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December 13, 2011

"The Limits of Bigger Penalties in Fighting Financial Crime"

The title of this post is the headline of this new entry in the Dealbook section of the New York Times.  The piece is authored by Professor Peter Henning, and here are excerpts:

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....

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....

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.

December 13, 2011 at 08:04 AM | Permalink

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Comments

The linked article is an apology for doing nothing and a promise to do nothing in the future. All of the reasons given are legitimate hurdles to overcome in any investigation/prosecution of financial crimes. But they are not legitimate excuses for not even trying.

Because there will be no investigations/prosecutions of other than a token number of financial crimes, the conduct which the statutes prohibit has in effect been decriminalized.

So discussing the severity of the punishment imposed on the "unlucky few" who are prosecuted is pointless.

Posted by: Fred | Dec 13, 2011 11:04:50 PM

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