Opportunity For Large Financial Fraud Cases

Maybe government officials are starting to understand the nature of the problem on Wall Street:

The cycle of misbehavior is difficult to break.

Regulators and prosecutors blame a culture that prioritizes profit
over compliance. And as banks have grown larger, and more international,
illegality can stop in one unit of a bank even as it flourishes in another.

See the DealBook article, Prosecutors Wrestling with Wall Street’s Repeat Offenders here.

Suddenly, we just might have the perfect confluence of events to go after large financial fraud cases.

First, we have some banks that seem to think they are too big to be prosecuted. These banks apparently have so much money that even an $8.9 billion payment does not really affect their bottom line.

Next we have government regulators who are not satisfied when a bank pays and agrees to behave. Rather, these regulators seem to want the banks to actually behave.

Yes, we also have one more element and that is relatively new incentives for whistleblowers to provide the government with information vital to tracking down and prosecuting these cases.

Since both the CFTC and SEC whistleblower offices allow individual whistleblowers to remain anonymous and still collect a reward for their information, they are powerful tools. However, these specific reward laws unlike the False Claims Act do not allow the whistleblower to pursue the fraud unless the government takes action itself.

So, it is extremely important to see any indication that the government is acting to pursue financial fraud cases.  In that sense this recent report from DealBook is important news.   The article points out how the government wants to pursue banks who have not lived up to previous settlement agreements. The government apparently is also becoming inoculated to arguments that these banks are too big to be held accountable.

For example, when government prosecutors were negotiating with BNP Paribas, to settle allegations regarding billions of dollars handled for Sudan and Iran, the Bank was supposedly too big to have to plead guilty to a crime. Here’s what their lawyer argued:

To illustrate the concern, the lawyer presented prosecutors with a fake
newspaper article reporting that a huge bank had pleaded guilty for
the first time in decades. The hypothetical report detailed what
regulatory problems could befall the bank if prosecutors did not lower
their demands for a fine and take precautions when extracting a plea.

See the DealBook article.

The fine was lowered to $8.9 billion and the bank was forced to guilty. Yet the world did not come to an end:

Far from reporting a crisis, BNP’s chief executive that day noted that
the bank “will once again post solid results this quarter.”

See the DealBook article.

While that sentence may have been intended to placate the bank’s investors, it may have had a different effect on the prosecutors and regulators.  The world has not come to an end as the result of big banks being forced to plead guilty and or pay large fines.  So, it would appear the government has the capability to enforce the law.  If the banks don’t live up to the agreements in deferred prosecution deals, the government may just continue to prosecute.

It can, after all, take a long time to break a cycle of misbehavior.

If we can believe the DealBook article, the cycle of prosecution is not over on Wall Street.