The New York Times’ Gretchen Morgenson dutifully tells us, based on a Los Angeles Times sighting, that federal prosecutors will not be filing charges against the Tanned One, Angelo Mozilo of Countrywide. This follows the failure of investigations to lead to a criminal prosecution of another major perp in the financial crisis, one Joseph Cassano, the head of AIG’s Financial Products unit.
There has been far too little discussion of why no legal action has been taken.
Readers can no doubt come up with additional reasons, but I see at least two. The first is that the deregulation of financial services in the 1980s and 1990s, along with some very questionable court decisions (as in ones that reversed decades of precedents), have rendered many activities that would have been impermissible perfectly kosher. Yet the very fact that that people who oversaw businesses that were clearly engaged in reckless behavior and at a minimum serious omissions and misrepresentations to investors have gotten off scott free.
The ability of executives to use lawyers and accountants as paid-for human shields has greatly hindered prosecutions. Cassano’s “get out of jail free” card was that he told his accountants what he was up to.
In the sort of thefts that little people engage in, like holding up a store, the person who drives the car is an accessory and can be prosecuted. But white collar crooks can escape if they get their advisors to wink and nod (in both criminal and civil cases, most juries will be very reluctant to find an executive guilty for something his accountant signed off on). Now that would suggest that the logical route is to go after the crooked (or at best criminally incompetent) advisors. But as we wrote in ECONNED:
Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.
I haven’t seen anyone itemize the various changes over the last two decades that have wound up facilitating abuses in the financial services industry; the closest I’ve seen was in Frank Partnoy’s book Infectious Greed, which was published before the crisis.
The failure of legal experts to discuss what would need to change for seemingly obvious crimes to be prosecuted successfully strikes me as peculiar. But maybe the experts have circled the wagons and don’t want to expose the many ways in which financial reform fell short.
The second reason is timid prosecutors. A commonly invoked excuse for the failure to file criminal cases is that they are hard to win. But the standard set by the investigators seems to be that they will win all or most of the cases, which is bizarre. As long as a prosecution does not look foolish or overreaching, filing cases where there are good grounds for doing so does have deterrence value. High profile cases are costly to the targets: they consume management time and generate bad PR. Stanley Sporkin, the SEC’s head of enforcement in the 1970s was feared all over Wall Street precisely because he was not afraid to go after questionable behavior, even if he might not prevail in court.
And you aren’t going to be any good at litigating financial cases if you are afraid to try them. That in turn leads to a vicious circle: you won’t attract high caliber law school grads if you aren’t seen as being a good training ground (by contrast, the County of New York Robert Morgenthau was always able to attract talent because it was recognized in the law profession as a top flight operation; Sonia Sotomayor, Eliot Spitzer, and Andrew Cuomo were all assistant DAs under Morgenthau).
An obvious example is the SEC’s recent failed prosecution against former Bear Stearn hedge funds executives. Conventional wisdom is that the outcome proves that the loss confirms that it is hard to win complex criminal cases. But Enron was vastly more complex, yet it resulted in a raft of settlements (with jail time and big fines) and convictions. The fact is the SEC did a bad job. It made rookie mistakes, like relying overmuch on e-mails that looked damaging and failing to do adequate discovery on the surrounding circumstances.
By contrast, there is a blindingly obvious case that has not been filed, namely, against Richard Fuld for Sarbanes-Oxley and SEC violations. For reasons that strike me as unfathomable, the opinion of Anton Valukas, the Lehman bankruptcy examiner, who said he did not think Lehman’s deeds rose to the level of criminal prosecution, has been taken as the final word. Valukas has an admirable record as a litigator, but attorneys will often have differences of points of view as to the viability of a cause of action, and also might come up with legal theories different than the ones Valukas contemplated (particularly since structured finance litigation is a cutting edge area of the law).
I’d welcome securities lawyer input on this one, but the argument in Fuld’s favor would seem to be that he didn’t know about Repo 105 (an unacceptable posture under Sarbox, but that might get him out of criminal liability) and that the London law firm signed off on the procedure. Against Fuld would be that Lehman was clearly desperate to dress up its financial and was engaging in numerous questionable valuations that were attracting the attention of analysts, that the firm went opinion shopping for a legal opinion, and that the financial presentation was clearly misleading.
