When Financial Entities are Sued by Government

These days, it’s difficult to keep up with the latest financial lawsuits. There are hundreds of ongoing cases; so many that the lines are blurred and one doesn’t know who the bad guys are anymore. On Thursday, American consumers learned of two more instances where financial entities are sued by the government.

When Financial Entities are Sued

Citing institutional practices as justification, federal prosecutors announced they would be filing criminal charges against several employees who worked for SAC Capital. These practices, according to the warrants, allowed those employees to engage in insider trading in an effort of gaining profits illegally.

For more than 10 years, employees collected various data, including non public information about companies and their respective officers. These efforts were “substantial, pervasive and on a scale without known precedent in the hedge fund industry”. The U.S. attorney prosecuting the case, Preet Bharara, calls SAC a “veritable magnet for market cheaters”. Employees were forced to stay a step ahead and were pressured to gather insider information that would result in millions in profits, even though it was illegal. For more than 40 pages, the indictment spells out the intricacies of these criminal activities. What’s most interesting, however, is that the hedge fund’s founder, Steven A. Cohen, isn’t named as a defendant.

Funds Dry

Bharara also said he believes what’s left in terms of money in the fund is Cohen’s own funds. When the convictions came down on an earlier indictment, investors began abandoning the fund. He also said the indictment’s purpose isn’t to freeze any of those remaining assets. Employees were hired partly because of who they knew. Bharara makes mention of one employee who was referred to by Cohen as the “guy who knows the quarters cold”. He also made mention of the fact this employee shared a house in the Hamptons with a CFO of a Fortune 100 company and that he was “tight with this manager”. There was no evidence in the hundreds of pages subpoenaed to suggest any information was either gained or used in any legal manner.

Even the hedge fund’s legal department was unable to convince managers to steer clear of hiring employees whose past activities included insider trading. Due diligence revealed several candidates had questionable pasts, yet were hired over those objections. In this documentation, Cohen was referred to simply as “SAC owner”. Cohen reportedly was aggressive in forcing his employees to use questionable methods in gathering information and stealing clients.

Predicting the Future

This could be a prelude for what’s to come in the months ahead. As a result of this investigation, there have been many more hedge funds that have raised red flags. Its best year saw assets rise to more than $15 billion, even though it was a bad year for the Dow. There’s no doubt this is the tip of the proverbial iceberg and while Bharara has his game plan carefully mapped out, it could be months before the public knows for sure just how deep this scandal goes.

Prepaid Debit Cards and Payroll

While Bharara is unraveling the case at his Manhattan office, another example of what happens when financial entities are sued came to light. The state of New York announced it was investigating prepaid debit cards that are being used by several retailers instead of traditional paychecks. While the transition isn’t necessarily bad, it’s the fact that banks are pocketing big profits because of the retailers now forcing employees to carry a the debit cards. Among those in the crosshairs are Home Depot, Wal Mart, Time Warner Cable, Red Lobster, Olive Garden and more. The state’s attorney general confirmed his office was looking into these allegations.

Bloomberg is reporting that disclosures aren’t being made to employees and the fee structures are difficult to find and even more complicated in the verbiage. Workers often have no idea how much they’re paying for the use of these cards. New York Attorney General Eric Schneiderman’s office said in a press release,

We are concerned about excessive or insufficiently disclosed fees which may unduly reduce employees’ take-home pay.

Now, state lawmakers want to put measures into place that will ensure compliance with the various labor laws. On Thursday, it was learned that both Costco and Walgreens are being looked into.

Prefer Direct Deposit

Many workers simply have no need for a prepaid card and can’t understand why they can no longer enroll in direct deposit or receive a traditional paper paycheck. Turns out, a company can’t force its employees to open a prepaid account and if those employees do agree to receiving their paychecks on a debit card, that permission must be given to the employer in writing. Not only that, but should the employee decide it’s no longer feasible, he can rescind that authorization at any time. At that point, the employer must allow direct deposit or issue a paper check. Further, an employee’s or would-be employee’s decisions can’t be a condition for employment or continued employment.

This isn’t the first time a case like this has been brought to the forefront. Pennsylvania has already dealt with a lawsuit, this time because a former McDonald’s employee was forced to accept her pay on a prepaid card and her requests for direct deposit were continually denied. The fast food restaurant has since changed its policies and allows employees to choose the most convenient method of receiving their pay.

These two cases are indicative of how the business, financial and legal sectors are merging. Unfortunately, there are so many incredible cases being unveiled these days, it can be difficult to muddle through the unethical and illegal practices.

What ultimately happens to Cohen will set the pace for these types of cases moving forward. With the prepaid debit cards being forced on employees, it’s likely new federal laws will be put into place because of that.

How do you think the government should handle these types of cases? Would a requirement that you accept your pay on a prepaid card be enough to decline an employment offer? Let us know your thoughts.

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