A number of stories commemorating the tenth anniversary of the Sarbanes-Oxley law last Monday whined that prosecutors have brought few individual criminal cases tied to the financial crisis.
The SEC has been busy with non-crisis-related insider trading cases, but the scoreboard does show a handful of crisis-related civil complaints using Sarbanes-Oxley laws. But that misses the bigger picture.
The Department of Justice, the SEC and, of course, numerous private plaintiffs have sued banks quite a few times in the last 10 years since Sarbanes-Oxley went into effect for fraud and illegal acts including financial crisis crimes. The problem is not too few prosecutions, but that no one at the top of these organizations typically takes a fall for the crimes. There's also no penalty for repeatedly breaking promises to the DOJ and SEC to never break the laws again.
The moral hazard that results when banks take for granted taxpayer bailouts is nothing compared to the pass they get when the prosecutors and market watchdogs don't punish repeat offenders.
The law firm Gibson Dunn recently published a report on deferred prosecution and non-prosecution agreements, DPAs and NPAs, for the first half of this year. DPAs and NPAs are used when prosecutors believe criminal conduct may have occurred but, because of a company's extensive cooperation, willingness to fire responsible executives, or the potential for serious collateral damages, a guilty plea would not be in the public's best interest. The Department of Justice has used these agreements for more than a decade and the SEC since 2010. About 33% of DOJ agreements have primarily addressed fraud claims and approximately 26% have covered Foreign Corrupt Practices Act claims since 2000. Guilty plea collateral damage can affect shareholders, employees and other corporate stakeholders. The consequences of a guilty plea to a bank or financial institution include loss of state and federal charters, credit downgrades and breach of debt covenants as well as reputational risk.
Since 2007, the Department of Justice has used DPAs or NPAs 17 times against banks and fined them more than $4 billion. But, in spite of promising more than once not to commit crimes ever again, UBS, Barclays and Wachovia are recidivists. The SEC has used NPA and DPA agreements sparingly since 2010 and only two of them were for financial institutions, Fannie Mae and Freddie Mac. Those charges related to the subprime loan collapse and alleged wrongdoing from 2006 to 2008. The NPAs with Fannie and Freddie had no financial penalties and were announced in conjunction with still unsettled civil charges against three top former executives of each firm for securities fraud.
DPAs and NPAs include the caveat that if the offender corporation "commits any … crime subsequent to … this Agreement, or if [the offender corporation] has given false, incomplete, or misleading testimony or information at any time," the firm is subject to prosecution for any federal violation of which the DOJ has knowledge, including perjury and obstruction of justice.
JPMorgan Chase and Wachovia have been ordered to "cease and desist" breaking the law by the SEC in addition to being on the receiving end of NPAs and DPAs. Citigroup has signed three "cease and desist" orders between 2006 and 2011, including one for its CDO sales practices during the financial crisis. Citigroup has been a repeat offender in other areas.
But look what happened when Judge Jed Rakoff recently objected to this repeat performance of criminal and civilly offensive behavior by Citigroup. The SEC responded to the judge's objections by explaining to the court that defendants are less likely to settle if forced to admit liability, out of fear the admission will harm them in shareholder lawsuits.
Is the SEC supporting recidivists because, if they don't, they may have to try the case and maybe even lose? The prosecutors and regulators condone repeat criminal and civilly offensive behavior by allowing banks, in particular, to settle more than once and pretend to plan to be good in the future. By agreeing to DPAs and NPAs, prosecutors and regulators admit they're also worried about the collateral damage that could occur when a financial institution admits criminal behavior and takes a financial or litigation hit as a result.
There are at least a dozen banks now under investigation for Libor manipulation including prior DPA, NPA and SEC "cease and desist" beneficiaries such as Bank of America, JPMorgan Chase, UBS, Credit Suisse, Deutsche Bank, Lloyds and HSBC. HSBC is additionally under severe scrutiny for drug money laundering, a popular claim settled with several other banks in the past. Tax fraud charges make an appearance, too, among some of the same banks mixed up now with Libor manipulation such as UBS and Deutsche Bank.
We'll see no justice as long those charged with protecting the public, the taxpayers and the investor are more worried about quick court wins and maintaining bank profits than punishing illegal activities once and for all.
Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.