Justice in the Financial Crisis: Prosecutors Have Plenty of Targets

Preet Bharara, the U.S. Attorney prosecuting the insider trader cases, is quoted in a recent New Yorker article as saying that a lack of manpower was the reason that authorities hadn't prosecuted more people involved in the financial crisis: "If the well is dry," he said, "a thousand more people aren't going to get you water in that well." 

Of course, that's absurd. New evidence emerges nearly every day that the well is not dry and that numerous financial firms engaged in illegal behavior during the boom. In particular, there is plenty of evidence that firms misled investors about the quality or risks associated with mortgage-backed securites -- and that these lies had devastating effects as investors lost fortunes.

Last year, Goldman Sachs settled with the government for $550 million for failing to share damaging information about collateralized debt obligations it sold to clients even as it helped a hedge fund bet against the securities underlying those CDOs. And just last week, the government settled with J.P. Morgan in a similar case. Also last week, the SEC reached a $200 million settlement with the financial firm Morgan Keegan and Company, and two of employees, James C. Kelsoe Jr. and Joseph Thompson Weller, for misleading investors about the true value of mortgage-backed securities in five of its funds.

This week brings yet more revelations: According to the Wall Street Journal, the SEC is broadening their probe against Stifel Financial for pitching dubious CDOs to a school district in Wisconsin that lost tens of millions of dollars. "The districts were defrauded in these transactions and have spent nearly three years proving how and why," said C.J. Krawczyk, a Milwaukee lawyer representing the schools.

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New York AG Picks Up Ball the Feds Dropped on Banks

New York State Attorney General Eric Schneiderman is hoping to be the first law enforcement official to truly hold the big banks accountable for their actions in precipitating the subprime mortgage crisis. According to news reports today, Schneiderman has "has opened an investigation into the packaging of mortgage loans into securities." His first targets are Bank of America Corp., Morgan Stanley and Goldman Sachs. He is requesting meetings with bank officials and requesting documents.

Schneiderman is tapping into the public deep frustration that nobody -- and I mean nobody -- has yet been held criminally responsible for the systematic deception, conflicts of interest, and excessive risk-taking that surrounded the securization of subprime mortgage debt by Wall Street. The banks made hundreds of billions of dollars by bundling questionable loans together and then -- with the help of compromised rating agencies -- peddling this junk as AAA securities, luring everyone from local pension funds to foreign governments.

Schneiderman is stepping up just in time. For various reasons, which were detailed recently in an extraordinary New York Times investigation, federal authorities have totally dropped the ball in ensuring justice following the financial crisis. In contrast, the Savings and Loans scandal of the 1980s resulted in no fewer than 800 bank officials going to jail. Major figures in the last wave of corporate scandals also went to prison, including Bernie Ebbers of Worldcom, Jeffrey Skilling of Enron, and Dennis Kozlowski of Tyco.

The Times article notes that while criminal intent is difficult to prove:

"legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could. Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.

This is where Schneiderman comes in.

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Another Mortgage Fraud Conviction

Give it time: prosecutors just might send a serious number of people to prison for the outsized greed and cheating that led to the mortgage meltdown. While these offenders are unlikely to include kingpin figures at the top banks, they aren't mere minnows either.

The latest score for prosecutors was announced yesterday when Sean Ragland pleaded guilty for his role in a $1.5 billion fraud at a major mortgage-lending facility run by Taylor, Bean & Whitaker Mortgage Corp. As the Justice Department describes the case:

According to a statement of facts submitted with his plea agreement, in 2005 TBW established a wholly-owned lending facility called Ocala Funding.  Ocala Funding raised money by selling asset-backed commercial paper to financial institutions, including Deutsche Bank and BNP Paribas , and used the money to purchase TBW mortgages. The facility was managed by TBW and had no employees of its own.

Ragland had tracking and reporting responsibilities with respect to Ocala Funding, and today he admitted that from 2006 through August 2009, he and other co-conspirators engaged in a scheme to mislead investors and auditors as to the financial health of the lending facility.  According to court records, shortly after Ocala Funding was established, Ragland learned there were inadequate assets backing its commercial paper. . . .

