Regulators Shut Big Chicago-based Bank

Friday, Aug. 20, 2010
(WASHINGTON)—Regulators on Friday shut down a big community bank based in Chicago that has been known for its social activism but racked by financial troubles in recent months. A consortium funded by several of the biggest U.S. financial firms is buying its assets and pledging to operate the new bank by the same principles.

ShoreBank, with $2.16 billion in assets and $1.54 billion in deposits, was the 114th U.S. bank to fail this year.

The Federal Deposit Insurance Corp. took over ShoreBank. Urban Partnership Bank, the newly chartered financial institution, agreed to assume ShoreBank's deposits and nearly all its assets. (See three lessons of the Lehman Brothers collapse.)

In an unusual move, the FDIC allowed some of ShoreBank's executives to continue running the restructured bank. Executives who joined ShoreBank recently, as the bank struggled to raise capital, will manage Urban Partnership Bank. These managers "did not contribute to the bank's problems," the FDIC said.

The FDIC on Friday also seized Community National Bank at Bartow, in Bartow, Fla.; Independent National Bank of Ocala, Fla.; and Imperial Savings and Loan Association of Martinsville, Va.

ShoreBank lost $39.5 million in the second quarter amid soured real estate loans. The bank had been under a so-called "cease and desist" order from the FDIC for more than a year, requiring it to boost its capital reserves. ShoreBank was able to raise more than $146 million in capital this spring from several big Wall Street institutions. It was unable, however, to secure federal bailout funds it sought from the Troubled Asset Relief Program.

ShoreBank had indirect ties to a few members of the Obama administration — one of them, presidential adviser Valerie Jarrett, was on the board of a Chicago civic organization led by a ShoreBank director — and powerful supporters, including former top federal banking regulators Ellen Seidman and Eugene Ludwig. (See how Europe's banks are faring.)

House Republicans launched an inquiry this spring into whether the administration intervened to help shepherd a bailout of ShoreBank. Rep. Darrell Issa of California, the senior Republican on the House Oversight and Government Reform Committee, sent a letter to a White House legal adviser asking specific questions on possible contacts between administration officials and executives of ShoreBank or potential investors.

Investors in Urban Partnership Bank read like an all-star roster of U.S. finance, including American Express Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., GE Capital Equity Investments Inc., Morgan Stanley, Northern Trust Corp. and Wells Fargo & Co. The Ford Foundation and the MacArthur Foundation also are investors.

The FDIC and Urban Partnership Bank also agreed to share losses on $1.41 billion of ShoreBank's loans and other assets. (See what the Chairman of the Federal Reserve is doing to boost the economy.)

ShoreBank was founded in 1973 with the aid of several dozen institutional backers. The bank has been known for promoting redevelopment, minority business and environmentally responsible lending, and serving low- and moderate-income neighborhoods in Chicago. It was the nation's first community development and environmental bank, branching out from its roots on Chicago's South side to Cleveland, Detroit, the Pacific Northwest and 40 foreign countries.

"Urban Partnership Bank will provide access to financial services and support to distressed neighborhoods in order to help transform distressed neighborhoods into strong, stable communities," David Vitale, the chairman of Urban Partnership Bank, said in a statement issued Friday night. "The private investment in this new financial institution demonstrates commitment to restoring the economic vitality of our communities," Vitale said.

The bank's consulting arm ShoreBank International Ltd. has provided loans to entrepreneurs and mortgages to homeowners in Africa, Asia and Eastern Europe.

TIME

SEC Now Offering Big Payoffs To Whistle-Blowers

Thursday, Aug. 19, 2010

In what could give new meaning to the phrase — "If you see something, say something" — a clause within the financial reform legislation is offering big cash rewards to whistleblowers who report fraud and other wrongdoing at U.S.-listed companies and Wall Street banks.

Under the program, which is already live, anyone who provides a tip that leads to a successful Securities and Exchange Commission action will be able to collect between 10% and 30% of the amount recovered — as long as the total amount exceeds $1 million. This means the minimum payout is $100,000. The whistle-blower could be a company insider or a private investor, if they're able to offer information or analysis that leads to an action. And with potential payoffs netting millions — or even tens of millions — of dollars, experts are bracing for a surge in tipoffs. (See the worst business deals of 2009.)

