The Case for the Corporate Death Penalty The Case for the Corporate Death Penalty Restoring Law and Order on Wall Street Mary Kreiner Ramirez and Steven A Ramirez New York University Press New York NEW YORK UNIVERSITY PRESS New York www.nyupress.org © 2017 by New York University All rights reserved References to Internet websites (URLs) were accurate at the time of writing Neither the author nor New York University Press is responsible for URLs that may have expired or changed since the manuscript was prepared ISBN: 978-1-4798-8157-4 For Library of Congress Cataloging-in-Publication data, please contact the Library of Congress New York University Press books are printed on acid-free paper, and their binding materials are chosen for strength and durability We strive to use environmentally responsible suppliers and materials to the greatest extent possible in publishing our books Manufactured in the United States of America 10 Also available as an ebook For our parents, who taught us For our family, who supports us And, for Ferdinand Pecora, the Hellhound of Wall Street, who inspires us Contents Acknowledgments Preface Introduction A Short History of White-Collar Criminal Prosecutions Angelo Mozilo and Countrywide’s “Toxic” Subprime Mortgages Wall Street’s Fraudulent Sales of Toxic Mortgages Lehman’s Phantom Cash Joe Cassano and AIG’s Derivatives Casino Goldman’s Abacus The Dimensions of Lawlessness Conclusion: Looking Forward: Reimposing Law Bibliography Index About the Authors Acknowledgments This book benefited from comments made by participants at faculty workshops at Case Western Reserve University School of Law, Indiana Tech Law School, Florida A&M University College of Law, and Loyola University of Chicago School of Law, at its Norman Amaker Public Interest Law & Social Justice Retreat The book also benefited from excellent legal research by Kevin Dan, Raymond James, Jessica Backus, and Jose Lebron Nicholas Flatley, CPA, assisted with accounting issues Two anonymous reviewers provided excellent feedback and insights Loyola University of Chicago supported this project through summer research stipends Preface In defiance of any notion of the rule of law, our government failed to prosecute any senior bankers or large banks at any of the major financial firms at the center of the financial crisis of 2007 to 2009 This book demonstrates that the US government failed to pursue criminal misconduct that justified charges against the financiers at the center of the subprime crisis, and that justified dismantling Wall Street’s most powerful megabanks under current law At the outset, however, we must highlight that this book of necessity must proceed upon an inadequate factual foundation specifically because the government failed to adequately investigate and prosecute the enormous crimes underlying the financial crisis Criminal prosecutions entail the most thorough and reliable government investigations because they require proof beyond a reasonable doubt and other protections under our Constitution Most notably, the defendant must be accorded the right to counsel and the right to confront witnesses through crossexamination The rules of evidence further ensure that only relevant and reliable evidence is admitted in a criminal trial Thus, the American people essentially were deprived of the most accurate and reliable instrument for learning the truth behind the financial crisis of 2007 to 2009 Congress conducted many hearings on the financial crisis, and the firms we discuss appeared at the center of that maelstrom The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) conducted many investigations and pursued civil fines and enforcement actions against many of the key wrongdoers during the crisis Lawmakers directed the Financial Crisis Inquiry Commission (FCIC) to investigate the causes of the crisis, and the commission produced a voluminous report that is available for free online Victims of securities fraud can and have pursued private litigation under the federal securities laws against virtually all of the firms we highlight Massive settlements and some degree of judicial fact-finding occurred in connection with these civil actions The media conducted some important investigations into the wrongdoing that occurred and reported extensively on whistleblowers These sources, however, are necessarily inferior options for learning the truth behind the financial crisis The best source of truth is in the context of adversarial criminal trials with all the due process protections that defendants in our nation enjoy Cross-examination of witnesses, in particular, is rightly termed “the greatest legal engine for the discovery of truth ever devised.” There are many negative consequences to the federal government’s failures to enforce the law, and we discuss them in great detail Yet, one profoundly unpleasant consequence is that the American people must settle for lesser sources to learn the truth of what precipitated the financial collapse of 2008, and whether incentives and disincentives have been adjusted in the aftermath of the crisis Massive fraud and other crimes caused the crisis, and the government let the perpetrators get away with billions in loot while the global economy suffered trillions in losses that we all paid Any book that seeks to examine and critique the government’s wholesale failure to pursue appropriate criminal prosecutions must by necessity rely upon sources other than criminal findings of a jury after a full-blown government investigation and public trial Our sources are therefore suboptimal Nevertheless, in composing this book we endeavored to rely upon the best primary sources available whenever possible We sought the government’s own findings and investigatory activity whenever possible We utilized the most reliable news sources for reports of witness accounts and important facts as a backup to sworn testimony or factual government findings Furthermore, because we think that our ultimate conclusion—that