Charlie Riedel/Associated PressPresident Obama called for tougher penalties for corporate crime.
President Obama, in a speech last week, called for strengthened oversight and accountability of financial firms by increasing the punishments that can be imposed for criminal violations. This comes on top of a recent proposal by Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, to ratchet up the available civil penalties for violating the securities laws.
Seeking greater punishments for white-collar offenders gives the impression the government is taking steps to prevent crime, but there is a substantial question whether these proposals will have any appreciable impact on deterring future violations. The problem is not so much the penalty that can be imposed but proving a violation so that the punishment can be meted out. The paucity of criminal prosecutions from the financial crisis shows that the real difficulty lies in gathering evidence to prove a crime took place.
In his speech in Kansas, Mr. Obama said:
“Too often, we’ve seen Wall Street firms violating major antifraud laws because the penalties are too weak and there’s no price for being a repeat offender. No more. I’ll be calling for legislation that makes those penalties count so that firms don’t see punishment for breaking the law as just the price of doing business.”
What type of penalty would “count” is unclear because financial firms have already been fined significant amounts, like the $550 million civil penalty imposed on Goldman Sachs for selling a mortgage-bond related security. Whether that type of penalty deters future misconduct remains to be seen.
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Severe sanctions that would put a company out of business — a corporate death penalty — seems unfeasible in the current economic environment when the net result would be significant job losses for lower-level workers who had nothing to do with the violations.
Before any punishment for financial misconduct can be imposed, the government must prove an intentional violation, which in a criminal case requires proof beyond a reasonable doubt. That is often the rub, because the perceived financial “crimes” committed by Wall Street firms and others believed responsible for the financial crisis would involve showing intent to defraud, a difficult standard to meet.
The recent collapse of MF Global is a good example of just how hard it will be to prove criminal violations. A lawyer for the bankruptcy trustee said that the apparent loss of more than $1 billion in customer money was the result of “suspicious” transactions. The New York Times reported that there were multiple instances in which customer money was used to keep the firm afloat, perhaps going back as far as August 2011.
In his testimony last week before the House Agriculture Committee, Jon S. Corzine, MF Global’s former chief executive, said he had no idea how the customer money disappeared. He asserted that he “never intended to break any rules,” and that if any employee claimed the transfers were at his direction, then he was “misunderstood.”
This is the classic defense offered by senior corporate officers when there is wrongdoing at a firm, that they were not directly involved and therefore did not have the intent to mislead. Any decision to transfer customer money likely involved multiple layers of corporate management, meaning that fingers can be pointed elsewhere if no one had the primary responsibility for the decision.
The final days of MF Global appear to be marked by desperation to save the firm, and it is unlikely anyone thought about the potential penalties that could be imposed if they violated the law. Many financial frauds start small, with individuals cutting corners to keep the company afloat or make a quarterly number, all in the hope that once things stabilize they can make it right again. Even the accounting fraud at Enron started out with just reaching for those last few pennies of earnings to meet Wall Street’s estimates, and it grew from there.
Substantial prison terms have been imposed for violations of the antifraud laws in the last few years. The hedge fund manager Raj Rajaratnam received 11 years for insider trading, the longest sentence for that violation ever given, and Zvi Goffer, a former trader at Mr. Rajaratnam’s Galleon Group, received 10 years for the offense. In the most prominent mortgage fraud prosecution to date, Lee B. Farkas, the former chairman of Taylor, Bean Whitaker, received a 30-year prison term for causing losses the government estimated at $2.9 billion.
Along the same lines, in a $205 million health care fraud case, in September a federal judge in Miami gave a 50-year sentence to a former executive of a mental health company. And Bernard L. Madoff received perhaps the highest sentence ever for fraud: 150 years.
It is difficult to conclude the penalties available under the law for committing financial crimes are somehow lacking. Most financial frauds involve multiple violations that can be charged as separate crimes, so the potential punishment is often quite high, even for corporations that can only be subjected to fines. But corporate cases rarely even get to court because prosecutors are willing to allow companies to enter into deferred or nonprosecution agreements in which the punishment is agreed to in advance.
Congress has already pushed for higher sentences through Section 1079A of the Dodd-Frank Act, which directed the United States Sentencing Commission to review the sentencing guidelines for securities and financial crimes to ensure they reflect the impact of the offenses. So there is already pressure to ratchet up the recommended punishment for corporate fraud.
Higher recommended sentences may not result in great punishments because not all federal judges are willing to impose significant prison terms on white-collar offenders who often have otherwise sterling reputations and present little threat of future violations. The sentencing guidelines are not mandatory, so judges are largely free to draft sentences they consider appropriate.
Just increasing potential prison terms or fines may not have any appreciable impact in deterring fraud, given the difficulties of proving a financial crime and the differing views of judges on the appropriate punishment for a white-collar offender. That is especially true in cases like insider trading where it is hard to identify any individual victims and the defendant may be an executive with a record of charitable contributions.
Although President Obama asserted that Wall Street firms have violated “major antifraud laws,” the assumption that crimes occurred is easy to make but much more difficult for prosecutors to prove. And even if a crime can be established, it is not clear that just authorizing even greater punishments will have any real effect in deterring wrongdoing.
Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.
This post has been revised to reflect the following correction:
Correction: December 12, 2011
An earlier version of this post gave an incorrect middle initial for the chairwoman of the Securities and Exchange Commission. It is Mary L. Schapiro, not S.
Article source: http://feeds.nytimes.com/click.phdo?i=762f38127d1f3f3ea3e7689ed708e67c