Business writers have begun making excuses for the failure to prosecute anyone from the finance business for the crimes that led to the Great Crash. Here are a couple of examples, link, link. One excuse is that it is difficult to prove criminal mens rea, that the defendant intended to defraud.

Nonsense. The courts of the Southern District of New York have jurisdiction over many of these cases.* Here is a jury instruction on intent to defraud that was accepted by the Second Circuit Court of Appeals in US v. Kaiser, 609 F.3d 556 (2d Cir. 2010):

Judge Griesa instructed the jury that the required mental state for securities fraud was that Kaiser “acted knowingly and with intent to deceive,” and elaborated as follows:

In order to convict the defendant, you must find that he knew that false statements were being made, false information was being incorporated into the earnings results and the accounts receivable results, that he knew that the promotional allowance figures were being inflated, and that he did this with intent to cause a deception, a falsification. Now this means that he cannot be convicted of mistake, he cannot be convicted if he in good faith thought that these results were correct, even though they turned out not to be correct. And the government must prove the contrary of the idea of mistake or good faith belief. The government must prove, as set forth here, that he knew of the false and fraudulent inflation of the promotional allowance figures, he knew of the false and fraudulent inflation of earnings as a result and accounts receivable as a result and that he did that with intent to create a deception.

This instruction was used in a case where the defendant provided false information for inclusion in financial statements. It can easily be modified to cover a case where the defendant made true statements, but omitted to make other statements necessary to make the statements made not misleading, in violation of SEC Rule 10b-5.

One easy example comes from the Final Report of the Financial Crisis Inquiry Commission, beginning at .pdf page 193, describing the process of securitization of real estate mortgage-backed loans. The Originator lends money to home buyers, and sells the loans into a trust which issues bonds in an underwriting. SEC Regulation AB requires that the parties disclose the underwriting standards followed by the Originator:

(3) A description of the solicitation, credit-granting or underwriting criteria used to originate or purchase the pool assets, including, to the extent known, any changes in such criteria and the extent to which such policies and criteria are or could be overridden.

17 CFR § 229.1111(a)(3). Following this rule, the offering materials must disclose the underwriting standards and all of the exceptions.

The Final Report says that the underwriters hired due diligence firms to examine a selection of the mortgages for compliance with the underwriting standards.** That sample might have been as low as 2-3%. One of the due diligence firms provided summary statistics for its reviews. In the fourth quarter of 2006, the firm found that 74% of the loans it reviewed met the stated underwriting standards or the stated exceptions. Another 10% were accepted despite the failure to meet guidelines, and 16% were rejected. The underwriter presumably bought the rest of the loans. That means that about 25% of the loans purchased did not meet the underwriting standards.

This information is crucial to a purchaser whose only source of repayment is the mortgage loans. The offering materials generally say something like: the Originator generally applies the following mortgage underwriting guidelines, with some exceptions; or, we might waive the guidelines on a case-by-case basis if there are grounds for and exception. That is not disclosure of the probability that 25% of the loans don’t meet stated underwriting criteria.

So, the instruction to the jury would be tweaked to say something like:

In order to convict the defendant, you must find that he knew that the offering materials stated that the loans in the portfolio generally met the underwriting guidelines of the Originator, that there was a report showing that 25% of the loans in the portfolio didn’t meet the underwriting guidelines, and that without that information, the statements in the offering materials were misleading, and that he did this with intent to cause a deception, a falsification.

Is there a jury of 12 people who wouldn’t convict?

For more on this, Yves Smith writes here.
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*We can’t expect anything from this bunch, they’re too busy with insider trading cases involving millions to focus on the billions of losses in RMBSs.

**See also this.