Richard Cordray, President Barack Obama’s nominee to head the new Consumer Financial Protection Bureau, has said he wants to use his new role to do “on a 50-state basis the things [he] cared most about as a state attorney general — with a more robust and comprehensive authority.”
Such a statement is scary indeed given Cordray’s track record as Ohio’s attorney general.
After Cordray took over the office from Marc Dann, who resigned in scandal, many in the business community held out hope that the new state AG would clean up his predecessor’s practice of farming out the state’s lawsuits to his campaign contributors. Instead, Cordray adopted the practice with gusto, parceling out at least six more lawsuits on a contingency-fee basis.
As a side effect of the federal Private Securities Litigation Reform Act of 1995, state employee pensions, the largest investors in the marketplace, largely control modern class-action litigation alleging securities fraud: Such funds have led suits resulting in 43 or more settlements in each of the last five years, totaling at least $2 billion annually.
Cordray sidestepped a then-existing Ohio law that forbade the state from entering into any contracts with a firm that had given more than $2,000 to the campaign of an official with oversight of the contract in question. He funneled contributions through the Ohio Democratic Party.
In that way, Cordray in a two-year span pulled in $830,000 from out-of-state plaintiffs’ law firms, including $270,000 from Kaplan Fox & Kilsheimer and $175,000 from Bernstein Litowitz Berger & Grossman — both New York shareholder-class-action specialists. These and other firms in turn netted millions out of the more than $1 billion in settlement dollars negotiated with Wall Street firms in the wake of the financial crisis.
Although a still-existing executive order from the Bush era prohibits the federal government from entering into contingency-fee contracts with private attorneys, the CFPB’s open-ended authority, created under the 2010 Dodd-Frank financial reform, would otherwise afford Cordray vast powers to create work for his trial-lawyer allies.
Cordray’s CFPB would be able to issue an array of rules and regulations that could spur more lawsuits, and he could gin up the value of private actions with sweeping subpoena powers — think of former New York Attorney General Eliot Spitzer on steroids.
Moreover, whereas most federal agencies carefully balance power across bipartisan commissions with substantial Congressional oversight, the CFPB director is answerable only to the president.
Apart from Cordray’s nomination, Dodd-Frank problematically delegates power to state attorney generals to enforce certain federal laws, including those against state and federally chartered banks.
Similar provisions “deputizing” state AGs to enforce federal laws are now being inserted regularly into federal laws by the litigation industry’s friends in Congress.
This turns federalism perversely on its head by giving federal regulatory authority, in effect, to the most aggressive state AG in the nation who can hoist his regulatory views on the citizens of the other 49 states in the union.
Worse, such rules might be used by some state AGs to turn federal regulation over to the same avaricious trial lawyers who so regularly gobble up their state-law litigation dockets.
To prevent such abuses, the Obama administration should clarify that the executive order against contingency-fee contracting applies to all state enforcement actions deriving from federal law.
Better still, Congress should rethink its practice, in Dodd-Frank and elsewhere, of turning over federal regulation to state AGs in the first place.
Finally, the Senate should not accept Obama’s nomination of Cordray without substantial questioning and scrutiny — and not without reforming the CFPB structure to make its leadership more accountable.
James R. Copland is the director of the Center for Legal Policy at the Manhattan Institute for Policy Research.