Money can be "extraordinarily effective" in getting people to blow the whistle when they see fraud, says John Phillips, whose law firm Phillips & Cohen LLP specializes in whistleblower cases. The U.S. Government evidently agrees. "We expect the awards will prompt a significantly greater number of insiders to come forward with high-quality evidence of fraud," says SEC spokesman John Nester.

In the past, the SEC's whistleblowing program was limited to insider trading cases and offered only small discretionary, rather than mandatory, rewards ranging from 0 to 10% of the money recovered. "It was completely ineffectual, completely discretionary," says Phillips. (Read about a whistleblower case involving ignorance.)

The narrow scope and poor cash rewards generated little response: Since the program's launch in 1988, only 14 applications led to actions where a civil penalty was ordered, and only eight cash awards were handed out totaling $1.16 million, according to SEC officials. The largest award came last month when the ex-wife of a hedge fund adviser at Pequot Capital Management was awarded $1 million for her role in providing information that led to Pequot paying $27 million to settle an insider trading case involving Microsoft securities. The ex-wife had discovered a key email on her computer hard drive that led to the action against her ex-husband's former employer. (Read about the new sheriffs of Wall Street.)

But this legislation extends the program beyond insider-trading cases to all securities law violations and, most importantly, offers bigger payoffs and therefore bigger incentives to speak out. People can report almost any securities violations, ranging from money laundering, accounting fraud and ponzi schemes to bribery. Also, the SEC will be looking at not only independent knowledge, but even analysis as proof. The means an academic, private investor, or even a journalist or a securities analyst who conducts independent research and uncovers fraud based on that research could collect an award if their information is new and leads to an action.

"So you can have people who might have done analysis for academic reasons or personal trading reasons or research that they sell, that they may now, in addition, provide to the SEC with an eye toward getting a bounty," says Paul Leder, a partner at Richards, Kibbe & Orbe LLP and former SEC official for 12 years. He noted how the options backdating scandal in 2006 stemmed from academic articles that described how the option grants to executives and board members were extraordinarily well-timed. The SEC picked up on the analysis and wound up filing dozens of cases against companies and executives. (Comment on this story.)

Even a CEO could squeal on his own company as long as he wasn't personally convicted in connection with the fraud. "Yes, to the extent that they themselves are not culpable," says Phillips. "You can't initiate the fraud and then go collect on it."

The legislation bars certain people from receiving awards — officers or employees of a regulatory agency, the department of justice, a self-regulatory organization, the Public Company Accounting Oversight Board or a law enforcement organization, as well as company auditors and anyone convicted of a crime related to the securities violation.

The program also protects squealers against company retaliation. Any whistleblower who is fired, demoted, suspended, threatened, harassed or discriminated against by a company for providing info or testifying in an SEC investigation, can file an action in the U.S. District Court. If they succeed in proving their case, the legislation guarantees the person's reinstatement, two times the amount of backpay owed, and coverage of all court and attorney fees—so long as the action is filed within a certain time period.

The potential payoff is high. The recent judgment against Goldman Sachs resulted in a $550 million penalty. "If you got 10% of that, it's pretty good money," says Leder.

Even a mid-cap company could wind up with a consent order or suit in the millions of dollars, says Daniel Karson, executive managing director and counsel at Kroll, a risk consulting company. "So 10% for making a phone call is a pretty good payday," he says.

One obvious question overhanging this new lure for whistleblowers is whether the SEC will have the staff to handle it. "The government always has limited resources," says Karson. "I think the SEC is going to be overwhelmed in short order with people bringing these kinds of actions — they're going to have to sort through what has substance and what doesn't." The SEC has indicated it will be opening a whistle-blowing office and chairman Mary Schapiro told a House committee the agency would need to hire 800 new people to fully implement the financial reform bill's changes.

"There's real money to be made," says Leder. "I think it's a powerful incentive."

TIME

Translation Advertising: Where Shop Meets Hip-Hop

Monday, Aug. 30, 2010

Steve Stoute, the marketing force behind boutique advertising shop Translation, has made a living by pretty much ignoring the barriers Madison Avenue has traditionally drawn around demographics and ethnicity.

Ten years ago, Stoute left the music business — just before it tanked — and jumped into advertising and marketing. He saw an opportunity to navigate the gap that existed between corporate America and the lucrative youth market, an estimated $1.2 trillion sector that companies are eager to tap into but frequently miss the mark reaching. "Brands don't often speak to young people in a way that is representative of them," says Stoute. "What I do is contemporize a brand." But, he says, "I don't take the brand away from what it stands for. I don't change who they are in order to appeal to the next generation." (See the top 10 TV ads of 2009.)

