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Wall Street Fraud and Fiduciary Duties: Can Jail Time Serve As an Adequate Deterrent for Willful Violations?

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Wall Street Fraud and Fiduciary Duties: Can Jail Time Serve As an Adequate Deterrent for Willful Violations? S. HRG. 111–835 WALL STREET FRAUD AND FIDUCIARY DUTIES: CAN JAIL TIME SERVE AS AN ADEQUATE DETERRENT FOR WILLFUL VIOLATIONS? HEARING BEFORE THE SUBCOMMITTEE ON CRIME AND DRUGS OF THE COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION MAY 4, 2010 Serial No. J–111–88 Printed for the use of the Committee on the Judiciary ( U.S. GOVERNMENT PRINTING OFFICE 63–555 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC PATRICK J. LEAHY, Vermont, Chairman HERB KOHL, Wisconsin JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa ARLEN SPECTER, Pennsylvania JON KYL, Arizona CHARLES E. SCHUMER, New York LINDSEY GRAHAM, South Carolina RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas BENJAMIN L. CARDIN, Maryland TOM COBURN, Oklahoma SHELDON WHITEHOUSE, Rhode Island AMY KLOBUCHAR, Minnesota EDWARD E. KAUFMAN, Delaware AL FRANKEN, Minnesota BRUCE A. COHEN, Chief Counsel and Staff Director MATT MINER, Republican Chief Counsel SUBCOMMITTEE ON CRIME AND DRUGS ARLEN SPECTER, Pennsylvania, Chairman HERB KOHL, Wisconsin LINDSEY GRAHAM, South Carolina DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa CHARLES E. SCHUMER, New York JEFF SESSIONS, Alabama RICHARD J. DURBIN, Illinois TOM COBURN, Oklahoma BENJAMIN L. CARDIN, Maryland AMY KLOBUCHAR, Minnesota EDWARD E. KAUFMAN, Delaware HANNIBAL KEMERER, Democratic Chief Counsel WALT KUHN, Republican Chief Counsel (II) VerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC C O N T E N T S STATEMENTS OF COMMITTEE MEMBERS Page Kaufman, Hon. Edward E., a U.S. Senator from the State of Delaware ............ 2 Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared statement .............................................................................................................. 130 Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1 WITNESSES Breuer, Lanny A., Assistant Attorney General, Criminal Division, U.S. De- partment of Justice, Washington, DC ................................................................ 34 Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia Law School, New York, New York ........................................................................................... 18 Pontell, Henry N., Professor of Criminology, Law & Society, University of California-Irvine, Irvine, California .................................................................... 20 Ribstein, Larry E., Mildred Van Voorhis Jones Chair, Associate Dean for Research, University of Illinois College of Law, Champaign, Illinois ............. 24 Roper, Barbara, Director of Investor Protection, Consumer Federation of America, Pueblo, Colorado ................................................................................... 2 Silvers, Damon A., Policy Director and Special Counsel, AFL–CIO, Wash- ington, DC ............................................................................................................. 6 Verret, J.W., Assistant Professor, George Mason University, Arlington, Vir- ginia ....................................................................................................................... 22 Weissmann, Andrew, Partner, Jenner & Block, New York, New York .............. 4 SUBMISSIONS FOR THE RECORD Black, William K., Associate Professor of Economics and Law, University of Missouri, Kansas City, Missouri, statement .................................................. 49 Blumenthal, Richard, Connecticut Attorney General, Hartford, Connecticut, statement .............................................................................................................. 80 Breuer, Lanny A., Assistant Attorney General, Criminal Division, U.S. De- partment of Justice, Washington, DC, statement ............................................. 84 Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia Law School, New York, New York, statement ........................................................................ 106 Cummings, Andre´ Douglas Pond, Visiting Professor of Law, University of Iowa College of Law and Professor of Law, West Virginia University College of Law, statement ................................................................................................ 118 Galbraith, James K., Lloyd M. Bentsen, Jr., Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, statement ............................................................................. 127 Pontell, Henry N., Professor of Criminology, Law & Society, University of California-Irvine, Irvine, California, statement ................................................ 132 Ribstein, Larry E., Mildred Van Voorhis Jones Chair, Associate Dean for Research, University of Illinois College of Law, Champaign, Illinois, state- ment ...................................................................................................................... 141 Roper, Barbara, Director of Investor Protection, Consumer Federation of America, Pueblo, Colorado, statement ............................................................... 152 Silvers, Damon A., Policy Director and Special Counsel, AFL–CIO, Wash- ington, DC, statement .......................................................................................... 165 Verret, J.W., Assistant Professor, George Mason University, Arlington, Vir- ginia, statement ................................................................................................... 172 Weissmann, Andrew, Partner, Jenner & Block, New York, New York, state- ment ...................................................................................................................... 174 (III) VerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC VerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC WALL STREET FRAUD AND FIDUCIARY DU- TIES: CAN JAIL TIME SERVE AS AN ADE- QUATE DETERRENT FOR WILLFUL VIOLA- TIONS? TUESDAY, MAY 4, 2010 U.S. SENATE, SUBCOMMITTEE ON CRIME AND DRUGS, COMMITTEE ON THE JUDICIARY, Washington, DC. The Subcommittee met, pursuant to notice, at 9:30 a.m., in room SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, Chairman of the Subcommittee, presiding. Present: Senators Specter, Whitehouse, Klobuchar, and Kauf- man. OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE OF PENNSYLVANIA Chairman SPECTER. Good morning, ladies and gentlemen. The Judiciary Subcommittee on Criminal Law will now proceed with this hearing on the issues of alleged Wall Street fraud and what is the appropriate governmental response. The issues have come into sharp focus recently with the filing of charges by the Securities and Exchange Commission against Gold- man Sachs. We have seen an economic crisis gripping the country for many months, enormous loss of jobs, enormous loss of gross na- tional product, problems that are worldwide, and serious issues have been raised as to the connection between the so-called mort- gage bubble and what has happened. In the allegations by the Securities and Exchange Commission, they have focused on packaging of mortgages, subprime mortgages, then bundled and then securitized with the stock being sold backed up by those subprime mortgages. The allegation has been made that the player who put together the mortgages then engaged in short selling. But a question arises as to what the duty, if any, is owed by the participants in this kind of an arrangement where in- vestments are sold, what reliances on the part of the purchasers that there is a sense of a solid investment, while at the same time they are being sold short, which is a bet that they are going to go down in price. Some defenses have been raised, but we are dealing here with sophisticated buyers, and we are going to inquire into that. There are complicated arrangements with a variety of definitions and classifications, different duties owed as to someone who is de- (1) VerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC 2 fined as a broker, someone who is defined as a dealer, someone who is defined as an investment adviser. And the final resolution of duties really depend upon how Congress sees it. We have the au- thority to define those relationships once we understand them. An extraordinarily complex field. I have long believed that it is insufficient to have fines for fraud. For corporate fraud, if you have a fine, it is calculated as part of doing business. And even where you have $1 billion fines, it is a relative matter where you have corporations which have $85 billion in net proceeds and very, very substantial profits. I had experience as a public prosecutor years ago and found that criminal convictions worked as an appropriate measure of punish- ment and worked as a deterrent to others. This Subcommittee
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