branch. We are bolstering our capabilities by looking to hire more analysts and investigators. Financial fraud cases require the patient, sometimes tedious, always careful review of lots of documents. They require talking to a lot of witnesses. They require people who can see trees and forests. They require simply put, excellent investigators.
We have, in other words, created an infrastructure that will allow us to be proactive, literally, to act first and to make things happen.
With that, let me end with two sentences that, I believe, best sum up our approach to financial fraud. They are a shorthand way to understand what our vision for going forward needs to be:
We don’t know what is coming next.
We aren’t going to wait to find out.