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Subprime Criminal Probes Yet to Catch Big Fish

By Reuters -  |  Posted 2008-06-09 Print this article Print

Legal experts say complex financial frauds can take years to investigate before prosecutors make a decision on whether they have a case.

NEW YORK/WASHINGTON (Reuters) - More than a year into a U.S. housing market meltdown, prosecutors have yet to bring major cases against mortgage industry leaders -- and the slump's worst may pass before any charges are filed.

After the FBI revealed in January that it was looking into possible mortgage-related corporate crime such as accounting wrongdoing or insider trading at 14 major companies, the number of firms under scrutiny has grown to 19 but developments have slowed to a trickle. Separately, federal authorities are probing about 1,200 cases of individual mortgage scams.

Just because authorities have proceeded quietly does not mean the probes have stalled. Legal experts say complex financial frauds can take years to investigate before prosecutors make a decision on whether they have a case.

And outlines of the government's strategy are taking shape. The FBI and U.S. Department of Justice say they are examining some major industry executives in their investigations, with FBI Director Robert Mueller saying the bureau is working to identify "large-scale industry insiders" in its probes.

But the prospect is unlikely of a major federal task force zeroing in on a large company, as with the special group created several years ago to investigate the collapse of Houston-based energy trader Enron. However, the Justice Department has created a mortgage fraud working group to oversee issues such as standards for measuring losses and establishing a central storehouse for mortgage documents.

Authorities also are unlikely to look to force companies out of business through criminal charges, well aware of the many job losses spurred by the demise of accounting firm Arthur Andersen after it was indicted over its dealings with Enron.

The subprime meltdown began more than a year ago, gaining momentum with the April 2007 bankruptcy of New Century Financial Corp NEWCQ.PK, which once epitomized the boom in extending home loans to borrowers with weak credit histories.

The criminal probes involving financial firms are examining whether shareholders were properly informed of companies' exposure to risky mortgage loans, and whether portfolios of mortgage-backed loan products were properly accounted for.

Investigators must first develop expertise in these areas, and then try to unravel whether anyone intentionally misled investors, experts say.

"In a case of this size and complexity, a year is nothing," said Samuel Buell, a former prosecutor on the Enron Task Force who now is a law professor at Washington University in St. Louis. "In fact, if there were a case brought within mere months of something of this scale that would be troubling."

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