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TRACking the Decline in Criminal Prosecutions for Financial Fraud

Wednesday, November 30, 2011 14:36
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From the Project On Government Oversight


In the aftermath of the financial crisis, the federal government launched several high-profile initiatives to crack down on financial fraud in the banking and mortgage industries. So why haven’t we seen more criminal prosecutions in these areas?

The Transactional Records Access Clearinghouse (TRAC) recently reported that federal criminal prosecutions for financial institution fraud are at a 20-year low. This grim news comes at a time when everyone from Wall Street protestors to federal judges is questioning the government’s enforcement efforts.

It’s now been over two years since Congress passed the Fraud Enforcement and Recovery Act (FERA), which provided DOJ and other agencies with significantly enhanced resources to investigate and prosecute financial fraud. Shortly FERA was enacted into law, President Obama created an interagency task force to coordinate these efforts.

These initiatives have certainly produced some flashy headlines. But the actual data on criminal prosecutions are much less impressive. Granted, the statistics alone do not tell us much about the complexity or quality of the cases that have been investigated and prosecuted by the federal government in recent years. However, the numbers are a starting point for oversight in government enforcement efforts and they raise some questions.

TRAC reported that criminal prosecutions for financial institution fraud are at a 20-year low, according to information obtained from the Executive Office for U.S. Attorneys under the Freedom of Information Act:


(Full disclosure: TRAC co-director David Burnham is a POGO board member.)

As Catherine Rampell at The New York Times pointed out, this decline occurred during a period in which total prosecutions for federal crimes increased significantly.

TRAC’s report specifically examined federal criminal prosecutions for Financial Institution Fraud, described as “[f]raud and embezzlement, including through the use of credit cards and credit card information, in which banks, savings and loan associations, credit unions and similar financial institutions are the victims.” In FY 2010, the vast majority of these prosecutions resulted from referrals by one of three agencies: the FBI, Postal Service, and Secret Service.

To be fair, there has been a modest increase in criminal prosecutions under other DOJ categories such as Mortgage and Securities Fraud:


But this uptick does not compensate for the significant decline in prosecutions for financial institution fraud, which began well over a decade ago.

Earlier this year, The New York Times reported that there has also been a steep decline in criminal referrals made by financial and banking regulatory agencies, especially compared to the flurry of referrals made during the savings and loan crisis:


Even with the passage of FERA, TRAC’s data do not reflect any significant increase in criminal referrals leading to prosecutions under the program categories mentioned above.

There have certainly been individual cases in which the government has prosecuted and convicted high-profile defendants in the financial sector for egregious violations of the law. Last month, for instance, Raj Rajaratnam was sentenced to 11 years in prison for his “involvement in the largest hedge fund insider trading scheme in history,” in a case that relied heavily on wiretapping and other undercover techniques that often require significant resources. It’s also worth noting that there has been an increase in the average prison term for financial institution fraud, according to TRAC’s data.

Nonetheless, some Members of Congress are questioning why FERA has not had more of an impact, in terms of quantity or quality. At a hearing last year before the Senate Judiciary Committee, former Senator Ted Kaufman (D-DE) explored several possible explanations:

I know the Justice Department, the SEC and FBI have all been working incredibly hard, and I mean incredibly hard, reviewing countless transactions, interviewing myriad witnesses, pouring over literally millions of pages of documents. And yet we have seen very little in the way of senior officer or board room level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin. Why is that? Is it because none of the behavior in question was criminal? Is it because too much time passed before the investigators got serious? Has the trail gone cold? Is it because the law favors the wealthy and powerful? Or is the explanation much more complex?

Assistant Attorney General Lenny Breuer defended DOJ’s track record, and argued that the SEC and other agencies have picked up the ball in cases that did not rise to the level of criminal misconduct. Indeed, the SEC recently announced that it filed a record 735 enforcement actions in FY 2010, including cases “addressing misconduct that led to or arose from the financial crisis.”

At the same time, the SEC has been heavily criticized by U.S. District Judge Jed Rakoff and others for its practice of entering into settlements in which the defendant does not admit or deny wrongdoing. And as Jonathan Weil at Bloomberg discovered last year, DOJ may be using some creative math to calculate its prosecutions related to the financial crisis. Senator Charles Grassley (R-IA), Ranking Member of the Judiciary Committee, has expressed concern that the Financial Fraud Enforcement Task Force “is nothing more than a press release collection agency utilized by the Justice Department to collect examples of investigations and prosecutions that would otherwise have been brought.”

Alexander Eichler at The Huffington Post pointed to several trends that might help to explain the drop in criminal prosecutions for financial institution fraud, such as the increased use of deferred prosecution agreements and other alternatives to litigation, the “outsourcing of investigations” to the companies accused of wrongdoing, and a lack of adequate funding for financial and banking regulatory agencies.

For more on this issue, be sure to check out TRAC’s report, which also includes the latest monthly data on the top ranked lead charges, judicial districts, and district judges for cases involving financial institution fraud.

Michael Smallberg is a POGO Investigator.

The Project On Government Oversight is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government. Founded in 1981, POGO (which was then known as Project on Military Procurement) originally worked to expose outrageously overpriced military spending on items such as a $7,600 coffee maker and a $436 hammer. In 1990, after many successes reforming military spending, including a Pentagon spending freeze at the height of the Cold War, POGO decided to expand its mandate and investigate waste, fraud, and abuse throughout the federal government.

Throughout its history, POGO’s work has been applauded by Members of Congress from both sides of the aisle, federal workers and whistleblowers, other nonprofits, and the media.

Read more at Project On Government Oversight


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