Will Perpetrators of Financial Crimes Ever Face Justice?

Some will rob you with a six gun and some with a fountain pen – Woodie Guthrie

Like mushrooms popping up in a damp basement, a slew of court settlements have been registered recently involving the big banks and their role in the financial crisis. An informal review of settlements over the last two years reveals about 16 multi-million dollar payouts from the big banks amounting to some $1.6 billion in fines and restitution and $13 billion in buybacks of auction-rate securities that were represented to be as safe as cash.

Sounds impressive, doesn’t it? But when fines are stacked up against an elite white-collar crime spree worth trillions, it is a little less impressive.

Broad Array of Crimes Revealed

A review of the settlements shows an array of fraudulent and illegal actions.

* Predatory, deceptive and abusive lending related to mortgages
* Securities fraud, including creating investment vehicles designed to fail
* Accounting fraud
* Brokerage fraud
* Bribery of government officials
* Undisclosed conflict of interest in financial analysis and advice
* Lying to shareholders and investors
* Robbing consumers with abusive overdraft fees
* Robbing homeowners by overcharging them by hundreds or thousands of dollars, when they were already in bankruptcy and foreclosure

A review of cases reveals a pattern: no admission of wrongdoing, earnest promises to do a better job and a fine representing a fraction of the infraction. Because the fine is paid by shareholders, no one is held accountable and the whole incident is swept under the rug.

Last week, a federal judge reviewing a proposed settlement between the Securities and Exchange Commission (SEC) and Citigroup sounded off. “Why isn’t the government getting tough with the banks?” Judge Ellen Segal Huvelle demanded of government lawyers. The SEC wanted to fine Citigroup $75 million for failing to disclose to shareholders some $50 billion in subprime mortgage investments that were deteriorating during the financial crisis and ultimately crippled the bank. This is the third time that a federal judge has weighed in with regulators to demand stiffer penalties against the banks.

Incompetence and Indifference Allows Elites to Avoid Accountability

In these cases there is no jury. The judge acts as a stand-in for the public interest. While we can hope that judges are getting tougher on these settlements, the whole process lets the people who committed the crimes avoid the public rage and personal accountability that helps to deter future crimes.

Recently, Judge Emmet G. Sullivan sharply questioned one settlement with Barclays Bank telling government lawyers that the public might see the settlement as a “free ride” and noted that “requiring banking officials to stand before federal judges and enter pleas of guilty might be a powerful deterrent to this type of conduct.”

But now, two years after Wall Street's fraudulent and reckless behavior collapsed the economy, costing average Americans trillions in lost wages, savings and housing wealth and throwing eight million people out of work and some six million families out of their homes, not one Wall Street banker or predatory lender is behind bars.

“The failure of the Bush and Obama administrations to imprison a single CEO of the nonprime mortgage lending specialists that led what the FBI aptly named an 'epidemic' of mortgage fraud in 2006 -- four years ago -- demonstrates a level of incompetence and indifference to the crimes of the elites that is staggering,” says University of Missouri law Professor Bill Black, a former federal regulator during the Savings and Loan crisis of the 1980s.

Even Drug Money Laundering Tolerated

America's largest banks apparently can engage in the most flagrantly criminal activity and emerge unscathed. While average Americans would be given a stiff jail term for laundering even small amounts of drug money, this summer Bloomberg News broke the story that Wells Fargo/Wachovia had been caught laundering billions in Mexican drug cartel money, but got away with a slap on the wrist.

The Justice Department charge sheet against the bank indicates that between 2003 and 2008, Wachovia handled $378.4 billion for Mexican currency exchanges, "the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history." According to Bloomberg, the sum is equal to one-third of Mexico's current gross domestic product. Yet the bank's penalty for laundering over $380 billion in drug money is going to be a promise not to ever do it again and a $160 million fine. Given that the firm's top officers were alerted to this activity, which fuels Mexico's murderous drug war, shouldn't someone have to stand trial?

Unequal Justice

The perception of unequal justice -- one set of rules for the average Joe, and another for the elites on Wall Street -- erodes the public’s faith in the criminal justice system and our political system as a whole.

“Our prisons have tens of thousands of blue collar thieves. If one added up the cumulative financial damage they caused it would not represent one-hundredth of one percent of the losses caused by a single fraudulent large nonprime specialty lender,” says Black, who hopes that someday a leader will emerge with the courage (and common sense) to prosecute the elite criminals that cause our recurrent, intensifying financial crises.

Bank of America ex-CEO Kenneth Lewis and ex-CFO Joe Price, are facing fraud charges connected to their personal involvement in the secret payout of a $3.6 billion dollar bonus package to Merrill Lynch executives shortly before the bank took over the investment firm in 2008. This time, it's not federal agencies pressing charges but the New York Attorney General's office.

Barring a dismissal, these two bankers may yet find themselves before a judge this fall. But it is highly unlikely that this one prosecution will satisfy the nation’s hunger for justice.

TAKE ACTION: Click here to send a note to the FBI and the Department of Justice and tell them to pick up the pace. These firms may be too big to fail, but their executives are not too big for jail.

LEARN MORE: See our informal tally of recent settlements below.

