Jeff Barnes/Foreclosure Defense Nationwide “New Legal Issues”


DECEMBER 16, 2013

With the release of the US Bank admissions per our post of November 6, 2013; the issuance of the opinions from the Supreme Courts of Oregon and Montana holding that MERS is not the “beneficiary”; and recent opinions from various jurisdictions which are now, finally, holding that securitization-related issues are relevant in a foreclosure, a host of new legal issues are about to be litigated in the trial and appellate courts throughout the country. It has taken six (6) years and coast-to-coast work to get courts to realize that securitization of a mortgage loan raises issues as to standing, real party in interest, and the alleged authority to foreclose, and that the simplistic mantra of the “banks” and servicers of “we have the note, thus we win” is no longer to be blindly accepted.

One issue which we and others are litigating relates to mortgage loans originated by Option One, which changed its name to Sand Canyon Corporation and thereafter ceased all mortgage loan operations. Pursuant to the sworn testimony of the former President of Sand Canyon, it stopped owning mortgage loans as of 2008. However, even after this cessation of any involvement with servicing or ownership of mortgage loans, we see “Assignments” from Option One or Sand Canyon to a securitization trustee bank or other third party long after 2008.

The United States District Court for the District of New Hampshire concluded, with the admission of the President of Sand Canyon, that the homeowner’s challenge to the foreclosure based on a 2011 alleged transfer from Sand Canyon to Wells Fargo was not an “attack on the assignment” which certain jurisdictions have precluded on the alleged basis that the borrower is not a party to the assignment, but is a situation where no assignment occurred because it could not have as a matter of admitted fact, as Sand Canyon could not assign something it did not have. The case is Drouin v. American Home Mortgage Servicing, Inc. and Wells Fargo, etc., No. 11-cv-596-JL.

The Option One/Sand Canyon situation is not unique: there are many originating “lenders” which allegedly “assigned” mortgages or Deeds of Trust long after they went out of business or filed for Bankruptcy, with no evidence of post-closing assignment authority or that the Bankruptcy court having jurisdiction over a bankrupt lender ever granted permission for the alleged transfer of the loan (which is an asset of the Bankruptcy estate) out of the estate. Such a transfer without proof of authority to do so implicates bankruptcy fraud (which is a serious crime punishable under United States criminal statutes), and fraud on the court in a foreclosure case where such an alleged assignment is relied upon by the foreclosing party.

As we stated in our post of November 6, the admission of US Bank that a borrower is a party to any MBS transaction and that the loan is governed by the trust documents means that the borrower is, in fact, a party to any assignment of that borrower’s loan, and should thus be permitted to seek discovery as to any alleged assignment and all issues related to the securitization of the loan. We have put this issue out in many of our cases, and will be arguing this position at both the trial and appellate levels beginning early 2014.

Jeff Barnes, Esq.,

Releasing Fukushima radioactive water into Pacific ‘inevitable’ — Reports: Japan very aware of danger posed by past releases; Contaminants are concentrated thousands of times in food chain; At end of chain are humans “who may suffer genetic damage, cancer, other health problems and even death” 

Published: December 16th, 2013 at 11:21 am ET

By ENENews

Yomiuri Shimbun, Dec. 16, 2013: Release of water into sea inevitable after purification at Fukushima plant […] The government has been in lockstep with TEPCO in a project to create as early as possible “frozen-soil underground water shields” […] Given that the project has never been attempted anywhere else, the risk of the project encountering difficulties cannot be ruled out. […] The volume of contaminated water currently stored already amounts to nearly 400,000 tons. […] Should the tanks be destroyed because of a calamity such as a strong earthquake, there is a danger that a large quantity of contaminated water could spill from them, like the collapse of a dam.

