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Why we cannot assume CFP® equals “Fiduciary”

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Rick Kahler MS CFP

By Rick Kahler MS CFP®

One of the most important ways to find competent and trustworthy investment advisers is to be sure they owe you a fiduciary duty.

This means the advisers’ legal and ethical responsibility is to act in your best interests, not their own or their employer’s.

An ongoing legal case featured in an October 31 article by Ann Marsh in the online Financial Planning magazine highlights both the importance and the difficulty of finding a fiduciary adviser. (Disclosure: I am one of several advisers quoted in the article.)

The whistleblower case against J. P. Morgan involves an adviser and former J. P. Morgan employee, Johnny Burris, who says he was fired after refusing to give in to pressure to sell some of his employer’s high-priced products that he did not believe to be in his clients’ best interest.

Importance?

Here is why this case is important to anyone looking for financial advice: many advisers at investment firms like J. P. Morgan hold the Certified Financial Planner (CFP) designation. According to the website of the CFP Board of Standards, the organization that awards the certification, CFP’s are required “to put your interests ahead of their own at all times and to provide their financial planning services as a ‘fiduciary’—acting in the best interest of their financial planning clients.”

This sounds straightforward enough. Since 2008, the CFP Board has positioned the CFP designation as an indicator that an adviser will put clients’ interest first.

Unfortunately, that isn’t quite accurate.

Here is the tricky part: Advisers who sell financial products are allowed to “wear two hats” in their interaction with consumers. Any time they are giving financial advice and acting as financial planners (as defined by the CFP Board), they are expected to act in the best interest of the client/customer.

Yet if they don’t give any financial advice other than what is ancillary to the sale (a very confusing concept) of financial products to the same client/customer, that fiduciary requirement does not apply. The consumer is apparently expected to have the exceptional discernment and knowledge to know which hat is being worn at any given time.

As a consumer, you can assume that advisers holding the CFP® designation have completed many hours of education and passed tests to assess their professional competence.

However, because of the CFP Board’s hairsplitting, you cannot assume “CFP” equals “fiduciary.”

You still have to ask two essential questions:

The first is “In this engagement with me, who are you primarily responsible to, me or your company?” An adviser employed by a brokerage house or investment bank is very likely to be held most responsible to their company and expected to sell that firm’s financial products. This sets up a conflict of interest, in that the products with the highest fees will make the most money for the firm and the adviser, while those with lower fees may well be in the best interest of the clients.

A CFP® adviser who works for an independent financial planning firm may be less likely to be pressured to sell a given line of products. They also may do enough financial planning to be required to be a fiduciary.

However, you still need to ask the second question: “How do you get paid?” Any adviser who receives income from selling financial products cannot fully represent clients as a fiduciary without first overcoming an inherent conflict of interest.

***

stock market

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Assessment

An adviser who doesn’t sell any products, who gives investment advice, and whose income comes solely from client fees is answerable and responsible to those clients as a fiduciary. You can trust that such a fee-only adviser will genuinely put your interests first. 

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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***

Welfare Benefit Trust Plans for Physicians?

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A SPECIAL REPORT FOR THE ME-P

“Hall of Fame” for Egregious Investment Advice

By David K. Luke MIM, Certified Medical Planner™ – candidate

[Physician Financial Advisor – Fee Only]

www.NetWorthAdvice.com

www.CertifiedMedicalPlanner.org

Physicians unfortunately often become unwitting targets of some very egregious investment advice. Usually it involves an investment product with an imbedded fat commission just waiting to be deposited in a “financial advisor’s” bank account.

In the “Hall of Fame” of egregious investment advice is the Welfare Benefit Trust. About 10 years ago, while I was working for a top five national brokerage firm (this was before my fee-only days when I was still on the “dark side”) our internal Insurance Products Department at the brokerage firm’s head office presented an amazing investment product. This “Welfare Benefit Trust” we were told should be shown to our profitable small business owners as a cure for their every ill caused by paying too much taxes. A Welfare Benefit Trust essentially works like this:

  • The business provides a fringe benefit for their employees, such as health insurance and life insurance.
  • The benefit is established in the name of a trust and funded with a cash value life insurance policy
  • Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company, and
  • The owners of the company can withdraw the cash value from the policy in later years tax-free.

Yes, the holy grail of tax avoidance has been achieved: tax deductible up front and tax-free when you withdraw. By the way, if you are not familiar with such investments there is a reason. They are not legal by the tax code. Physician practices, as well as other small and mid-sized businesses, became buyers into these welfare benefit trusts as they were sold as a way for the practice to “protect” a large profit in a certain year from being taxed. We were told it was not uncommon for a single transaction into a welfare benefit trust to be $200,000 to $300,000 dollars or more in a single premium payment, yielding typically a six-figure commission check.

