Crime and Punishment (or the Lack Thereof) for Financial Fraud in the Subprime Mortgage Meltdown: Reasons and Remedies for Legal and Ethical Lapses

AuthorCatharyn Baird,Anita Cava,Don Mayer
DOIhttp://doi.org/10.1111/ablj.12033
Date01 September 2014
Published date01 September 2014
Crime and Punishment (or the Lack
Thereof) for Financial Fraud in the
Subprime Mortgage Meltdown:
Reasons and Remedies for Legal and
Ethical Lapses
Don Mayer,* Anita Cava,** and Catharyn Baird***
INTRODUCTION
The subprime mortgage crisis that led to the 2008 financial meltdown
continues to haunt the U.S. and global economies. In the United
States, the crisis still reverberates, leaving some economists concerned
that a full recovery may never happen.1Many Americans have seen
their homes wrongfully foreclosed on,2their investments greatly
*Chair of the Business Ethics and Legal Studies Department at the Daniels College of
Business, University of Denver.
**Professor of Business Law, University of Miami School of Business Administration and
Co-Director, UM Ethics Programs.
***Professor Emeritus, Regis University, and CEO of EthicsGame, LLC.
We thank Mr. Brian M. Stewart, J.D., for his invaluable research assistance.
1See, e.g., Paul Krugman, Op-Ed., Defining Prosperity Down, N.Y. TIMES, July 8, 2013, at A21,
http://www.nytimes.com/2013/07/08/opinion/krugman-defining-prosperity-down.html?_r=0.
Other economists are slightly more sanguine, even while noting that the United States has
experienced a “systemic crisis,” the first since the Great Depression of the 1930s and similar
to the crises in 1873, 1893, and 1907. Carmen M. Reinhart & Kenneth S. Rogoff, Sorry, U.S.
Recoveries Really Aren’t Different,B
LOOMBERG (Oct. 15, 2012, 6:30 PM), http://
www.bloomberg.com/news/2012-10-15/sorry-u-s-recoveries-really-aren-t-different.html.
2Jessica Silver-Greenberg & Ben Protess, Banks Find More Wrongful Foreclosures Among Military
Members, N.Y.TIMES, Mar. 3, 2013, at B1. See also Marian Wang,What Is a Wrongful Foreclosure?,
PROPUBLICA (Nov. 24, 2011, 9:35 AM), http://www.propublica.org/blog/item/primer-what-is-a
-wrongful-foreclosure.
bs_bs_banner
American Business Law Journal
Volume 51, Issue 3, 515–597, Fall 2014
© 2014 The Authors
American Business Law Journal © 2014 Academy of Legal Studies in Business
515
de-valued,3or their livelihoods lost,4yet there have been no significant and
successful criminal prosecutions for those most responsible.5Because the
In 2012, the five largest mortgage service companies (Bank of America Corporation,
JPMorgan Chase & Co., Wells Fargo & Company, Citigroup, Inc., and Ally Financial, Inc.,
formerly GMAC) settled with forty-nine state attorneys general and the Department of Justice
in response to allegations of shoddy loan servicing, illegal robo-signing and faulty foreclosure
processing. The settlement was for $25 billion. Collectively, the five banks had been servicing
nearly sixty percent of the nation’s mortgages. NATIONAL ASSOCIATION OF ATTORNEYS GENERAL,
NAAG NEWS,STATE ATTORNEYS GENERAL,FEDS REACH $25 BILLION SETTLEMENT WITH FIVE LARGEST
MORTGAGE SERVICERS ON FORECLOSURE WRONGS,available at http://naag.org/state-attorneys
-general-feds-reach-25-billion-settlement-with-five-largest-mortgage-servicers-on-foreclosure
-wrongs.php (last visited Feb. 28, 2014).
3Phillip Swagel, The Cost of the Financial Crisis: The Impact of the 2008 Economic Collapse,THEPEW
CHARITABLE TRUSTS (Apr. 28, 2010), http://www.pewtrusts.org/uploadedFiles/wwwpew
trustsorg/Reports/Economic_Mobility/Cost-of-the-Crisis-final.pdf?n=6727.
U.S. households lost on average nearly $5,800 in income due to reduced economic
growth during the acute stage of the financial crisis from September 2008 through the
end of 2009. Costs to the federal government due to its interventions to mitigate
the financial crisis amounted to $2,050, on average, for each U.S. household. Also, the
combined peak loss from declining stock and home values totaled nearly $100,000, on
average per U.S. household, during the July 2008 to March 2009 period.
The Impact of the September 2008 Economic Collapse,T
HE PEW CHARITABLE TRUSTS (Apr. 28, 2010),
http://www.pewtrusts.org/our_work_report_detail.aspx?id=58695(last visited Feb. 28, 2014).
4Catherine Rampell, Comparing the Job Losses in Financial Crises, N.Y. TIMES (Sept. 25, 2012),
http://economix.blogs.nytimes.com/2012/09/25/comparing-the-job-losses-in-financial-crises/
?_php=true&_type=blogs&_r=0. Tracking depressions and recessions since 1977 and com-
paring job losses in the Great Depression of the 1930s, Rampell notes that job losses from
financial crises are always high, as was true with the recession that started with the 2008
financial meltdown. Id. See also Jed Rakoff, The Financial Crisis: Why Have Not High-Level
Executives Been Prosecuted?, N.Y. REV.OF BOOKS (Jan. 9, 2014), http://www.nybooks.com/
articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/.