The Fukushima Nuclear Disaster : One of the World’s Worst-Ever Cases of Pollution, Professor Fumikazu Yoshida of Hokkaido University’s Graduate School of Economics, Economic Journal of Hokkaido University, March 2013: Now, the Nuclear Safety Commission has initially tolerated the dumping of radioactive contaminated water in the sea since they claim that it will be diluted. But even diluted in seawater contaminants will be concentrated thousands of times throughout the food chain. Such elementary knowledge concerning the environmental consequences of pollution […] is now apparently being forgotten. […]

The Fukushima Nuclear Power Station incident and marine pollution, Marine Pollution Bulletin, 2012: […] The facts indicate that Japan had already been very aware of the potential danger and effects that the emission might cause […] there remains a certain potential nuclear radiation threat to the neighbouring countries of Japan […] In the long run, the radioactive wastewater will have severe effect on fish including reduction in reproductive capability, morphological abnormalities, leukopenia, anorexia, lethargy, growth depression, and hyperactivity (Forman, 1983; Lomio, 1979). […] Furthermore, the radioactive wastes once enter into the marine food chain will be harmful to various kinds of animals and finally human being themselves who may suffer genetic damage, cancer, other health problems and even death from the nuclear radiation, since the final consumers at the end of the chain are often human (Forman, 1983). […] the ocean-related economy in the bordering states may also suffer from the radioactive wastes. If, however, the potentially injured states wait until the material damage happens, in order to claim damages from Japan, it would probably be too late. […] the reasonable principle of imputation is that so long as there is sufficient evidence to prove that the acts of a state might cause serious damage to the long-term development of the marine environment, this state should bear the responsibility for transboundary harm. […]

Read the full article in the Marine Pollution Bulletin here (pdf)

Fukushima Evacuee: We’re human guinea-pigs in an experiment… we’ll never forgive gov’t or Tepco! — US Attorney: It’s up to the American people to make them pay; Japan is threatening to put people who speak out in concentration camps

Published: December 12th, 2013 at 12:03 pm ET

By ENENews

The Asia-Pacific Journal, Dec. 9, 2013 (translated by Tom Gill) — Shoji Masahiko, Fukushima evacuee: […] now what really matters is human health. […] The national government and the village mayor insist now as ever that they will decontaminate the village, that they will enable us to go home […] But why, when human life and health should be the top priority, should that be reason to choose return, return to the village, as a higher priority than the people’s health, our children’s health, our grandchildren’s health? – That is something I cannot fathom. For my part I have actually started to think that we are being used as the world’s first human guinea-pigs, in an experiment […] We will never forgive those responsible – the national government, the Tokyo Electric Power Company, and those who helped make this happen!

Gundersen: All of Japan is contaminated, gov’t covering up enormous exposures to public; Epidemic is just beginning — Evacuee: We are in fact dying in Fukushima; What happened to us will soon affect all Japanese people (VIDEOS)

Published: December 16th, 2013 at 8:54 pm ET

By ENENews

Arnie Gundersen, Chief Engineer at Fairewinds, Dec. 16, 2013: The Japanese parliament has just passed the state secrets law. It’s really an information ‘iron curtain’ that’s preventing people in Japan from learning just how bad the exposures were that they received after the accident at Fukushima. […] They’re trying to underestimate the amount of radiation that the Japanese received […] I think they’re neglecting some really serious sources of radiation in their effort to convince the Japanese people that nuclear power is safe. […] These exposures not being calculated by the Japanese, or the IAEA, are in fact enormous. [..] Fukushima was 3 times worse than Chernobyl as far as the noble gases [e.g. xenon, krypton] that were released. […] There’s already a 10-fold increase in thyroid issues in Japan and we’re just at the beginning of the thyroid epidemic. […] As I discovered when I was in Tokyo during the book tour during 2012, all of Japan is a radiologically contaminated area, and the people in Japan need to take extraordinary precautions. The net effect of all this is the total exposure to the Japanese is being grossly underestimated. >> Watch the video here


Testimony of a Fukushima Evacuee, Oct. 30, 2013 — Miko from Iwaki City (at 7:00 in): What the state announces is different from the reality. […] As I just told you what the media says and the facts are entirely different.  […] What happened to Fukushima residents will soon affect all Japanese people […] While some say the radiation has dispersed, we are now safe people are in fact dying in Fukushima. One day a nephew of my friend died of Leukemia. The next day her husband also died. […] There are people living in Fuksuhima, now, they all say: “We’re guinea pigs after all […] many people are dying, huh? There’s nothing we can do, it’s useless, so why bother? I’d rather focus on happy things” and continue with their decontamination. […] People refuse to face the fact that these will eventually come back to haunt them. >

