Right in the middle of the midterm election season, and just before Attorney General Eric Holder reportedly might step down, he made it known that the Justice Department will really really indict Wall Street executives in financial fraud cases. This time, definitely. “We expect to bring charges in the coming months,” Holder said on Wednesday. I guess the first six years of an Attorney General’s tenure is all just a wind-up.
The unlucky executives who happen to still be legally culpable when Holder needs to establish a legacy appear to include former Countrywide CEO Angelo Mozilo, who has been retired for six years (and whose case would be a civil prosecution), and individuals involved with the illegal rigging of foreign exchange trades. The forex scandal is certainly bad, but it’s indistinguishable from similar riggings to the Libor benchmark interest rate or the interest-rate swap calculation ISDAFix.
It’s as if the Justice Department constructed a dartboard with all the sundry financial crimes and decided to throw their resources at the one they happened to hit. (It’s not for nothing that the forex crimes mainly involve foreign banks, too.)
Preparing the ground for when this all falls through, Holder made some unusual pre-indictment excuses in his speech this week at New York University. He cited deliberately opaque lines of authority at large financial institutions that make it difficult to pin responsibility on high-ranking individuals for fraud. And he engaged in the time-honored executive branch prerogative of blaming Congress, arguing that awards to financial whistleblowers were set too low, and that lawmakers needed to modify the Financial Institutions, Reform, Recovery and Enforcement Act (FIRREA) to raise those payouts above the $1.6 million cap.
I’ve talked to plenty of whistleblowers in my day, and not one of them ever mentioned getting into it for the money. Most just want to do the right thing, at great personal risk. Whether or not they should be rewarded handsomely (and they should, since they invariably put their careers on the line), I don’t think announcing a bigger payday will move the needle on more people coming forward.
Anyway, law enforcement agencies have plenty of methods, beyond waiting for whistleblowers, to collect evidence that implicates those at the very top. The Justice Department is finally getting around to the most obvious one: flipping guilty lower-level employees to go after the big fish. Why this wasn’t done in previous cases boggles the mind, but in the forex probe, prosecutors have begun to outfit informants with body wires, among other generic crime-fighting tools.
Even local police departments in one-stoplight towns employ these techniques, so the belated pick-up by the Justice Department, years after the financial crisis receded, actually makes them look far worse than normal. The fact that Marshall Miller, No. 2 at DOJ’s criminal division, pleaded with banks this week to turn in their own employees, effectively handing over investigative power to the banks to make their own scapegoats, is similarly dispiriting.
Despite the promise of individual accountability, DOJ is considering financial settlements in the forex probe, which would cost banks billions in fines. It is in this area where we can determine just how serious DOJ is about cracking down on corporate fraud.
An amazing yet little-noticed story in The Wall Street Journal this week uncovered that federal prosecutors have failed to collect $97 billion in civil and criminal fines, a figure that has tripled since 2004. DOJ’s average annual collections of fines over the past decade total less than 25 percent of the penalties imposed. A spokesman said that only $10 billion of the remaining $97 billion will ever get collected, as the individuals or businesses cited simply don’t have the ability to pay.
The story offers a bit more heat than light. We don’t completely know who hasn’t paid the Justice Department; examples include Jordan Belfort, the broker whose life story was revealed in The Wolf of Wall Street, and ponzi schemers Thomas Mitchell and Bernie Madoff. Whether or not companies have paid their debts, including big banks or other corporations, is unclear. The Justice Department’s Inspector General has an ongoing investigation into the efforts of the agency to collect criminal and civil debts, including “the process for classifying debts as uncollectable.”
What we do know is that the Justice Department never shies away from putting big dollar figures in press releases touting its “tough” enforcement actions. Holder did it again on Wednesday: “In total, the Justice Department has brought over 60 cases against financial institutions since 2009, resulting in recoveries totaling over $85 billion,” he said. The fact that his agency routinely collects only one-quarter of the penalties it issues didn’t get mentioned.
It’s getting to the point that we should mentally reduce all these figures in our heads the day DOJ announces them, secure in the knowledge that they don’t really collect debts so much as hope that the money comes in. And if that’s the effort put to the civil penalties, I won’t hold my breath for good outcomes from the criminal cases.
It’s not like criminal cases are hard to find in the financial world. Yesterday the Consumer Financial Protection Bureau filed suit against a brazen scheme by the Hydra Group, an online payday lender. Hydra would buy personal financial information from data brokers and then make deposits to people’s banking accounts without their knowledge. Having given them the “loan,” Hydra would then take out money from those accounts in “finance charges” that eventually far exceed the initial deposit.
Consumers would often not find out about this loan they didn’t request until getting hit with thousands of dollars in charges, and if they complained, Hydra would produce phony loan documents to prove their consent. The Federal Trade Commission found a different payday lender running the same scam, and also filed suit.
CFPB and FTC got a federal judge to shut down the schemes and freeze the assets of the companies involved, and they will attempt to collect refunds for consumers, as well as a penalty. But these activities are no different than breaking into a bank vault and taking the cash. Hydra’s executives should be criminally prosecuted, and importantly, CFPB named them in their lawsuit (Richard Moseley, Sr., Richard Moseley, Jr., and Christopher Randazzo). But CFPB can only refer criminal cases to the Justice Department, and I assume they’ll get around to the prosecution during the next election cycle. At least we can be happy that CFPB, not DOJ, is actually collecting the fine.
“The Justice Department will continue to be relentless in our pursuit of anyone, anywhere, who violates the law,” Holder concluded this week. If his record constitutes relentlessness, I’d hate to see nonchalance.
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