New York Times: Prosecution of Financial Crisis Fraud Ends With a Whimper


In 2011, Robert Khuzami of the Securities and Exchange Commission announced charges against top executives from Fannie Mae and Freddie Mac. Credit Win Mcnamee/Getty Images

One source of great frustration from the financial crisis has been the dearth of cases against individuals over subprime lending practices and the related securitization of bad loans that caused so much financial havoc. To heighten the frustration, I offer Aug. 22, 2016, as the day on which efforts to pursue cases related to subprime mortgages were put to rest with no individuals — save perhaps the unfortunate former Goldman Sachs trader Fabrice Tourre — held accountable.

On that date, the Securities and Exchange Commission settled its last remaining case against a former Fannie Mae chief executive for securities fraud related to the disclosure of the company’s subprime mortgage exposure. The agency accepted a mere token payment that will not even come out of the individual’s own pocket.

On the same day, a federal appeals court refused to reconsider its May ruling that Bank of America’s Countrywide mortgage unit and one of its former executives did not commit fraud by failing to disclose to Fannie Mae and Freddie Mac that the subprime loans it was selling to them did not come close to the contractual requirements for such transactions.

In December 2011, the S.E.C. publicized its civil securities fraud charges against top executives from Fannie Mae and Freddie Mac for understating their exposure to subprime mortgages, which resulted in the government taking them over. Robert Khuzami, then the head of the S.E.C.’s enforcement division, said that “all individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”

That is not how it turned out, however. Five of the executives settled in 2015 by arranging for modest payments to be made on their behalf by the companies and their insurers, amounts that were never even described as penalties in the settlements.

Each also agreed not to hold a position in a public company that would require signing a filing on its behalf for up to two years. That is far short of the director and officer bar the S.E.C. usually seeks in such cases, but at least it had the sound of something punitive regardless of whether there was any real impact.

The settlement with the sixth defendant, Daniel H. Mudd, the former chief executive of Fannie Mae, disclosed in a judicial filing on Aug. 22, did not even reach that modest level of accountability. Fannie will make a $100,000 donation on his behalf to the Treasury Department — which is like shifting money from one pocket to another because the government already controls the company. Nor is there any ban on Mr. Mudd holding an executive position at another public company, something that at least resulted from the cases against the other executives.

What the S.E.C. accomplished in settling the cases against Mr. Mudd and the other executives hardly sends a message to other executives to be careful about how they act in the future. No money came out of the pockets of any of the defendants, and the prohibitions on future activity were token requirements. It was, after all, unlikely that any of the defendants would have been put in a leadership position at a public company within the applicable time. It is difficult not to come away with the impression that the settlements were little more than a slap on the wrist, and perhaps less than that for Mr. Mudd.

The case involving Countrywide may be more disheartening because it calls into question the scope of a federal statute from the savings and loan crisis, the Financial Institutions Reform, Recovery, and Enforcement Act, or Firrea, that the Justice Department used to extract large settlements from banks. That law authorizes the Justice Department to seek civil penalties for conduct that violates the mail and wire fraud statutes if it affects a bank.

The government won the jury trial in 2013. Preet Bharara, the United States attorney in Manhattan, said that “in a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow. That profit, however, was built on fraud.” The trial court hit Bank of America with a $1.267 billion penalty and ordered a former Countrywide executive, the only individual named as a defendant in the case, to pay a separate $1 million fine.

But the United States Court of Appeals for the Second Circuit in Manhattan overturned the verdict last year by ruling that the government had not shown fraud because there was no false statement made when Countrywide sold loans that did not meet certain contractual obligations it had with Fannie and Freddie. The opinion found that “willful but silent noncompliance” with a contract was not fraudulent without some later misstatement.

The government’s aggressive approach to the case may explain why the Justice Department asked the full appeals court to review the decision even though such a request is rarely granted.

