Friday, October 26, 2012

Private Prison Industry Shenanigans in Florida

Protesting private prison profiteering
The Corporate Justice Blog has taken up the issue of the privatization of the U.S. prison industry repeatedly in the past several months.  Now news from Florida, as lawmakers and private prison company executives together have attempted to circumvent the law in order to see a massive privatization effort expand to many more of the state's prisons.  In a wide-ranging and lengthy exposé, David Reutter on Prison Legal News has painstakingly detailed the incredible conflict between private prison companies CCA and the GEO Group together with Florida lawmakers, and the public prison union as they grapple furiously in state court seeking control over the state's prisoners.

Sadly, no party to these proceedings seems to be advocating on behalf of ending the failed system of mass incarceration in the nation or in Florida in particular, as all involved parties seek their own economic interests above all else.

Essentially, Florida lawmakers, bankrolled by the private prison lobby, attempted to massively privatize the prison system in Florida by quietly attaching a prison proviso to an appropriations bill, efforts which were recently found to be against the law by a state trial court judge.  Why attempt to hugely increase the percentage of private prisons in Florida in the dark of the night?

From the article, several very unsettling themes emerge:

First, the privatization attempt was manufactured without careful Florida legislature consideration:

"State Senator Mike Fasano, who chairs a Senate Budget Subcommittee in charge of prison spending, applauded the court’s decision striking down the wholesale prison privatization plan. 'This is a perfect example of why we should not be making major policy changes in provision language that did not go through substantive committees, debated, and taken testimony pro and con,' he stated.  'It didn’t go through the appropriate committee process. It wasn’t heard in criminal justice committee in the Senate. It wasn’t heard in my committee that oversees the Department of Corrections budget,' Fasano noted. 'You would think that if we were doing such a major policy change, it would have gone through those two committees. It wasn’t a stand-alone bill and that’s what, if I’m not mistaken, the court has said, that it should have been a stand-alone bill because it’s a single subject issue.'

Second, claims that private prisons save taxpayer money in the long run have proven false or elusive:

"Senate Budget Committee Chairman J.D. Alexander responded to criticism about the failure to perform due diligence and follow proper legislative procedures regarding the prison privatization plan by saying his committee had received testimony that the plan would save around $22 million annually. That estimate was based on the minimum 7% cost savings required by statute for private prison contracts, though such savings have not been proven. . . . Despite being almost two decades into its prison privatization experiment, Florida has been unable to show that private prisons have been a solution to the state’s ever-expanding prison system. 'Florida’s experience with privatized prisons raises serious questions about whether the taxpayers are getting their money’s worth,' concluded an April 2010 report by the Florida Center for Fiscal and Economic Policy (FCFEP), an independent research organization. . . .  'The FCFEP found there was no evidence that prison privatization had saved Florida taxpayers money, as required by law, because “the procedure to establish a 7% cost savings is flawed.' Additionally, there is virtually no difference in recidivism rates of prisoners released from private or public prisons, so savings have been elusive in that respect as well."

Third, prison privatization efforts simply function as a lawmaker channeling of taxpayer funds from the public sector into the hands of private prison executive friends and donors:

"Prior to representing FDOC employees, on September 12, 2011 the Teamsters filed an ethics complaint against Governor Scott. The complaint alleged that the prison privatization plan was tainted by almost $1 million in political contributions from CCA and GEO Group that went to Scott, state lawmakers and the Republican Party.  According to the Teamsters, during the last election cycle GEO and its executives gave $829,665 to political parties and candidates in Florida, while CCA donated $138,494. Additionally, both CCA and GEO made contributions to Governor Scott’s inaugural fund in the amounts of $5,000 and $25,000, respectively. GEO had also paid its team of Florida lobbyists between $220,000 and $360,000 to influence state officials, and the company reportedly said it would spend $3 million to compete for the Region IV private prison contract.  'The governor’s privatization scheme smacks of political payback, pure and simple,' said Wood.  'It all comes down to politics and the big donors,' noted Senator Fasano. 'GEO and the other private companies that run prisons are very big donors to the party here in Florida and to the elected officials, both past and present.'

Finally, fourth, why privatize an industry that is clearly a governmental function?  For efficiency?  Cost saving due to competition?  Hardly.  Not in the prison industry:

"Considering there is scant evidence that private prisons in Florida have saved the state money, and that prisoners released from privately-operated facilities have the same or higher recidivism rates as those released from public prisons, the repeated efforts by the state legislature to privatize FDOC Region IV can best be explained as political payback for campaign contributions from private prison firms.  While companies like CCA and GEO Group will profit from expanded prison privatization contracts, and politicians will benefit from those companies’ continued lobbying efforts and financial largess, should the legislature prevail in its private prison plan the loser will be Florida’s taxpayers, as public funds will be diverted from the FDOC into the coffers of for-profit prison firms with no discernable benefit to the state.  As the battle to expand prison privatization in Florida continues, one expert has recommended that everyone slow down. 'In what will be the largest correctional privatization contract in U.S. history, a more deliberate process would be prudent,' said Professor Hallett. 'Assuming you accept the logic of market forces controlling costs, then why would you bias the process in favor of an already monopolized industry, which itself lowers cost efficiency and accountability?"

