Downside to Settlements

April, 2013

Washington -- As a matter of public policy, too many pre-trial settlements in cases of civil fraud are a bad idea. At least some of the cases should go to trial to let the public see what the alleged perpetrators did and how government enforcement agencies responded.

Widespread financial fraud involving banks, securities dealers, traders, mortgage lenders, and student loan lenders has been afoot throughout the land for a decade or more, but hardly any cases go to trial. The cases are settled with payments among the parties involved, including the U.S. government, and records are sealed or destroyed. The perpetrators are out the money (often only a fraction of the fraud involved); in exchange they have essentially purchased the right to claim that they have not been convicted of wrongdoing. The plaintiffs are seemingly satisfied with the payments and with the public knowledge that the perpetrators really, really, really did not want to go to trial to let the public see the evidence of what they did. In other words, the public should look at the size of a settlement to get an idea of the fraud and which party would have won at trial.

This is a bad bargain for the public interest. The public should not have to guess at what happened based on scanty settlement information. Some judges agree and will not routinely approve such settlements. Federal district judges Jed Rakoff and Sidney Stein in New York are examples of judges who think the public may have more of an interest in seeing the evidence than the settlement parties have in concealing it.

These two judges have held up major financial fraud settlements including those involving the SEC. Good for them! To me, the idea that going to trial would clog up the courts -- a reason some judges use to encourage or force settlements -- must be balanced against the salutary effect an occasional trial would have on would-be fraudsters.

I recently settled a case (with DOJ's assistance) involving financial fraud with the Kentucky Higher Education Student Loan Corporation. I was the qui tam relator in the case under the False Claims Act. Given my distaste for settlements, I nevertheless agreed to settlement in this case because the several million dollars coming back to the U.S. Treasury is substantial. My share is also significant; and the ability to put a sizeable amount of it immediately to good charitable use to combat financial waste, fraud, and abuse was an important consideration.

Equally important is that this settlement does not include any "gag orders" on either party. The lender may say what it wants about me, and vice versa. Evidence is not under seal or destroyed. There are no restrictions on what I may do with my own share (such odious provisions are contained in many settlements). This case, along with another case I settled in 2010 against Student Loan Finance Corporation of South Dakota (which failed to live up to its settlement agreement), provides a good opportunity for researchers and academics to see behind the usual screens that obscure a clear view of financial fraud. A good study using these two examples would look at clever but illegal financial tricks; how the manipulations could be slipped by the government; how bond counsels, accounting firms, and ratings agencies could be misused, perhaps willingly; and how the government itself responded, sometimes appropriately, but often ineptly.

The wave of settlements without trials over the past decade has been a missed opportunity to combat financial fraud, but with a good case study perhaps the next generation can learn in the classroom what has been missed in the courtroom.

"Undermining Pell" Indeed

April, 2013

Washington -- The Education Policy Program at the New America Foundation has published an accurate, unblinking look at the sorry state of the country's student financial aid efforts. In "Undermining Pell: How Colleges Compete for Wealthy Students and Leave the Low Income Behind," author Stephen Burd documents that the higher education access gap across income lines is widening as more and more colleges turn their backs on students and families that are struggling financially.

The reaction to this report on Capitol Hill will not be pretty. Congress -- both houses, both parties -- will claim that this not their fault and will congratulate themselves on support for Pell grants; they will then blame colleges for raising tuition and threaten that someday they are going to do something about those greedy colleges.

It will be the rare member or staffer who reads the report and asks whether colleges are simply and rationally responding to federal incentives to move to the so-called High Tuition, High Aid model of student aid finance. There are a lot of advantages to moving to this model, and a whole new profession of enrollment managers has been eager to sell colleges on it. One big advantage is that the model creates enough institutional aid so as to make Pell grants completely fungible in student financial aid packaging. Why allow Pell grant increases to go to the needy when for all intents and purposes the federal funds can be used to recruit the wealthy and thereby raise institutional ranking? So many colleges have done it with impunity and success, it is hard for remaining colleges to hold out.

Congress could eliminate its counterproductive incentives by applying the tools of fiscal federalism that are common in other federal programs and agencies, such as maintenance-of-effort, matching requirements, or performance standards. The New America Foundation, to its credit, advocates changes to the Pell program to lessen tuition increase incentives and to make certain that more of the Pell billions actually wind up helping those Congress intends to help.

