Where Are the Financial Crisis Prosecutions?

The White Collar Slump?

By Jesse Eisinger
ProPublica: jesse@propublica.org

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You may have noticed that prosecutors in this country are in something of a white-collar slump lately.

The stock options backdating prosecutions have largely been a bust [1], not because it wasn’t a true scandal. The Securities and Exchange Commission and the Justice Department investigated more than 100 companies. Over a hundred took accounting restatements. Yet only a handful of executives went to prison, with some high-profile cases fizzling out. Prosecutors also stumbled in other high priority corporate fraud prosecutions, like the KPMG [2] tax shelter and the stock-exchange specialists [3] cases.

Bear Sterns

The most spectacular prosecutorial flameout [4] was the case against the Bear Stearns hedge fund managers. The consequences of that disaster are still reverberating. The United States attorney’s office in Brooklyn rushed to haul low-level executives in front of a jury based on a few seemingly incriminating emails. The defense was easily able to convince jurors that these represented only out-of-context glimpses of fear as markets swooned, not a conspiracy to mislead. But, now we have a supposedly new push: the insider trading scandal.

Insider Trading

The United States attorney in Manhattan, Preet Bharara, and the United States Attorney, General Eric H. Holder Jr., are hyping their efforts. “Illegal insider trading is rampant and may even be on the rise,” Mr. Bharara dubiously pronounced in a speech [5] in October. The Feds are raiding [6] hedge funds and publicly celebrating their criminal investigations related to insider trading.

The storyline is that Wall Street now lives in fear. Hedge fund managers’ phones might be tapped, any stray remark is suspect, and old trades are being exhumed so that the entrails can be examined.

In fact, plenty of folks on Wall Street are happy about the investigation. A scant few — the ones with clean consciences — like the idea that the world of special access to favorable tips is being cleaned up.

But others are pleased for a different reason: They realize the investigation is a sideshow.

All the hype carries an air of defensiveness. Everyone is wondering: Where are the investigations related to the financial crisis?

Enron, Lehman, Merrill, Citigroup and Others

John Hueston, a former lead Enron prosecutor, wonders: “Have they committed the resources in the right place? Do these scandals warrant apparent national priority status?”

Nobody from Lehman, Merrill Lynch or Citigroup has been charged criminally with anything. No top executives at Bear Stearns have been indicted. All former American International Group executives are running free. No big mortgage company executive has had to face the law.

How about someone other than the Fabulous Fab [7] at Goldman Sachs? How could the Securities and Exchange Commission merely settle with Countrywide’s Angelo Mozilo [8] — and for a fraction of what he made as CEO?

The world was almost brought low by the American banking system and we are supposed to think that no one did anything wrong?

The most common explanation from lawyers for this bizarre state of affairs is that it’s hard work. It’s complicated to make criminal cases in corporate fraud. Getting a case that shows the wrong-doer acted with intent — and proving it to a jury — is difficult.

But, of course, Enron was complicated too, and prosecutors got the big boys. Ken Lay was found guilty (he died before he served his time). Jeff Skilling is in prison now, though the end result was bittersweet for prosecutors when much of his conviction was overturned by the Supreme Court. WorldCom’s Bernie Ebbers and Tyco’s Dennis Kozlowski are wearing stripes.

Complicated Cases

Sure, it takes time to investigate complicated cases. Many people think that the SEC, at the least, will bring some charges against top executives at Lehman Brothers. The huge, ground-breaking special examiner’s report [9] on Lehman Brothers laid bare problems with Lehman’s accounting. But that report came out back in March — on a bank that blew up more than two years ago. That seems awfully slow.

The most popular reason offered for the dearth of financial crisis prosecutions is the 100-year flood excuse: The banking system was hit by a systemic and unforeseeable disaster, which means that, as unpleasant as it may be to laymen, it’s unlikely that anyone committed any crimes.