The privatization of the prison industrial complex has been and will continue to be a terrible failure, for all parties involved, except perhaps, for the executives and shareholders of the private prison companies.

Wednesday, October 24, 2012

Justice Department Sues Bank of America for $1 Billion

The Department of Justice announced today that it is suing Bank of America for fraud.  In seeking $1 billion from BofA, Justice claims that the bank (and predecessor Countrywide Financial before it) engaged in widespread mortgage fraud through a program known inside the banks as "The Hustle."  The Hustle references Bank of America and Countrywide's effort to fraudulently sell streamlined mortgages to Fannie Mae and Freddie Mac, which were originated through the banks on a streamlined basis, wherein common banking procedures and regulations were ignored.

According to CNN:  "The suit alleges that 'the Hustle' was a nickname for the bank's 'High-Speed Swim Lane' or HSSL program, designed to streamline the mortgage origination process. But the government alleges it was 'intentionally designed to process loans at high speed and without quality checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans.' The government says the program was started by mortgage lender Countrywide Financial, but continued after it was purchased by Bank of America in 2008."

As the nation continues to struggle under the burden of the mortgage crisis of 2008, the Justice Department in 2012, four years later, is still attempting to sort through the banking fraud that seized the industry during the run-up to the mortgage meltdown.  That a program designed by bankers to streamline the mortgage origination process was nicknamed "The Hustle" by the very bankers that engaged the process is telling.

According to the charge, The Hustle led to "widespread falsification" of mortgage numbers and data by Countrywide Financial.  Further, top federal prosecutor Preet Bharara described the practices of Countrywide executives as "spectacularly brazen in scope."

(photo courtesy of Senseiich, Wikimedia Commons)

Thursday, October 18, 2012

University of Washington Hosts Risk Management Symposium

On October 5, 2012, the University of Washington School of Law hosted an outstanding symposium entitled Managing Risk in a Complex World. The program provided the broadest overview of business risks conceivable. The keynote speaker, Bill Ayer, Chairman, Alaska Air Group, articulated a rationalized vision of risk-management that should be a model for CEOs. Professor Anita Krug organized this excellent and timely program.

My contribution focused on risk management failures in the financial sector leading to the financial crisis. More specifically, I focused on whether the Fed's new proposed rules requiring enterprise-wide risk management committees (promulgated under the Dodd-Frank Act) address the underlying causes of those risk management failures. (See video above).

In general, the Fed's rules are a positive step. Nevertheless, the rules would benefit from improvements such as a more robust definition of independence for members of the new risk management committee required for all systemically important firms. I argue that the board of every systemically important firm should certify (under penalty of SEC disbarment from service on boards) that the members of the risk management committee have no substantial personal, familial, social or business relationship with senior management or the firm (other than serving as director). I expand on these points in a forthcoming law review article entitled Enterprise-Wide Risk Management after the Financial Crisis, which is outlined in this PowerPoint presentation.  

Given the role of risk mismanagement in driving and amplifying the financial crisis, Dodd-Frank lights the way for superior corporate governance outcomes in the future (both within and outside the financial sector). Unfortunately, the proposed Fed rules are still suboptimal.

Friday, October 5, 2012

Judge Decertifies Class of African-American Borrowers

A federal judge recently decertified a previously certified class action based on the Supreme Court's Wal-Mart opinion that we've discussed previously on the Corporate Justice Blog.  In a real opportunity to examine predatory lending in the wake of the mortgage crisis of 2008, the Supreme Court's limiting Wal-Mart holding has now made it much more difficult for plaintiffs to proceed on claims of discriminatory and predatory lending.

From the National Law Journal:

"A Boston federal judge has decertified a class of African-American mortgage borrowers, finding that evidence of their statistically higher payments isn't enough to establish commonality in light of the Supreme Court's ruling in Wal-Mart v. Dukes.  On September 18, [2012], Judge Rya Zobel of the District of Massachusetts granted the defendants' motion to decertify the class in Barrett v. Option One Mortgage Corp.  [Judge] Zobel had previously certified the plaintiff class of African-American borrowers who obtained a mortgage loan from one of the defendants, in March 2011.

Three months later, in June 2011, the Supreme Court ruled in Wal-Mart. In its 5-4 ruling, the high court held that the plaintiffs in a class action on behalf of more the 1 million female current and former workers failed to prove a companywide policty of discrimination.  Justice Antonin Scalia, writing for the court, found that evidence of such a policy was necessary for the plaintiffs to show the commonality needed to certify a class under Federal Rule of Civil Procedure 23(a)(2).

The borrowers in Barrett sued H&R Block Mortgage Corp. and subsidiaries Option One, Ada Services Corp. and San Canyon Corp. They claimed the defendants' policy, which gave brokers the discretion to add charges unrelated to a borrower's creditworthiness, had a disparate impact on African-American borrowers. Brokers could set a higher interest rate than a borrower's minimum based on creditworthiness and charge loan origination and processing fees."