« Could capital reprieve cost Colorado Gov his office? | Main | "Rational Criminal Addictions" »

August 30, 2014

"The criminalisation of American business"

20140830_cna400The title of this post is the headline of this notable new Economist cover story, which carries the subheadline "Companies must be punished when they do wrong, but the legal system has become an extortion racket." Here are excerpts:

Who runs the world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company.

The amounts are mind-boggling. So far this year, Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and other banks have coughed up close to $50 billion for supposedly misleading investors in mortgage-backed bonds. BNP Paribas is paying $9 billion over breaches of American sanctions against Sudan and Iran. Credit Suisse, UBS, Barclays and others have settled for billions more, over various accusations. And that is just the financial institutions. Add BP’s $13 billion in settlements since the Deepwater Horizon oil spill, Toyota’s $1.2 billion settlement over alleged faults in some cars, and many more.

In many cases, the companies deserved some form of punishment: BNP Paribas disgustingly abetted genocide, American banks fleeced customers with toxic investments and BP despoiled the Gulf of Mexico. But justice should not be based on extortion behind closed doors. The increasing criminalisation of corporate behaviour in America is bad for the rule of law and for capitalism (see [companion] article)....

The drawbacks of America’s civil tort system are well known. What is new is the way that regulators and prosecutors are in effect conducting closed-door trials. For all the talk of public-spiritedness, the agencies that pocket the fines have become profit centres: Rhode Island’s bureaucrats have been on a spending spree courtesy of a $500m payout by Google, while New York’s governor and attorney-general have squabbled over a $613m settlement from JPMorgan. And their power far exceeds that of trial lawyers. Not only are regulators in effect judge and jury as well as plaintiff in the cases they bring; they can also use the threat of the criminal law.

Financial firms rarely survive being indicted on criminal charges. Few want to go the way of Drexel Burnham Lambert or E.F. Hutton. For their managers, the threat of personal criminal charges is career-ending ruin. Unsurprisingly, it is easier to empty their shareholders’ wallets. To anyone who asks, “Surely these big firms wouldn’t pay out if they knew they were innocent?”, the answer is: oddly enough, they might.

Perhaps the most destructive part of it all is the secrecy and opacity. The public never finds out the full facts of the case, nor discovers which specific people—with souls and bodies—were to blame. Since the cases never go to court, precedent is not established, so it is unclear what exactly is illegal. That enables future shakedowns, but hurts the rule of law and imposes enormous costs. Nor is it clear how the regulatory booty is being carved up. Andrew Cuomo, the governor of New York, who is up for re-election, reportedly intervened to increase the state coffers’ share of BNP’s settlement by $1 billion, threatening to wield his powers to withdraw the French bank’s licence to operate on Wall Street. Why a state government should get any share at all of a French firm’s fine for defying the federal government’s foreign policy is not clear....

In the longer term, two changes are needed to the legal system. The first is a much clearer division between the civil and criminal law when it comes to companies. Most cases of corporate malfeasance are to do with money and belong in civil courts. If in the course of those cases it emerges that individual managers have broken the criminal law, they can be charged.

The second is a severe pruning of the legal system. When America was founded, there were only three specified federal crimes — treason, counterfeiting and piracy. Now there are too many to count. In the most recent estimate, in the early 1990s, a law professor reckoned there were perhaps 300,000 regulatory statutes carrying criminal penalties—a number that can only have grown since then. For financial firms especially, there are now so many laws, and they are so complex (witness the thousands of pages of new rules resulting from the Dodd-Frank reforms), that enforcing them is becoming discretionary.

This undermines the predictability and clarity that serve as the foundations for the rule of law, and risks the prospect of a selective — and potentially corrupt — system of justice in which everybody is guilty of something and punishment is determined by political deals. America can hardly tut-tut at the way China’s justice system applies the law to companies in such an arbitrary manner when at times it seems almost as bad itself.

August 30, 2014 at 10:40 PM | Permalink


TrackBack URL for this entry:

Listed below are links to weblogs that reference "The criminalisation of American business":


I would like to criminalize rent seeking, with the death penalty for raids on the public fisc over $6 million.

The lawyer traitor forced banks to lend to irresponsible ghetto people on pain of losing their charters.

They over rode the decisions of certified underwriters to do so.

In a sharp business tactic, they bundled these and sold them to sophisticated institutions, many abroad. The latter were seeing high interests, and it became the standard of due care for fund managers to acquire these high yield bundled loans.

