Bankers’ Hours column: Fraud is not so easy to prove
The federal government has been notoriously unsuccessful in prosecuting fraud cases against banks and investment firms in connection with the financial crisis of 2008.
Just recently, a federal appeals court reversed a lower court levied fine of $1.27 billion against Bank of America, as well as a $1 million civil penalty against one of the bank’s executives.
According to a recent Wall Street Journal article, some 156 cases have been brought against banks and their employees since the great meltdown, with charges resulting against 47 people, 24 of whom either settled or pleaded guilty. That leaves just 11 contested cases, and only five of those were found guilty.
That kind of a batting average would get an outfielder sent to Fargo, and it’s prompted speculation that the fix is in. Sen. Elizabeth Warren once asked pointedly at a banking committee hearing why so few bankers have gone to jail.
Ms. Warren, a former law professor, probably knows the answer: Under the law, fraud is very hard to prove. (Required disclaimer: I am not an attorney, and I don’t even play one, but I’ve been around a business for a long time in which the crime raises its ugly head often.)
A prosecutor has to prove intent to get a conviction. It’s a crime to intend to defraud an individual or business, and then turn that intent into action.
However, greed, incompetency, inattention, neglect, laziness, making an egregious error, or simply falling asleep at your desk are definitely not crimes. Neither is following company policy and direction in order to keep your job, as long as you don’t knowingly commit an illegal act. If they were, a lot of us, including the writer of this column, would be in the slammer. (That is, if there were enough people out of jail to prosecute and guard us.)
The Bank of America case involved a program at Countrywide, the failed mortgage giant that B of A bought in July 2008. Countrywide was originating billions of dollars in mortgages every month and passing them on to private mortgage securities, as well as to Fannie Mae and Freddie Mac, the government-sponsored mortgage conduits taken over by the feds later that year. Investors were clamoring for the securities into which these loans were fed, and Countrywide had a name for expediting the packaging process: High Speed Swim Lane, or HUSTLE.
A district court judge ruled that Countrywide intended to defraud Fannie and Freddie, but a three-judge court of appeals panel unanimously reversed that decision. To make a very long story very short, no intent to defraud, just the bosses working to satisfy demand, saying, “Shovel more loans into the hopper, we’ve got people waiting to buy the paper.”
I’ve had a bit of personal experience with a couple of examples. About 13 years ago, a Denver metro area construction loan originator and servicer took 11 Denver banks, including the one I was with, for about $12 million (such a quaint number by today’s standards), by diverting funds meant to pay off one project to another that ran out of money to complete it, all the time intending to pay everything back when the finished properties should sell.
Of course, he never could. Our management delivered reams of information, as did the other institutions, to the U.S. Attorney’s office for its investigation. At the time, we were closely questioned by the DOJ as to any comments, memoranda, letters or emails that the alleged perpetrator might have issued that showed any form of intent. We couldn’t, and, apparently, neither could anyone else. The gentleman was never charged.
On the other hand, we worked with the proprietor of a similar operation right here in the Roaring Fork Valley, who did exactly the same thing, although in this instance the victims were individuals, not banks (my bank was not a victim). Since our relationship with his company ended long before the principal’s arrest, I was not close to the case against him, but he copped a plea, and is now serving a 10-year prison term. There would have had to be very strong evidence of intent for this kind of plea bargain and sentence; very similar circumstances, but a very different outcome.
Most fraud cases aren’t as clear cut as the one involving Bernie Madoff.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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