criminal-law international finance
Why don&#39;t US prosecutors press for imprisonment for crime in the banking industry?
<p>In <a href="https://www.theguardian.com/business/2018/aug/15/rbs-bankers-joked-about-destroying-the-us-housing-market" rel="nofollow noreferrer">this</a> article by <em>The Guardian</em> published two days ago they report:</p>
<blockquote>
<p>RBS bankers joked about destroying the US housing market after making millions by trading loans that staff described as <strong>&quot;total fucking garbage&quot;</strong>, according to transcripts released as part of a $4.9 billion (£3.8 billion) settlement with US prosecutors ...</p>
<p>The DoJ (Department of Justice) ... said the bank made <strong>&quot;false and misleading representations&quot;</strong> {ie they lied} to investors in order to sell more of RMBS (Residential Mortgage Backed Securities) [ie homes] ... which are forecast to result in losses of $55 billion to investors ...</p>
<p>The banks chief credit officer in the US referred to selling investors products backed by <strong>&quot;total fucking garbage&quot;</strong> loans with <strong>&quot;fraud that was so rampant ... [and] random&quot;</strong>.</p>
<p>He added that <strong>&quot;the loans are all disguised to, you know, look okay kind of ... in a data file&quot;</strong>.</p>
</blockquote>
<p>So much for the sophisticated risk assessment models of banks risk assessment departments and of rating agencies: garbage in, garbage out.</p>
<p>The article goes on to report that</p>
<blockquote>
<p>The DoJ said senior RBS executives <strong>&quot;showed little regard for their misconduct, and internally made light of it.&quot;</strong></p>
<p>In one exchange as the extent of the contagion became clear, RBS's head trader recieved a call from a friend who said <strong>&quot;[I'm] sure your parents never imagine[d] they'd raise a son who [would] destroy the US housing market in the richest nation in the world.&quot;</strong></p>
</blockquote>
<p>To which the head trader joked:</p>
<blockquote>
<p><strong>&quot;I take exception to the word 'destroy'. I am more comfortable with 'severely damage'</strong></p>
</blockquote>
<p>A joke that affirms his guilt in this matter. One senior banker explained to a colleague:</p>
<blockquote>
<p>that risky loans were the result of a broken mortgage industry that meant lenders were <strong>&quot;raking in the money&quot;</strong> and were incentivised to make as much money as possible.</p>
</blockquote>
<p>As opposed to being incentivised to fix the industry.</p>
<blockquote>
<p>Employees who might have raised the alarm about the riskiness of such lending <strong>&quot;don't give a shit because they are not getting paid&quot;</strong></p>
<p>The bank made <strong>&quot;hundreds of millions of dollars&quot;</strong> from selling RMBS the DoJ said, while disguising the risk they posed to investors.</p>
<p>By October 2007, as signs of stress began to show in the banking system, RBS chief credit officer wrote to his colleagues expressing his true feelings about the burgeoning volume of subprime loans in the housing market. He said that loans were bing pushed by <strong>&quot;every possible ... style of scumbag ... [it was like] quasi-organised crime ... nobody seemed to care.&quot;</strong></p>
</blockquote>
<p>The emphasis in bold was added to dialogue in the extracts above.</p>
<p>This raises a question about how to reform and fix the banking industry. According to Chomsky, the formation of Western capitalism was in large part by due to &quot;radical judicial activism&quot;. Perhaps it will take radical judicial activism to fix it. Clearly the system is broken - even the bankers themselves admit it.</p>
<p>Surely one instrument at hand for the legislative profession is punishment. The bank is being punished by being fined but negligible personal responsibility is taken - as also admitted by the bankers. Notably, no names are mentioned above - only the name of the office they occupy.</p>
<p>Q. Is this due to the principle of limited liability?</p>
<p>A general principle in economics is higher risk is supposedly correlated with higher rewards. Yet soldiers put their lives on the line for defending a nation against attack yet are rewarded much less than bankers that are putting other peoples lives at risk.</p>
<p>Why aren't bankers punished for the very real harm they can do to an economy? The USA has the death penalty for example (the UK does not) but one need not go as far as the ultimate sanction - imprisonment is possible - ten years, twenty years or life.</p>
<p>Q. Why aren't US prosecutors (and UK prosecutors for that matter) not pressing for imprisonment in such cases? Is this because there are no such laws under bankers can be so indited (notably, in the case reported on above, there is the additional complication of extradition) or that there are - but powerful vested interests prevents the actual execution of the law as it is intended? If so - how exactly are they prevented?</p>
<p><strong>note:</strong> {this is clarification by the poster} as opposed to [this is clarification by the reporter] of quoted text. See comments below this post.</p>

