In the second year of a massive market meltdown that cost the world an estimated $50 trillion in 2008, there's something sorely missing -- besides all the money.
When do the bad guys start going to prison?
Investors hoping for a cleanup on Wall Street are still waiting for the Ken Lays, the Dennis Kozlowskis or at least the Martha Stewarts of the mortgage collapse to emerge.
Otherwise, the takeaway might be that nothing illegal happened and that economy-rocking losses caused by risky, overleveraged loans are just the way things work -- and then investors won't trust the market again for years to come.
Hang on, say former prosecutors who have connections inside the branches of law enforcement handling these kinds of cases. The prosecutions are on the way.
Lawyers are buzzing
"The financial-fraud unit of the U.S. Attorney's Office in Manhattan is humming," says Steven Feldman, a former assistant U.S. attorney in the Eastern District of New York, the Department of Justice office that typically develops cases against the Gordon Gekko types. "From everything I can tell in talking to my former colleagues, they are working very hard," says Feldman, now a criminal-defense attorney with New York law firm Herrick, Feinstein."I think you will see federal prosecutors kicking into high gear soon," agrees Mark Ressler, a former federal prosecutor who is now a criminal-defense attorney with Kasowitz Benson Torres & Friedman in New York.
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Who will take the hit? These attorneys don't say and probably don't know. But FBI Director Robert Mueller recently told Congress that the bureau had launched more than two dozen investigations into Wall Street companies such as Bear Stearns, Credit Suisse Group (CS, news, msgs) and Lehman Bros., as well as mortgage companies Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) and insurer American International Group (AIG, news, msgs).
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They're looking into:
- The details of Ponzi schemes run by scam artists like Bernard Madoff.
- Hedge fund managers who allegedly talked up their funds to avert panic withdrawals while privately acknowledging things looked ugly.
- Whether top executives at some of the key players in the financial mess made promises to customers or shareholders that they knew were impossible to keep.
So what's taking so long?
The FBI only recently shifted resources away from counterterrorism to investigations of white-collar crime, says former Assistant U.S. Attorney Karl Buch, now a criminal-defense attorney with New York law firm Chadbourne & Parke.
Such cases are complex, so they take a lot of time to build, Buch says. Prosecutors must sift through tons of paperwork and e-mail to find smoking guns. They also have to interview a lot of witnesses, hoping to pressure underlings to rat out their bosses.
"They could be working on 100 cases, but they are not going to tell you about any of those until they are ready to make arrests," Feldman says.
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Another problem is that the Securities and Exchange Commission and banking regulators had eased up on chasing financial bad guys over the past several years, says former SEC special counsel Michael Malloy, now a professor at University of the Pacific's McGeorge School of Law in Sacramento, Calif. "The normal pipelines for criminal referrals have dried up," he says.
That said, a scan of media reports and my interviews with white-collar-crime defense attorneys and others reveal where prosecutors are -- or should be -- aiming their investigations. Here's a look.
The Ponzi schemers
The case against Madoff, who ripped off investors for tens of billions by shifting money around to produce paper returns, may have been the easiest to build, if only because he appears to have cooperated. He pleaded guilty Thursday and faces up to 150 years in prison.But while Madoff has been compared to guys like Enron's Lay and Tyco's Kozlowski, his operation sits apart from the banking meltdown.
Others in the Ponzi scheme crowd face only civil charges thus far. But that could change. Civil cases usually come first because they are easier to build; criminal cases require a higher burden of proof.
On the list right after Madoff is R. Allen Stanford, accused by the SEC of suckering investors for $8 billion. Instead of putting investors' money in the high-yield certificates of deposit he'd promised, Stanford allegedly used the funds to buy a Caribbean island, a $10 million castle (with a moat) in Miami and a fleet of private jets, along with supporting three or four "outside wives" in addition to his real one.
Continued: The Bear Stearns pair
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