Radiation in Fukushima groundwater skyrockets 3,500+ times over weekend — Just 5 meters from Pacific Ocean — Nothing being done to stop it flowing into sea (PHOTO)

Published: December 17th, 2013 at 8:05 am ET 
By ENENews 
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Tepco, Dec. 17, 2013: As a result of the measurement, it was found that the gross-β density in the groundwater observation hole No.0-3-2 obtained at the east of the Units 1-4 Turbine Buildings on December 16 [was] 63,000Bq/L […]

Jiji Press, Dec. 17, 2013: Highest Ever Radiation Detected in Fukushima Plant Well […] Some 63,000 becquerels of radioactive materials that emit beta rays, such as strontium-90, per liter have been found in groundwater […] the highest level at the well [Tepco] said Tuesday […] sample [was] taken on Monday from the observation well 5 meters from the coast […] Since the company is not takings steps to prevent tainted water in the well from flowing into the sea […] the water is likely to be reaching the plant’s bay. […] standards require strontium-90 levels to be less than 10 becquerels in water to be released into the sea. […]

AP: ‘Tritium rain’ to result from disposal of Fukushima contaminated water? Expert: You may be interested to know radioactive rainfall occurs around nuclear plants during normal operations (VIDEO)

Published: December 17th, 2013 at 1:54 pm ET 
By ENENews 
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Associated Press, Dec. 3, 2013: Experts on [the Japan government’s contaminated water] panel also proposed establishing a special team to focus on how to deal with massive amounts of tritium, the only isotope that cannot be removed chemically by existing technology. […] U.S. officials evaporated tritium water at the Three Mile Island plant following the 1979 accident, but the method is not recommended for Fukushima, where there is too much and it is likely to come back as tritium rain.

In fact, the method has been recommended for Fukushima

Joonhong Ahn, professor in UC Berkeley’s nuclear engineering department: Water that’s been treated to remove radionuclides apart from tritium, which can’t be filtered out, can be evaporated […] “Amounts of tritium would be small, so that radioactivity that would be discharged into the atmosphere would be acceptably small” […] discharging low-level contaminated water at the Fukushima station into the sea may need to be used in addition or as an alternative to evaporation.

Arjun Makhijani, President of the Institute for Energy and Environmental Research, at the Community Symposium on Decommissioning San Onofre, Oct. 19, 2013 (26:45 in): You might also be interested to know that all nuclear power plants, that are of the variety of light water reactors, release tritium to the atmosphere, so you can expect radioactive rainfall around nuclear power plants. We have asked the NRC to require monitoring of rainfall — because people have private wells in many places – but they have refused to require it.

Hot particle found 400 kilometers from Fukushima with radioactivity over 40 billion Bq/kg — Large black puddles of fallout along roadsides might well be from inside failed fuel rods (VIDEOS)

Published: December 17th, 2013 at 12:59 am ET 
By ENENews 
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Arnie Gundersen, Chief Engineer at Fairewinds, Dec. 16, 2013 (at 3:30 in): Large puddles of black particles have been found on the side of the road, each individual grain is extraordinarily radioactive. This is fall-out, this is hot particles that have coalesced together on the side of the road. Recently a hot particle was discovered 250 miles [400 kilometers] away from Fukushima. It was so radioactive that if it were a pound of material instead of just a particle, the pound would be giving off 20 billion disintegrations per second [44 billion becquerels per kilogram] […] That small speck could easily be lodged in someone’s lung. >> Watch the video here