As various readers (as well as former securities litigators) have told me, prosecution is a very effective deterrent to white collar criminals. It certainly won’t end shady behavior but it would cut the incidence down considerably. Hence its absence as a real threat is a serious loss.
29 comments
Comments are closed.
Why would someone at the SEC want to jeopardize their chance at partnership at a white shoe law firm by going hard after against the biggest clients of white shoe law firms? The people at my law school who went to govt lawyering vs. big law firms werent differentiated by their abilities, just their short term v. long term perspective (go work at the SEC and thanks to its horrible levels of under staffing do legitimate case work or go work at a big law firm and spend 10 months a year in a room going over documents looking for three sentences.)
If you were a REAL kick-ass, they’d have to hire you to get you on their side! I can’t tell you how many times attorneys get hired by clients because the client winds up seeing the lawyers on the other side of the table in action and realizes they are better than the attorneys he engaged.
You arent buying legal acumen per se. You are being “As veteran of 10 years at the SEC, our newest Partner has long impressed members of Congress on both sides of the political divide with his legal acumen”
You are missing my point. Being feared would make you MORE valuable.
In the heyday of M&A in the 1980s, the best hostile takeover banker, Bruce Wasserstein, would regularly get retained for very big bucks to sideline him. Similar logic at work here.
But being feared is HARD. Only a relative few can succeed.
And if top management (at a regulatory agency) doesn’t WANT effective staff, they will bypass the most competent job applicants in favor of the lazy and corruptible. And then sabotage the efforts of anyone who surprises them with an excess of energy and enthusiasm.
Yves I understand your point. You are missing mine — it isnt about being feared. Its about generation upon generation of law grads learning a couple of lessons from their ex-big law partners. 1) never make too big of a stink about securities regulation because the courts will slap you down anyway 2) focus on relationship building with the firms and 3) whenever you get too far ahead there is the glorious Supreme Court to point out to you how you are going too far in your regulation.
It is literally ingrained in us. I remember a couple of my friends who were recent grads telling me that in 09 they had Sand Weil show up to their class and lecture them on securities regulation…
Hmmm!
Why would someone at a white shoe law firm even think of choosing for a partnership, an ex-SEC lawyer which only call to fame is to be the one who hold the record for bending over backward the farthest? No white shoe law firm would take a chance of jeopardizing their reputation like that, no?
Give the SEC free hands to do their job, (ie. get the bought and paid for Rent-A-Congress out of the way NOW!!) pay their top honchos very well so they can tell Lloyd or Jamie to go beat their respective beaver if need be, and, like Yves said, bring cases to Court already!! That is how you attract good people who want to be with a top gun operation.
If Wall Street won’t see the Light, make them feel the heat!
Are you serious? The upper echelons of numerous white shoe firms are full of ex-SEC guys.
I just saw this same bit of news on HufPost a minute ago. Unbelievable!
What can I say, except that our wise O’leader O’bama needs to pardon O’Maddoff immediately…
Psychoanalystus
The problem with indiciting Mozillo from the sham government we in the US have at this point is that his conduct was not qualitatively different from that of many, only a tad more egregious. To indict him is to put the 24 news cycle on a trial which makes plain there should be dozens more headed up the river after him. And that wouldn’t do in this US of A, that the rich should be accountable for their crimes. So better to let a lizard slither off than to dig out the nest. That would upset to many Very Important and Serious People.
We do not at this point have a justice system in the US. The rich got scared in 2007, and they pushed through a soft coup to effectively take over state economic policy. It is impossible at present to indict and try anyone of wealth for an economic crime. I’m completely serious in making that assertion. This is a political issue far, far more important than which wimp is going to run for either of the right wing parties we have nationally. How many citizens out there do you suppose are even aware that the rich are now exempt from criminal prosecution?
But I will tell the oligarchs something they should hear if they care about their own survival: This class exemption from the rule of law will prove deadly to them. Look to any revolution you care to find, and the impunity of the wealthy is very near the top of the grievances which drives people into open revolt. For your own survival, you anti-socials of great wealth, you’d better cough up a monied thief to actual justice now and again, because your corrupt and heavy hand is showing here.
Richard Kline said: “How many citizens out there do you suppose are even aware that the rich are now exempt from criminal prosecution?”
As Thomas Frank put it in the latest issue of Harper’s:
“…we have spent the past thirty years doing everything we could to transfer the wealth of the nation into the bank accounts of the affluent, to send them victorious, happy and glorious, long to reign over us.