an unprecedented breakdown in the rule of law occurred in our nation after the greatest financial collapse in history—is something that every citizen must reflect upon, we have strived to make the basis of our conclusion as transparent as possible Therefore, whenever possible we employed Internet-based sources that are easily accessible to as many citizens as possible Another important reality that every reader should explicitly understand is that we cannot and not find any particular individual or firm guilty of criminal misconduct Only a jury after a full criminal trial could so A book cannot convict a suspect, and this book should not be read or understood to accuse anyone of criminal misconduct On the other hand, we take the federal government to task on the much more specific issue of whether sufficient evidence exists to show that an individual or firm should stand trial for criminal charges—or, stated otherwise, should face federal indictment Even on this more narrow point, more caution regarding our conclusions is in order The government by definition may access sources unavailable to us as authors The government may subpoena documents and compel sworn testimony Under threat of indictment, the government may obtain more information from putative defendants not available to us Government attorneys no doubt could access whistleblowers and informants to a much greater degree than us In every case discussed in this book the government necessarily knows more than us The most we can say as a result of this reality is that it appears or it seems that there is sufficient or strong evidence for any particular person or firm to suffer a criminal indictment Nor has the government been particularly forthcoming about its efforts and findings regarding the massive mortgage-related fraud that we chronicle in this book For example, on October 9, 2012, the Financial Fraud Enforcement Task Force held a press conference to report on the DOJ-led interagency success in combating mortgage fraud launched a year earlier in October 2011 At the press conference, Attorney General Eric Holder was eager to demonstrate the government’s pursuit of justice for Main Street, making the following statements regarding criminal prosecutions pursuant to the Distressed Homeowner Initiative: “[I]t’s been a model of success Over the past 12 months, it has enabled the Justice Department and its partners to file 285 federal criminal indictments against 530 defendants for allegedly victimizing more than 73,000 American homeowners—and inflicting losses in excess of $1 billion” (DOJ 2012e) The DOJ has repeatedly stressed its priority of investigating and prosecuting mortgage fraud in numerous public statements Shortly after the press conference the DOJ’s Office of the Inspector General (OIG) requested documentation to support the statistics provided, and in November 2012 DOJ officials admitted the statistics might not be accurate Despite repeated requests for the corrected information, the DOJ waited 10 months, until August 2013, to release more accurate figures to the public The press release dated October 9, 2012, has been modified on the DOJ’s website to present supportable statistics and the faulty numbers have been corrected, but the true numbers paint a far less robust response: 107 criminal defendants have been charged (80 percent fewer defendants that the professed claim of 530); 17,185 criminal victims were involved (a 76 percent decline from the 73,000 victims claimed in the press conference); and, most strikingly, $95 million in criminal losses were addressed (down 91 percent from the claimed $1 billion) Moreover, the DOJ never offered accurate information regarding the number of executives charged, and thus this statistic does not appear in the modified press release The OIG audit report added that for 10 months after DOJ acknowledged to OIG the statistics were inaccurate, those “seriously flawed” figures were repeatedly disseminated in various mortgage-fraud-related DOJ press releases (DOJ 2014a) The DOJ therefore does not always accurately disclose its findings and actions, compounding all the difficulties identified above with assessing the government’s response to the criminality driving the financial crisis Finally, the DOJ does not routinely explain its decisions to decline prosecution of any individual or firm Any focus on any particular individual or firm, however, misses the point of this book We not address the criminality of any particular person or firm but rather critique the conduct of the US government and the Department of Justice based upon an apparent pattern of unjustified decisions to decline criminal prosecutions (and administrative remedies such as ordering asset sales or spin-offs of subsidiaries to shareholders) of powerful financial institutions and powerful financiers It is the decision that our government made that zero prosecutions of any megabank or Wall Street banker would proceed since the collapse of 2008 that we argue constitutes the historic breakdown in the rule of law This book must be read in light of the above limitations and that particular purpose At base, this book confronts the historic breakdown in the rule of law and addresses the underlying lack of justification for the government’s failure to enforce laws now on the books, promulgated well before the crisis Furthermore, this book proposes attainable measures to restore the rule of law in the financial sector .. .The Case for the Corporate Death Penalty The Case for the Corporate Death Penalty Restoring Law and Order on Wall Street Mary Kreiner... justification for the government’s failure to enforce laws now on the books, promulgated well before the crisis Furthermore, this book proposes attainable measures to restore the rule of law in the financial... that foreign media outlets now question the rule of law in the US financial sector The damage does not end there If the most powerful act above the law, then social incentives to skirt the law