<blockquote>
  <p>Q: Why don't US prosecutors press for imprisonment for crime in the
  banking industry?</p>
  
  <p>Q. Why aren't US prosecutors (and UK prosecutors for that matter) not
  pressing for imprisonment in such cases?</p>
  
  <p>Is this because there are no such laws under bankers can be so
  indicted (notably, in the case reported on above, there is the
  additional complication of extradition) . . . ?</p>
</blockquote>

<p>Prosecutors have the legal authority to prosecute bankers for crimes, and not infrequently do press charge bankers with crimes and press for imprisonment for crimes in the banking industry, and have obtained many very long prison sentences in cases like these. </p>

<p><a href="https://www.theatlantic.com/magazine/archive/2015/09/how-wall-streets-bankers-stayed-out-of-jail/399368/" rel="noreferrer">For example</a>, "following the savings-and-loan crisis of the 1980s, more than 1,000 bankers of all stripes were jailed for their transgressions." And, in 2008, the laws involved were, if anything, easier to prosecute and had stricter penalties than they did in the 1980s.</p>

<p>There were <a href="https://money.cnn.com/2016/04/28/news/companies/bankers-prison/index.html" rel="noreferrer">35 bankers convicted and sent to prison</a> in the financial crisis, although arguably <a href="https://www.nytimes.com/2014/05/04/magazine/only-one-top-banker-jail-financial-crisis.html" rel="noreferrer">only one of them was really a senior official</a>.</p>

<p>This said, the real question is not why they don't do this at all, but why prosecutors exercise their discretion to refrain from seeking imprisonment or lengthy imprisonment, in cases where they either have a conviction or could easily secure a conviction.</p>

<p>A former justice department prosecutor (in the Enron case) argues in an Atlantic article that <a href="https://www.theatlantic.com/business/archive/2016/08/why-arent-any-bankers-in-prison-for-causing-the-financial-crisis/496232/" rel="noreferrer">it is harder than it looks</a>. But, he ignores the fact that a lot of people looking at the very Enron case he prosecuted after the fact has concluded that the criminal prosecution may have done more harm than good, leading to significant harm to innocent people (for example by <a href="https://en.wikipedia.org/wiki/Enron_scandal" rel="noreferrer">destroying the careers and wealth of Arthur Anderson accountants</a> who had no involvement with the case, due to a conviction that was ultimately overturned on appeal). This changed the pro-prosecution of corporations attitude that had prevailed before then (corporations are easier to prosecute than individuals since you don't have to figure out exactly who in the corporation committed the wrong).</p>

<p>This time, regulators and securities law enforcers <a href="https://www.theatlantic.com/magazine/archive/2015/09/how-wall-streets-bankers-stayed-out-of-jail/399368/" rel="noreferrer">sought mostly civil fines against entities with some success</a>: </p>

<blockquote>
  <p>49 financial institutions have paid various government entities and
  private plaintiffs nearly $190 billion in fines and settlements,
  according to an analysis by the investment bank Keefe, Bruyette &amp;
  Woods. That may seem like a big number, but the money has come from
  shareholders, not individual bankers. (Settlements were levied on
  corporations, not specific employees, and paid out as corporate
  expenses—in some cases, tax-deductible ones.)</p>
</blockquote>

<p>The same link also points out the two very early criminal prosecutions against individuals resulted in acquittals by juries at trial, for reasons that may have been very specific to those trials, undermining the willingness of prosecutors to press even strong cases for almost three years and undermining the credibility of their threat to prosecute criminally.</p>

<p>Also, this is not a universal rule. For example, China routinely executes people who are convicted in summary trials of banking law violations and corruption charges.</p>

<blockquote>
  <p>Q. Is this due to the principle of limited liability?</p>
</blockquote>

<p>No. </p>

<p>Banking officials in a limited liability entity (and all banks are limited liability entities) can have criminal liability for acts in violation of banking and fraud laws, notwithstanding limited liability.</p>

