Tough to Prosecute

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.


Prosecutions may be difficult to bring, said white-collar crime expert Peter Henning, a law professor at Wayne State University. He said it is much more likely to see action by the U.S. Securities and Exchange Commission, which can bring civil cases, rather than criminal prosecutions.

"I don't think we'll see high-level people involved because it's hard to identify exactly what went wrong," he said. "They are going to have to find the fraud. Losing billions of dollars is assumed to be bad, but that doesn't make it a crime."

Among the companies cited in press reports, court documents or company statements as subjects of federal investigations are: Doral Financial Corp (DRL.N: Quote, Profile, Research), Beazer Homes USA Inc (BZH.N: Quote, Profile, Research) and Countrywide Financial Corp (CFC.N: Quote, Profile, Research).

In one criminal case, Manhattan federal prosecutors in March announced charges against a former treasurer at Doral, Mario Levis, who is accused of scheming to defraud investors at the mortgage lender. He denies the allegations.

Last week, American International Group Inc (AIG.N: Quote, Profile, Research) disclosed that the Justice Department and the SEC were investigating whether it overstated the value of contracts linked to subprime mortgages.

Authorities have been criticized in the past for moving too slowly in major financial fraud cases. With Enron, it took more than two years after the company's late 2001 collapse for prosecutors to secure criminal indictments against former top executives Jeffrey Skilling and Kenneth Lay.

There was "severe public criticism and bewilderment regarding why it was taking so long for indictments to be issued," said another former prosecutor in the Enron case, John Hueston. He is now a lawyer at law firm Irell & Manella LLP in Los Angeles, and represents companies and individuals in subprime mortgage investigations.

U.S. Attorney General Michael Mukasey last week ruled out an Enron-style task force -- which involved a large team of prosecutors working in Houston and Washington.

"This isn't that type of phenomena," he told reporters. He said the mortgage problems appeared to be in specific geographic markets and cited the FBI's current policy of pursuing fraud cases through regional task forces.

In New York, home of the U.S. financial industry, the U.S. attorney in Brooklyn last month launched a mortgage task force. His office recently brought a case in which lenders were said to be the victims. Eleven people, including mortgage brokers and attorneys, were charged with scheming to defraud mortgage companies and banks of more than $14 million.

So far, most federal mortgage prosecutions have involved relatively low-level frauds. These types of small, localized frauds are similar to the kinds of cases that emerged from the savings-and-loan crisis of the late 1980s, Henning said.

One big prosecution came from that crisis -- the criminal case against former S&L boss Charles Keating. His convictions on charges of defrauding investors were later overturned.

Mueller, asked last month whether one company would emerge as the criminal emblem of the mortgage fraud crisis, said it was too early to say.

"We would have to look at those cases, if and when charges are brought down the road, to get a better handle on an answer to that question," he said.

(Editing by Maureen Bavdek)


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