Twenty billion reasons why there will be more efforts to fight financial fraud

The effort to combat financial fraud is growing, in intensity and scope. Everyone involved — the banks, the lawyers, and the regulators — all have a lot to learn. If they weren’t aware of that already, this fact was brought home today by a headline from the newspaper (where some of my favorite people work) The Guardian:

“JP Morgan to pay $1.7bn over involvement with Madoff scam: Settling charges that it ignored evidence of fraud, the bank’s payments to the US government total nearly $20bn.”

You can research this story and the figure all you want but it says right here $1.7 billion is a lot of money for a single case—a case to settle criminal charges. Of course the total of $20 billion for the year is not exactly small change either.

J.P. Morgan was Madoff’s banker and, apparently, now the bank has to pay up for that ill-conceived relationship, in addition to having already paid up for other fraudulent activities over the last few years:

“The settlement, announced on Tuesday, includes a so-called deferred prosecution agreement that requires the bank to acknowledge its failures but also allows it to avoid criminal charges. No individual executives were accused of wrongdoing.”

Madoff, of course, is in jail, but his bankers are not. I’m not sure how I feel about that part of it. If people knowingly aided Maddoff and his scheme, jail doesn’t seem out of the question. Still, that’s not my point here. My point is that, while these numbers seem massive, I think this is just the beginning of a new era of prosecution of financial fraud.

The lawyers in this country with the greatest experience understanding and dealing with fraud schemes are only now beginning to use the new tools they have to pursue such schemes in the financial sector. The Dodd-Frank Legislation, which created the SEC and CFTC whistleblower reward offices, is still so new that we really have yet to see them put to full use. The financial world is just learning that whistleblowers can go to lawyers and report financial fraud anonymously. Bankers are just learning that they can earn rewards anonymously for helping those agencies pursue cases of fraud.

It is also true that most false claims cases filed under the traditional False Claims Act legislation of the federal and state governments focuses on health care and/or defense contracting fraud. So the lawyers who fully understand the procedure of whistleblower law, and the process of representing whistleblowers, are working to play catch up and learn about financial fraud and securities regulations.

What will drive this are the same things that drove the expansion of cases filed under the federal and the state False Claims Act legislation: new and better laws and an expanded market. Government contracting has been consistently growing since the 1980s, since roughly the time the Federal False Claims Act was brought back to life by amendments in 1986. The market for government contracting expanded exponentially, and while false claims cases also expanded, it is a continual struggle to keep up with the market. More money was available to both honest and also—regrettably—to dishonest contractors trying to cash in on Treasury money.

Now the same thing has happened in the financial world. There is more money in securities trading and finance, so there is a bigger market for dishonest financial transactions. The idea that fraud in this industry should be the subject of real litigation has only recently been embraced by politicians and the broader public. As a result, new whistleblower laws have been crafted to more effectively fight this type of fraud.

The combination of more money and better laws means that we will see more frequent and much bigger cases of financial fraud being prosecuted by the government and brought to light by whistleblowers. Hopefully, this will help most investors see the value of investing in actual industry that enriches the nation instead of ripping off individuals and the government. Really, that’s the intent of these laws. In the meantime, those of us who work on False Claim Act cases have to get to work and see what we can do about financial fraud.