<blockquote>
  <p>Is this because . . . powerful vested interests prevents the actual
  execution of the law as it is intended? If so - how exactly are they
  prevented?</p>
</blockquote>

<p><strong>This does happen but not often.</strong></p>

<p>Sometimes this happens, but not very often. </p>

<p>The corruption angle is a popular narrative on the political very progressive left of American politics, but as I explain below (as you note "Chomsky, the formation of Western capitalism was in large part by due to "radical judicial activism".", and Chomsky is a very left wing social and economic historian almost to the point of Marxist analysis), this visceral narrative isn't really accurate most of the time. First, for what it is worth, the prosecutors play a much larger role in this than "activist" judges do. Secondly, the decision making process is more nuanced and less blatantly corrupt and self-interested than his attempt at "legal realist" analysis would suggest. There are legitimate reasons for someone in a prosecutor's shoes to focus less on these cases, even if in the end analysis you think that they have made the wrong choices in these cases. The case for prosecuting banking fraud severely is basically a utilitarian one, but criminal prosecution is guided by norms beyond utilitarian norms.</p>

<p>There are certainly cases where an elected prosecutor or high level elected official is persuaded not to bring criminal charges or to be lenient due to pressure from powerful vested interest.</p>

<p>When this is done, a white collar criminal defense attorney, or a "fixer" who deals with political sensitive cases (sometimes on an elected official's staff and sometimes not), or an elected official or political party official contacts the prosecutor or the prosecutor's boss or is the prosecutor's boss, and based upon the plea from the powerful interests (direct or indirect) urges the prosecutor to back off and the prosecutor complies.</p>

<p>At the most extreme level, a Governor or President or parole board can pardon someone facing prison for banking crimes, which has happened, but is extremely rare.</p>

<p>But, this sort of direct intervention in an individual case is not terribly common. My guess would be that 1% to 10% of banking prosecutions are affected by this kind of influence particular to a given case. This is far too small a number of cases to reflect the reluctance of prosecutors to bring criminal bank fraud cases that we observe.</p>

<p><strong>More Often Policy Decisions Are Involved</strong></p>

<p><em>Budgets And Institutional Case Prioritization</em></p>

<p>Much more common would be for the elected prosecutor or the administration that employs an appointed prosecutor to decide to deprioritize a particular kind of case and/or to reduce funding (both at the law enforcement/regulatory agency level and at the subdepartment of the prosecuting attorney's organization level) for prosecution of these kinds of cases as a matter of broad policy.</p>

<p>Every prosecutor's office and law enforcement office on the planet has more crimes that it could prosecute and pursue than it has resources to do so, so it is always necessary to have some kind of priorities to decide which of those cases will be pursued.</p>

<p>For example, perhaps the Justice Department funds a white collar crime enforcement office with the resources to prosecute only 750 cases a year, and there are 7,500 strong cases that the offices could prosecute. </p>

<p>The white collar crime prosecution office has to then prioritize which of the 7,500 strong cases is chooses to pursue. It might, for example, in good faith, decide the focus on white collar crime cases that harm "widows and orphans" and other large groups of people who can't afford to hire their own lawyers to bring civil cases to sue the wrongdoers themselves to mitigate the harm that they suffer.</p>

<p>More specifically, <a href="https://www.theatlantic.com/magazine/archive/2015/09/how-wall-streets-bankers-stayed-out-of-jail/399368/" rel="noreferrer">a policy set in place by Deputy Attorney General Eric Holder in the Justice Department in 1999</a> was followed:</p>

<blockquote>
  <p>The so-called Holder Doctrine, a June 1999 memorandum written by the
  then–deputy attorney general warning of the dangers of prosecuting big
  banks—a variant of the “too big to fail” argument that has since
  become so familiar. Holder’s memo asserted that “collateral
  consequences” from prosecutions—including corporate instability or
  collapse—should be taken into account when deciding whether to
  prosecute a big financial institution. That sentiment was echoed as
  late as 2012 by Lanny Breuer, then the head of the Justice
  Department’s criminal division, who said in a speech at the New York
  City Bar Association that he felt it was his duty to consider the
  health of the company, the industry, and the markets in deciding
  whether or not to file charges.</p>
</blockquote>

<p>This was a top level policy choice made a decade before the Financial Crisis arose, not an individualized act of corrupt interference.</p>

