No Fault Corporate Crime

Holding Holder to Account
by RUSSELL MOKHIBER

Ten years ago, if you wanted to quickly find out what was going on in the world of corporate crime, you would just type in the word “fined” into a news database.

Up would come a series of penalties or fines brought against big corporations by federal law enforcement officials in Washington, D.C.

Exxon fined for pollution.

Or ADM fined for antitrust violations.

But over the past decade, corporate lobbyists have worked their will in Washington, and enforcement against corporations has been watered down to the point where now corporate crime enforcement is way down the list.

Last night I typed “fined” into Google News – and these were the top five stories that came up:

1. A french perfume executive was fined for making racist remarks.
2. Fifteen people were fined for spitting in India.
3. The NBA fined Los Angeles Clippers foward Reggie Evans $25,000 for making an obscene gesture.
4. Only twenty five dog owners in northeast Scotland have were fined in the last year for dog fouling.
5. And the Houston Dynamo soccer midfielder Colin Clark was fined for using a gay slur at a ball boy.

Story number six did have to do with corporate crime – but it was from Europe.

Last week, the EU fined 14 air-shipping companies a combined $225 million for price fixing.

Now, try typing in the phrase “corporate crime” into Google News.

The phrase has been pretty much banished from American journalism and politics.

So, when you type in the words “corporate crime” into Google News, you will primarily see reports from overseas say the Irish Times or a newspaper in Australia – or you will see a quote from Ralph Nader, or a story from Corporate Crime Reporter.

Last night, I typed in the words “corporate crime” into Google News, and much to my surprise the first thing that came up was a Reuters story about the U.S. Attorney General Eric Holder.

I have been reporting on Holder since he took office three years ago.

As far as I can tell, last month was the first time in his three years as Attorney General that he uttered the phrase “corporate crime.”

And this is what he said at a meeting of state Attorney Generals in Washington.

“We’re gonna make some news with regard to holding individuals responsible for things we tend to think of as corporate crimes,” Holder said.

Get it?

We’re going to hold individuals responsible.

Not hold corporations responsible.

Hold individuals responsible for things we tend to think of as corporate crimes.

Now, what Holder said here is important.

Because he comes from a corporate law firm – Covington & Burling – where he represented primarily corporations, not individuals.

And when he leaves office, Holder most likely will return to Covington & Burling.

Where he will represent primarily corporations – not individuals – against federal law enforcement officials, in their increasingly weakened state.

Every week in Corporate Crime Reporter, we run a question/answer format interview with someone who has something to say about corporate crime.

When we started Corporate Crime Reporter 25 years ago this month, our first ever interview – the first of now over 1,200 interviews – was with Rudy Giuliani – who at the time was the U.S. Attorney in Manhattan.

At the time, Giuliani believed that if you were to bring a case against a major American corporation, you secured a guilty plea, or took the case to trial.

Or you just didn’t bring the case.

And Giuliani’s view was the view of federal law enforcement back then.

Bring a criminal charge if you have a criminal case. And secure a guilty plea. Or don’t bring the case.

As a result, major American corporations were convicted of crimes on a regular basis.

Because they engaged in crimes on a regular basis.

And the message was sent – you commit a crime, you will be convicted and publically shamed.

Today, major American corporations are still committing crimes on a regular basis.

But the difference is today major American corporations are rarely convicted of their crimes.

It’s not that they no longer engage in corporate criminal behavior.

It’s that they have set up a system where they no longer have to plead guilty to their crimes.

Instead, they settle these major corporate crime cases with deferred and non prosecution agreements.

These are the criminal equivalents of the neither admit nor deny consent decrees used for decades by the Securities and Exchange Commission and that recently have come under fire by federal judge Jed Rakoff in New York.

And so, if you are a criminal defense attorney at Holder’s former firm of Covingon & Burling, this is how you practice corporate crime law:

1. Your client comes to you with evidence of criminal wrongdoing by the corporation.
2. You approach the Justice Department and disclose it.
3. The Justice Department offers you a deal.
4. The Justice Department says to you – if you cooperate in the criminal investigation against the individuals involved at the company, we will let you off the hook with a deferred or non prosecution agreement.
5. There will be no criminal conviction against your corporate client.
6. But you must cooperate against the individuals involved.
7. And those individuals will likely be convicted and go to jail.

