Financial Crimes Bedevil Prosecutors
A former top U.S. official in charge of investigating the financial crisis said the government has concluded that many inquiries of wrongdoing by financial executives can’t succeed as criminal prosecutions.
“There’s been a realization and a more deliberate targeting by the Department of Justice before we launch criminally on some of these cases” said David Cardona, who was a deputy assistant director at the Federal Bureau of Investigation until he left last month for a job at the Securities and Exchange Commission. The Justice Department has decided it is “better left to regulators” to take civil-enforcement action on those cases, he said.
In an interview shortly before his move, Mr. Cardona said a three-year slog through probes at large mortgage lenders and securities firms had led federal officials to conclude the U.S. government’s best strategy in many cases is to pursue only civil charges. While defendants avoid the possibility of prison in such cases, they carry a lower burden of proof.
Mr. Cardona said Monday that his new duties in the SEC’s regional office in Miami are a “logical progression” after more than 25 years at the FBI, where he often worked closely with SEC officials. Mr. Cardona said his move wasn’t the result of frustration with the number of prosecutions stemming from the crisis.
While at the FBI, Mr. Cardona oversaw dozens of criminal probes of large financial firms. The FBI’s probes haven’t led to any successful prosecutions of high-profile executives in relation to the financial crisis, despite demands from some lawmakers and angry Americans. In contrast, the SEC has filed crisis-related civil-fraud cases against 81 firms and individuals, and it has negotiated almost $2 billion in penalties in cases that have been settled.
The comments by Mr. Cardona offer one of the starkest explanations yet for the government’s track record in prosecuting possible fraud and other misdeeds tied to the crisis. He said an initial burst of optimism by federal officials when they began examining banks and securities firms slowly gave way to frustration over how to prove criminal intent. U.S. officials were especially rattled by the 2009 acquittal of two Bear Stearns Cos. hedge-fund managers, which triggered “a lot of rethinking on how we do things,” he said.
Many criminal probes have gone nowhere, including investigations of insurer American International Group Inc.; mortgage lender Countrywide Financial Corp., now part ofBank of America Corp.; mortgage lender Washington Mutual Inc., which collapsed into bankruptcy;securities firm Goldman Sachs Group Inc.; and other major firms embroiled in the crisis.
So far, the most prominent conviction has been that of Lee Farkas, former chairman of Taylor, Bean & Whitaker Mortgage Corp. He was sentenced in June to 30 years in prison for a multibillion-dollar fraud scheme that led to the collapse of Colonial Bank, a unit of Colonial BancGroup Inc., and that cheated the government. But that fraud began long before the crisis.
The FBI still is investigating more than 2,800 mortgage-fraud cases, led by about 350 agents, people familiar with the matter said. The agency works closely with federal prosecutors and regulators such as the SEC and Federal Deposit Insurance Corp.
Mr. Cardona said regulators have done a “fine job” addressing through civil-enforcement actions allegations that “perhaps would have been difficult” to prosecute. One example: Goldman’s agreement last year to pay $550 million to settle civil-fraud charges related to its Abacus 2007-AC1 mortgage-bond deal. The New York company didn’t admit or deny wrongdoing, though Goldman said it made a “mistake” in failing to tell investors a hedge-fund firm helped assemble the deal and was betting against it.
Phil Angelides—chairman of the Financial Crisis Inquiry Commission, a panel formed by Congress that looked at the causes of the meltdown—said law-enforcement agencies need to do even more. “The FBI efforts on mortgage fraud were deficient,” he said in an interview. “If laws have been broken, there should be vigorous investigation and prosecutions, and we haven’t seen that in the wake of this crisis.”
A spokesman for the SEC declined to comment. Last week, Robert Khuzami, the SEC director of enforcement, said: “Often, people ask me: ‘Why isn’t the SEC putting more people in jail?’ And I am reminded that not everyone realizes the SEC does not have criminal-enforcement authority.”
A Justice Department spokeswoman said, “We have brought hundreds of criminal cases for mortgage fraud, investment fraud and other white-collar crimes. When we find evidence to prove beyond a reasonable doubt that a crime was committed, we will not hesitate to pursue criminal charges.”
Since the financial crisis erupted in 2008, many legal experts have said the U.S. government faced an uphill battle in prosecuting financial-industry executives. Criminal intent is especially hard to prove in complex financial cases, because prosecutors must convince jurors, beyond a reasonable doubt, that a fraud was intentional.
Some financial executives have said it is unfair to punish them for what is nothing more than their failure to predict the financial crisis. Many legal experts have said much of the most controversial behavior likely was a product of poor judgment, not criminal wrongdoing.
More than 1,000 bankers went to prison in the wake of the savings-and-loan banking crisis of the 1980s and 1990s. After the financial crisis, “there was an immediate reaction that maybe this was another savings-and-loan type crisis, that we could actually establish criminality in many of these cases,” Mr. Cardona said in the interview.
Those hopes eventually faded. For example, he said, FBI officials investigated two collateralized debt obligations created by Goldman in 2007 that soon plummeted in value.
“A lot” of the Justice Department’s criminal investigations, Mr. Cardona said, “hinge on disclosure.…What does adequate disclosure mean? And those are really technical arguments that sometimes get lost with a jury.”
“That’s what makes these cases difficult to charge many times. And that certainly was the case with” the two Goldman deals, he said. No criminal charges have been filed against Goldman or its employees stemming from behavior during the financial crisis. A spokesman for Goldman declined to comment.
U.S. officials also are leery of bringing to trial criminal prosecutions where a jury might decide the losses were due to bad judgment or market conditions, not deceit.
Mr. Cardona said the 2009 acquittal in the Bear Stearns case was part of a “learning curve on which cases we…feel we have the ability to convince a jury that criminality has occurred.”
As a result, many cases hinging on technical issues such as disclosure are being left for civil-enforcement actions, he said. The SEC still is pursuing civil-fraud charges against the two former hedge-fund managers. Their lawyers declined to comment.
Mr. Cardona’s former position at the FBI hasn’t been filled yet, according to a spokesman.