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Monday, Nov 9, 2009
Some white-collar criminals do go to jail. Charles Ponzi, master of the pyramid scheme, went to prison in 1920 for defrauding 40,000 people out of $15 million. Billy Sol Estes, a Texan who raised capital in the '60s by mortgaging nonexistent farm equipment, also spent time in the slammer, as did the king of junk bonds, Michael Milken.
But those men are exceptions. Study after study shows that white-collar criminals, particularly those who work on Wall Street, regularly receive kid-glove treatment. Jail time is extremely rare. According to TRAC, a crime database at Syracuse University, the SEC referred 609 cases to the Justice Department between 1992 and 2001. The U.S. attorneys declined to prosecute on all but 187 of the cases, and though they earned guilty verdicts in 142 of those, only 87 people spent time in jail.
And if they do go to jail, they don't get a chance to get comfortable. The financiers behind the '80s savings-and-loan scandal -- one of the costliest financial crimes of the century -- spent an average of 36.4 months behind bars. Milken, arguably the best known of the convicts, logged only 22 months in prison. Meanwhile, according to a study conducted by Henry Pontell, a criminologist at the University of California at Irvine, a burglar who steals $300 or less goes to jail for 55.6 months, and first-time drug offenders are locked up for an average of 64.9 months.
Sunil explains the disparity in treatment as a result of class background and access to power. Wall Street's alleged criminals "are at the highest realms of society," he says. "They went to Harvard or Stanford. They belong to country clubs. They're rich old white men who know how to work the system."
But its not just a matter of knowing how to maneuver through the system; the system itself encourages such behavior. According to legal experts and former regulators, the legal system has over the past 25 years shifted in favor of those who commit complex financial crimes. The deck is stacked in favor of future Ponzis.
Prosecutors, for example, are now required to prove intent before they can win a criminal conviction for financial crimes. In other words, they have to convince a jury that an analyst intentionally defrauded customers while knowing that he was committing a crime. This is an extremely high legal standard, and it's relatively new, says Michael Greenberger, a University of Maryland law professor and the former head of trading and markets at the Commodities Futures Trading Commission (CFTC).
"You used to be able to find fraud if there was recklessness [aggressive disregard for the law], but now they have to have knowledge of the fraud," he says. "Through a combination of Supreme Court decisions in the '80s and early '90s and the 1995 Private Securities Litigation Reform Act, you have to demonstrate that the analyst is not just an aider and abettor to the fraud but also a primary actor. It's a much higher standard."
Congress is also to blame, says James Cox, a securities law professor at Duke. Funding for enforcement is not adequate to the task.
"The SEC is managing a restricted budget in a multitrillion-dollar economy," Cox says. "It's very difficult for them to go to the mat in these cases."
Prosecuting white-collar crime also tends to require more work, notes U.C. Irvine's Pontell. Prosecutors must have a firm grasp not just of the law but also of high finance, and they must be willing to fight a well-heeled defendant who can drag out the case. So when a U.S. attorney can bust, say, three prostitution rings in the same time it takes to prosecute one person accused of insider trading, it shouldn't come as a surprise that many prosecutors decide not to bother with the latter.
"[They] only go after the biggest and best cases," Pontell says. "Why else would a prosecutor waste their scarce resources on something with an uncertain outcome? They have to show convictions."
Could high-watt public outrage alter this legal landscape? Don't hold your breath, Cox says. "It's highly unlikely that the [conflict of interest] cases will pique the interest of the U.S. attorney," he says. "It's possible that there will be a criminal investigation, but it looks like there will be some kind of restitution instead."
