Yes, Virginia, There is a Thing Called Justice

justice-scale-761665_1Perhaps the most devastating aspect of the financial crisis on Wall Street is the uneasy feeling among people  that our system of justice is fundamentally unequal.

Not a single high-level executive has been prosecuted by the U.S. Department of Justice or the U.S. Securities Exchange Commission for fraud that precipitated a world-wide financial collapse, from which many are still suffering. At the heart of the collapse was the bundling and sale  of bad mortgages into “securities” that were backed by nothing more substantial than a wish and a prayer.

The government’s “failure to prosecute” the  financial executives who set this fraud in motion and profited obscenely from it gives rise to a profoundly depressing notion that American democracy is just a front for predatory capitalists who ignore the law while reaping 99 percent of the nation’s wealth. Once that belief is credible, it is easier to think that other institutions, including our judicial system, look the other way.

Jed S. Rakoff, a federal judge for the Southern District of New York, has written an important article in The New York Review that offers real insight into and debunks the reasons proffered by the government for its failure to prosecute.  But most importantly, Judge Rakoff took off his black robe  for a moment to challenge the very idea that it is ever acceptable for our government to be willfully blind to corporate executives who engage in financial fraud.

U.S. Attorney General Eric Holder told Congress that it is difficult to prosecute when “we are hit with indications that if you do prosecute—if you do bring a criminal charge—it will have a negative impact on the national economy, perhaps even the world economy.”

Judge Rakoff’s response: “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.”

Judge Rakoff notes the Financial Crisis Inquiry Commission, in its final report, used variants of the word “fraud” 157 times to describe what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. The commission found the number of reports of suspected mortgage fraud rose twenty-fold between 1996 and 2005 and then doubled again in the next four years.

The judge notes that the statute of limitations is expiring on fraud related to the financial collapse.

He said the U.S. Department of Justice’s position, until at least recently, was that “going after  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.”


The New Untouchables – Wall Street Crooks

Most of the federal appellate decisions I read every week attempt to justify why federal judges were  correct when they summarily dismissed a worker’s claims against an employer before the case even got to a jury.

So few of these cases make it through the federal judiciary that it has raised questions about objectivity and balance.

Perhaps that is why it is so irksome that the U.S. Department of Justice failed to criminally prosecute even a single Wall Street executive in connection with the 2008 collapse of Wall Street, which caused widespread unemployment and a massive loss of wealth for senior citizens who are facing an uncertain retirement.  ( Note: The PBS show Frontline did a superb job examining the DOJ’s failure to prosecute in the documentary, The Untouchables.)

Now it appears the U.S. Securities and Exchange Commission – which at least did something even if it was too little, too late – is effectively foreclosed from bringing future prosecutions for civil fraud arising from the Wall Street meltdown.

The U.S. Supreme Court unanimously ruled last month in Gabelli v. SEC that while some private plaintiffs can extend the statute of limitations through the so-called “discovery rule,” the SEC cannot.  The Court held that the five-year statute of limitations for the SEC to bring a civil suit seeking penalties for securities fraud against investment advisers begins to tick when the fraud occurs, not when it is discovered.

Is it over? Will the titans of Wall Street who brought down the economy to fill their own pockets   continue to summer in Nantucket and winter in the Carribean?  It seems so.

The SEC alleged that Marc Gabelli, a portfolio manager, and Bruce Alpert, chief operating officer at the investment firm Gabelli Funds, LLC, allowed a client to engage in a trading technique known as “time zone arbitrage”  from1999 and 2002 while assuring  other investors in the same mutual fund that the technique would not be tolerated. Time zone arbitrage unfairly takes advantage of the differing time zones between markets. The SEC launched its investigation in 2003, but did not file a complaint until 2008.

Gabelli and Alpert argued the SEC waited too long to bring charges against them.  The U.S. Court of Appeals for the Second Circuit in New York  disagreed, ruling that the time runs out five years after the agency discovers — or could have reasonably been expected to discover — the fraud.

In a 9-0 ruling, the U.S. Supreme Court in Gabelli v. SEC reversed the appellate court and said the SEC cannot extend the statute of limitations through the so-called “discovery rule.” Chief Justice John Roberts wrote:  “Unlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit. It can demand that securities brokers and dealers submit detailed trading information.”

In some respects, the Supreme Court’s decision represents good public policy because it requires federal investigators to move quickly and protects innocent  citizens  from costly and protracted investigations.  But in another sense, the Court’s decision represents very bad public policy because iIt contributes to what courts like to call the appearance of prejudice. Many citizens feel – with good reason – that the system is tilted in favor of the rich and powerful and the Gabelli decision does nothing to disabuse them of that notion.

Meanwhile, Eric H. Holder Jr., the nation’s attorney general, remained unapologetic this week:

 “I am concerned that the size of some of these institutions becomes so large 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,”

So much for the Dodd Frank financial regulation law, which was the .Obama administration’s remedy for problem of banks that are too-big-to-fail.