Friday, January 25, 2013

The Curious Case of No Fraud Indictments

The Curious Case of No Fraud Indictments

I wonder if Bernard Ebbers, former Chairman of WorldCom, watches public television.  Does Jeff Skilling, former President of Enron, read The New York Times?  What about Dennis Kozlowski, ex-chairman of Tyco International, or John Rigas, founder of Adelphia Communications?  Are they following the aftermath of the financial crisis?

Mr. Ebbers was convicted of fraud in 2005 for false financial reporting that pumped up and then destroyed WorldCom.  Mr. Skilling was convicted of fraud and conspiracy in 2006 for creating fraudulent transactions within Enron that led to its demise.  Mr. Koslowski was convicted in 2005 for unauthorized bonuses, purchases of artwork, and the payment of an investment banking commission.  In 2004, Mr. Rigas and his sons were convicted of fraud for looting Adelphia, which went bankrupt.

The Clean Up Agenda (1999)

Meanwhile, there hasn’t been an indictment, let alone a conviction, of any senior executive on Wall Street.  If Mr. Ebbers had tuned into his local PBS station on Wednesday evening, he would been able to watch Frontline’s documentary, “The Untouchables.[1]  The documentary explores the reasons why Wall Street’s leaders haven’t been indicted on fraud charges for the mortgage debacle.  And, Mr. Skilling might have read Jesse Eissinger’s story in The New York Times, entitled “Financial Crisis Suit Suggests Bad Behavior at Morgan Stanley.”[2]  Mr. Eissinger’s reporting highlights the unsavory behavior of bankers and executives at Morgan Stanley as they packaged and sold mortgage-backed securities.  The evidence is contained in a civil law suit filed by a Taiwanese bank.


Why has Wall Street escaped the clutches of the Criminal Division of the US Justice Department?  According to the Justice Department, they can’t find the requisite evidence to prove criminal intent.  Frontline’s reporting strongly suggests that there are plenty of whistleblowers and reams of documents that would suggest otherwise.


We’re presented with a very disturbing picture.  Ten years ago, the Justice Department under the Bush Administration went after a series of senior executives who committed fraud against their investors, and for the most part, won convictions.  The Justice Department under President Obama has yet to file an indictment.


Before my Republican friends start cheering the law and order credentials of the Bush Administration, we need to remember that Ebbers, Skilling, Kozlowski, and Rigas were outsiders.  They rose quickly from obscure backgrounds to build their companies.  Except for Skilling’s MBA from Harvard Business School, these men did not come from elite institutions.  Bernie Ebbers graduated from Mississippi College with a degree in physical education. Dennis Kozlowski attended Seton Hall.  And, John Rigas got his undergraduate degree from RPI.   While Wall Street willingly financed their growing empires, these guys weren’t part of the club.  And when their businesses collapsed, Wall Street scurried to distance itself from their misdeeds.  Only a few Wall Street analysts were caught in their transgressions.


In Frontline’s documentary, Assistant Attorney General Lanny Breuer admits that has was worried about the broader damage that might be brought about by pursuing criminal cases against senior Wall Street executives.  Mr. Breuer’s concern parallels the line of argument articulated by Treasury Secretary Timothy Geithner throughout the financial crisis.  Mr. Geithner has consistently opposed policies or actions that in his view might endanger the system.  We’re left to wonder if the US Treasury directed the Justice Department.  On the other hand, Mr. Geithner’s position was so clear that he probably didn’t need to say anything for Justice to get the message.


Unfortunately, the system Mr. Geithner and Mr. Breuer are protecting isn’t financial.  The World Economic Forum in Davos symbolizes the system they are defending.  Although, the Secretary skipped this year’s event, Davos is where America’s bank regulators routinely mingle with the titans of Wall Street.  The senior executives at Morgan Stanley aren’t worrying about criminal indictments.  Instead, they’re at Davos, along with their colleagues from Goldman Sachs, JP Morgan, and Bank of America.


The civil lawsuits filed by aggrieved clients, the Justice Department, and the SEC will cost the banks plenty.  However, those judgments and fines will hurt shareholders and not the executives who created the financial crisis.  In the end, you’ll be hurt because it’s mutual funds or pensions that hold these stocks.  We know that the Justice Department can pursue fraud charges.  Just ask Messrs. Ebbers, Shilling, Kozlowski, and Rigas.  When it comes to Wall Street, the long arm of the law is just too short.


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