Stupidity is No Crime

Or, barring that wildly implausible explanation (since, indeed, many people saw the crash coming and warned about it), the argument is that acting stupidly and recklessly is no crime.

As I ride the subway every morning, I often fantasize about criminalizing stupidity and fecklessness. But alas, it’s not to be.

Nevertheless, it’s hardly reassuring that bankers, out of necessity, have universally adopted the dumb-rather-than-venal justification. That doesn’t mean, however, that the rest of us need to buy it. It’s shocking how pervasive and triumphant this narrative of the financial crisis has been.

Link: http://www.propublica.org/thetrade/item/where-are-the-financial-crisis-prosecutions/


Just as it’s clear that not all bankers were guilty of crimes in the lead-up to the crisis, it strains credulity to contend no one was. Corporate crime is usually the act of desperate people who have initially made relatively innocent mistakes and then seek to cover them up. Some banks went down innocently. Surely some housed bad actors who broke laws.

As a society, we have the bankers we deserve. Sadly, it’s looking like we have the regulators and prosecutors we deserve, too.


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11 Responses

  1. How to Select an E&O Policy for FAs

    For bankers, accountants, insurance agents and financial advisors [FAs] selecting an errors-and-omissions insurance policy, consider these following tips:

    1. Read all the definitions in a policy.
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    With respect to definitions, it is very important to understand what constitutes a claim. Is it being served with legal papers – or – is it just thinking that you might be? Some insurers require the insured to give written notice to the company of any act committed that may result in a written claim. Other key definitions are “financial planner”, “financial advisor” and “financial planning services” etc. You may discover that the definitions used by the insurers are not the ones generally understood in the profession. They may vary by insurer.

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    Dr. David Edward Marcinko MBA CMP™


  2. Annual Wall Street Review of Shenanigans

    This past year prosecutors, regulators, Congress and journalists have spent the year uncovering the financial shenanigans that brought the market to its knees. It’s been marked by a few blockbuster settlements and more revealing investigations as well as by some noticeable inaction in the reckoning.


    Hope Rachel Hetico RN MHA
    [Managing Editor]


  3. The Financial Crisis Inquiry Commission has pulled together a valuable trove of documents, but often did not push for material that could answer the most pointed questions about the 2008-09 banking meltdown.




  4. FBI Raids Home Of Former NAPFA President

    The home of a Seattle-based investment manager, Mark F. Spangler, a high-profile name in the financial planning world, has been raided by FBI agents in search of records that could tie him to defrauding clients out of as much as $46 million.

    According to published reports, the SEC is also investigating the matter.




  5. Occupy New York City

    24 hour news and information about Liberty Plaza Occupation in New York City.




  6. It’s just too hard!

    Former Justice Department official, David Cardona, told the Wall Street Journal that bringing financial wrongdoing to account is “better left to regulators,” who he says are doing a “fine job” bringing civil cases.


    Would you like some cheese with that whine?



  7. Jeff Skilling Remains in Jail

    The poster boy of crime-doesn’t-pay.

    Post-the Enron era was Jeff Skilling, the hard charging CEO of the firm who was sentenced to 24 years in prison for fraud. And, it seems, Jeff will remain in jail.




  8. Now … Five Years On

    Five years after a wave of risky mortgage bets cratered the banking system and sent the global economy into recession, the banks behind the mess have paid or agreed to pay billions of dollars fines and restitution.

    But, not a single senior executive from the biggest banks has gone to jail.
    Any thoughts?



  9. About Citigroup Inc

    Did you know that it was reported the U.S. Department of Justice is preparing to sue Citigroup Inc on charges that the bank defrauded investors on billions of dollars worth of mortgage securities in the run-up to the financial crisis, after talks to resolve the probe broke down?




  10. Mary Jo White was Supposed to Turn Around the S.E.C.
    [She Hasn’t]

    The new chairwoman of the S.E.C. has made some unnecessary foes while her agency has bungled several significant regulatory rules.




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