A few years later the gig was up as it became obvious these could not be tax legal. My understanding is that most medical practices that bought these “unrolled” them when the major brokerage firms realized that avarice got the best of them and stopped selling them. In 2007, the IRS and the Treasury Department issued a formal warning cautioning “about certain Trust Arrangements Sold as Welfare Benefit Funds”. The IRS called these “abusive schemes” and made such a transaction what the IRS lovingly calls a “listed transaction”. Essentially, a listed transaction is a transaction that the IRS has determined to be a tax avoidance transaction. The IRS even keeps these Listed Transactions on their website, listed in chronological order from 1 to 34. Welfare Benefit Trusts is #33.

Good Welfare Benefit Trusts

First of all, it is important to mention that “there are many legitimate welfare benefit funds that provide benefits” according to the IRS. Internal Revenue Code Sections 419 and 419A spell out the rules allowing employers to make tax-deductible contributions to Welfare Benefit Plans. There is nothing wrong with these plans and no mystery to them. After all, a medical practice or any business for that matter is allowed to deduct the costs of doing business as an expense. This includes employee salary and benefits.

VEBAs (Voluntary Employee Benefits Association) have been around since 1928 and are used by employers to provide health, life, disability, education and other benefits for their employees and are the original Welfare Benefit Trusts. When properly established and executed, a VEBA can be a legitimate employee benefit structure. In 2007 the United Auto Workers, in order to relieve the Big 3 Automakers from carrying the liability for their health plans on their accounting books, formed the world’s largest VEBA with over $45 billion in assets.

Bad Welfare Benefit Trusts

However, the IRS does have a problem with Welfare Benefit Plans that are promoted to small business owners as a scheme to avoid taxes and provide medical and life insurance benefits to key employees that in substance primarily serve the owner(s) of the business. These 419 Welfare Benefit Plan schemes claim that the employer’s contributions are deductible under IRC section 419 as ordinary and necessary business expenses, allowing the business owner to provide a life insurance policy for his favorite employee, himself, and accumulate cash value in a life insurance policy.

Lest there be any confusion or debate, IRC 264(a)(1) states:

(a) General rule

No deduction shall be allowed for –

(1) Premiums on any life insurance policy, or endowment or

annuity contract, if the taxpayer is directly or indirectly a

beneficiary under the policy or contract.

While VEBAs have been used properly, as in the UAW example above, unfortunately they are often a front for an abusive tax shelter. In the 1970’s VEBAs were being used by the wealthy as a popular tool for tax reduction and asset protection. In 1984 Congress passed the Deficit Reduction Act, which limited the use of VEBAs. In the 1990’s however VEBAs were structured to give business owners tax benefits not allowed and got back on the IRS radar. Two state medical societies along with a neonatology group practice became test cases by the IRS that helped close those VEBAs with abusive tax structures and purporting to be employee welfare benefit plans: Southern California Medical Professionals Association VEBA, New Jersey Medical Profession Association VEBA and Neonatology Associates, PA. Although the VEBAs claimed to have favorable determination letters, the actual execution of the plan did not comply with the law, mainly by allowing the employees to hold term policies in the plan that could be converted into universal life policies at the same insurer and use the conversion credit account to spring cash value in the policy. This then allowed policyholders to borrow against the UL policy as a supposedly nontaxable source of retirement income, with the repayment of the loan paid out of the policy’s death benefits. (“Making Welfare Plans Work”, Advisor Today, September 2000 P 110). This of course is not allowed under the tax code.

Those that think that they may be in the clear with their abusive tax shelter because:

  1. A large passage of time has occurred since they have owned it
  2. They have a favorable determination letter
  3. Other honorable businesses/ Medical Societies also have the same tax shelter
  4. My insurance agent said it was legal

may want to read the 98-page ruling by the United States Tax Court filed on July 31, 2000 in the case of the above-mentioned Neonatology and related cases. The long arm of the IRS reached back 9 years to 1991, 1992, 1993 disallowing hundreds of thousands of dollars and assessing deficiencies and huge “accuracy-related” tax penalties. Even the doctors that had died since then were not given a break either; their estates and surviving widows were assessed the deficiencies and penalties.

