As insider trading cases come to light, SAC Capital was indicted this week. In the aftermath of the 2008 financial crisis, there have been very few criminal prosecutions. A former federal prosecutor who also served as a special inspector general who oversaw the Troubled Asset Relief Program, Neil Barofsky, commented, “The folks responsible for this incredibly painful economic damage that struck our economy have gone free.” According to NPR.org, insider trading prosecutions have resulted in more than 70 convictions. Neil Barofsky commented, “This sends a very, very powerful message to the entire industry.”
William Black, a top lawyer for the Office of Thrift Supervision during the savings and loan debacle in the 1980s comments on why more bankers aren’t in jail. During the savings and loan crisis he noted that there were a thousand agents working on and auditing fraud cases. Yet when the financial crisis struck, there were only about 120 FBI agents working on bank fraud. He comments that these are tough cases for a jury to understand, with mortgage securitization and complex financial instruments. “It would be much more difficult than the insider trading cases.”
Understanding the securitization and diversification of risk tranches of triple A, B, and C mortgage securities isn’t the worst of it. Really considering the derivatives and option pricing is likely to give any jury a headache. It is also hard to criminalize banks when the government bailed them out and wanted to save them. However, more oversight could have prevented insider trading form happening as it did with Rajaratnam, Rajat Gupta or SAC Capital.
Former federal prosecutor Barofsky comments, “I think that there was a tremendous amount of fraud.” Attorney William Black thinks it’s not too late to prosecute the firms in the financial industry that have been involved in this kind of securities fraud.
Jamie Dimon, CEO of JPMorgan Chase, told Jim Cramer of Mad Money on CNBC, “One of the great things about America is, failure is not illegal or wrong…you make investments. They don’t always pay off. It doesn’t mean you’re a criminal.”