“Oh, we’ve cut their taxes, gladly transferring much of the cost of keeping their holdings safe onto our own shoulders. We’ve furnished them with special megaphones so that their voices might be heard over the hubbub of the crowd. We have conferred upon them separate and better schools, their very own transportation system, and a full complement of private security guards. We’ve built an entire culture of courtiers and sycophants to make their every waking hour an otherworldly delight.
…Americans are born to serve and assist the wealthy; it is our inalienable duty … We cater to the wealthy in our work lives and we glorify them in our leisure … We take up collections for the public schools because we feel the fortunes of the rich ought to go unencumbered by that burden.” – Thomas Frank “Servile Disobedience” (Harpers)
And for all this deference and servility, what do the rich offer non-rich Americans in return?
What they offer in return is they loot the country, exempt themselves from criminal prosecution, then blame it all on workers and the middle class.
Well said! What could be a better example of what happened in housing? The banks created system desitined to collapse and the only people losing their wealth and often their home or the hard working citizens of the United States. The entire burden of the trillions lost has been dumped on the shoulders of the Middle class as the banks get bailed out and the politicians get their palms greased, the American homeowner gets fleeced. Of course as banks make record profits…..
The Banks are running the country and driving policy. It is likely never going to stop at this rate because no one has the stones to stand up and speak the truth. All the new blood in congress is apparently not much different than the old. they are all bought and paid for by the banks and their lobbyists and Obama is such an elitest it is commical. He wouldn’t know middle class if it slapped in in the face.
totally agree that just bringing more public suits will change culture and behavior on wall street. it terrifies senior people when a spitzer or cuomo bring public attention to bad behavior especially if the enforcement action is made public at the beginning of the process. while some might think it unfair, the concept of ensuring that regulatory enforcement action is made public at the beginning of the process as opposed to the end matters. the problem is that the Street fights back and there aren’t many public officials or jounalists who look great when light shines on their own affairs. hence lack of courage to be a crusader.
Remember what happened to Spitzer?
The layers of corruption cannot be penetrated by one person…
There are all of the reasons above, and then there is a really simple one that helps tie it together.
We see it all the time in cost-cutting in both business and government: the details are delegated and the only reports back are often financial reports. Reports of problems are viwed VERY unfavorably and can cost jobs and promotions.
“Just Make it Happen!” is a common mantra. The underlings are told to cut costs by 25% and raise sales by 25% without any direction at all beyond “Just Make it Happen!”
This is then passed down layer by layer until it starts to get close to the layers where the people (costs) will be cut. That is when the real fun starts. In these levels, jobs are on the line and people will do ANYTHING to “Make it Happen!”
Meanwhile, in the corner suite corporate policies are produced that state that the company values are highly laudable and illegal activities are not countenanced. Meanwhile, six layers down, people are trying to figure out how to foreclose on orders of magnitude more houses with half the stay the staff they had in the previous downturn. In order to “Make it Happen!” they are well beyond cutting corners. Any memos that go up the line about this are met with complete disbelief that the staff do not understand “Make it happen!” Most of the pople know that these memos should not be produced, but internal e-mails get circulated among the staff “Making it Happen.”
Meanwhile, there is a stong likelihood that many of the senior executives are completely clueless that the very fundamentals of their business have lost both their ethical and legal underpinnings. Since the financial reports they are looking at show everything going according to plan, they believe that they have effectively cut costs and raised revenue successfully. Many of them are not deliberately criminal – it is more simply a massive case of negligence and incompetence. For this they are regarded with 8-figure annual compensation packages. If they are going to get nailed with something, it will probably be because they engaged in an after-the-fact coverup.
However, things like Repo 105 and Fuld do not fall into this category. But it is unusual for blatantly illegal activities to soil the carpets of the executive suites. That dirty work gets done in the trenches by the people who would otherwise lose their jobs.
There should be a lot of people going to jail. However, I think we will need to wait for the Final Crash for that to start to happen at which time all credibility will have vanished from everyone in the financial system. I expect that will start in the next couple of years. The Bernank and TurboTax Timmy are working overtime to position us for it.
Here is a classic example of an executive suite structured to generate desireable memos: http://us.cnn.com/2011/POLITICS/02/20/rumsfeld.interview/index.html?hpt=C1
Rumsfeld says they would not have invaded Iraq if the White House knew that there were no WMDs in Iraq. However, it was clear to everybody in the intelligence community what memos about WMD in Iraq should say. So rumors and uncorroborated “eye witnesses” were elevated in importance and systematic investigations like the UN work were lowered in importance.