<p><em>Advocacy From Representatives Of Victims</em></p>

<p>Another common voice for leniency are lawyers on behalf of victims of white collar crimes (I've been in this spot myself on behalf of clients). Why?</p>

<p>Mostly for two reasons:</p>

<ol>
<li><p>People in prison don't make future income to compensate the victims out of.</p></li>
<li><p>People prosecuted criminally pay fines and court costs that don't go to the victims and reduce the pool of available funds for the victims.</p></li>
</ol>

<p>The private lawyers representing victims recognize that not prosecuting a white collar criminal leaves that person at large to commit future economic crimes (white collar criminals are rarely a physical threat to the people in the community around them or to anyone who doesn't do business with them) and that it fails to strongly discourage others from doing the same thing in the future.</p>

<p>Institutional victims of banking crimes and other white collar crimes may also urge prosecutors not to prosecute the crimes that victimized them, because they fear that the publicity would harm them more than the criminal penalties for the offender (whom they have ample means to sue in a civil action) would benefit them.</p>

<p>The fact that victims seek leniency more often in white collar crime cases than in almost any kind of case (other than domestic violence cases, where victims also often urge leniency out of love and as a result of their economic dependency on the perpetrator), often causes prosecutors to determine that criminal prosecutions seeking long prison sentences are not a priority for the victims of these crimes and to prioritize their case loads accordingly.</p>

<p>To get the $190 billion of settlement money that was paid from individuals would have required convictions of 1900 people capable of paying $100,000,000 each in 1900 very hard fought individual criminal cases, instead of 49 civil cases. This may or may not have been possible, as the most culpable figures were often in upper management, while the most affluent potential defendants were in top management and would have been harder to pin with personal criminal liability. Many top managers are relatively hands off in their management style and didn't get into the culpable criminal details. There are plenty of very influential and powerful bankers who were highly culpable who would have had less than $10,000,000 of net worth, much of which wasn't tainted with improper conduct, which isn't to say that prosecutors couldn't have seized it from them for fines and restitution, but it does make the moral case for doing so less clearly compelling.</p>

<p><em>Evaluating Priorities For Limited And Expensive Prison Resources</em></p>

<p>Prosecutors sometimes reason in white collar crime cases that keeping a white collar criminal in prison is very expensive to the state (up to $70,000 per person per year), and doesn't change the risk of physical harm to the general public, and that a felony conviction itself and fines and publicity and probation conditions are often sufficient to mitigate the risk that the convicted person will reoffend and to discourage others from doing the same thing in the future. </p>

<p>Parole boards, in systems that have them, often release white collar criminals as early as possible, applying the same reasoning. Also, white collar criminals tend to be model prisoners.</p>

<p>An incarcerated white collar defendant is also depriving the public of tax revenues on income that person would otherwise receive if out of prison. A long prison sentence can victimize the public economically in amounts comparable to a moderate magnitude economic crime.</p>

<p>Crudely speaking, prosecutors reason: "Why spend huge amounts of scarce prison money to lock someone up when we have murders and rapists and people who steal things at gun point and violent criminals who seriously injure people without justification who really need to be our priority to get off the streets? The devious and dishonest banker doesn't present the same sort of risk to the general public and his conviction and probation conditions should suffice to prevent him from having the ability to do this in the future."</p>

<p><em>Social Class Bias</em></p>

<p>Yet another reason is that often prosecutors and the people who set policy for prosecutors don't see white collar crimes as culpable in the same way that they do blue collar crimes.</p>

<p>Most prosecutors spend the vast majority of their careers prosecuting blue collar criminals, terrorists and the like. These are people from a different social class, who live lives very unlike their own, and the people who are victimized by these crimes tend to be middle class or more affluent people and businesses. Banks, for example, are routinely victims of armed robberies which prosecutors prosecute, and of embezzlement by low level employees, which prosecutors prosecute. Bankers socio-economically and culturally are a lot like the prosecutors themselves (who are lawyers), their peers, and the victims they usually defend, and are rarely like the people that they usually prosecute (lower class, often minority people, who have never worked in an office, failed in school, are quick to anger and hurt others, etc.).</p>

<p>At an individual case level, a white collar criminal defense lawyer can often marshal very impressive character witnesses to say that the defendant is basically a good guy who messed up once, while this is frequently very difficult for blue collar criminal defendants to do in a way that really reaches prosecutors and judges.</p>

