COMMENTARY | COLUMNISTS | JOHN PATRICK FORD
Observations

Wall Street gets a warning

The federal Justice Department made an amazing discovery. It declared that banks don't break the laws; bankers do. It's about time the government watchdogs admit that corporate executives create the scams that have hit the financial markets over the last three decades.

Without implicating the individuals behind financial scandals, the Securities and Exchange Commission and other financial departments have levied huge fines against Wall Street firms and banks in cozy settlement arrangements. Very few ever get to a court of law. The perpetrators never admit any wrongdoing. They just write a check for multi-millions of dollars and walk away to develop another new scheme.

Who really pays? The stockholders are the penalized victims, but perhaps the securities violation made enough money to offset the fine.

Here are some recent examples of fines levied against major financial institutions:

Wall Street's biggest firms including Goldman Sachs Group, JPMorganChase, Citigroup and HSBC among many others agreed to a $1.87 billion settlement to resolve allegations they conspired to limit competition in the lucrative credit-default swaps market. If there was indeed a conspiracy deserving such a large fine, someone in those corporations must have been personally involved

The settlement averted a trial following years of litigation by hedge funds, pension funds, university endowments, small banks and other investors who sued as a group. They claimed the banks manipulated the price opacity in the market and made millions of dollars. Who could possibly have arranged such a massive scheme to control financial markets? Apparently the CEOs knew nothing about it, or so they claim.

A few years back in the midst of the subprime mortgage collapse, Angelo Mozilo, founder and former CEO of Countrywide Financial, never faced any criminal charges. Investors and banks lost millions, not to forget all the homeowners who lost their homes in foreclosure.

The new Justice Department investigative procedures will require a company under surveillance to provide the names of the key company personnel involved in the scheme that they are checking. Government officials believe this will pave the way for executive indictments. Will the changes guarantee that a Wall Street executive suspect will be led away in handcuffs? That was a dramatic scene in recent films about Wall Street scams, such as "The Wolf of Wall Street" and earlier "Wall Street."

Commentators on the new Justice Department procedure suggest that the challenges for indictments are greater than the new rules can solve. In all likelihood, prosecutors today would still struggle like they did trying to blame Mozilo of Countrywide Financial for manipulating the mortgage market and bringing down the entire U.S. economy.

When Lehman Brothers collapsed in 2008 creating huge investor losses, the Justice Department did conduct investigations of the executives along the same guidelines that they now propose and were unable to prove any personal wrongdoing. White-collar crime is hard to prove if you do not have direct evidence because any blame can be attributed to bad judgment, not intent to break a law.

There have been some successes in past years, such as the two executives of Enron who finally were given prison sentences in 2006 after five years of legal efforts. Indictments were also successful for two Bear Stearns hedge fund managers and JPMorganChase traders, for example, but the executives of those companies were not implicated.

Then there were the character scammers: Bernie Madoff, the King of Ponzi Schemes, was nailed with 150 years of prison after bilking investors of $18 billion over 20 years; Stewart Parnell, the CEO of a peanut butter manufacturer, just received 28 years in prison. He was guilty of 70 felony counts for the sale of peanut butter tainted with salmonella.

Still, many get away with only a slap on the wrist. Criminal investigations involve the FBI, but that agency is dedicated more to fighting terrorism than white-collar crime.

There is little to cheer about these new administrative procedures. Sally Yates, the Deputy Attorney General at the Justice Department has advised, “I'm not trying to tell you that this means that tomorrow, all of a sudden, corporate heads are going to be rolling.” She addressed the New York University School of Law emphasizing six key steps to such prosecutions, including the refusal to award companies credit for cooperating without full disclosure of individual wrongdoing. “It's all or nothing. No more picking and choosing what gets disclosed,” Yates said.

In recent weeks other criminal charges are pending against non-financial organizations. After years of dodging and legal maneuvers, General Motors has agreed to a $900 million fine for failure to recall and replace faulty ignition switches. This is a federal case that might send some executives to prison because the company's failure to replace the defective part caused 169 deaths.

Nobody was killed by another auto defect, but Volkswagen investors did lose 18 ½ percent of stock value on the day that the company was charged with violation of clean air rules. Officials admit using phony software to test diesel emissions and get clearance for distribution in air quality control countries. California and U.S. regulators claim 482,000 vehicles were sold with income tax credits but without adequate emission prevention. Somebody cheated there.

That seems to be the misguided philosophy coming out of corporate board rooms. No one can honestly claim that no personal commitment was intended when these cost-savings decisions were made at the upper levels of industrial management.

Now it's up to the Justice Department and the FBI to stop looking the other way for white-collar crimes while collecting fat fines to enhance their operations.

*****

Ford is a freelance writer located in San Diego. He can be reached at johnpatrick.ford@sddt.com.

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Ronald Bills 12:00am September 26, 2015

Quite detail! Very good job Is this an online additions of the Transcript? Not sure where you are publishing.