DDay reports the Financial Crisis Inquiry Commission made criminal referrals as they thought warranted, but it refused to comment on any specific referrals. He updates that story here. The FCIC Final Report (large .pdf) gives us two categories of crimes that it might have reported.
The number of suspicious activity reports—reports of possible financial crimes filed by depository banks and their affiliates—related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009.
P. 22 (references are to the .pdf page, not the page number in the report). Suspicious Activity Reports are required by 31 USC § 5318(g) and 12 CFR § 22.11. When a covered financial institution, like a bank or brokerage firm, detects a known or suspected federal criminal violation involving the bank as an intended victim or in a transaction conducted through the institution, it has to file an SAR on this form (.pdf), or electronically. If the suspect is identifiable, the floor for reports is $5000, and if the suspect cannot be identified, the floor is $25,000. This would include mortgage fraud. Reports are filed with the Financial Crimes Enforcement Network, FinCEN, a bureau in the Treasury Department.
The FCIC report says that Countrywide filed SARs in 13% of the cases where there was an internal referral of potentially fraudulent activity. P. 190. A Wells Fargo fraud analyst testified that reports were not filed with FinCEN in “hundreds and hundreds and hundreds of fraud cases”. P. 190. Even so, the number of SARs for mortgage fraud rose from 23,998 in 2005 to 37,547 to 65,004 to 67,507 in subsequent years. One reason there were no prosecutions is that the FBI reduced the number of agents working the SARs. There were prosecutions of mortgage brokers, but no one seemed to notice that loans were funded even in the face of evidence of fraud, as the Wells Fargo fraud analyst testified.
The failure to file a SAR as required is a crime. 31 USC § 5322.
Second, the FCIC Report says this:
… the report documents that major financial institutions ineffectively sampled loans they were purchasing to package and sell to investors. They knew a significant percentage of the sampled loans did not meet their own underwriting standards or those of the originators. Nonetheless, they sold those securities to investors. The Commission’s review of many prospectuses provided to investors found that this critical information was not disclosed.
That sounds like securities fraud to me, and DDay’s update seems to confirm that possibility.
The FCIC intends to put a treasure trove of documents and testimony on line for review by any prosecutor who might be interested. That kind of transparency is fine for government, but the US Chamber of Commerce is apoplectic at the prospect that businesses should face that kind of disclosure.
Lisa Rickard, president of the U.S. Chamber’s Institute for Legal Reform, criticized that plan. “The commission’s final report and its pledge to post raw materials — apparently including information obtained from companies as well as other government agencies — is an astounding abuse of process that would effectively create a government-sanctioned Wikileaks,” Rickard said in a formal statement today.
I wonder if she’ll blow a gasket if WikiLeaks really has documents on a major US financial institution. For what it’s worth , Ms. Rickard, WikiLeaks is a lot less scary if you didn’t commit a crime.
Even better for Ms. Ricard’s mental well-being, Lambert at Correntewire has constructed a partial index of the documents put online by the FCIC, located here. He says that the data is not searchable:
It’s apparent that the Commission allowed the banksters to print out their documents and emails, then scan the printouts, and then PDF the scanned images.
Digging information out of this pile will take an unnecessary amount of time and work.
Peter Henning thinks that the FCIC final report will make criminal prosecution difficult. Henning, who writes White Collar Watch for the New York Times DealBook blog, says
The commission’s various conclusions provide a plausible defense for almost any executive who might be accused of securities fraud or misleading investors: it was all the fault of uncontrollable market forces and regulatory laxity.
That’s the business Twinkie defense: the market made me do it and the cops didn’t stop me. If you are selling securities, you have to meet a high standard of truthfulness: you can’t just leave out the ugly things about your offering to concentrate on its wonderfulness. The FCIC claims that is what happened.
Maybe Henning and Rikard can commiserate over soothing cocktails at the Whiners Club.