<p>The bottom line is that prosecutors (and judges, many of whom are former prosecutors) sympathize with, understand and relate to white collar criminals far more than they do with ordinary blue collar criminals. And, this colors their judgments about what kinds of punishments (criminal or non-criminal) are appropriate for the kind of conduct that these people commit. </p>

<p>Their instinct is that a crime that might be committed by someone like me is probably not as serious as a crime that a judge or prosecutor would never dream of committing like an armed robbery of a bank, even though economically, the banking fraud crime may have caused $500,000,000 of harm while the armed bank robbery may have caused only $5,000 of harm.</p>

<blockquote>
  <p>Why don't US prosecutors press for imprisonment for crime in the
  banking industry?</p>
</blockquote>

<p>They certainly do. For instance, this has evidently happened <a href="https://www.leagle.com/decision/infdco20180808d35" rel="nofollow noreferrer">U.S. v. Heine</a> to the extent that the defendants were sentenced to imprisonment. This case was among the results fetched through <a href="http://www.leagle.com/leaglesearch?all=bank%20imprisonment%20director%20fraud&amp;woany=robbery" rel="nofollow noreferrer">this query on leagle.com</a>.</p>

<blockquote>
  <p>Q. Is this due to the principle of limited liability?</p>
</blockquote>

<p>No. Limited liability has to do with financial obligations, not with the legal ramifications that an agents' misconduct may have on his liberty.</p>

<p>The context of your inquiry seems centered on the subprime mortgage crisis. Unfortunately, neither the article by <em>The Guardian</em> nor your inquiry points to concrete facts or laws that would permit a useful discussion of that matter. For instance, the article could have done a better job by giving specifics on what <em>false and misleading representations</em> the DoJ attributed to the bank.</p>

<p>I will oversimplify because this is not an Economics forum, but the subprime mortgage crisis stemmed from (1) homebuyers' pursuit of real estate they could not afford (which entails more moral hazard than miscalculation); and (2) a lack of risk monitoring in a context of generalized, easy access to loans. Generally speaking, the rest consists of transfers of risk that occurs on a daily basis in financial markets. That by itself does not imply that any laws were violated. In any case, it would have been the SEC's and/or other regulators' duty to proceed timely and in accordance with the regulations that may have been violated.</p>

<p>Absent an actually fraudulent representation from a party to a counterparty, the law is clear in that </p>

<blockquote>
  <p>No fiduciary relationship exists ... [where] the two parties were
  acting and contracting at arm's length.</p>
</blockquote>

<p><a href="https://www.leagle.com/decision/19962195925fsupp127012043" rel="nofollow noreferrer"><em>Procter &amp; Gamble Co. v. Bankers Trust Co.</em>, 925 F.Supp. 1270, 1289 (1996).</a></p>

<p>The entities' failure to scrutinize investment risks does not necessarily mean that their counterparty(-ies) broke the law, even if the latter profited from the transactions. In particular context of the subprime mortgage crisis, regulators neglected their obligation to monitor [and react in] what became an otherwise valid race of who can transfer higher levels of risk elsewhere. The number of households that were affected does not render this matter more criminal than if only a handful of agents incurred losses.</p>

<p>Lastly, Chomsky's allusions to "radical judicial activism" wrongfully conflate capitalism and judicial arbitrariness. That notion misleads people into thinking that capitalism is synonym for corruption, when in fact the latter is much closer to judicial activism. </p>

<p>For instance, judge/<a href="http://www.oneclubofjusticides.com/2018/04/felon-carol-kuhnke-seeks-reelection-as.html" rel="nofollow noreferrer">felon Carol Kuhnke's</a> lecture (at court <a href="https://3.bp.blogspot.com/-Ck7HHqFkIaE/Wsoe0CGdR0I/AAAAAAAAARY/OucDrTd_kOAXRwHpcjSKoFsfyWEc0hTjQCLcBGAs/s1600/employers.jpg" rel="nofollow noreferrer">hearing</a>) that Michigan "<em>loves insurance companies [...] oil companies [...] and everybody who's powerful</em>", and that I (or the rest of us) have to "<em>stay out of the way</em>", is the epitome of her judicial depravity. While this felon in black robes might be catering to entities she deems useful for her ambitions to remain in judicial office, one should never confuse between her corrupt mentality and the actual notion &amp; dynamics of capitalism.</p>
