Justice Department officials yesterday vowed to unravel the complex financial deals that helped prompt a market crisis in an effort that will generally seek criminal charges against individual brokers and bankers, rather than companies themselves, according to interviews with lawyers involved in the cases.
Mindful of the fallout from the last wave of business fraud cases six years ago, authorities are leaning against seeking indictments of major banks and insurers that may have inflated the value of their mortgage-related investments. Instead, prosecutors will look for such garden-variety crimes as false statements and insider trading by executives who tried to disguise financial problems or pad their wallets.
Exhibit A is Bear Stearns, the investment bank that collapsed in March and was bought by J.P. Morgan Chase during a cash squeeze that ultimately gripped Wall Street. Two former fund managers there are fighting criminal charges for allegedly misleading investors about the financial health of their unit. The company will avoid indictment, according to two sources familiar with the case who spoke on condition of anonymity because the process is not final. Robert Nardoza, a spokesman for the U.S. Attorney's office in the Eastern District of New York, declined to comment yesterday.
That pattern is likely to persist even as fallout from the liquidity crisis intensifies. Last week, the FBI announced 26 investigations underway at companies including Fannie Mae, Freddie Mac, Lehman Brothers, American International Group, Countrywide Financial and IndyMac.
At an American Bar Association conference yesterday, Deputy Attorney General Mark R. Filip vowed that prosecutors would press ahead to decode the obscure financial products at the heart of the market's troubles. He said there would be "no unwillingness to take the facts and the law where they lead."
Yet the tenor is markedly different from the last wave of financial scandals, which began with the indictment of accounting firm Arthur Andersen six years ago. The firm swiftly collapsed, costing tens of thousands of jobs. More recently, corporate executives and civil liberties advocates pressed for legislation that would bar strong-arm prosecution tactics. In August, Filip issued guidance that reminds prosecutors to consider the rights of corporate employees.
Among other factors, the guidelines require government lawyers to take into account the health of a business when they make decisions about whether to file criminal charges. Given the current landscape, with Lehman in bankruptcy proceedings, Fannie Mae and Freddie Mac under federal control, and AIG surviving only after an $85 billion infusion from the Treasury, lawyers with experience in such cases predict few major criminal prosecutions of businesses.
"It would be a very rare company that would ever be prosecuted," said Joshua Hochberg, former chief of the Justice Department's fraud section. "These are all negotiated settlements. . . . A criminal conviction brings mandatory debarment and effectively puts a corporation out of business."
Prosecutors for months have been sifting through documents in an effort to separate bad business decisions from possible criminal conduct.
The initiative has been complicated in part by gaps in regulation of mortgage-backed securities. Credit-default swaps, a kind of insurance against defaults on housing-related investments, are not considered a security under the laws that govern the Securities and Exchange Commission, according to Columbia University law professor John Coffee Jr. That means companies that sell the swaps do not have an affirmative duty to advise investors about their risks. Rather, brokers would be subject to law enforcement action only if they made a misleading statement about their risks or value, perhaps in a bid to win greater fees.
"It's always fraudulent when you have a material misrepresentation, deliberately made, with the intent to deceive and for personal gain," said Gil M. Soffer, who oversees corporate fraud prosecutions at the Justice Department.
Such allegations go to the heart of a criminal case filed last month against two former Credit Suisse employees and may underpin an investigation of individuals who had worked at Lehman and who were involved in the same market, known as auction-rate securities. The Lehman probe was reported yesterday by the Wall Street Journal.
Government officials with experience investigating corporate fraud say some of the patterns they are detecting -- lying to investors, shifting debt off corporate balance sheets -- are familiar.
"The more things change, the more things stay the same," said Benton Campbell, U.S. for the Eastern District of New York and a former member of the government's Enron Task Force.
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