Thus, Holder’s statement – “We’re gonna make some news with regard to holding individuals responsible for things we tend to think of as corporate crimes.”

Last month, we interviewed David Uhlmann.

Uhlmann is the former head of the Environmental Crimes Section at the Justice Department.

And he’s currently a Professor of Law at the University of Michigan Law School.

When Uhlmann was head of the Environmental Crimes Section, he didn’t use deferred and non prosecution agreements in corporate crime cases.

Uhlmann says that deferred and non prosecution agreements have no place in major corporate crime cases.

These agreements were originally meant for minor street cases, not major corporate crime cases.

When the Department entered into a non-prosecution agreement last year to resolve criminal investigation into the Upper Big Branch mine disaster, Uhlmann wrote a scathing opinion article in the New York Times titled For 29 Dead Miners, No Justice.

“Twenty-nine miners died in West Virginia. They died because Massey had a history of mine safety violations,” Uhlmann told us.

“They died at a facility where the company kept a double set of books – one for internal purposes, which documented violations, and one for mine safety officials that covered up those violations.”

“To enter a non-prosecution agreement in a case where 29 people died and there is so much evidence of criminal wrongdoing reflects poorly on the Justice Department.”

Uhlmann says that the Environmental Crimes Section to this day does not settle corporate crime cases with deferred and non prosecution agreements.

Maybe that’s why Holder and his aides stripped the Environmental Crimes Section of authority over the criminal investigation into the Gulf oil spill cases and gave it to the Criminal Division.

Uhlmann believes that it will be a travesty of justice if the Department doesn’t secure guilty pleas in the Gulf oil spill cases.

But they didn’t in the Massey Energy case.

And the odds are not good that they will in the BP oil spill cases.

Not that crimes weren’t committed in the Gulf oil spill cases. They clearly were. But after all, Holder is from Covington & Burling. And he’s going back to Covington & Burling. And his top deputies came from corporate law firms and they are going back to corporate law firms.

Obviously, this practice of no fault corporate crime has taken hold at the top and been filtered right down through the entire federal enforcement system.

Last month, I caught this headline from a Canadian newspaper:

“Wal-Mart Pleads Guilty in Teen’s Death.”

The story began:

“Walmart Canada pled guilty Tuesday in the case of a teenager who was electrocuted on the job last year."

When I saw that, I went to our federal OSHA web site and searched for a similar case. And I found one also from last month where a Verizon worker was electrocuted on the job. OSHA proposed a civil fine of $140,700.

The point is that a criminal conviction sends a message that a civil fine or a deferred and non prosecution can’t.

A criminal conviction says to the corporation – what you have done is serious and we are bringing out our most serious weapon to bear – a criminal conviction.

Corporations get it.

What big corporations fear most is the reputational hit of that headline –“Wal-Mart Pleads Guilty in Teen’s Death." Corporations will do – and have done – everything in their power to avoid that headline.

So, our criminal justice system is out of whack.We must get back to the days of when you brought a case, you secured a guilty plea or you went to trial. Like Professor Uhlmann says, deferred and non prosecution agreements have no place in corporate crime practice.

And now the question becomes – how to bring back some balance to our corporate criminal justice system?

There is a clear power imbalance in Washington with the corporate law firms holding the upper hand. Young law students would much rather go for the fancy offices and big salaries of a corporate law firm than a Justice Department cubicle.

When I was a teenager, I had an uncle who would warn me about U.S. colleges being high priced tool factories for the corporations. The choice of which college or law school to go to was not nearly as important as the choice of what you did with your education.

Education for what? – was the question we were asked. And it was made clear to us that a decision to work for a corporate law firm or not was a moral choice.

And that’s what is missing. A moral code and a shaming mechanism to enforce it.

We were told, in effect, – shame on you if you decide to slave away working to undermine the criminal justice system on behalf of Wal-Mart and BP or Massey Energy.

Sure, every corporation deserves legal representation. But it doesn’t have to be you.

We must also shame our public officials into securing convictions when convictions are warranted. To insist on corporate criminal prosecutions in worker death cases where warranted. To do away with deferred and non prosecution agreements in corporate crime cases. To demand action where action is due.