Rakoff writes, “Five years have passed since the onset of what is sometimes called the Great
Recession. While the economy has slowly improved, there are still millions of Americans
leading lives of quiet desperation: without jobs, without resources, without hope.” Id.
5There have been at least two exceptions to the “no significant prosecutions” claim. Kareem
Serageldin, former managing director of Credit Suisse Group AG, pled guilty to a conspiracy
charge in April 2013 and was sentenced to two and a half years in prison for inflating the
value of mortgage bonds as the housing market collapsed. Rachel Abrams & Peter Lattman,
Ex-Credit Suisse Executive Sentenced in Mortgage Bond Case, N.Y. TIMES (Nov. 22, 2013), http://
dealbook.nytimes.com/2013/11/22/ex-credit-suisse-executive-sentenced-in-mortgage-case/.
Judge Alvin K. Hellerstein of the U.S. federal district court in Manhattan gave Serageldin less
than the five-year recommended sentence under the Federal Sentencing Guidelines, because
“[h]e was in a place where there was a climate for him to do what he did.” Id.
The other exception is the prosecution of Lorraine Brown, CEO of LPS, a subsidiary of
DocX, hired by Wall Street banks to get the paperwork done to foreclose on many of the
subprime mortgages that had gone into default from 2008 to 2010. Press Release, U.S. Dep’t
516 Vol. 51 / American Business Law Journal
consequences of the financial sector’s risk-taking have been so severe,
many wonder why there have been so few criminal prosecutions.6In
October 2011, President Obama had one answer when he noted that in the
“subprime lending fiasco,” “a lot of that stuff wasn’t necessarily illegal, it
was just immoral or inappropriate or reckless.”7By contrast, former
Federal Reserve Chairman Alan Greenspan stated in 2010,
[t]here are two fundamental reforms we need—to get adequate capital and,
two, to get far higher levels of enforcements of statutes of fraud statutes,
existing ones. I’m not even talking about new ones. Things were being done
which were certainly illegal and fairly criminal in certain cases. Fraud, fraud is
of Justice, Former Executive at Florida-Based Lender Processing Services Inc. Sentenced to
Five Years in Prison for Role in Mortgage-Related Document Fraud Scheme; Over 1 Million
Documents Prepared and Filed with Forged and FalseSignatures, Fraudulent Notarizations
(June 25, 2013), available at http://www.justice.gov/opa/pr/2013/June/13-crm-711.html.
Brown pleaded guilty to committing mail and wire fraud and was sentenced to serve five
years in prison for “her participation in a six-year scheme to prepare and file more than 1
million fraudulently signed and notarized mortgage-related documents with property
recorders’ offices throughout the United States.” Id.
These prosecutions, however, leave the leading figures from Wall Street and the major
subprime lenders untouched by criminal sanctions. Rakoff, supra note 4. Rakoff compares the
current lack of prosecutions to the government’s record in the Savings and Loan Crisis of the
1980s and the widespread accounting frauds of the 1990s. He writes, “In striking contrast
with these past prosecutions, not a single high-level executive has been successfully pros-
ecuted in connection with the recent financial crisis, and given the fact that most of the
relevant criminal provisions are governed by a five-year statute of limitations, it appears likely
that none will be.” Id.
6See Matt Taibbi, Why Isn’t Wall Street in Jail?, ROLLING STONE (Feb. 16, 2011, 9:00 AM),
http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216 (quoting an
unnamed congressional aide); see also Gretchen Morgenson & Louise Story, In Financial Crisis,
No Prosecution of Top Figures, N.Y. TIMES, Apr. 14, 2011, at A1. Charles Ferguson, a documen-
tary filmmaker whose movie Inside Job examined the backroom collegiality of bankers,
regulators, and academics connected to the 2008 financial collapse, accepted his Oscar for
Best Documentary Film in February 2011 with the comment, “Forgive me, I must start by
pointing out that three years after our horrific financial crisis caused by financial fraud,
not a single financial executive has gone to jail, and that is wrong.” Alexandra Cheney, ‘Inside
Job’ Oscar-winner Says More FinancialExecutives Should Be Jailed, WSJ BLOGS (Mar. 1, 2011, 7:00
AM), http://blogs.wsj.com/speakeasy/2011/03/01/inside-job-oscar-winner-says-more-financial-
executives-should-be-jailed (recounting an interview with Ferguson and quoting his Oscar
remarks).
7Jake Tapper,Wall Street Corruption, Solyndra, and Fast & Furious: Today’s Q’s for O—10/6/2011,
ABC NEWS BLOGS (Oct. 6, 2011, 12:40 PM), http://abcnews.go.com/blogs/politics/2011/10/wall-
street-corruption-solyndra-and-fast-furious-todays-qs-for-o-1062011 (providing a transcript
of an interview by Jake Tapper with President Barack Obama).
2014 / Crime and Punishment 517

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT