Losing everything you have in a get rich quick scheme designed by dubious “bankers” with no government regulation or oversight?
In China, there’s an app for that.
Millions of Chinese investors, according to this morning’s Washington Post, have invested huge sums of money – in some cases, their entire life savings – in so-called peer-to-peer (P2P) lending companies, hoping for a huge return on their investments. Instead, most have gotten nothing.
Instead of being the answer to their financial prayers, the Post notes that the Chinese now realize that many of the now-defunct companies were, instead, “little more than pyramid schemes allowed to flourish for years in China’s overheated economy.”
And they were allowed to flourish – and then fall – with no oversight or regulation by the Chinese government.
The results have been devastating. So much so, in fact, that many Chinese are doing something extraordinary by their country’s standards: They’re protesting their government’s inaction.
“In early August,” the Post reports, “swindled investors from throughout the country planned a protest outside the China Banking and Insurance Regulatory Commission in Beijing to demand repayment.” And even though “[t]he demonstration was preemptively crippled by security officials, who rounded up potential activists at their homes and workplaces,” anger at the government’s failure to protect investors – or return any of the money they invested and lost – continues to grow.
Now, Donald Trump has spent a lotof time on Twitter and elsewhere railing against China’s economic policies (and its failures to follow intellectual property laws and so forth). But in reality, and in a very crucial way, Trump isn’t fighting against the Chinese lawlessness that leads to ripping off Americans; instead, he’s looking to bring a particular aspect of Chinese lawlessness (the failure to protect investors) here to the U.S. in order to enable others (particularly some of the biggest donors to the Republican party) to rip off Americans.
As China feels intense pressure to step up its oversight of shady financial practices, Trump is practically bragging about leaving American investors vulnerable to such crooked schemes. “No President has ever cut so many regulations,” Trump said in February, adding that, “It’s not even close.”
Indeed, since taking office, Trump’s Cabinet Secretaries have led a virtual crusade against nearly every type of regulation imaginable. And in a White House where appointees regularly compete for a public display of the President’s affection, his pick for the Securities and Exchange Commission, Hester Peirce, is determined not to be left behind.
Last month, Peirce told Politico she would support ending decades of common-sense policy allowing investors to band together and sue corporations that swindled or defrauded them, opening the door for those companies to include forced arbitration clauses in their public offerings. Doing so would wipe away one of the most powerful deterrents to the kind of corporate shenanigans and Ponzi schemes now embroiling China.
That’s because the threat and effectiveness of investor lawsuits are undeniable. In McGrew v. Harris Bank, a case pursued in Washington State, a successful class action recovered more than $14 million for investors cheated in a Ponzi scheme. Similarly, in Getty v. Philip Steven Harmon, lawyers for investors identified a key person responsible for this scheme who was affiliated with SunAmerican Securities, Inc. - which knew or should have known that securities laws were being violated. The suit recovered more than $5 million for cheated investors.
These examples show how private enforcement of our securities laws has been essential to getting redress for people ripped off by Ponzi schemes. But perhaps the most significant example ever came in the form of the Bernie Madoff catastrophe. In that case, the S.E.C. seems to have had at least some advance warning about the shaky nature of Madoff’s enterprise, but failed to take meaningful regulatory action. Then after the grenade went off, destroying the savings of thousands of Americans, the most significant recoveries that were brought about came from private securities class actions against people who enabled Madoff’s fraud – and, not, notably, from the S.E.C. So when Trump S.E.C. officials talk about gutting private actions, they’re taking exactly the wrong lesson from the agency’s greatest failure in recent decades.
Yet under Peirce’s plan, the U.S. government would effectively adopt the no regulation stance of the Chinese, importing one of the most dangerous aspects of other governments’ policies while eroding confidence in American markets and jeopardizing the savings of millions of investors here.
(Does anyone imagine that any of Donald Trump’s voters pulled the lever for him because they were thinking, “man, I wish that America was more like China, where scam artists can use Ponzi schemes to steal peoples’ life savings”? Despite a lot of media profiles of Trump voters, that particular voter hasn’t yet been found.)
It’s a proposal so rife with landmines that even the Chinese are (albeit belatedly) waking up to the realization that government inaction can lead to devastating consequences.
“Last week,” the Post reports, “China’s banking regulator publicly called for urgent measures to clean up the fiscal mess left by the failing peer-to-peer industry. It also laid out a 10-point plan to address the financial risks inherent in the industry.”
But for many Chinese investors, the plan is too little too late. And Chinese investors who have been swindled out of millions by the unchecked Ponzi schemes are turning to what – until the Trump Administration – would be a uniquely American solution: getting redress from the courts.
One group of investors have “pooled about $7,000, enough to hire a lawyer to try to seek their money,” with one Beijing lawyer telling the Post that “a lawsuit is the best tool that many investors have,” while noting that, in a country where lax government regulation led to such devastation in the first place, “success remains extremely rare.”
“The government,” one investor who lost $80,000 investing in three P2P companies said, “has completely failed to act.”
For an American President so doggedly determined to aggressively take on Chinese financial practices – and to take credit for the strength of American markets – it should be an ominous warning not to emulate such behavior, but instead to reinforce the longstanding U.S. policies that have helped investors hold crooked companies accountable while keeping American investments among the most trusted, and securely regulated, in the world.