Banging Our Heads on the Low Hanging Fruit of Wall Street Criminal Cases Ripe for Prosecution

A few days ago, the NY Times reported that Angelo Mozilo of Countrywide Mortgage fame is not going to face criminal charges. Nor does it seem that any of the MOTU will see anything more than civil fines from the SEC, if that. Evidently, the Department of Justice (DOJ) doesn’t think Mozilo’s actions rose to the level of criminality despite the fact that this same Angelo Mozilo is on record with an email describing his own products as dangerous.

E-mails released by the SEC quoted Mozilo denigrating various risky loans that Countrywide and other lenders provided, especially subprime mortgages that didn’t require down payments from borrowers who had abysmal credit.

“In all my years in the business, I have never seen a more toxic product,” Mozilo said in one message.

I was working in a US Attorney’s office (USAO) in the mid 80’s when the savings and Loan crisis was going on. I remember a steady drumbeat of criminal cases happening all over the country. I naively assumed that today’s bigger, further reaching crisis would trigger the same kind of response. Boy, am I being proven wrong. It seems like DOJ and SEC have almost completely abdicated any notion of criminal accountability, and more often than not, civil penalties are born by shareholders. So, if you are a MOTU and thinking about ripping off your shareholders and the public via securities fraud, wire fraud and mail fraud, what exactly is your deterrent?

For me, this is money paragraph in the NY Times piece:

Today, Mr. Black says, the government doesn’t have nearly as many resources to pursue such cases. With the F.B.I. understandably focused on terrorism, there isn’t a lot of manpower left to dig into potential crimes that may have taken place during the financial crisis. Fewer than 150 of the bureau’s agents are assigned to mortgage fraud, for instance. Several lawyers who represent white collar defendants told me that outside of New York, there aren’t nearly enough prosecutors who understand the intricacies of financial crime and know how to prosecute it. It is a lot easier to prosecute people for old-fashioned crimes — robbery, assault, murder — than for financial crimes.

[emphasis added]

Well, yeah, duh, of course white collar crime is harder to prosecute. You have well-dressed, well-spoken attractive defendants with really good lawyers. There is no dead body, there is no smoking gun. Nine times out of ten, the prosecution does not have the advantage of the kind of innate racial prejudice that so often “helps” bring about convictions in street crime cases. However, the crux of these prosecutions is proving that the defendant had the “intent to defraud.” What has already come out in the press makes it clear that there are several cases where that intent will be almost laughably easy to show. Hello? Goldman Sachs actually designed and sold a product that was meant to fail, just so one of its clients could bet against it. Yet that merits only a civil case?

It is because these kinds of cases are harder to prosecute that getting a job at a USAO is supposed to be so prestigious. This is supposed to be where the best and brightest young legal talent go to win their spurs. The whole notion that suddenly DOJ lawyers don’t know how to prosecute white collar cases is astounding to me. Has a post-Monica Goodling DOJ completely lost the ability to recruit talented young lawyers? Are you now getting an army of Yoos, Schlozs and Monicas? How many DID you hire from unaccredited law schools? Surely, there are a few competent ambitious youngsters who want to become national heroes by finally bringing about the accountability in the financial sector the public cries out for.

I have the answer, it’s called “in house CLE” (continuing legal education). Find some USAO alumni from the good old days when your office used to be competent and give them a contract to come in and teach the theory and techniques of prosecuting financial crimes. And stop with excuses for your nonfeasance.

There is no end to obvious cases to be made. As Yves Smith points out

First, the statement, “fraudulent actions at Countrywide took place at the bottom of the food chain” suggests that it was low level employees operating on their own. Huh? Countrywide had the best organized call centers in the industry. It has been widely reported that the bank would call borrowers six months after a loan closing and tell them, falsely, that a reset was imminent in order to get them to refi quickly and generate more fees for the bank. Similarly, Countrywide would also advertise specials, most often for no-fee loans. Ex employees have told me that it was a pure bait and switch. The call centers were armed with scripts to tell callers why that product was not good for them and another one was more suitable. My source have told me they are highly confident none of the advertised loans was every sold.

This point to institutionalized patterns of deception, involving senior managers, not low level employees out of control.

Similarly, Nocera suggests investors knew Countrywide’s loans were drecky. That too is misleading. The bank made specific representations about the quality of the loans they were making, and now a number of court cases allege the bank violated those promises by putting far worse loans into its deals. So the idea that the investors knew what they were buying is a canard, and one Nocera surely knows about, and chooses to overlook.

[emphasis added]

Voila! Two cases, and rather straightforward ones at that. Not that hard to prove and most of the evidence has already been uncovered. That’s before you even get into all the prosecutorial tools the Sarbanes-Oxley Act affords you. See Yves for more on that. Enough of this look forward, not backward crap. Accountability requires reviewing past bad acts, and it provides deterrence for future bad acts. Which is also why you should read this piece from BMAZ.

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