It’s shameful that more than three years since the financial crisis crippled the American economy there has not been a single prosecution of a Wall Street firm even though fraud and financial misrepresentations played a significant role in the meltdown.

Even Sixty Minutes pointed this out in December of last year.

But still, nothing.

And before he goes back to Covington & Burling, Eric Holder has to be held to account.

It is shameful that Holder cares more about individual wrongdoing than he does about corporate wrongdoing.

Most importantly, we need to support our local corporate crime police, to bolster their enforcement budgets, to begin to level the playing field between corporate criminals and the police.

The Multiple Scams of Goldman Sachs

Yes, It Can Get Even Worse
By DEAN BAKER

Last year, Rolling Stone columnist Matt Taibbi described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." It turns out that Mr. Taibbi was far too generous in his assessment of the huge investment bank.

Since that time we have learned that Goldman played a central role in helping Greece to hide its government budget deficit from the European Union, the financial markets, and the public at large. Goldman sold complex swaps to Greece in which it paid the Greek government for future revenue streams on items like airport landing fees. This was in effect a loan, but the swap allowed the Greek government to avoid entering the borrowed money on its books as a loan, which would have raised its budget deficit above the euro zone limits. Today of course Greece’s financial meltdown is threatening the stability of the euro.

Just last month Goldman was sued for sex discrimination by a former vice-president who claims that she was put on the “mommy track” after taking a maternity leave. She was fired as she was about to start a second leave. (In fairness to Goldman, Wall Street is still for the most part an all-boys club.)

But the big news is Goldman’s indictment for putting together a collaterized debt obligation (CDO) from mortgage-backed securities that were expected to fail and then marketing it to its clients as a good investment. The central allegation is that in early 2007, hedge fund manager John Paulson recognized that the housing bubble was starting to collapse.

This meant that many mortgages would go bad. The subprime mortgages, in which homeowners had little or no real collateral, and were facing resets to higher interest rates, were especially vulnerable. Paulson worked out a deal with Goldman in which he would pick the mortgage-backed securities that were put into the CDO. Paulson would then bet that the CDO would go bad, by taking out credit default swaps (CDS) on the CDO. A credit default swap is effectively an insurance policy where the issuer makes up a loss if an asset goes bad.

Goldman was left with the other side of Paulson’s deal, finding suckers to buy this huge piece of junk. It would have been hard to find buyers for this CDO if investors knew that Paulson had deliberately constructed it as a piece of junk to short. Therefore, according to the SEC charges, Goldman concealed Paulson’s role in constructing the CDO. Goldman allegedly told investors that the CDO was constructed by neutral parties, rather than letting them know that the assets were picked by a hedge fund manager who was taking a short position.

Of course Paulson won his bet, the CDO he put together really was trash. He made nearly a billion dollars on this particular bet, which involved buying CDS from AIG. AIG was unable to pay off its bet, so Paulson got his money courtesy of the taxpayers when the government stepped in to bailout AIG. Goldman was also buying CDS to bet against the CDOs it was putting together, although it is not clear that it had bet against this particular CDO. In any case, it clearly profited from the issue since Paulson paid Goldman $15 million for its services.

Goldman’s conduct in this deal can be framed using an analogy from Phil Angelides, the head of the Financial Crisis Inquiry Commission. Angelides noted that Goldman has bought CDS on the CDOs that it had issued and sold. He compared this to selling a car with bad brakes and then buying insurance on the car. In fact, Goldman effectively cut the brake lines, sold the car to unsuspecting customers and then bought the insurance policy.

In fairness to Goldman, there is no reason to believe that they are any less ethical than any of the other big Wall Street actors, just more effective. The other big banks do the same sorts of deals, even if they aren’t able to pull off quite as many scams as Goldman.

All of this should drive home the urgency of both breaking up the big breaks and some serious financial reform. The folks who should have been clamping down on this behavior were all Goldman’s friends, starting with then Treasury Secretary Henry Paulson, who had just left his position as Goldman CEO to take the job.

Even if we put in place a better regulatory structure, as long as financial regulation is a conversation between friends, it will not be serious. We need to kill the Goldman vampire squid along with the rest of the species. Only when we have reduced these monsters to a manageable size can be confident that they will be effectively regulated.

