Occupy Federal Courts: Where Are the Financial Fraud Prosecutions?


By: Sean Disken

In these days, following some of the most comprehensive financial instability in the history of the United States, we have seen large groups of people flocking to Occupy movements across the nation. The Occupy protests are largely an expression of a portion of society’s indictment of the financial industry and its major players. But where, in light of this public outcry, is the government? While the Occupiers cry for blood, assured of the guilt of America’s business people, in 2011, the number of financial fraud prosecutions has fallen to half of those a decade ago.

As this chart from Syracuse University details, the prosecutions for financial fraud under Obama have fallen to new lows. In September 2011, the SEC reported that only 73 persons or entities had been sued regarding actions that caused or resulted from the financial crisis, i.e., misleading investors and concealing risks. Of these 73 defendants, none had been prosecuted criminally. With an unemployment rate of over 9%, and the annual rate of economic growth falling to only 1% over the past 6 months, one would expect to see a rise in prosecutions of those who “created the conditions that led to the catastrophe.”

There are numerous theories being offered by financial and legal commentators pertaining to this lack of action. Some believe the drought is a result of Congress’ weakening of regulations, yet others point to a difficult burden of proof (calling for Congress to amend the statutes to require prosecutors to prove that bankers ‘should have known’ as opposed to ‘knew’ of their crimes). Another interesting explanation is the use of deferred prosecution agreements, which “allow companies to voluntarily report their own misconduct and avoid harsh consequences.” Some have even gone so far as to blame counter-terrorism for detracting federal resources from financial crimes.

More saliently, however, some commentators point to regulators’ fears that prosecutions may further weaken the economy. Could this policy of promoting the ‘greater good’ actually fly? At the moment, it seems this theory is the most realistic.  One Fannie Mae official recently expressed the fear that with a flood of litigation, “we risk pushing these guys off a cliff and we’re going to have to bail out the banks again.” While it is certainly true that “[t]he fact that prosecutions go up or down is almost never an indication of whether that particular crime is going up or down,” and it very well might be true that some executives and institutions are guilty of wrong doing, it is not unreasonable to argue that imposing criminal penalties against some of the nation’s most influential financial players can lead to a significant set back to the economic recovery.

This theory comes with the obligatory parade of horribles. Criminal actions against corporations and executives can lead investors to fear that large fines and power regime changes within corporations can decrease “earnings for years and contribute to further losses across the financial services industry.” Such investor hesitancy could seriously stall the economic recovery, causing us to ‘occupy’ ourselves more at work, and less at play.



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Fordham Journal of Corporate & Financial Law