The government's astounding inability to prosecute any but the most egregious cases of securities fraud has effectively privatized the enforcement of financial laws. It's time to make that outsourcing official.
How soft are this watchdog's teeth? Yesterday, the government sued Goldman Sachs (GS) for $491 million in a case about mortgage fraud. Last year Goldman had $39 billion in revenues. If the suit is successful, look to see a brief but significant drop in valet parking tips until it is paid off.
This comes on the heels of Friday's announcement that Federal criminal investigations of IndyMac, and New Century Financial and Washington Mutual were officially going nowhere. Earlier this year the U.S. Attorney's office Los Angeles closed its investigation of Countrywide Financial with no charges being filed. More investigations are likely to be shut down unless charges are filed soon. Negotiations between big banks and state attorneys general may give the banks broad immunity against future claims.
Three -- count them, three -- cases against individuals
But wait, there's more -- well, make that less. The Justice Department has brought exactly three cases against employees at large financial firms and 0 (zero) against executives at large banks. (It is worth remembering that the Feds didn't catch Bernie Madoff; he turned himself in.) Apparently Federal prosecutors are playing the same role for large banks that the ratings agencies once played.
The usual explanation for this is that these are very complex cases and conspiracy is hard to prove and... and yet private firms seem to be doing quite well. Prosecutors say this is because the standard of proof in civil cases is lower than in criminal ones.
This seemingly plausible excuse is just that: An excuse. The big question is, why haven't the Feds tried to leverage information unearthed in these civil cases? None of the evidence found or confidential informants used seems to have made its way into any of these stalled investigations.
Further, if the government really is out-gunned in these cases, why hasn't it really privatized them? If ever there were cases which justified the use of monomaniacal special prosecutors, these are them.
Instead we're stuck with civil cases which almost never target executives or directors. As New York Times reporters Louise Story and Gretchen Morgenson explain, "The lack of criminal inquiries by the government means that restitution is often paid by innocent parties -- shareholders -- who have already been hurt by the questionable conduct."
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