Japan’s Black Dust, Fairewinds Energy Education, July 10, 2013: Marco Kaltofen, President at Boston Chemical Data Corp. & Doctoral student researcher at Worcester Polytechnic Institute: […] We kept hearing reports about something unusual, a black dust […] we finally got a very small sample […] It’s a single substance. It’s not a mix of mineral particles and pieces of dead bugs and plant matter and dust particles […] it doesn’t look like the surrounding soils. And it is much more intensely radioactive than any other soil or dust sample we’ve gotten from around Fukushima Daiichi. […]  There’s something unusual happening with this stuff. […] this particle contains not only fission waste products from the reactor but very likely contains a concentrated unburned nuclear fuel. And that’s unusual. This sample had by far the highest level of uranium daughters that we’ve seen in a dust or soil sample. We’re actually seeing material that might well have come from inside a failed fuel assembly. >> Watch the video here

Jiji: No solution seen for Fukushima’s radioactive water — Kyodo: Toxic ocean leakage to go on into 2020s — Experts: “High potential for marine life and human health effects through ingestion over generations”

Published: December 16th, 2013 at 4:33 pm ETBy ENENews 

Jiji Press, Dec. 16, 2013: No Solution in Sight for Fukushima N-Plant Tainted Water […] No solution is in sight as [Tepco] struggles with ever-increasing amounts of radioactive water […] The situation has improved little in the [past] six months […] very high-level radioactive water has been detected under the ground […] TEPCO detected 1.8 million becquerels of radioactive materials per liter of water collected on Thursday from an observation well some 40 meters from the seawall, the highest on record.

Kyodo News, Dec. 11, 2013: A government panel […] estimated that the utility will not be able to fully address the risks of water leaks by the end of fiscal 2020. […] “If measures are taken smoothly, a large part of the risks (posed by leaks from tanks) will be reduced around the end of fiscal 2020, but the amount of toxic water could surpass the tank storage capacity depending on the situation…and risks associated with keeping a large amount of tritium-water will remain,” the report said.

Estimate of Consequences from the Fukushima Disaster, Nordic PSA Conference (nuclear utilities in Finland and Sweden), September 2011: Some estimates of contamination of ocean waters were performed […] More than 1.1e17 Bq [110 quadrillion becquerels] of Cs137 in total is estimated to have been released into the ocean. With respect to bio-accumulation and weighting factors for fish and other sea fauna a long-term cycle can be expected and high potential for marine life, sea-birds and human health effects through ingestion over generations.

Sentiments of US District Judge, Jed S. Rakoff – We Need More Judges Like This One!

I was reading some information about the financial crisis in this country (USA), and ran across a paper written by US District Court Judge Jed S. Rakoff.  If we had more Judges with the mind of this one, we would not be in nearly as bad a shape as we are in.  I have not yet figured out how the Judges justify allowing foreclosures, when they know for a fact that the Banks and their attorneys are creating fraudulent documents, committing perjury in their Courtrooms, and are breaking so many laws, that it has become the norm…  

Read what Honorable Judge Jed S. Rakoff says:

Why Have No High Level Executives Been Prosecuted In Connection With The Financial Crisis?
by Jed S. Rakoff
(U.S. District Judge)

Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans leading lives of quiet desperation: without jobs, without resources, without hope.

Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever-more-esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?

If it was the former – if the recession was due, at worst, to a lack of caution – then the criminal law has no role to play in the aftermath. For, in all but a few circumstances (not here relevant), the fierce and fiery weapon called criminal prosecution is directed at intentional misconduct, and nothing less. If the Great Recession was in no part the handiwork of intentionally fraudulent practices by high-level executives, then to prosecute such executives criminally would be “scapegoating” of the most shallow and despicable kind.

But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years.Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past 50 years or so in bringing to justice even the highest level figures who orchestrated mammoth frauds. Thus, in the 1970’s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken. Again, in the 1980’s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than 800 individuals, right up to Charles Keating. And, again, the widespread accounting frauds of the 1990’s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected C.E.O.’s as Jeffrey Skilling and Bernie Ebbers.

In striking contrast with these past prosecutions, not a single high level executive has been successfully prosecuted in  connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears very likely that none will be. It may not be too soon, therefore, to ask why.

One possibility, already mentioned, is that no fraud was committed. This possibility should not be  discounted. Every case is different, and I, for one, have no opinion as to whether criminal fraud was committed in any given instance.