Ragland admitted that, at the direction of other co-conspirators, he prepared documents that inaccurately and intentionally inflated figures representing the aggregate value of the loans held in Ocala Funding or under-reported the amount of outstanding commercial paper. He sent this false information to the financial institution investors, other third parties and an outside audit firm.

These lies helped to bring down TBW and also help precipitate the fall of one of the 50 largest U.S. banks, Alabama-based Colonial Bank. Greed is deadly stuff. 

Prosecutors have been working their way through the TBW crowd. The firm's former president, Raymond Bowman, already pleaded guilty as has the former treasurer Desiree Brown. Some executives from Colonial Bank also have pleaded guilty.

One figure who hasn't pleaded guilty is TBW's former chairman Lee Farkas. He's headed for a trial soon, with prosecutors recently denying a request by his attorney, William Cummings, to delay that trial.

Again, Farkas is no Angelo Mozilo. But he was a real player in the boom and one of the shadier ones, too. As the Wall Street Journal reports:

Farkas is a Florida businessman who built Taylor Bean from a small mortgage company into the nation’s largest mortgage lender not owned by a bank. Federal prosecutors claim he engaged in a seven-year, multibillion-dollar fraud by double pledging Taylor Bean’s mortgage loans and improperly transferring loans and securities between the company’s bank accounts. He’s been charged with 16 counts of bank, wire and securities fraud. If convicted, he could spend the rest of his life in prison. He’s pleaded not guilty to the charges. His trial is set to begin April 4.

Needless to say, the three TBW executives who have pleaded guilty so far have all made deals with the prosecution to help nail Lee Farkas. So this guy could end up getting one of the stiffer prison sentences to emerge from the mortgage meltdown.

Mortgage Collapse: Not All Guilty Parties Will Get Off

A depressing truth of the mortgage crisis is that while numerous individuals and companies broke or bended the law in pursuit of profits, very few are likely to see the inside of a court house much less a prison cell. The inability of prosecutors to indict Angelo Mozilo, of Countrywide, is a case in point. That company engaged in rampant illegality to boost earnings, but the man who ran it will live out his days as a free multi-millionaire. 

Instead of nailing the kingpins, prosecutors have largely been catching smaller operators engaged in mortgage fraud. So it was reassuring to hear today that the feds had nailed -- and given real prison time to -- a somewhat bigger fish for a fraud that totaled $136 million.

Michael J. McGrath, Jr., 47, pleaded guilty last year to one count of mail and wire fraud conspiracy and one count of money laundering in connection with a scheme to fraudulently sell Fannie Mae hundreds of loans belonging to various credit unions from 2002 to early 2009.

Other members of the conspiracy included U.S. Mortgage's chief financial officer and its servicing manager, Leroy Hayden, of East Stroudsburg, Pa.. Hayden, 47, has pleaded guilty to one count of wire fraud conspiracy and is currently scheduled to be sentenced on March 24.

Prosecutors said that at McGrath's direction, Hayden provided numerous reports to credit unions falsely stating that loans that had been sold were still in the credit unions’ portfolios.

McGrath admitted that he devised the scheme to prop up U.S. Mortgage, and that he used the proceeds to fund U.S. Mortgage's operations, his personal investments, and investments he made on U.S. Mortgage’s behalf, prosecutors said.

Executive Sentenced to 14 Years in Mortgage Fraud Case

Foreclosure Relief Scams: How Big is the Problem?

One of the most troubling facets of America's cheating culture is that a range of cottage industries exist that prey on people's economic misfortunes. The latest example is the rampant problem of foreclosure help scams. These are scams, as we've discussed elsewhere on the site, in which companies or lawyers promise to help a homeowner avoid foreclosure -- only to take up front fees and then do nothing.

I say this problem is "rampant" because a new study, just out by the Federal Trade Commission, reports that the government received 28,584 complaints from consumers about frauds related to mortgage foreclosure relief and debt management. The real number is probably much higher, assuming that there are plenty of other victims out there who never complained.

FTC Annual Report on Consumer Fraud