The executives said “Make it Happen” and it did. We are still paying the price. This was simple incompetence and negligence for the most part. The criminal activities came later with the Yoo memos etc.
My guess is that most of the criminal prosecutions of Wall Street executives are going to be related to statements to investors, regulators, and Congress that they make after they find out how deep the doo doo is after years of “Making it Happen” in their organizations. That is where the coverups and lies proably begin in the corner offices. The SEC and Justice may not even be looking there.
I hesitate to tie something so serious to a work of fiction, but this is very well depicted in “Tree of Smoke” by Denis Johnson. It’s particularly self-defeating in intelligence which, of course, is supposed to inform the decision making of the policy makers, not the other way around.
I have the misfortune to work with the SEC almost daily. It is full of ambitious incompetents. I agree, the case against Mozillo would have been easier to prosecute than the Enron case was. But, just like the Cassano case, could not be prosecuted because of who else would have to be brought in as a “co-conspirator”. If the public knew how the SEC and DOJ really worked, both would be closed down. The “revolving door” controls prosecutions. That’s the bottom line.
Remember USA, the Big Fall will come at the moment the internal objective contradictions of the society become too great to ignore. All empires come apart within, not from external enemies…all of this is tragically comical when Big Military will not save it from within.
Wolves cull the weak and feeble otherwise they might get hurt.
Eric Holder is the worst lawyer in the U.S. He’s confident Julian Assange has committed crime(s), but can’t find any indictable miscreants from the housing bubble and resultant crash. Damn, he’s making John Mitchell look good.
As far as I can tell from my less than perfect coverage of news releases, New Century was another figment of our imaginations, and quite distressing to me personally, so must be the guy I knew that worked there.
Another Reminder that Crime Pays: “….federal prosecutors will not be filing charges against the Tanned One, Angelo Mozilo of Countrywide. This follows the failure of investigations to lead to a criminal prosecution of another major perp in the financial crisis, one Joseph Cassano, the head of AIG’s Financial Products unit.”
Hmmm, where is Abimael Guzman (aka, Presidente Gonzalo) when you need him?
“Everything’s [f**d] up, and nobody goes to jail,” he said. “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.” – a former Senate investigator (via Matt Taibbi)
Almost two years ago Mozilo toped Time’s list of those responsible for the financial crisis. A little tar and feathers might be instructive. Also state AGs should file criminal charges and give these bloated parasites nowhere to hide.
I will still blame Congress and the State legislators for being afraid of conflict; regulators can’t do their job if they don’t have any clear charts, maps or courses to sail with. Admittedly, my analysis is in the stage of a conjecture trying to work its way to a hypothesis. I am still relying on Theodore Lowi’s book The End of Liberalism for this but his look at Liberal (We’re all liberals now) government regulation has yet to be challenged: it was a total failure because Congress was too fearful of creating controversy by actually writing real law so it’s been a series of wholesale regulatory give-aways to the Executive Branch with broad delegations and no real substance.
watch the ‘Inside Job’ made by Charles Ferguson
and read the Matt Taibbi article in this month’s Rolling Stone magazine
then you will have no questions about how Wall St can get away with no criminal charges for questionable conduct
It’s been 30 months since the shit hit the fan and people are runing out of dilitory games to play with the victims and disenfranchized.
The wild card is that America has 80 million guns and everyone is slowly understanding the fraud perpetrtrated with monetary policy,garbage regulatoty oversite and rampant fraud.
So when do the kidnappings, bombings,assisnations and RPG’s & rockets start hitting Manhattan and the Hamptons?
Please revive the picture stories of Goldman Sachs guys packin’ concealed carry weapons while being stalked by high powered rifles accross the street.
Interesting thought but the congress would bring in thousands of troops to protect those criminals. They don’t want to have their gravy train destroyed.
If the public new about the DOJ and SEC it would be closed down…..I doubt it. The publics knows about Washington DC, politicians, criminals running rampant in both houses, tbtf bank criminals and they all seem to be thriving. What makes anyone think the SEC and DOJ would be any different. We have the most incompetent and criminal government on the planet but no one really says much because they are so brain washed into thinking that it is capitalism. Complete joke.