 But the stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in  accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgagebacked securities. Similar warnings, many from within the financial community, were disregarded, not because they were  viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”

Without multiplying examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the sole collateral for highly-leveraged securities that were marketed as triple-A, i.e., of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?

While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies, I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities. Rather, their position has been to excuse their failure to prosecute high level individuals for fraud in connection with the financial crisis on one or more of three grounds:

First, they have argued that proving fraudulent intent on the part of the high level management of the banks and companies involved has proved difficult. It is undoubtedly true that the ranks of top management were several levels removed from those who were putting together the collateralized debt obligations and other securities offerings that were based on dubious mortgages; and the people generating the mortgages themselves were often at other companies and thus even further removed. And I want to stress again that I have no opinion as to whether any given top executive had knowledge of the dubious nature of the underlying mortgages, let alone fraudulent intent. But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this context. Who, for example, were generating the so-called “suspicious activity” reports of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top level banker, one might argue, confronted with increasing evidence from his own and other banks that mortgage fraud was increasing, might have inquired as to why his bank’s mortgage-based securities continued to receive triple-A ratings?  And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?  

This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, in cases involving complexities, such as accounting treatments, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068 (2011), “The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances.” Thus, the Department’s claim that proving intent in the financial crisis context is particularly difficult may strike some as doubtful.

Second, and even weaker, the Department of Justice has sometimes argued that, because the institutions to whom mortgagebacked securities were sold were themselves sophisticated investors, it might be difficult to prove reliance. Thus, in  defending the failure to prosecute high level executives for frauds arising from the sale of mortgage-backed securities, the then head of the Department of Justice’s Criminal Division, told PBS that “in a criminal case … I have to prove not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying. And frankly, in many of the securitizations and the kinds of transactions we’re talking about, in reality you had very sophisticated counterparties on both sides. And so even though one side may have said something was dark blue when really we can say it was sky blue, the other side of the transaction, the other sophisticated party, wasn’t relying at all on the description of the color.”

Actually, given the fact that these securities were bought and sold at lightning speed, it is by no means obvious that even a sophisticated counterparty would have detected the problems with the arcane, convoluted mortgage-backed derivatives they were being asked to purchase. But there is a more fundamental problem with the above-quoted statement from the former head of the Criminal Division, which is that it totally misstates the law.  In actuality, in a criminal fraud case the Government is never required to prove reliance, ever. The reason, of course, is that would give a crooked seller a license to lie whenever he was  dealing with a sophisticated counterparty.  The law, however, says that society is harmed when a seller purposely lies about a material fact, even if the immediate purchaser does not rely on that particular fact, because such misrepresentations create problems for the market as a whole. And surely there never was a situation in which the sale of dubious mortgage-backed securities created more of a huge problem for the marketplace, and society as a whole, than in the recent financial crisis.

The third reason the Department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy. Thus, Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.” To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse — sometimes labeled the “too big to jail” excuse – is disturbing, frankly, in what it says about the
Department’s apparent disregard for equality under the law.

In fairness, however, Mr. Holder was referring to the prosecution of financial institutions, rather than their
C.E.O.’s. But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.

Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations, for your consideration or amusement as the case may be.

At the outset, however, let me say that I totally discount the argument sometimes made that no such prosecutions have been brought because the top prosecutors were often people who previously represented the financial institutions in question and/or were people who expected to be representing such
institutions in the future: the so-called “revolving door.” In my experience, every federal prosecutor, at every level, is seeking to make a name for him-or-herself, and the best way to do that is by prosecuting some high level person. While companies that are indicted almost always settle, individual defendants whose careers are at stake will often go to trial. And if the Government wins such a trial, as it usually does, the prosecutor’s reputation is made.My point is that whatever small influence the “revolving door” may have in discouraging certain white-collar prosecutions is more than offset, at least in the case of prosecuting high-level individuals, by the career-making benefits such prosecutions confer on the successful prosecutor.  So, one asks again, why haven’t we seen such prosecutions growing out of the financial crisis? I offer, by way of speculation, three influences that I think, along with others, have had the effect of limiting such prosecutions.

