A Judge Takes Wall Street’s Watchdogs to Task

Stern Words for Wall Street’s Watchdogs, From a Judge

WASHINGTON â€" It used to be common for the federal government to prosecute prominent people responsible for debacles that rattled the financial system. Michael R. Milken, the junk bond artist, went to prison in 1991; Charles H. Keating Jr., the face of the savings-and-loan crisis, pleaded guilty to four counts of fraud in 1999; and it looks like Jeffrey K. Skilling, the former chief executive of Enron, will be in prison until 2017.

And what of the recent financial crisis? The statute of limitations on most plausible charges is running out, and it seems there will not be a single prosecution of a prominent figure in the entire mess.

Judge Jed S. Rakoff wants to know why. In a blistering essay in the issue of The New York Review of Books that arrives this week, he argues that the Justice Department has failed in its rudimentary responsibilities, offering excuses instead of action.

Judge Rakoff, who sits on the Federal District Court in Manhattan, has long been outspoken, idiosyncratic and iconoclastic. In 2002, in a decision that was promptly overturned, he ruled the federal death penalty statute unconstitutional. More recently, he has presided over a series of big financial cases and has blocked proposed settlements as too opaque or lenient, to the frustration of both Wall Street and prosecutors.

I asked him what had prompted his unusual essay.

“As a judge, I got to see many cases that grew out of the financial crisis and to see situations that gave me pause,” he said. “When I added my own background as both a prosecutor and defense counsel, I was struck by how things were proceeding in a different way than they had in the past.

“That caused me to think about it more than I otherwise would have,” he said, “and I thought my views as a citizen might commend themselves to others.”

In his essay, Judge Rakoff is careful to say that he does not know if high-level executives committed crimes as they presided over the collapse of the market for mortgage-backed securities. That would seem to keep him out of judicial-ethics trouble and available to hear future cases. But he seems inclined to credit the conclusions of the Financial Crisis Inquiry Commission, which found rampant incompetence, mendacity and fraud.

Judge Rakoff is more direct in critiquing the Justice Department’s principal reasons for failing to prosecute top executives. He acknowledges that it can be hard to prove criminal intent, particularly against people several levels removed from those who constructed and marketed the securities.

But the legal doctrine of “willful blindness” could be put to valuable use, he writes, adding that “the department’s claim that proving intent in the financial crisis is particularly difficult may strike some as doubtful.”

A second argument against prosecution is even weaker, the judge writes, singling out statements by Lanny A. Breuer, an assistant attorney general in charge of the department’s criminal division, in a 2012 interview with the PBS program “Frontline.” Mr. Breuer said there were “very sophisticated counterparties on both sides” on many transactions and that proving fraud is hard if they did not accept what they were told at face value.

“I have to prove,” Mr. Breuer said, “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.”

That last phrase, Judge Rakoff writes, “totally misstates the law.”

“In actuality, in a criminal fraud case the government is never required to prove â€" ever â€" that one party to a transaction relied on the word of another,” he writes.

(Mr. Breuer told me that he had meant to describe a different and uncontroversial requirement in fraud prosecutions â€" that prosecutors must prove the statements at issue were material.)

Judge Rakoff also has no patience with Attorney General Eric H. Holder Jr.’s statement to Congress that some prosecutions should be approached with caution because they may “have a negative impact on the national economy, perhaps even the world economy.”

Judge Rakoff says that “this excuse â€" sometimes labeled the ‘too big to jail’ excuse â€" is disturbing, frankly, in what it says about the department’s apparent disregard for equality under the law.”

Brian Fallon, a Justice Department spokesman, said Judge Rakoff “does not identify a single case where a financial executive should have been charged, but wasn’t.”      

“The department has criminally prosecuted thousands of defendants for financial fraud and other related crimes in the last five years, and there are a number of active investigations still ongoing,” he added. “Even in striking the nation’s largest-ever settlement with JPMorgan last month, the department preserved its ability to investigate and potentially charge individuals at the company if the evidence supports it.”

Having found the department’s rationales unconvincing or worse, Judge Rakoff asks: “What’s really going on here?”

Freely admitting that he is speculating, he offers three theories. One was that the department had other priorities, including terrorism, the Madoff scandal and insider trading cases. A second was that the government’s own role in the financial crisis complicated matters.

“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,” he writes.

The third reason is the most interesting: An institutional shift toward prosecuting companies rather than individuals. This has yielded some enormous monetary settlements but has, Judge Rakoff writes, “led to some lax and dubious behavior on the part of prosecutors, with deleterious results.”

The fear of prison concentrates the mind in a way the prospect of writing a check on a corporate account does not. “And from a moral standpoint,” Judge Rakoff writes, “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.”