In 2002 the IRS talked Congress into passing new laws basically killing the use of multiple employer 419 plans. Some TPAs (third party administrators) that had set up the multiple employer plans discovered that they could use single employer 419 welfare benefit trusts and VEBAs because Congress forgot to include them when they passed the negative laws shutting done the multiple employer plans. This forced the IRS to issue notices 2007-83 and 2007-84, Rev. Ruling 2007-65 and make welfare benefit trusts listed tax transactions now on the listed tax transactions list. (“Negative IRS Notices On 419 and VEBA Plans” Roccy M. Defrancesco Nov 1, 2007)

Ugly Welfare Benefit Trusts

I call these “Ugly” because these Welfare Benefit Trusts were sold to small business owners after the 2007 IRS listed transaction warning, and after the multiple IRS notices and revenue rulings. The major brokerage firms by 2004 had stopped selling Welfare Benefit Trusts to protect their own financial interests, realizing these were compliance and lawsuit time bombs. The 2007 IRS listed transaction notice along with multiple other notices however did not seem to stop some smaller broker dealer firms and life insurance agents from promoting these.

I have become aware of the fact that Welfare Benefit Trusts that are in violation of the basics of the tax code (unlimited full deduction of premium,  100% tax free distribution to owner of cash value) are still being sold even today and even affecting existing clients. These Welfare Benefit Trusts go by many different names and the insurance agents selling them are using a number of different insurance companies to fund the plan. These plans involve the sale of an insurance policy usually with a six-digit premium that often pays the insurance agent a six-digit commission, so perhaps I should not be surprised that individuals (physicians?) are still being victimized

Conversation with IRS Attorney on Welfare Benefit Trusts

On January 20, 2012 I discussed with Betty Clary, an IRS attorney that helped draft the listed transaction #33 on the IRS website, on what exactly the IRS considers an abusive Welfare Benefit Plan. She stated that, once you take out the fact that the trust cannot be offering a collective bargaining element which is covered by another IRS code, there were three elements they look for:

  1. There has to be a Trust that claims to be providing welfare benefits
  2. There is either a cash value policy involved that offers accumulation or a policy in which money is set aside for a future policy in which accumulation occurs, such as a term policy that can then offer a higher accumulated value.
  3. The plan cannot deduct in any year more than the benefit provided. For example if the plan just provides a death benefit, the most that can be deducted in a year is only the term cost of that benefit, not the entire premium. If the plan offers medical benefits, then only the cost (what was paid out to the employee) for that benefit can be deducted in that year.

I found it interesting that the IRS is pursuing this broader definition as an abusive plan. Betty explained that in the case of a discovered abusive Welfare Benefit Plan, the IRS would disallow the deductions, assert income back to the owner as a distribution of profits, and assess penalties. The courts are clear that you cannot get out of penalties by claiming you are relying on the person that sold you the Welfare Benefit Plan.

What if you currently have a Welfare Benefit Trust for your Practice?

Realizing that someone you trusted has financially devastated you, carelessly misguided you and sold you a bogus tax program in order to pay cash for his new 7 series BMW can be a difficult and rude awakening. After accepting the fact that your Welfare Benefit Plan you have for your practice meets the basic criteria as mentioned in this article as an abusive transaction, I would recommend that you consult an attorney that specializes in pursuing promoters of abusive Welfare Benefit Plans and discuss your options. I have had discussions with Lance Wallach, an accountant and expert witness used in a number of Welfare Benefit Trust cases, which has confirmed to me that you must be proactive. You may be advised to file an IRS form 8886, which is a disclosure form related to prohibited tax shelter transactions. The penalties for failure to file a form 8886 can be stiff. Of course, filing this form will open the Pandora’s Box on your Welfare Benefit Trust to the IRS. Lance has told me that many of these 8886 filings are done incorrectly. An incorrectly filed IRS form is an unfiled IRS form, so please consult a CPA who is experienced in this area. Your attorney that has expertise with Welfare Benefit Trusts will be able to guide you with this. Regarding recourse, according to Lance, most all cases are settled out of court, as the insurance company, the agent, and the agency prefer to avoid the publicity.

Conclusion

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Video on Why The Federal Government Is Suing The Banks

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The Case against Banks – Trying to Understand the Financial Crisis?

Did you know that Federal regulators recently filed a lawsuit against banks for their role in the financial crisis. This motion graphic done, with What’s Trending, breaks down the story so you can understand the facts behind the case.

Video Link: http://columnfivemedia.com/work-items/whats-trending-motion-graphic-why-the-federal-government-is-suing-the-banks/

Source: www.ColumnFiveMedia.com

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Is the Mutual Fund Company “Invesco” Dissing Podiatrists?