Goldman Case Is Likely Tip of the Legal Iceberg

Shareholder suits, criminal indictments likely after fraud allegations
by Daniel Wagner

WASHINGTON - The fraud charges against Goldman Sachs & Co. that rocked financial markets Friday are no slam dunk, as hazy evidence and strategic pitfalls could easily trip up government lawyers.

Yet that hardly matters, experts say, because the allegations will kick off a new era of litigation that could entangle Goldman and other banks for years to come.

The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.

Goldman said the charges are "unfounded in law and fact." In a written response to the charges, the bank said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio - not the hedge fund client. Goldman said it lost $90 million on the deal.

That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.

The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.

"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."

Among the legal action expected in the coming months:

Class-action suits by Goldman shareholders who believe Goldman alleged misconduct made their stakes less valuable could come as early as Monday. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent Friday as the bank lost $12.5 billion in market capitalization.

Suits by investors who believe Goldman sold them on deals that were doomed to fail. The investors in the transaction at the heart of the SEC case could sue first, followed by others who believe their losses were similar.

Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, 31-year-old Fabrice Tourre, to criminal prosecution.

Charges by regulators about other mortgage investments at Goldman and elsewhere. SEC enforcement chief Robert Khuzami told reporters Friday the agency is racking up evidence on other deals in the overheated market that preceded the financial crisis.

Already the case has provoked legal questions from foreign governments, according to published reports. That's because the financial crisis forced many countries to bail out banks that lost money on investments arranged by Goldman.

German regulators are considering legal action against Goldman, newspaper Welt am Sonntag reported, quoting a spokesman for Chancellor Angela Merkel.

The charges would be on behalf of IKB Deutsche Industriebank AG - an early victim of the financial crisis that was rescued by the state-owned KfW development bank among others. IKB invested in the deal regulators are targeting.

The flurry of legal activity is likely to proceed separately from the SEC's case against Goldman, which experts said faces numerous pitfalls.

To prove its fraud case against Goldman, the government must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions.

The government's greatest challenge, experts said, will be boiling the case down to a simple matter of fraud. The issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the government's claims.

"If you wanted to go after Goldman with a complaint that wouldn't stick, this would be perfect," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "If you look at these products, almost all of them look like hoaxes because of the junk inside."

Legal experts pointed to the paucity of evidence in the government's lawsuit, which contains short excerpts from e-mails but lacks key information about what the various investors knew and what actions they took.

The quality of the evidence was not clear from the complaint, said Jacob Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker PA.

Frenkel said there's been an uptick in "cases where the government chooses select excerpts from e-mails as the basis for its allegations only to find the balance of the text or other e-mails prove otherwise."

For example, prosecutors last fall tried unsuccessfully to use a series of e-mails to convict two Bear Stearns hedge fund executives. They wanted to convince jurors that there was behind-the-scenes alarm at the hedge funds as investments in complex securities tied to mortgages began to slide.

The jurors were not swayed. After the verdict, some jurors told reporters they found the evidence against the two executives flimsy and contradictory. Others suggested the pair were being blamed for market forces beyond their control.

Goldman already has advanced a similar argument. "Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities" were in the investment pool, the bank said in a written response to the charges Friday.

That's part of a time-honored tradition of defusing accusations by bringing in details that may or may not be relevant, said James Cohen, a professor at Fordham University School of Law.

"Traditionally it's in the interest of the party that has Goldman's role to muddy the waters - it's rarely in their interest to have the picture as sharp as HDTV," Cohen said.

Several legal experts suggested Goldman and the SEC had reached an impasse over a settlement before the charges were announced. They speculated that Goldman was unwilling to admit that it allowed the hedge fund to create a portfolio of securities that was designed to fail because that admission could do irreparable harm to Goldman's reputation.

"Goldman could've easily paid a fine already," said John Coffee, a securities law professor at Columbia University. "So I don't think it's money they're fighting over."

The case has been assigned to U.S. District Judge Barbara Jones of New York. Jones is the federal judge who five years ago presided over the $11 billion criminal fraud case that toppled WorldCom Corp. and sent its former CEO Bernard Ebbers to prison for 25 years.