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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Monday, June 27, 2011

Goldman Sachs Should Be Prosecuted for Fraud

The article excerpted below is a summary of all that has gone wrong in (not) prosecuting the banks, like Goldman Sachs, who caused the financial crisis of 2008. It discusses regulatory weaknesses, the lack of justice when only small fines are used to settle claims, the banks getting away with deceptive accounting practices, misinformation or failure to disclose critical information (Goldman Sachs) and generally the lack of prosecutions by the DOJ and SEC.

The article suggests that there is, therefore, a great need for private lawsuits if we ever wish to restore public trust in the justice system.

Thanks to a reader for the link.

Too Big to Fail or Too Big to Change
Posted by Chad Johnson - The Harward Law School Forum, based on an article by Ross Shikowitz

. . . .

The SEC was also recently criticized for failing to tack fraud claims onto its “record” $550 million settlement with Goldman Sachs (“Goldman”) in July 2010, even though the company admitted that it failed to disclose critical information to investors relating to its ABACUS transaction, a deal that was “born-tolose,” according to Taibbi. Specifically, Goldman chose not to tell its clients that prominent hedge fund manager John Paulson had selected the securities included in the ABACUS vehicle, while at the same time betting against the value of those same securities. Indeed, because of the strength of the claims against Goldman and the concurrent criminal probe by the DOJ, many investors expected a settlement in excess of $1 billion. John Carney, a CNBC senior editor, noted that in light of the deal, “somewhere Goldman’s lawyers and executives are probably popping the cork on a bottle of bubbly. This settlement was a win for them.”

Academics have also questioned whether the SEC’s recent civil penalties are sufficient to punish and deter misconduct. Columbia University law professor John C. Coffee recently published an article suggesting that the SEC’s settlement with Countrywide Financial’s (“Countrywide”) CEO Angelo Mozilo was far from equitable. The SEC charged that Mozilo and other Countrywide executives misled investors regarding the company’s risky loan portfolio as the mortgages it originated and securities it generated transformed a recession into a full-blown crisis. The SEC’s complaint revealed that Mozilo himself authored emails that described the company as “flying blind,” explained that the company’s loans were “poison,” and described one category of Countrywide loans as “the most dangerous product in existence…there can be nothing more toxic.” Indeed, Mozilo admitted in his emails that he “personally observed a serious lack of [underwriting] compliance” and recognized that “it was just a matter of time that we will be faced with…much higher delinquencies.” Nonetheless, in October 2010, the SEC agreed to settle the action against Mozilo for $67.5 million, lauding the settlement as a “record penalty.” Coffee highlights that Mozilo, who was not required to admit to any wrongdoing, paid only $22.5 million of the settlement because Bank of America (and its shareholders) indemnified Mozilo for $45 million. These figures are even more egregious when juxtaposed with Mozilo’s estimated $140 million in profit reaped from his insider trading of Countrywide stock. As Coffee questions, “[i]s $22.5 million a successful outcome for the SEC where the defendant retains the other $117.5 million of his estimated $140 million in profits?”

Significantly, as described by Coffee, Mozilo was “in an especially vulnerable position” because the SEC civil trial was looming and could have provided federal prosecutors with the information necessary to indict and prosecute the executive. Instead, following the settlement, the DOJ closed its criminal investigation of Mozilo in February 2011 without taking any action against him. This oft-characterized “hollow victory” bolsters the view that executives consider government penalties and sanctions to be a mere “cost of doing business” and illustrates the absence of meaningful deterrence in financial markets.

The DOJ has faced similar criticism for its lack of prosecutions. Documentary filmmaker Charles Ferguson, whose film “Inside Job” won the 2011 Academy Award for Best Documentary for its examination of the financial crisis, recently decried the DOJ’s relative paucity of prosecutions during his Oscar acceptance speech. “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single executive has gone to jail, and that’s wrong,” Ferguson said. In response to similar criticism a few months prior, the DOJ proclaimed the “successes” of its financial fraud task force “Operation Broken Trust.” So far, however, the task force has not shined a light into executives’ corner offices at the corporations that placed the global economy in peril. Instead, observers have criticized Operation Broken Trust as targeting hundreds of “petty thieves” who committed small-time frauds, which some claim demonstrates that the DOJ is either unwilling or unable to hold Wall Street titans accountable for their role in the subprime bust.

Further, a review of the DOJ’s recently released statistics supporting Operation Broken Trust’s purported accomplishments reveals that the DOJ’s figures are, at best, unsupported. As columnists such as Andrew Ross Sorkin of The New York Times and Jonathan Weil of Bloomberg have detailed, several of the criminal and civil cases touted by the DOJ were commenced before Operation Broken Trust was initiated, and certain of the criminal convictions that the DOJ highlighted did not lead to any criminal sanctions whatsoever.

The lack of meaningful government sanctions raises legitimate questions as to whether corporate executives will continue to evade responsibility for their actions. Many have described the financial crisis as “unexpected” or “unforeseeable.” In contrast, the recent report from the Financial Crisis Inquiry Commission (“FCIC”) makes clear that the mortgage meltdown was an avoidable event born of fraud, as well as of failures in corporate governance and risk management. Significantly, the FCIC explicitly concluded that banks selling mortgage products failed to disclose critical information to investors. Indeed, a former president of one of the top mortgage research companies testified before the FCIC that, even though approximately 28 percent of the loans issued to homeowners with poor credit examined by his company failed to meet even basic underwriting standards, nearly half of those loans were nevertheless packaged and unloaded onto unsuspecting investors. According to publicly released emails, “vomit” and “crap” were the terms of art used by UBS employees in 2007 to describe the company’s assetbacked securities; a Bear Stearns Deal Manager wrote in 2006 that investors were being sold a “SACK OF S**T.”

Nevertheless, in response to this accumulating evidence, the SEC and the DOJ have remained largely silent. Are large, systemically important institutions and their ilk too big to be threatened with sanctions that approximate the size of the frauds perpetrated against the public? Has “too big to fail” transformed into “too big to challenge?”

The relative lack of prosecutions stemming from the financial meltdown stands in sharp contrast to the government’s response to past corporate malfeasance. The criminal cases arising from the Savings and Loan scandals of the 1980s and 1990s, where some of the biggest kingpins—including Charles Keating of Lincoln Savings & Loan and roughly 3,800 other bankers—were thrown behind bars, as well as the Enron and WorldCom accounting debacles in the early 2000s where Jeffrey Skilling, Kenneth Lay and Bernard Ebbers were jailed, demonstrated that executives would be held accountable for their crimes. This time, the public is left wondering whether the U.S. government possesses the appropriate tools to adequately police its markets and protect against future misconduct. As prominent hedge fund manager David Einhorn recently told The New York Times, “since there have been almost no big prosecutions, there’s very little evidence that [the government] has stopped bad actors from behaving badly.” Simply put, without forcing executives to answer for their misconduct, no amount of financial reform will restore public trust in government or the markets.

. . . .

Read the entire article here


Anonymous said...

Hank Paulson gets honorable mention...remember him?

David Stockman: Ben Bernanke is finished!

Anonymous said...

It doesn’t get any better than this

SEC Financial Regulatory Powers Might Be Handed Over To Wall Street-Funded Finra

Uncle Max goes after GS..

Max Keiser and Lars Schall discuss Greece — below the Eiffel Tour!

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