19 June 2007

FACTA: The Writing is on the Wall...

Now that the financial community is wiping their brow with a sigh of relief on this latest Supreme Court ruling, what can a General Counsel or Chief Risk Officer expect? Will the adversarial train of plaintiff suits slow down and come to a halt. Not likely.

The U.S. Supreme Court's ruling that blocks investors from suing Wall Street investment banks under antitrust laws could save Wall Street firms a bundle by limiting investors to smaller recoveries.

In a case dating back to the dot-com bubble, the high court ruled Monday that antitrust suits would pose a "substantial risk" to the securities market. Damages in antitrust cases are tripled, in contrast to penalties under the securities laws.

The ruling struck down a lower court decision that would have allowed investors to go after Wall Street firms that they say engaged in anticompetitive practices by conspiring to drive up prices on about 900 newly issued stocks in the late 1990s.

Because the well-documented implosion of names like Enron Corp. swallowed any serious money that investors might hope to recover from that and other flame-outs, some investors have turned to the banks and other Wall Street regulars such as accounting firms that did work for such companies.

Wall Street institutions in the case before the Supreme Court were Credit Suisse Securities (USA) LLC, formerly Credit Suisse First Boston LLC; Bear, Stearns & Co. Inc.; Citigroup Global Markets Inc.; Comerica Inc.; Deutsche Bank Securities Inc.; Fidelity Distributors Corp.; Fidelity Brokerage Services LLC; Fidelity Investments Institutional Services Co. Inc.; Goldman, Sachs & Co.; The Goldman Sachs Group Inc.; Janus Capital Management LLC; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley & Co. Inc.; Robertson Stephens Inc.; Van Wagoner Capital Management Inc.; and Van Wagoner Funds, Inc.

These institutions may not have "Anti-Trust" anxiety from the Supreme Court any longer yet there are plenty of other Operational Risks on their minds. Namely International Fraud.

In an era of data warehousing, metadata management, business process management and the looming BASEL II Accord there are plenty of conversations about what to do about fraud and other regulatory compliance. Multi-factor authentication for online banking systems is not a trivial matter when it comes to Enterprise Risk Management. Is the customer service organization ready for the upgrade? Is the consumer going to be confused on what questions they are being asked to get access to their latest online credit card statement? What is my customer "churn" factor? In other words, how many of my customers are jumping ship as a result of the operational risks that have turned their loyalty into consumer driven class action fraud litigation?

An International Banking Fusion Center is on the horizon and it's not too far from the same justification that addresses Know Your Customer (KYC) and the financing of terrorism.

According to one study respondent, "Organizations are secretive of fraud losses and that inhibits our ability to work together."

"The sharing of intelligence is key to being able to take advantage of the predictability of fraud," First Data's Barwell continues. "Banks are sitting on valuable data that, if analyzed innovatively, could provide fraud intelligence worth sharing. One major bank has shown that if their internal client databases across business lines and geographies are analyzed using sophisticated link analysis tools, spurious networks of accounts can be uncovered and, when fully investigated, could uncover organized networks of first-party fraud accounts."

Barwell adds that several U.S. banks have expressed interest in taking the "quantum leap" to true data sharing.

The International Language of Fraud

"In the last eight to 10 years, fraud has really gone international," says Steve Baker, director of the Midwest region of the Federal Trade Commission (FTC). The FTC maintains a Consumer Sentinel database that includes more than 3.5 million consumer fraud complaints and is accessible to more than 3,000 law enforcement agencies internationally. In 2006, 22 percent of the reported fraud was cross border.

So What? What does information sharing have in common with:

International fraud, Identity Theft and the risk of litigation within the banking or credit card industry. Now the bankers want to sue the retailers and recover losses for the lack of privacy and security controls at the retailers. Since December 2006, plaintiffs’ class action firms in California and elsewhere have filed over 200 nationwide class actions in federal court against a broad spectrum of retailers and restaurants alleging violations of the Fair and Accurate Credit Transactions Act ("FACTA"). In addition to California federal courts, FACTA cases have been filed recently in federal courts in Pennsylvania, Illinois, New Jersey, Nevada, Maryland and Kansas.

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