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BIG BANKS SETTLEMENTS

The Firm:

Goldman Sachs

1. The Company/Subsidiary: Goldman Sachs/Litton Loan Servicing LP
The Settlement Amount: $60 million
The Settlement date: May 10, 2009
The Court or Federal Agency: The Massachusetts attorney general’s office
The Complaint: Goldman paid the fine to end the Massachusetts AG's investigation into allegations that it engaged in predatory lending practices in the state. The settlement will be used to reduce the mortgage payments of 714 Massachusetts residents who had secured subprime mortgages funded by Goldman Sachs.
Source: Wayne Leslie, “ Goldman Pays to End State Inquiry Into Loans,” The New York Times, May 11, 2009

2. The Company/Subsidiary: Goldman Sachs
The Settlement Amount: $550 million ($300 million to the U.S. government and $250 million to investors
The Settlement date: July 15, 2010
The Court or Federal Agency: The Securities and Exchange Commission
The Complaint: In April 2010, the bank was accused of securities fraud in a civil suit by the SEC that claimed the bank had created and sold mortgage investments that were secretly devised to fail. Though Goldman did not formally admit to the SEC's allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws.
Source: Gretchen Morgensen, “SEC Accuses Goldman of Mortgage Fraud,” The New York Times, April 16, 2010

The Firm:

Wells Fargo

1. The Company/Subsidiary: Wells Fargo
The Settlement Amount: $1.4 billion
The Settlement date: November 18, 2009
The Court or Federal Agency: California's attorney general
The Complaint: “The brokerage arm of the bank marketed the securities, which resemble corporate debt and whose interest rates were regularly reset by auctions, as an alternative to cash for years, even after analysts warned that the market could freeze up. In February 2008, banks stopped participating in the auctions and effectively locked up investors’ cash. Under the terms of the settlement, Wells Fargo agreed to buy back at par value by April 2010 all auction-rate securities bought through its brokerage unit by investors before the market froze up.”
Source: Cyrus Sanati, “Wells Fargo to Repurchase $1.4 Billion of Securities,” The New York Times, November 18, 2009

2. The Company/Subsidiary: Wells Fargo/Wachovia Bank
The Settlement Amount: $160 million
The Settlement date: March 17, 2010
The Court or Federal Agency: The United States District Court for Southern District of Florida
The Complaint: Under the agreement, Wachovia will forfeit $110 million, representing the proceeds of illegal narcotics sales that were laundered through the bank, the United States attorney’s office in the Southern District of Florida said. The bank will pay an additional $50 million fine to the Treasury. A deferred prosecution agreement with the Justice Department resolved charges that the bank had willfully failed to establish a program to guard against money laundering. It also resolved Wachovia’s admitted failure to identify, detect and report suspicious transactions in third-party payment processor accounts.
Source: REUTERS, “Wachovia and U.S. Settle a Money Laundering Case,” The New York Times, March, 17, 2010.

3. The Company: Wells Fargo
The Settlement Amount: $1.5 million
The Settlement Date: July 21, 2010
The Court or Federal Agency: The United States District Court, AZ
The Complaint: Surprise alleged that the financial institution invested the city's money in a risky, off-shore company backed by subprime mortgages and home-equity loans. Surprise officials last week said Wells Fargo Bank would pay $1.5 million in a settlement agreement to the city.
Source: “Surprise City Council accepts Wells Fargo's Offer on Settlement,” The Arizona Republic, July 28, 2010.

4. The Company/Subsidiary: Wells Fargo
The Settlement Amount: $203 million
The Settlement date: August 10, 2010
The Court or Federal Agency: The United States District Court for the Northern District of California
The Complaint: “A federal judge on Tuesday ordered Wells Fargo to pay California customers in restitution for claims that it had manipulated transactions to maximize the overdraft fees it charged. Instead of processing transactions in the order in which they were received, Wells Fargo put through the largest to smallest. In a stinging 90-page opinion, United States District Judge William Alsup wrote that the practice was unfair and deceptive.”
Source: Andrew Martin and Ron Lieber, “Wells Fargo Loses Ruling on Overdraft Fees,” August 10, 2010

The Firm:

JP Morgan Chase

1. The Company Subsidiary: JP Morgan Chase/Bear Stearns Companies
The Settlement Amount: $28 million
The Settlement date: September 9, 2008
The Court or Federal Agency: Federal Trade Commission
The Complaint: The Bear Stearns Companies and its mortgage servicing unit agreed to pay $28 million to settle federal charges it had deceived subprime borrowers and had engaged in abusive loan practices before the investment bank's collapse.
Source: “Bear to Pay $28 Million to Settle Loan Complaint,” The New York Times, September 9, 2008

2. The Company/Subsidiary: JP Morgan Securities Inc.
The Settlement Amount: will pay a penalty of $25 million, make a payment of $50 million to Jefferson County, and forfeit more than $647 million in claimed termination fees.
The Settlement date: November 4, 2009
The Court or Federal Agency: The Securities and Exchange Commission
The Complaint: “JP Morgan Securities Inc. settled charges with the Securities and Exchange Commission for two former managing directors' alleged roles in an unlawful payment scheme that enabled them to win business involving municipal-bond offerings and swap-agreement transactions with Jefferson County, Ala.”
Source: Fawn Johnson and Michael Aneiro, “J.P. Morgan Unit Settles Alabama Case,” November 5, 2009