The new report cites a 2002 paper I wrote while at the Department of Education. In this paper I found that student loan debt for the low income went up over time regardless of whether Pell grants increased or decreased. Pell increases were actually related to lower borrowing among the non-needy. To my knowledge, no one else has looked at these relationships, although Lesley Turner has admirably put an annual price tag ($6 billion in 2011) on the amount of Pell grants essentially lost to the low-income due to their fungibility with institutional grants.

When I testified in 2007 on the reauthorization of the Higher Education Act and advocated killing the corrupt FFEL program in favor of putting billions of resulting savings into federal student grants, I did not do so to see low-income borrowing escalate and the access gap widen, but that is unfortunately what has happened. And the blame lies as much on the Hill as it does among the colleges.

[This post also appeared on the web page of the New America Foundation as "Don't Let Congress Off the Hook for 'Undermining Pell'".]

Nebraska Hall of Fame, Part II: Edith Schwartz Clements

May, 2013

Lincoln -- Last year I nominated scientist Edith Schwartz Clements and her husband, Frederic Clements, for the Nebraska Hall of Fame. It was foretold that they could not be selected, because the Hall of Fame Commission cannot induct more than one person every five years (unless the state statute is amended). Nevertheless, the nomination process itself served to remind at least a few Nebraskans of the accomplishments of this remarkable woman.

My summary statement in support of Edith Clements appears below.

In more detailed nomination papers, I described the influence the Clementses had on Willa Cather. Cather not only was an outspoken admirer of the art Edith brought to her science, but new scholarship shows how the Clementsian scientific view of nature shaped Cather's fiction.

If any researcher (particularly a student) has an interest in Edith Schwartz Clements, I have a collection of materials gleaned from the Carnegie Institution of Washington, the American Heritage Center of the University of Wyoming, the Bibliothek des BGBM in Berlin, and the Nebraska State Historical Society; I would be pleased to share them, along with books published by Edith.


Where to start about the indomitable Edith Clements? She was president of her junior class at the University of Nebraska, president of her sorority, captained a women's basketball team, gave fencing demonstrations, was elected to Phi Beta Kappa and Sigma Xi, became a teaching fellow in German, wrote a published dissertation in botany and, in 1906, became the first woman to be awarded a Ph.D. by the University of Nebraska.

She was only getting started. Her dream was to create an ecology laboratory, which she and husband Frederic did on the slopes of Pike's Peak. The laboratory existed for forty years, from 1900 to 1940. It helped train dozens of Nebraskans in botany and ecology, many of whom, like John Weaver, Frank Shoemaker, and Raymond Pool remained in Nebraska, and many of whom spread out across the country from Washington, D.C. to Texas to California, where they left lasting marks in the natural sciences for decades to come.

Edith ran the laboratory. She managed the logistics, chaperoned the undergraduates, enlivened the social activities, and taught ecology. In her spare time, she painted and published guidebooks the likes of which Willa Cather, on more than one occasion, said she would rather have written than all her novels.

Edith was married to Frederic Clements, the founder of the science of plant ecology, but she was no woman merely standing behind her man the great scientist. They were a scientific team, which the Nebraska Press Association once said was the greatest husband-wife team of scientists since the Curies. They published together under both their names, as can be seen in their works for National Geographic. Edith illustrated and helped compile two of the founding publications of the academic discipline of ecology, the second of which, Plant Succession, was recognized by the leading scientific institution of the day, the Carnegie Institution, as a monumental work of scholarship.

In 1911 Edith and Frederic toured Europe with the world's leading botanists and ecologists, making their mark permanently on the world stage. Two years later, the Europeans came to America on tour; they stayed longer at the Clementses' ecology laboratory than at any other location.

Yet Edith Clements' greatest contributions to Nebraska, to the Great Plains, and to her country as a whole may have come later in her life, when the Dust Bowl destroyed the livelihoods of countless farmers and ranchers across the plains. Concealing Frederic's life-threating health condition, she drove him between meetings in the nation's capital and then across the country through the Great Plains and the Southwest to invent and inspire conservation countermeasures to the Dust Bowl.

This was putting ecological science to the benefit of humankind, which was her life's great cause. After Frederic died in 1945, Edith carried on for more than two more decades, writing and defending the Clementses' approach to the discipline they had created and had dominated worldwide for more than half a century.