Be Very Afraid: “New Era” of White-Collar Prosecution at the DOJ

corporate crime

Lanny Breuer, the DOJ’s Assistant Attorney General for the Criminal Division, gave a speech today announcing a “new era of heightened white-collar crime enforcement — an era marked by increased resources, increased information-sharing, increased cooperation and coordination, and tough penalties for corporations and individuals alike.”

You can read his prepared remarks here.  We did, and we find them very troubling.

This is, of course, part of a larger trend back towards more white-collar enforcement. For much of the post-WWII era, through the early 1990s, white-collar cases didn’t get much attention. They were hard to spot in the first place, taking place behind closed doors in boardrooms and offices, not really part of any policeman’s beat. And allegations were challenging to investigate, and ever harder to prove to a jury. Agents and prosecutors lacked the knowhow and the tools to do the job.

And white-collar crime just wasn’t worth the effort — the law classified these crimes at the less-serious end of the spectrum. This wasn’t murder, it was just money. The crooks weren’t burglars or muggers, they were college-educated productive members of the community, involved in charities and otherwise living “normal” lives. Their crimes weren’t violent; they were almost administrative. Victims weren’t in your face, with visceral injuries and tangible losses; they were anonymous and diffuse. Devoting a lot of resources to prove minor offenses you didn’t really understand, with hard-to-identify-with victims, with easy-to-identify-with defendants, just wasn’t a big priority.

This all started to change in the mid-90s. By then, we’d gone through the junk-bond crisis and S&L meltdown of the late ‘80s, and the Sentencing Guidelines were now going into effect to severely increase potential penalties for white-collar cases. In the late ‘90s, with the tech bubble in full swing, average Americans were becoming investors like never before, with even cops and construction workers turning into day traders in their spare time. Tons of money from average Joes went into IRAs, brokerage accounts and 401(k)s. And then the bubble burst, the markets dipped, and the average Joe saw his investments tank. Whenever bubbles burst, they reveal many of the financial frauds that had been going on all along, but had escaped notice in the up market.

The bubble burst around the same time as massive corporate crimes began to be alleged, as at Enron and Worldcom. The middle class was outraged, and began to demand severe penalties for the fraudsters.

But 9/11 made federal law enforcement — the primary enforcers of white-collar crime — divert most of their resources away from the boardroom and into terrorism and violent crime. The focus simply changed, and there weren’t nearly as many white-collar prosecutions as might have been imagined.

In the meantime, the economy got back to normal. Clinton administration policies encouraging (well, compelling really) more home loans to riskier minority segments of the population became the impetus for massive subprime lending, which by the middle of the last decade turned into yet another massive bubble.

When that bubble broke in ’07 and ’08, this time there wasn’t another 9/11 to divert resources. The people clamored for something to be done, and this time the feds reacted. (Over-reacted, actually. The only case having anything to do with the meltdown was the Bear Stearns case, which was simply a rush by the Eastern District to snag a white-collar case, even though there actually was no wrongdoing, resulting in a quick acquittal at trial.) In ’09, acting U.S. Attorney for the Southern District Lev Dassin told a group of defense attorneys that there were more white-collar cases in the pipeline, and some big ones were coming down the pike.

We’re seeing that now, what with the Madoff and Galleon cases, and a slew of other Ponzi schemes and insider-trading cases now being announced. Sentences are on the rise for white-collar defendants, as well.

But we’re also seeing a big problem with how these cases get investigated and prosecuted. The feds are starting to use street-crime investigation techniques, like wiretaps and street surveillance, to build white-collar cases. That just doesn’t work.

-=-=-=-=-

Look at the Galleon case, and its offshoots. When they first broke last Fall, we wrote about how easily the feds could lose. As more allegations become public, it seems obvious how the feds were approaching their investigation. For the first time ever, they used wiretaps to build a white-collar case. Who did they use? Agents experienced at wiretaps. What kind of experience did they have? Drug cases. Mob cases.

So that’s the filter these agents had. That experience colored everything they saw and heard. So they saw and heard things that, in a mob case or a drug case, would look and sound incriminating. But these weren’t mobsters. These were Wall Streeters. Doing what seems to have been perfectly normal, legal stuff. It only looks bad if you don’t know what you’re looking at.

This is clearly a mistake. And it looks like the DOJ is now gearing up to magnify that mistake across the board.

-=-=-=-=-

“The techniques that have been used historically to go after organized crime or blue-collar crime need to be used at times in white-collar crime, because the American people expect no less.” That’s a quote from Breuer’s speech today.

That ought to scare you. It scares us. We’re going to have mob agents looking at Wall Street with the wrong filter. Bring a shopping bag to a friend’s house? It’s a cash delivery! Share gossip and rumors heard on the street? It’s insider trading!

And how many federal prosecutors really understand the day-to-day nuts and bolts of the financial world? Sure, they’re mostly bright and well-educated, but how many know the lingo? How many know what actually goes on at those long tables, with everyone on the phone and banging away on their keyboards? Considering where federal prosecutors come from, we’re willing to bet it’s not a big number at all.

So agents are going to be interpreting things wrong. And prosecutors are going to be interpreting things wrong. And now they’re just going to be doing it more.

How is that not scary?

-=-=-=-=-

So what else was announced? The Obama administration created a Financial Fraud task force last November, after the Galleon case broke. That’s just a committee, something to occupy high-level officials while other people get the actual work done. That’s no big deal.

Funding for white-collar enforcement is going to go up another 23%, on top of this year’s increases. That means more prosecutors and agents doing this stuff instead of other stuff, mostly.

The SEC is going to start using cooperating agreements, as well as deferred-prosecution and non-prosecution agreements, to get more people to own up to crimes or become informants. Breuer said that was more of a we’ll-see-how-that-one-works-out kind of thing.

There’s going to be more focus on FCPA (foreign bribery) cases. That’s already been a big focus in recent years, with 81 cases since 2004 (46 of those since last year alone).

And he closed with a fairly strong statement that corporations and higher-ups are going to need to start throwing people under the bus, if they want “meaningful credit” from the prosecution. “In talking about ‘meaningful’ credit,” he added, “we are not promising amnesty for doing the right thing. But self-reporting and cooperation carry significant incentives — by working with the Department, no charges may be brought at all, or we may agree to a deferred prosecution agreement or non-prosecution agreement, sentencing credit, or a below-Guidelines fine.”

Mm-hm.

Still scary.

Tags: , ,

Get a Trackback link

2 Comments

  1. Facebook Friend - S.F., May 26, 2010:

    Nathan, what’s the source for your information that the FBI used agents experienced at wiretaps in drug cases and mob cases, not agents experienced in securities prosecutions like insider trading? In fact, the Galleon case was investigated in large part by C-1, a securities FBI squad made up of FBI agents with backgrounds as stock brokers, lawyers and accountants. While they may not have done wire taps previously in securities fraud cases, those agents have interviewed and questioned so many stock brokers and financial industry folks that they are extremely conversant in the language and practices of Wall Street. They know what they’re looking at.

  2. Nathan, May 27, 2010:

    Not an inside source, but it sure seems like a reasonable conclusion, based on how the case has been presented, and based on the conclusions being offered, that the electronic and physical surveillance was colored by a street-crime mentality. However, based on how the cases have been playing out, it also is reasonable to conclude that the wires were being done by folks who are woefully inexperienced at doing them right. The more I hear about that case, the weaker it sounds.

Leave a comment

Time limit is exhausted. Please reload the CAPTCHA.