Now the government is claiming irregularities. I would file a counter suit against the government. I would demand e-discovery of the prosecutors, referring all child porn to the FBI. The justification is the improper motive of the Hate America Commies in the DOJ. At the very first adverse ruling by the lawyer traitor on the bench, I would demand a recusal. If not granted, demand e-discovery on the computer of the judge, seeking to disqualify the pro-government biased lawyer traitor on the bench.

I would then begin a movement to boycott all such lawyer traitors, where no product or service provider is to serve them in any way.

Why should the defendant live in uncertainty and the prosecution traitor stay relaxed? Rain legal hell on the lawyer traitor. I can say that if the counter suit is not dismissed on first pleading, the prosecutor will also be fired from government within a year, since the defense cost will have exceeded its value to the government.

Then begin a campaign of vilification and ask that all their affiliations ostracize them. This would include the parsing of every utterance and the filing of Disciplinary Counsel requests for investigations for any untoward ones.

Will any defense lawyer go along with this carpet bombing philosophy? No. The defense lawyer was a former prosecutor. His job is generated by the prosecution, not by the client. He worked with them, and still remains friends. After the case is over, they get together for drinks toasting to the stupidity of the public. So deterring the lawyer traitor will decrease his income.

So only a pro se litigant will ever do the above.

Posted by: Supremacy Claus | Aug 31, 2014 11:39:53 AM

Even though it is not mentioned, one of the best examples of criminalization of American Business is the DoJ's recent attempt to extort millions of dollars from Fed Ex (as they did to UPS) because they home deliver pharmaceuticals from non-FDA approved sources and pharmacies, even though Fed Ex has requested from the goobermint a list of pharmacies that are suspected in this enterprise.

You can't make this BS up. Oh yeah, goobermint apologists can!

I understand the risk of non-approved (and even counterfeit) pharmaceuticals which don't have proper tracking and pedigrees, but this is not Fed Ex's job, nor do I want it to be Fed Ex's job.

Posted by: albeed | Aug 31, 2014 10:40:46 PM

Wow - no actual criminal charges, but now civil fines are taken as "overcriminalization"? A global financial crisis with no criminal charges against a financial institution or executives and there is "overcriminalization"?

"In many cases, the companies deserved some form of punishment" Many? The article mentions: Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs, BNP Paribas, Credit Suisse, UBS, Barclays and BP. Exactly which of the mentioned companies did not deserve punishment?

Alternate perspective: Uncle Sam as meter maid, collecting a small share of the illegal take.
"By all appearances, the once-fierce visage of the Securities and Exchange Commission and the Justice Department has altered radically. Formerly the scourge of white-collar criminals, the prosecutorial apparatus has now morphed into a supersized meter-maid. The goal is no longer discouraging reprehensible behavior or stopping criminal activities; nor is it encouraging confidence in the markets. Rather, the former enforcers of the law have become a giant revenue collecting organization -- Rule of Law be damned."

Jon Stewart had an excellent takedown of the $13 billion JP Morgan 'shakedown'

"Extortion" requires an imbalance of power, but I fail to see the big, bad govt abusing the poor helpless corporate person with their meager amounts of money, lobbyists, PR flacks, law firms, etc.

Posted by: Paul | Sep 1, 2014 10:33:02 AM

So have we seen any TBTF bank officers doing the perp walk?

Moreover these settlements are paid by the shareholders, not the officers who were personally responsible for the frauds. All that happens to the perps is that their reputations are stained and their careers are damaged or ended. None of them have disgorge any bonuses that resulted from these frauds.

The Economist article is part of a PR campaign and should be considered along with this August 28th article from the Financial Times:


The Economist article does unintentionally make a legitimate point - that these settlements are not transparent. The dollar amount trumpeted in the DOJ or SEC press releases are likely off-set by the fact that some or all of the settlements can be deducted from corporate income taxes or can be off-set by credits for other conduct, both of which are undisclosed in the press releases. Some in Congress are trying to address this lack of transparency by the introduction of the Truth in Settlements Act.

See https://beta.congress.gov/bill/113th-congress/senate-bill/1898

I am not expecting this to become law. But even if it doesn't, the settlement amounts trumpeted in the press releases are a pittance when compared to the size of the frauds. The settlements can fairly be considered to be nothing more than a cost of doing business with no deterrent affect on future conduct.

Overcrimalization? No.

Decriminalization? Yes.

Posted by: Fred | Sep 2, 2014 8:57:43 AM

Paul and Fred:

Are you working for the DoJ or HUD for the betterment of all mankind and/or publicly educated? Can you explain how the Community Reinvestment Act and its amendments and regulations can be simplified in 50 words or less? Can you explain why Freddie and Fannie have remained untouched so far?