The appeals court judges issued a terse order on Aug. 22 denying the government’s request without further comment, which means the only option for challenging the ruling will be to try to take the case to the Supreme Court. The last time the Justice Department asked the Supreme Court to review a case from Mr. Bharara’s office was in United States v. Newman, an insider trading decision. The justices rejected that request before granting review in a similar case from California.

The likelihood that the Supreme Court will take up the appeals court’s decision appears to be low. The issue about what constitutes fraud in a contractual relationship is narrow, raising arcane questions about how a court should construe an agreement between sophisticated parties and when full disclosure is required. This is the type of claim that is usually pursued in a private lawsuit rather than through a federal enforcement action, so the justices may not want to be dragged into a dispute that will have little precedential impact on the application of federal law.

The lack of cases identifying individuals for any misconduct related to the financial crisis has become an all-too common complaint. What will be additionally disheartening to many is that even those few cases that were brought have now ended up largely as defeats for the government.

4 Responses

  1. Even though all these frauds are known to the public at large, when we made complaints about fraud in our mortgage, the replies idicate that we need to provide evidence. This is after clearly showing backdating in the assignment of mortgage to have the alleged mortgage to be in a secularized trust (CWABS, Inc ) to issue mortgage backed securities.


  2. Reblogged this on Matthews' Blog.

  3. One word…scumbags.

  4. How does any of this–findings, fines, jail time, etc., help the homeowners who have lost or are about to lose their homes?
    Can the records be accessed or used in their own cases? If so, is there an attorney anywhere who would know how to effectively use any of it to help a homeowner in distress?

    Our government knows the banks shoved people to the curb and took their homes illegally, but most judges ignore all of this.

    Most homeowners would say to the banks, “Okay, I’m behind on my mortgage, you (big bank) probably won’t and don’t have to give me a loan modification that I can afford, but could you at least not use lies and fraudulent or forged documents to take my family’s home while I try to get a modification?

    I saved for years and scrimped like crazy to buy my home and made payments on it for most of my life. I spent money and time improving it and maintaining it. Near the end, the rest of my kids’ college funds and my retirement fund made my last payments to you. So again, could you at least not use fraudulent documents and lies to take away our home?”
    Why, since it is obvious from the penalties and billions in settlements that the banks used forged and fraudulent documents to foreclose on homeowners, are judges still turning a deaf ear to homeowners presenting proof that the foreclosing parties have no provable interest in their homes and use fraudulent and forged documents to support foreclosures?

    I listened to a federal judge complain to a bank’s lawyer that he should have brought the note and the homeowner was getting away with not making “RENT” payments because without the note the bank had nothing. Without the lawyer ever producing the note, the judge ruled for the bank anyway. Worse than this, the judge changed the transcript to cover up statements he had made in a rage, that indicated early signs of Alzheimer’s. Having to rely on a federal judge who has no problem changing the transcript, impending Alzheimer’s or not, makes you want to just give up on the court system. The few appeal wins for homeowners appear to be neutralized after they are returned from appeals or even the supreme court to the lower courts.

    btw: Any lawyer turning a judge into the judicial commission for changing transcripts is putting his head under the bar association’s guillotine. Even representing homeowners against banks can bring on heat from the bar association.

    One attorney I know of was told by the state bar association that he should not have taken a homeowner’s case because it was without merit, and the bar wanted proof of the bank’s fraud presented to it before it would allow the lawyer to proceed without risk of bar discipline. This case involved fraudulent, forged, and back-dated instruments, all provided to the court by lawyers for the servicer/bank.

    If homeowners are wondering why it is so expensive or difficult to find a good lawyer to take their case, the above should help explain the situation. Bank lawyers are the darlings of the courts. Homeowner’s attorneys get the evil eye for defending deadbeats who just want a free house. Many lawyers who previously entered the fray on behalf of homeowners decided the stress and risk were not worth it and stopped taking those cases.

    I still believe there are some judges who are hold-outs against banks involved in fraudulent foreclosures, but they are few. It’s sort of like believing in protective angels. You read the stories, but never actually see one yourself. I still like to read the stories…

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