The Firm:

Morgan Stanley

1. The Company/Subsidiary: Morgan Stanley
The Settlement Amount: $7.2 million
The Settlement date: March 25, 2009
The Court or Agency: FINRA
The Complaint: Morgan Stanley & Co. will pay more than $7 million to resolve allegations of misconduct by two former brokers accused of misleading Rochester, N.Y., area employees of Eastman Kodak Co. and Xerox Corp. to take early retirement and invest retirement assets with them.
Source: “Settlement for Morgan Stanley,” Crain’s New York Business, March 25, 2009

2. The Company/Subsidiary: Morgan Stanley
The Settlement Amount: $102 million
The Settlement date: June 23, 2010
The Court or Federal Agency: Attorney General of the Commonwealth of Massachusetts
The Complaint: Morgan Stanley will pay $58 million to affected Massachusetts borrowers and $23 million to the state's pension fund to make up for the investment losses it suffered, and will return $19.5 million to the state's taxpayers.
Source: REUTERS, “ Morgan Stanley to Settle Case Over Subprime Loans,” The New York Times, June 24, 2010

The Firm:

Bank of America

1. The Company/Subsidiary: Bank of America
The Settlement Amount: $4.7 billion
The Settlement date: October 9, 2008
The Court or Federal Agency: Securities and Exchange Commission and the New York attorney general
The Complaint: “The Bank of America Corporation has agreed to buy back as much as $4.7 billion in auction-rate securities to settle charges that it misled thousands of customers about the risky investments, federal and New York state regulators said Wednesday.”
Source: THE ASSOCIATED PRESS, “Bank of America Agrees to Buy Back Auction-Rate Securities, The New York Times, October 9, 2008

2. The Company/Subsidiary: Bank of America/Merrill Lynch
The Settlement Amount: $26.5 Million
The Settlement date: September 9, 2009
The Court or Federal Agency: Texas State Securities Commissioner
The Complaint: “Merrill Lynch & Co. agreed to pay $26.5 million in a national settlement stemming from Texas's claims that the brokerage firm allowed sales assistants to sell securities without being properly registered.”
Source: Kevin Kingsbury, “Merrill to Pay $26.5 Million to Settle Sales-Practice Probe,” Wall Street Journal, September 9, 2009

3. The Company/Subsidiary: Bank of America/Countrywide Financial Corp.
The Settlement Amount: $108 million
The Settlement date: June 6, 2010
The Court or Federal Agency: Federal Trade Commission
The Complaint: “Bank of America Corp. agreed Monday to pay $108 million to settle U.S. claims that Countrywide, the mortgage lender it acquired two years ago, cheated hundreds of thousands of customers facing foreclosure on their homes.”
Source: Thomas Catan, “BofA to Pay $108 Million in FTC Case,” Wall Street Journal, June 8, 2010

4. The Company/Subsidiary: Bank of America/Merrill Lynch
The Settlement Amount: $150 million
The Settlement date: February 22, 2010
The Court or Federal Agency: Securities and Exchange Commission and the New York attorney general
The Complaint: Southern District of New York Judge Jed S. Rakoff "reluctantly" gave his conditional approval Monday morning to a $150 million agreement between the Securities and Exchange Commission and Bank of America Corp. to settle allegations that the bank failed to make required disclosures relating the $3.8 billion dollar bonus package paid to Merrill Lynch executives when BofA took over the investment firm in 2008. The Judge succeeded in getting the settlement raised from $33 million to $150 million.
Source: "Judge approves SEC Deal with Bank of America,"New York Times, February 22, 2010

The Firm:

Citigroup

1. The Company/Subsidiary: Citigroup Inc.
The Settlement Amount: $7 billion
The Settlement date: Dec. 11, 2008
The Court or Federal Agency: the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and state securities regulators
The Complaint: Under final settlements announced Thursday with regulators that include the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and state securities regulators, the two banks agreed to buy back billions of dollars of illiquid auction-rate securities from hundreds of customers. Those customers have been unable to sell the securities, which they thought were as good as cash.
Source: Liz Rappaport, “ CitiGroup, UBS Settle Deal on Payback,” Wall Street Journal, Dec 12, 2008.

2.The Company/Subsidiary: Citigroup
The Settlement Amount: $75 million
The Settlement date: July 29, 2010
The Court or Federal Agency: Securities and Exchange Commission
The Complaint: “Citigroup agreed on Thursday to pay $75 million to settle federal claims that it failed to disclose vast holdings of subprime mortgage investments that were deteriorating during the financial crisis and ultimately crippled the bank. The commission singled out two Citigroup executives-- Mr. Crittenden agreed to pay a $100,000 fine; Mr. Tildesley will pay $80,000.”
Source: Eric Dash and Louise Story, “Citigroup Pays $75 Million to Settle Subprime Claims,” The New York Times, July 29, 2010