As a result, Stoute has emerged as the hip-but-safe guy for large companies like Hewlett-Packard, Target and Samsung looking to grab a piece of the youth demographic. Leveraging his background in entertainment, Stoute has accumulated an impressive lineup of deals, most recently State Farm, Wrigley and the sports and entertainment division of McDonald's. His work for McD's includes the company's Super Bowl ad, which featured hoop gods LeBron James and Dwight Howard in a restyled version of the can-you-top-this-shot classic from 1993.

It was Stoute who in 2003 helped steer Justin Timberlake to McDonald's for its "I'm Lovin' It" campaign with a rather unorthodox approach: instead of McDonald's simply licensing an existing Timberlake song, Timberlake recorded an original "I'm Lovin' It" tune. The song got heavy airplay prior to the campaign's debut, and by the time the ad, also featuring Timberlake, aired, the public already had a relationship with the song. (See the 10 worst fast food meals.)

It's a strategy deployed by Bollywood filmmakers to create a musical connection with audiences before a movie is launched. To date, the "I'm Lovin' It" campaign remains one of the longest-running in McDonald's history. And it was Stoute who put pop singer Gwen Stefani together with Hewlett-Packard in a successful 2005 campaign to promote the company's Photosmart R607 camera. Says James Edmund Datri, CEO of the American Advertising Federation: "He blew apart the old model of the celebrity pitch, replacing it with a model that draws on celebrity, music, entertainment and culture to speak with audiences, not at them."

Stoute sees no reason Samsung shouldn't connect with fashion shows rather than with sports to sell high-definition televisions. Or that a sneaker company like Reebok shouldn't make a shoe endorsed by a rap star — which it did with Jay-Z in 2003. He recognized that younger consumers were fusing music, fashion and culture in their brand choices, and the Internet only intensified that lifestyle. (See the top 10 tasteless commercials.)

Stoute's ability to engage consumers with his clients' messages was on full display when Mary J. Blige debuted her new perfume, My Life, on the Home Shopping Network July 31 to record-breaking sales. The fragrance sold 60,000 units in six hours. According to the network, it also drove 20% of new customers to HSN. While the numbers were remarkable, so was the fact that buyers hadn't even had a chance to sample the fragrance. Rather, Stoute had gotten Blige to create a series of online video vignettes so customers could connect with her. He calls the perfume "Mary's life encapsulated in a product." The marketing came down to the power of storytelling, says Stoute. "I put Mary on air and let her speak her story, her life, her journey and showed footage of her being part of the process of making the fragrance. It was a grand slam."

TIME

War Fears May be Overblown as Iran Brings its Nuclear Reactor Online

Friday, Aug. 20, 2010

Iranian technicians walk outside the building that houses the Bushehr nuclear power plant's reactor, in the Iranian port town of Bushehr.

Behrouz Mehri / AFP / Getty Images

Despite the media hysteria over a supposed drumbeat for war with Iran, the White House is not unduly worried by the news that Russia will, on Saturday, begin loading enriched uranium into Iran's Bushehr nuclear reactor. While former Bush Ambassador to the UN and Fox News favorite John Bolton breathlessly warned Monday that Israel has just five days within which to bomb the reactor — after which an air strike would risk killing many thousands of civilians from a radiation leak — the Obama Administration has been more sanguine on the Bushehr news.

To Administration critics, the move to bring Iran's atomic energy plant online makes clear that Iran is not nearly as isolated by sanctions as Washington would like. But that misses the point, since Bushehr is actually exempt from those sanctions because it represents no nuclear weapons threat. And the Administration is moving to tamp down the hysteria being fomented by the likes of Bolton, reportedly making clear to the Israelis that the minimum time frame Iran would need to build a nuclear weapon, after declaring their intent by kicking out inspectors, is one year — plenty of time in which to take dramatic action. (See the world's worst nuclear disasters.)

Instead of prompting confrontation, the move to bring Bushehr online will be used by the Administration to argue that it demonstrates Western readiness to accept a Iranian nuclear energy program without uranium enrichment. The uranium that will power the Bushehr reactor is imported from Russia, while the reactor's spent fuel — from which Iran could hypothetically extract plutonium if it had the technology to do so, and if it weren't under the scrutiny of IAEA inspectors — will be removed from Iran by the Russians. And the fact that Bushehr will produce electricity with Russian-supplied uranium, says White House spokesman Robert Gibbs, "underscores that Iran does not need its own enrichment capability if its intentions, as it states, are for a peaceful nuclear program."

