Posted December 9, 2013
by Jerry Alatalo
Jed Saul Rakoff is a federal judge for the U.S. District Court for the Southern District of New York. He speaks here at the University of Pennsylvania Law School’s Distinguished Jurist Lecture 2013. After listening to his speech, he could be described as William Black’s milder-mannered brother. The body of his speech deals with the paucity (scarcity) of prosecutions of Wall Street managers for the massive frauds leading to the 2008 financial collapse in the U.S.A. and around the world, still being felt to this day.
It is interesting to note that Mr. Rakoff studied philosophy and law, and how this combination may have played a part in his views on how illegal activities during the years before the crisis have been handled by the Justice Department and other financial law enforcement agencies. My guess is that the study of philosophy came into the picture during Judge Rakoff’s analysis.
The speech will give men and women a clearer view of the situations and circumstances surrounding the 2008 meltdown.
So, why have there been so few prosecutions (almost zero) of managers at large financial companies? Were those managers unaware of the fraudulent activities of those under them, not realizing the extent or existence of frauds being perpetrated? Were there many mistakes, or intentional obfuscations of just how worthless complex financial products such as mortgage-backed securities were to buyers/customers at those firms?
Most of the men and women who have knowledge of the cause(s) of the 2008 meltdown are fully aware of the part played by massive frauds. Mr. Rakoff has come to conclude that the failure to prosecute people for those frauds signifies an “egregious (flagrant) failure of the justice system”, in sharp contrast to the prosecutions of hundreds of individuals during earlier years’ financial scandals involving “junk bonds” along with the 1980’s Savings and Loan (S+L) debacle, where hundreds of individuals became prosecuted, convicted, and punished.
He says that 800 people were prosecuted for their parts in the 1980’s S+L financial crimes. He points out that the Financial Crisis Inquiry Commission, when reporting on the 2008 situation, mentioned the word “fraud” 157 times, that the FBI was warning of the coming mortgage fraud crisis in 2004, and that a number of people had warned of the same in the years before 2008.
Judge Rakoff gives some possible reasons for the lack of prosecutions. Proving fraudulent intent is difficult, but top CEOs were aware of the legal issues, failed to make inquiries into what their companies were doing or not doing – many simply did not want to “know”. He points out that the Supreme Court has come down on the side of justifying “willful blindness” and “conscious disregard” as indicators of illegal intent, therefore prosecutable.
Mortgage backed securities in the forms of new, complex financial products were bought and sold at a very rapid pace, where it is difficult to determine if sellers were aware they were lying to buyers/customers, and the public – worldwide – was greatly harmed by the misrepresentations. Another reason for sparse or non-existent prosecutions was the idea that somehow the national and world economic situations would be harmed if individual managers were to face justice and punishment.
The judge points out that this defeats the concept of equality under the law to the fullest measure. He views Department of Justice excuses “unconvincing”. He does let the DOJ, SEC, and other enforcement agencies have some slack because there were anti-terrorism cases, Ponzi scheme cases, and insider trading cases all being pursued, pointing out that 120 FBI agents were available to investigate 50,000 mortgage fraud cases according to the Justice Department, then correcting that assertion as the SEC is responsible for mortgage-backed securities’ fraud cases.
He relates how the SEC had its focus on Ponzi scheme investigations after the infamous Bernie Madoff scandal, and that any mortgage-backed securities fraud cases were focused on smaller firms which were more easily prosecuted, as opposed to large financial institutions where years of long, hard work was required to prosecute. The least difficult cases became the focus, which were the Ponzi and insider trading varieties. The judge mentions that government lawyers have an incentive to win cases because then they have credentials for more lucrative career opportunities in the private sector, another factor in the choice to go after the cases which could be described as “low-hanging fruit”.
Judge Rakoff then mentions the government’s repeal of the Glass-Steagall Act, enacted shortly after the Great Depression to prevent the activities which led to that economic/financial crisis from happening again. Financial firms were now able to go full speed ahead with risking depositor’s money on speculative, highly risky investments such as trillions of dollars worth of mortgage-backed derivatives and other exotic, impossible to understand financial products.
Around the year 2000 mortgage underwriting regulations were tossed out, leading to over 50% of mortgages being of the sub-prime category, often seeing people having no real ability to repay mortgage loans given those loans and shortly becoming unable to hit the monthly payment. One can guess that those who were pushing these obviously bad loans – aware that the customers would default – surely knew about the bundling of those mortgages in “toxic assets” derivatives as the escape hatch for banks and other mortgage lending firms. These toxic mortgages were then sold to institutional investors – pension plans, city, state, and national governments, etc. around the world – after the major credit rating companies branded them “AAA”, analogous to the street merchants with dozens of watches inside their coats.
Judge Rakoff describes prosecutorial history in the past thirty years where there was a shift from going after high-level individuals to going after companies. His view is that companies cannot be liable unless individuals in the company are liable. He quotes a colleague who said, non-prosecution agreements had become the “mainstay of white-collar criminal indictments”. Instead of pursuing white-collar criminals like members of the mob hierarchy, beginning with low-ranking people who then “flip” to allow the law to go up the ladder and prosecute, accommodation is negotiated with the companies to allow the companies to hire lawyers for internal legal investigations. The companies’ lawyers prepare a detailed report showing areas of legal concern needing to be remedied, individuals are not prosecuted, and compliance measures become determined.
The judge comes to explain that managerial agents of the company, the people responsible for the crimes, should be prosecuted. He simply defines fraud as, “lying to obtain money or property”, and that failure to prosecute individuals serves to erase any form of deterrence for future frauds, hurts many innocent people when penalizing companies, and – “shows weakness in the justice system that needs to be addressed”.
Judge Rakoff speaks calmly and softly. His words on white-collar crime are thunderous.
(Video source Penn Law channel – YouTube)
- Why No Bankers Go To Jail (bloomberg.com)
- Federal Judge Slams DOJ For Not Prosecuting Wall Street Execs (blacklistednews.com)
- Here’s Why No Bankers Go to Jail (huffingtonpost.com)
- Federal Judge Slams DoJ for Not Prosecuting Wall Street Execs (commondreams.org)