First, the prosecutors had other priorities. Some of these were completely understandable. For example, prior to 2001, the FBI had more than 1,000 agents assigned to investigating financial frauds, but after 9/11 many of these agents were shifted to anti-terrorism work. Who can argue with that?  Eventually, it is true, new agents were hired for some of the vacated spots in fraud detection; but this is not a form of detection easily learned and recent budget limitations have only exacerbated the problem.

Of course, the FBI is not the primary investigator of fraud in the sale of mortgage-backed securities; that responsibility lies mostly with the S.E.C. But at the very time the financial crisis was breaking, the S.E.C. was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes, which for awhile were, along with accounting frauds, its chief focus. More recently, the S.E.C. has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led S.E.C. enforcement to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.

As for the Department of Justice proper, a decision was made around 2009 to spread the investigation of these financial fraud cases among numerous U.S. Attorney’s Offices, many of which had little or no prior experience in investigating and prosecuting sophisticated financial frauds. At the same time, the U.S. Attorney’s Office with the greatest expertise in these kinds of cases, the Southern District of New York, was just embarking on its prosecution of insider trading cases arising from the Rajaratnam tapes, which soon proved a gold mine of good cases that absorbed a huge amount of the attention of the securities fraud unit of that office. While I want to stress again that I have no inside information, as a former chief of that unit I would venture to guess that the cases involving the financial crisis were parceled out to Assistants who also had insider trading cases. Which do you think an Assistant would devote most of her attention to:  an insider trading case that was already nearly ready to go to indictment and that might lead to a highvisibility trial, or a financial crisis case that was just getting started, would take years to complete, and had no guarantee of even leading to an indictment? Of course, she would put her energy into the insider trading case, and if she was lucky, it would go to trial, she would win, and she would then take a job with a large law firm. And in the process, the financial fraud case would get lost in the shuffle.

Alternative priorities, in short, is, I submit, one of the reasons the financial fraud cases were not brought, especially cases against high level individuals that would take many years, many investigators, and a great deal of expertise to investigate.  But a second, and less salutary, reason for not bringing such cases is the Government’s own involvement in the underlying circumstances that led to the financial crisis.

On the one hand, the government, writ large, had a hand in creating the conditions that encouraged the approval of dubious mortgages. It was the government, in the form of Congress, that repealed Glass-Steagall, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the S.E.C. but also of such diverse banking overseers as the O.T.S. and the O.C.C. It was the government, in the form of the Fed, that kept interest rates low in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to low-income persons who might have previously been regarded as too risky to warrant a mortgage. It was the government, in the form of the government-sponsored entities known as Fannie Mae and Freddie Mac, that helped create the fora-time insatiable market for mortgage-backed securities. And it was the government, pretty much across the board, that acquiesced in the ever greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay.

The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations; and what did the government care, since they  were helping to boom the economy and helping voters to realize their dream of owning a home.

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of Bank of America with Merrill Lynch, of J.P. Morgan with Bear Stearns, etc. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault?

Please do not misunderstand me. I am not alleging that the Government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do.

 The final factor I would mention is both the most subtle and the most systemic of the three, and arguably the most important, and it is the shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions. It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until relatively recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer. The reasons were obvious. Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent.   Moreover, under the law of most U.S. jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?

 In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and, as a result, it has taken the form of “deferred prosecution agreements” or even “non-prosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.    

If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by “flipping” some lower level participant in the fraud whom you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate in order to reduce his sentence, and – aided by the substantial prison penalties now available in white collar cases – you go up the ladder. For a detailed example of how this works, I recommend Kurt Eichenwald’s well-known book The Informant, which describes how FBI agents, over a period of three years, uncovered the huge price-fixing conspiracy involving high-level executives at Archer Daniels, all of whom were successfully prosecuted.

But if your priority is prosecuting the company, a different scenario takes place. Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched. 

I suggest that this is not the best way to proceed. Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt  that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager?  And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery. So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.

In conclusion, I want to stress again that I have no idea whether the financial crisis that is still causing so many of us so much pain and despondency was the product, in whole or in part, of fraudulent misconduct. But if it was — as various governmental authorities have asserted it was –- then, the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.