G THE B IN EN V C R H E S A N 8 8 D 8 B 1 AR SINCE WWW. NYLJ.COM VOLUME 250—NO. 46 WEDNESDAY, SEPTEMBER 4, 2013 WHITE-COLLAR CRIME Expert Analysis Why So Few Prosecutions Connected to the Financial Crisis? n a recent interview, Attorney General investigations and prosecutions of account- Eric Holder told The Wall Street Journal ing fraud and misstatements in financial that he expects to announce in the com- statements. These investigations and pros- ing months significant cases arising from ecutions led to high-profile convictions of the financial crisis of 2008.1 The Attor- officials at Enron, WorldCom, Adelphia and Iney General’s remarks follow criticism that many other companies. the administration has not done enough to By And The contrast between these two periods prosecute individuals and institutions said Elkan Jonathan is reflected in the work of the financial fraud to be responsible for the crisis. One com- Abramowitz Sack taskforces created by the administrations mentator, noting that the Attorney General of George W. Bush and Barack Obama. In did not say whether the new cases would ed, broadly speaking, to the financial this article, we compare the work of the be civil or criminal, dismissed the prospect crisis, but ultimately skirted its edges. In two taskforces and then consider some of new cases with the quip, “I’ll believe it one case, against hedge fund managers possible reasons for the relative dearth of when I see it.”2 of Bear Stearns, the charges stemmed high-profile criminal cases arising from the In fact, the Department of Justice has from statements to investors about their financial crisis. brought few, if any, high-profile criminal funds’ mortgage-related investments, An Overview cases since 2008 charging important figures but the prosecution did not challenge in the mortgage and financial industries, or the underlying issuance or sale of the In November 2009, President Obama otherwise addressing in criminal charges financial instruments.6 In other cases, the announced the creation of a joint fed- the financial transactions that contrib- charges stemmed from inflated valuations eral and state taskforce, the Financial uted to the crisis. We have seen charges of mortgage-related securities.7 Fraud Enforcement Taskforce, to combat against Ponzi schemers exposed by the The high-profile criminal cases of the past financial fraud. The FFETF replaced the sharp decline in securities prices in 2008 several years, involving insider trading and Corporate Fraud Taskforce created by to 2009,3 and a slew of charges involving Bank Secrecy Act and money laundering vio- President Bush in July 2002 in response relatively low-level mortgage frauds,4 but lations, bear little or no relation to the finan- to the bursting of the tech bubble and a the criminal cases brought by the depart- cial crisis.8 These cases have held prominent spate of reported false and misleading ment are widely seen as missing the heart individuals and companies accountable for financial statements by public companies. of what caused the financial crisis.5 serious wrongdoing, but even then, have not Although the stated mission of both task- In several instances, the department satisfied the critics who complain that the forces is almost identical—to strengthen has brought criminal charges that relat- institutions have gotten off too lightly, and the investigation and prosecution of “sig- that the company officers and employees nificant financial crimes” and “ensure the involved in the illegal conduct were wrongly just and effective punishment of those given passes.9 who perpetrate” those crimes10—the work ELKAN ABRAMOWITZ and JONATHAN SACK are members of Morvillo Abramowitz Grand Iason & Anello. Abramowitz is The disparity between perceived finan- of the two taskforces looks very different. a former chief of the criminal division in the U.S. Attorney’s cial misdeeds and criminal prosecutions While the Bush taskforce released regular Office for the Southern District of New York. Sack is a former contrasts sharply with the period, about reports to the president and the public with chief of the criminal division in the U.S. Attorney’s Office for the Eastern District of New York. GRETCHAN R. OHLIG, 10 years ago, when prosecutors and defense detailed information, the FFETF has issued an attorney, assisted in the preparation of this article. lawyers were heavily engaged in criminal only one report in almost four years, and the WEDNESDAY, SEPTEMBER 4, 2013 information was vague. In addition to the On the civil side, the work of the Resi- officers, and obtained over $2.2 billion in infrequent reporting, the type of work done dential Mortgage-Backed Securities Working monetary relief.17 by each taskforce differs as well. The Bush Group, established after the release of the A similar upward trend has been doc- taskforce took credit for thousands of crimi- FFETF’s first year report and cochaired by umented at the CFTC. Fiscal year 2011 nal convictions, boasting