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Why No Bankers Go to Jail

November 19th, 2013

Paula Dwyer writing for Bloomberg’s The Ticker has a couple of interesting posts on the failure of US federal prosecutors failing to charge top financial executives with criminal wrongdoing.

In Judge Rakoff Wants Someone to Pay, Ms Dwyer quotes a recent speech to a gathering of securities lawyers by U.S. District Court judge Jed Rakoff, “who’s been at the heart of some of the most significant trials stemming from the financial crisis”,  asking why there haven’t been more criminal prosecutions.


The lack of prosecutions of senior financial executives “must be judged one of the more egregious failures of the criminal justice system in many years,” he said. And with a five-year statute of limitations running out, it appears “very likely” that none ever will be charged, Rakoff said.

In the follow up Why No Bankers Go to Jail she summarises the judge’s attempt to explain the hesitance to bring to justice those who contributed to the worst economic crisis since the Great Depression.

Theory 1: U.S. attorneys and the Federal Bureau of Investigation have other priorities, whether it’s antiterror cases after the Sept. 11 attacks, accounting frauds after Enron’s bankruptcy, or Ponzi rip-offs after Bernard Madoff’s huge scam. Financial frauds are particularly tough to crack, and many of the prosecutors with the requisite knowledge have been moved to other areas.

Theory 2: Law enforcement agencies have had to compete for a shrinking pot of money from Congress, and the best way to do that is by beefing up their statistics with smaller, easier cases and avoiding the years-long financial fraud probes that may turn up nothing. The Manhattan U.S. attorney, moreover, has been preoccupied with the sprawling insider-trading case against hedge-fund owner Raj Rajaratnam. Tapes of his conversations have been a gold mine — resulting in slam-dunk cases that have led to numerous convictions — for Manhattan prosecutors who previously would have focused on bank fraud.

Theory 3: The federal government’s involvement in the mid-2000s bubble — encouraging more people to buy homes, deregulating the financial industry, keeping interest rates low and giving Fannie Mae and Freddie Mac way too much leeway — may also have given prosecutors pause.

Theory 4: The U.S. has shifted over the last 30 years from prosecuting high-level individuals to using delayed-prosecution agreements to settle cases against entire companies. That shift “has led to some lax and dubious behavior on the part of prosecutors,” Rakoff said, including allowing managers to sweep crimes under the rug.

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