Attacking One of Us = Attacking all of Us

By Ann Miller RN MHA

[Executive-Director]

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Dear ME-P Readers, Subscribers and Visitors,

As you know, here at the Medical Executive-Post, we champion all hard working, honest and ethical medical professionals, regardless of specialty or degree designation. From the ME-P corporate executive suite, to the mailroom, we appreciate their laborious ministrations under increasingly difficult cultural, political and financial conditions on behalf of the US citizenry.

And so, it was with much dismay when this new advertisement from the behemoth mutual fund company Invesco, headquartered right here in Atlanta GA, was brought to our attention. Rest assured. We are not amused and request your input!

You Input Requested

Do you agree with the Ad? Is it an attack on one medical specialty – or on all of us? Would your opinion differ if the ad mentioned a proctologist – or a dentist? How about a brain surgeon or a nurse? Is the dated impression of doctors being on the golf-course still accurate?

More importantly, does the ad affect your impression of Invesco as a contemporaneous company aware of the modern Health 2.0 culture, or a backward thinking dinosaur resting on its [glorious or in-glorious] past?

Is it Time to Close the Door on Invesco?

Are they Aware?

Do you think that the huge and costly marketing department at Invesco is is even aware that our iMBA Inc sponsored, and ME-P promoted textbooks and handbooks, dictionaries, white papers and CD-ROMs on investing, financial planning, insurance, and risk and wealth management for physicians, was largely written by medical professionals of all stripes? Many holding dual degrees and designations like MBA, CFP®, CMP™, JD, MHA, CFA, etc.

Link: http://www.CertifiedMedicalPlanner.org

Or, that they have been used in [non-clinical] continuing education programs for medical professionals, for more than a decade?

Of course, this includes allopaths, osteopaths, podiatrists, nurses, physical therapists and other related members of the healthcare ecosystem? After all, it often takes a team to treat a poly-systemically ill patient.

Link: www.BusinessofMedicalPractice.com

Assessment

Feel free to contact Invesco directly and tell em’ what you think about their new ad campaign [positive or negative]:

Inveso Client Services:

  • Calls within the United States 800.959.4246
  • Calls outside of the United States 713.626.1919 (Call Collect)

Hours of Service – Monday-Friday, 7:00am-6:00pm CST; subject to change due to NYSE holidays or early market closings.

Contact Link: https://www.invesco.com/portal/site/us/menuitem.33e9ce03dea2c250a83af864f14bfba0/

Industry Indignation Index: 65/100 [probably smelly]

Conclusion

Over the next few weeks we will aggregate your thoughts and may report back to you, and Invesco, about the results. Till then, be sure to also tell us what you think. right here? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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A Look at Suicide Statistics

The Eleventh Leading Cause of Domestic Death

Courtesy Medical Billing and Coding [Infographics]

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One million people commit suicide every year. Suicide is the 11th leading cause of death in the US.

Japan

Japan also has one of the highest suicide rates in the industrialized world and these suicides are mostly attributed to unemployment and depression. It is the leading cause of death for Japanese people under 30; many choose to jump in front of trains as a suicide method. When suicide hotlines were set up in Japan, 1300 calls a week were received.

Assessment

This is a staggering number in Japan, and it signifies the importance of obtaining a job for people, since unemployment and depression are popular reasons for suicide.

Link: http://www.medicalbillingandcoding.org/a-look-at-suicide-statistics/

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Vows of Change at Moody’s

But, the Flaws Remain the Same

By Jesse Eisinger ProPublica | @eisingerj 

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In the aftermath of the financial crisis, nobody has gone to prison and there haven’t been any serious structural changes in the financial system. But at least everyone involved feels bad about it and has vowed to change, right? For Moody’s Investors Service, those pledges are empty, Bill Harrington says.

In this column, co-published with New York Times’ DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions.

A Window to the Debacle

Mr. Harrington was an analyst in the structured finance group at Moody’s for more than a decade, much of it spent rating collateralized debt obligations. He worked at Moody’s until the middle of last year, although he left the C.D.O. group in 2006. In his job, he had a window on the biggest debacle in the history of credit ratings. Companies like his allowed banks to pass off hundreds of billions worth of paper onto investors by waving their magic wands and deeming the securities investment-worthy.

Since then, the government has tried to change the ratings agencies. The Dodd-Frank financial reform law has some bold measures, like making the ratings firms liable for their judgments. Unfortunately, the rules are in danger of not being enforced because of budget constraints and resistance from the agencies.

