Some commenters on this blog have lamented the prosecution off Swiss banks and their enablers and asked why, in effect, those who live in glass houses should cast those stones. Perhaps this is an instance that tends to prove their case.
The whole article is a good read. Excerpts I found interesting are:
But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past fifty years or so in bringing to justice even the highest-level figures who orchestrated mammoth frauds. Thus, in the 1970s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken.
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Without giving further examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the chief collateral for highly leveraged securities that were marketed as AAA, i.e., securities of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?
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But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this case. Who, for example, was generating the so-called “suspicious activity reports” of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top-level banker, one might argue, confronted with growing evidence from his own and other banks that mortgage fraud was increasing, might have inquired why his bank’s mortgage-based securities continued to receive AAA ratings. And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?
This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, including in cases involving complexities, such as accounting rules, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A. (2011):
The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances.
Thus, the department’s claim that proving intent in the financial crisis is particularly difficult may strike some as doubtful.
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The third reason the department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy. Thus, Attorney General Eric Holder himself told Congress:
It does become difficult for us to prosecute them when we are hit with indications that if you do prosecute—if you do bring a criminal charge—it will have a negative impact on the national economy, perhaps even the world economy.
To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse—sometimes labeled the “too big to jail” excuse—is disturbing, frankly, in what it says about the department’s apparent disregard for equality under the law.
In fairness, however, Holder (who later claimed his comment was misconstrued) was referring to the prosecution of financial institutions, rather than their CEOs. Moreover, he might have also been influenced, as his department unquestionably was, by the adverse reaction to the Arthur Anderson case, where that accounting firm was forced out of business by a prosecution that was ultimately reversed on appeal. But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high-level executives were prosecuted, as opposed to the institution itself.
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Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent; rather it has offered one or another excuse for not criminally prosecuting them—excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations.
[Readers can savor Judge Rakoff's speculations in the article, but I won't cover them here.]
In short, a focus on quite different priorities is, I submit, one of the reasons the financial fraud cases have not been brought, especially cases against high-level individuals that would take many years, many investigators, and a great deal of expertise to investigate. But a second, and less salutary, reason for not bringing such cases is the government’s own involvement in the underlying circumstances that led to the financial crisis.
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On the one hand, the government, writ large, had a part in creating the conditions that encouraged the approval of dubious mortgages. Even before the start of the housing boom, it was the government, in the form of Congress, that repealed the Glass-Steagall Act, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the SEC but also of such diverse banking overseers as the Office of Thrift Supervision and the Office of the Comptroller of the Currency, both in the Treasury Department. It was the government, in the form of the Federal Reserve, that kept interest rates low, in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to individuals with low incomes who might have previously been regarded as too risky to warrant a mortgage.
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It was the government, pretty much across the board, that acquiesced in the ever-greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay. Indeed, in the year 2000, the Office of Thrift Supervision, having just finished a successful campaign to preempt state regulation of thrift underwriting, terminated its own underwriting regulations entirely.
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The final factor I would mention is both the most subtle and the most systemic of the three, and arguably the most important. It is the shift that has occurred, over the past thirty years or more, from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions. It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but until relatively recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer.
The reasons were obvious. Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent. Moreover, under the law of most US jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?
In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single person. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and as a result, government policy has taken the form of “deferred prosecution agreements” or even “nonprosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. Such agreements have become, in the words of Lanny Breuer, the former head of the Department of Justice’s Criminal Division, “a mainstay of white-collar criminal law enforcement,” with the department entering into 233 such agreements over the last decade. But in practice, I suggest, this approach has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.
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In conclusion, I want to stress again that I do not claim that the financial crisis that is still causing so many of us so much pain and despondency was the product, in whole or in part, of fraudulent misconduct. But if it was—as various governmental authorities have asserted it was—then the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.I noted Judge Rakoff's other recent musings in Judge Rakoff, the Wegelin judge, Is Interviewed on the U.S. Initiative Against Swiss Banks (Federal Tax Crimes Blgo 12/12/13), here.
The case discussed on willful blindness is Global Tech Appliances, Inc. v. SEB, ___ U.S. ___, 131 S. Ct. 2060 (2011), here. For other Federal Tax Crimes Blog discussions on willful blindness (which also goes by other verbal formulations, such as willful ignorance and conscious avoidance, click the link below for Conscious Avoidance.