in its 2008 Corpo- New York Attorney General Eric Schneider- brought record highs with 99 enforcement rate Fraud Taskforce Report to the President man, is illustrative. Schneiderman brought actions, the highest tally in the agency’s his- of nearly 1,300 corporate fraud convictions, the working group’s first case in October tory and a 74 percent increase over the prior including the conviction of almost 400 CEOs, 2012, filing a Martin Act lawsuit against year, and more than 450 new investigations CFOs, corporate presidents and vice presi- JPMorgan Chase Bank alleging fraud in the opened. In fiscal year 2012, the agency filed dents.11 These prosecutions included the package and selling of residential mortgage- 102 enforcement actions and opened 350 Justice Department’s Enron-related prosecu- backed securities.14 new investigations.18 tions, the Computer Associates securities Why So Few? fraud prosecution in the Eastern District of New York, and options backdating and tax The high-profile criminal cases Several explanations have been offered shelter prosecutions in the Southern District of the past several years bear for the relative dearth of crisis-era criminal of New York, to name a few. cases. We venture some preliminary conclu- This administration’s taskforce, on the little or no relation to the fi- sions of our own. other hand, has talked primarily of civil nancial crisis. First, the financial instruments and cases and regulatory enforcement actions. transactions underlying the recent crisis To the extent the FFETF has made refer- In addition, agencies that belong to the are immensely complex and involve many ence to criminal cases, it is not clear FFETF have relied heavily on civil stat- individuals performing highly technical whether and how they relate to the finan- utes to pursue wrongdoing. In the most tasks with large volumes of data. These cir- cial crisis. The single report released by recent example, Attorney General Holder cumstances present substantial challenges the FFETF in 2011, documenting its first announced a suit against Bank of America to prosecutors not only in understanding year accomplishments, contained no sum- under the Financial Institutions Reform, the relevant facts, but also in explaining mary statistics and did not separately Recovery, and Enforcement Act of 1989 the transactions to a jury. In fact, labor in identify criminal and civil enforcement (FIRREA), alleging fraud in connection many financial transactions is so divided efforts.12 Rather, the report listed the with the sale of over $850 million of resi- among different individuals that any one enforcement groups established within dential mortgage-backed securities, as individual’s guilt can be quite difficult to the taskforce and significant enforcement part of the ongoing efforts of the FFETF.15 articulate, much less prove beyond a rea- actions in each of those areas. Criticized Earlier this year, the taskforce announced sonable doubt. for its slow start,13 the FFETF appears to a lawsuit filed against Golden First Mort- In this light, the Justice Department’s reli- be largely a clearinghouse of information gage and its owner and president under ance on theories of civil liability and lower and resources to facilitate enforcement the FIRREA and the False Claims Act, burdens of proof in cases involving complex by other government agencies. another civil statute frequently relied on mortgage-related financial products makes a While the First Year Report provided by the federal government in pursuing lot of sense from a strategic standpoint, even some data on criminal cases, informa- financial fraud.16 if it leaves some critics unhappy. The Depart- tion on civil enforcement cases seemed Although the FFETF has not released ment has turned to FIRREA and the FCA to to predominate. On the criminal side, the new statistics since 2011, those released file civil charges against financial institutions Mortgage Fraud Working Group noted by member agencies of the taskforce for false statements and fraud in connection an increase in the number of defendants confirm that the government is pursuing with the complex financial deals underly- charged with mortgage fraud by U.S. Attor- more civil remedies in response to the ing the financial crisis. The department has ney Offices and a corresponding increase 2008 financial crisis. Enforcement statis- likewise charged entire firms rather than in the severity of sentences imposed in tics from the SEC reveal a constant steady individuals, no doubt because of the great those cases. The Securities and Commodi- uptick in enforcement actions. Fiscal years difficulty showing sufficient participation ties Fraud Working Group, cochaired by 2011 and 2012 brought the highest num- and knowledge by any one individual to Preet Bharara, the U.S. Attorney for the bers ever for the agency, with 735 and 734 warrant criminal sanction.19 Southern District of New York, reported total actions in those respective years.