The problem is gotcha regulations. I assume that people want to make profits, which as far as I know, is still legal. Government is not exactly helpful and I maintain that what they are doing (civil and not criminal penalties) is still extortion. If there are "real" crimes, try the SOBs in Criminal Court. Oh Yeah, we have that problem with plea bargains and the unchecked power of prosecutors. It is better to offer a smaller sum and take the money and run than rely on "Justice".

I tried to shy away from the many potential problems that can exist with financial institutions which are intimately tied at the waist with the FED and government. My problem is with the Fed Ex case. Forty million in costs will be passed on to the US population and is in actuality a "tax" on all of us.

Both the government and the financial institutions can therefore be considered "frauds".

Posted by: albeed | Sep 2, 2014 9:29:47 AM

Albeed asked me (and Paul) three questions:

“Are you working for the DoJ or HUD for the betterment of all mankind and/or publicly educated?”

No, I have never worked for the DOJ or HUD. I’ve been doing criminal law in private practice for 40 years. What’s your point about “publicly educated”?

“Can you explain how the Community Reinvestment Act and its amendments and regulations can be simplified in 50 words or less?

No. Once again, what’s your point about “50 words or less”?

“Can you explain why Freddie and Fannie have remained untouched so far?”

Yes, but it is very difficult to do with any nuance in a blog comment thread.

The short answer is that any criminal prosecution of any TBTF bank (or Fannie or Freddie) about its role in the mortgage securitization process would have publicly revealed that the banks were insolvent for accounting purposes, because the mortgage-backed securities on their balance sheets were worthless. This is where the expressions, "toxic assets" and "zombie banks", came from. Stated another way, these assets were worth zero and if valued truthfully (not fraudulently) on the bank balance sheets, the banks were insolvent.

First, these securities are worthless because most of the mortgages backing them were liar’s loans. There have always been and will always be liar’s loans. But during the run-up to the Great Recession, underwriting rules had been so loosened that anyone with a pulse could get a mortgage. Concurrently, bonus structures had been changed. Rather than basing bonuses on the quality of the loans, they were based on the face amount of the loans, which discouraged any proper underwriting. Once it became publicly known in a community that certain originators were “easy”, the liars beat a path to their doors. And the crooked originators knew exactly what was going on.

Second, these securities are worthless because most of the mortgages, whether liar’s loans or not, were fraudulently transferred to the trusts that issued the mortgage-backed securities. This was revealed during the robo-signing scandal. The documents that needed forged signatures to allow a contested foreclosure to be prosecuted were documents that were required by the terms of the trusts issuing the mortgage-backed securities to have been executed within a specific time-frame prior to the transfer to the trusts. Fraudulent misrepresentations were repeatedly made throughout the securitization process that these documents had been timely executed. They had not. The terms of the trusts did not permit the later execution of these documents only when needed to prosecute a contested foreclosure action.

There was origination fraud, appraisal fraud, representation/warranty fraud, accounting fraud, control fraud, and forgery throughout the securitization process. Many people made a lot of money and some people became fabulously wealthy from these crimes. Nothing has been done to personally hold the fraudsters to account.

Posted by: Fred | Sep 3, 2014 10:03:55 AM


Thank You for taking the time to explain. Your's has been the best response that I have ever received from anyone on this site. I do believe that government itself is complicit in the activities you discussed.

That as it may be, I still have problems with what is going on with Fed Ex.

Posted by: albeed | Sep 3, 2014 10:18:50 PM


You're welcome.

I was afraid when I was drafting my comment that because of your concern for the FedEx case I was talking past you. I wasn't aware of it until you pointed it out. I have since checked it out. Thank you.

What I found interesting was FedEx's response to the indictment, which pointed out (I paraphrase from memory) FedEx's long co-operation with law enforcement, that this co-operation might lessen because of the indictment, and that while FedEx has no problem co-operating with law enforcement, it will not do law enforcement's job.

So what did the DOJ ask FedEx to do that it wasn't already doing?

Posted by: Fred | Sep 4, 2014 9:58:09 AM


Fed Ex has been indicted by a federal Grand Jury for conspiracy to distribute unapproved drugs and controlled substances for home delivery of prescription drugs provided by "unapproved" pharmacies. Fed Ex maintains that it is a delivery company and has requested a listing of "unapproved" pharmacies from the government and has never been provided a list.

You can find many articles including the indictment and Fed Ex's response by googling Fed Ex and the DoJ. You will find that the government had previously shake down UPS.

Posted by: albeed | Sep 4, 2014 10:09:09 PM

Post a comment

In the body of your email, please indicate if you are a professor, student, prosecutor, defense attorney, etc. so I can gain a sense of who is reading my blog. Thank you, DAB