In other words, the U.S. believes that Iran's determination to enrich its own uranium calls into question its stated motives; like other Western powers, Washington fears that the enrichment activities, some of them initially conducted in secret, could service a clandestine bomb program. But that's not how the Iranians see it. For them, the fact that Russia says it will finally fuel the reactor after some 14 years of dragging its feet on the project is only proof that, as Mohammad Ahmadian, head of Iran's Nuclear Power Plants Production and Development Company, indelicately put it, "Western countries cannot be trusted." Tehran believes the Russians used Bushehr for political leverage to press Iran to comply with Western demands, and see the project as an object lesson in why they can't allow their nuclear program to be dependent for reactor fuel on the kindness of strangers. (See pictures of terror in Tehran.)

Iran has always insisted on its right, as a signatory to the Nuclear Non-Proliferation Treaty, to enrich uranium for energy purposes, and maintained that its purposes are peaceful. But enrichment does put bomb-making capability closer within reach for Tehran, and Iran has been ordered by the UN Security Council to suspend its enrichment until all issues of disclosure and transparency raised by the IAEA can be resolved. Iran, however, has made clear it is planning to expand its enrichment capacity (although Western intelligence believes it has encountered technical problems).

Bushehr coming online, then, is unlikely to alter the standoff over Iran's nuclear efforts either way. Sanctions adopted by the Security Council and a raft of new measures imposed by the U.S. and Europe aimed at stopping third countries trading with Iran have certainly had some impact in Iran, but most analysts still believe economic pressure is unlikely to change Iran's calculations. Iranian opposition leader Mehdi Karroubi this week warned that the sanctions are actually strengthening the hand of the hardline Republican Guard Corps because of their central role in sanctions-busting economic networks, and by creating an external excuse for economic hardship.

The improbability of sanctions breaking the stalemate has led to a flurry of media speculation over the possibility of Israel bombing Iran's nuclear facilities as early as next spring if the U.S. — as most expect — is reluctant to do so. Such speculation, however, tends to be based mostly on the apocalyptic rhetoric of Israeli politicians who frequently invoke Holocaust imagery in referring to Iran's enrichment activities, rather than on the more sober assessments of its security establishment. Whereas Netanyahu likes to tell Western audiences that Iran is led by an irrational "messianic cult", that view is not shared by Israeli military and intelligence analysts, according to Yossi Alpher, a Mossad veteran and former adviser to Israel's Defense Minister, Ehud Barak. Alpher argues that in light of the potentially catastrophic consequences, Israel would only take military action if Iran was in a position to launch a nuclear attack on the Jewish State in an "extremely short" time frame — and that a strike could set back the Iranian program for a significant period of time. (See the top 10 Ahmadinejad-isms.)

And the fact is Iran is nowhere close to the ability to attack Israel with nuclear weapons. The U.S. intelligence consensus holds that while Iran is developing the infrastructure necessary to create a bomb and also doing theoretical research on bomb design, it is not currently developing nuclear weapons nor has it made the decision to do so. Its goal is generally viewed as "breakout" capacity, i.e. the ability to build a bomb relatively quickly if it chose to do so — and even that capacity still appears to be some way off.

In explaining the peril they see in the Iranian program, Israeli leaders tend to accept that even an Iran armed with nuclear weapons is unlikely to initiate a nuclear exchange that would be suicidal for Tehran given the size of Israel's own nuclear deterrent. Instead, they warn that an Iranian bomb's primary impact would be to end Israel's strategic dominance in the regional balance of power, which would in turn embolden Israel's insurgent neighbors such as Hamas and Hizballah. Right now, the war talk may be designed primarily to stiffen the spine of Western policy makers on sanctions and diplomacy, by invoking an alternative too ghastly to contemplate.

Both sides know that rather than imminent military action, the next phase of the Iran standoff is likely to be a renewed round of talks with Iran. The U.S. and its allies hope to use the leverage of sanctions to persuade Iran to back down, while Iran will look to make smaller concessions, especially in areas where they have upped the ante, such as enriching uranium to 20%, which takes them a lot closer to the technological capacity to create bomb-grade materiel. For each side, the long game remains shaping the diplomatic compromise to their own liking.

TIME