But the biggest problems at Moody’s may have been cultural. The dominant ethos during the boom, instilled by Brian M. Clarkson, the former president and chief operating officer [1], was that customer service was Job 1. And the customers were the bankers.

Banker Customers

The ability for bankers to run the show has long been an obvious flaw in the ratings system for structured products. Investment banks create the securities and benefit when they receive generous ratings. Banks pay the agencies that supply the ratings. Yet the agencies are somehow supposed to hold the line with the people who are responsible for their paychecks.

To Moody’s credit, Mr. Clarkson is now gone. To Moody’s discredit, however, his philosophy is largely still in place, at least according to Mr. Harrington.

To the last day Mr. Harrington was there, he says, bankers remained hard-charging and aggressive advocates for their deals, sometimes to the point of abusing the analysts.

Wall Street ain’t beanbag, so that’s not surprising. The troubling aspect is that the Moody’s bosses acted like disinterested brokers between two sides in disputes with analysts, instead of standing up for the analysts and defending their independence. “That was the standard operating procedure that got worse and worse. We didn’t get the benefit of the doubt,” Mr. Harrington said.

When I asked Moody’s about Mr. Harrington’s experiences, a spokesman wrote in an e-mail: “We take strong exception to your characterization of Moody’s culture. We have always had an unwavering culture of integrity, analytical independence and objectivity and that culture has only grown stronger since the financial crisis.” He pointed to numerous efforts at Moody’s to improve the ratings process and to bolster Moody’s procedures.

In the spring of 2009, Mr. Harrington was working on a deal and a banker was persistently calling him. He returned the first call, but had other work that day and didn’t return the next two calls right away. “I thought caller ID served a purpose,” he said wryly.

Soon after, his boss alerted him to a call he’d received from Michael Kanef, the head of compliance. Mr. Kanef wanted to know why Mr. Harrington hadn’t returned the banker’s call. Mr. Harrington was shocked. Why was the head of compliance getting involved? But he got the apparent message: Analysts are to lean over backward for the bankers. That had been Mr. Clarkson’s philosophy, and now it was his successors’.

“The culture persists — and it’s being enforced by compliance department,” Mr. Harrington said.

So who is Mr. Kanef? Before he was the head of regulatory affairs and compliance, he was in charge of ratings on residential mortgage-backed securities [2]. Did such an executive deserve a promotion?

And then there is Raymond W. McDaniel, the chief executive throughout the housing boom, the bust and the entire financial crisis. He remains at the helm. And he had to swallow the bitter pill of more than $9 million in compensation last year. Indeed, most of Moody’s top management has been in place through the crisis.

Moody’s didn’t make Mr. Kanef or Mr. McDaniel available for comment.

The Blame Game

So if Moody’s doesn’t think the executives who ran the company were responsible for its collapse in reputation and contribution to the multitrillion-dollar financial crisis, who do they think is to blame? The analysts, Mr. Harrington says. The hard-working, low-level minions with little decision-making power.

Mr. McDaniel has conceded that sometimes “we drink the Kool-Aid.”

But that hardly makes the analysts to blame.

“If some analysts drank the Kool-Aid, it was only because management mixed and stirred it up and threatened that analysts wouldn’t get to heaven on the spaceship unless he or she drank it,” Mr. Harrington said.

Moody’s has recognized it has a disaster on its hands — a public relations disaster. Clients — the investors who use ratings — have been losing faith in the agencies. Mr. Harrington said that Moody’s executives marched analysts into meetings to explain how they were going to tell their clients about how much Moody’s had grown and learned from its mistakes. It was as if they were in “Communist re-education camp,” he said.

At one of these meetings, an analyst asked if they could be given training in how to deal with banker abuse, Mr. Harrington recalls. The suggestion was immediately shot down by the executive running the meeting.

Moody’s says that its retraining efforts are part of its continuing efforts to reach out to investors to improve its ratings.

Assessment

When Moody’s executives make public presentations, as when Mr. McDaniel testified [3] in front of the Financial Crisis Inquiry Commission, the overarching theme is that the agency’s problem was limited to the housing-related structured finance. Few people saw how fast and deep the housing market would crash. How could the ratings agencies?

A few weeks ago, Alan Greenspan penned an instantly notorious line: “With notably rare exceptions,” [4] he wrote, unfettered financial markets have worked well. Moody’s persists in believing that with notably rare exceptions, so too have credit ratings.

Full Article: http://www.propublica.org/thetrade/item/vows-of-change-at-moodys-but-the-flaws-remain-the-same/

Conclusion

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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/

Assessment

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.

Conclusion

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