Preet Bharara

In this week’s New Yorker, George Packer gives Preet Bharara, the US Attorney for the Southern District of New York, an opportunity to vent about the ill-treatment Bharara receives (currently only available by subscription). The article is primarily a detailed description of the trial of Raj Rajahratnam on insider trading charges. In an interview, Packer tells Bharara that a lot of people think insider trading cases are a side show to the massive fraud in the sale of real estate mortgage-backed securities.

When I asked him about it, his even manner gave way to pent-up annoyance at “ideologues”.” He said, “ It bothers me a little bit when people suggest, without knowing anything, that we’re not even bothering to look. We have grand-jury secrecy – I don’t go out and announce my investigations. But I got to tell you something: where there’s smoke, we take a look. Do you have any idea how much people want to bring the case if it exists? So what could be the reason we haven’t? Sometimes people say, “It’s because you’re beholden to these guys,” which doesn’t make any sense. Do we look like we’re afraid to prosecute anyone?”

The whining continues for several column inches. Bharara tells Packer that the big issue is that he can’t prove intent, because the blame can be spread out across a number of people, lawyers, accountants, and employees of the underwriter, the originators and others. Packer asked Bharara specifically about the documents from Clayton Holdings showing that many mortgages did not meet underwriting guidelines.

While he refused to comment specifically on the findings of any report, he answered generally that the damning evidence of an investigation can look very different upon closer inspection and when it comes up against the counter-evidence produced by a skilled defense in a criminal trial.

Bharara can’t be serious about any of this. First, the people calling for prosecutions aren’t doing so for any ideological reason. Everyone knows that there was pervasive fraud on Wall Street and in the mortgage origination process. Even the DOJ acknowledges this fact. It has filed a suit against Deutsche Bank alleging it engaged in pervasive fraud in origination, and then obtained guarantees from the FHA fraudulently.

Bharara seems to think he has to be able to prove intent to defraud before he can prosecute That will be news to the National Credit Union Administration and the other plaintiffs who have sued banks for violating The Securities Act of 1933 by failing to disclose the fact that they did not comply with the underwriting guidelines set out in their offering materials. The NCUA specifically denies that its suit is grounded in fraud. It claims that the offering materials were deficient, that the defendants knew they were not making proper disclosures, and that the statements and misstatements were done on purpose, because no one would have bought the garbage if they had known. That isn’t any different from what Bharara would have to prove in a criminal case. Who wouldn’t convict, no matter how great the defense attorney is?

Bharara says us ideologues don’t know whether he is investigating. We would know if he were investigating any public entity, because they would have to disclose that fact in their filings under the 1934 Act. I am not aware of any disclosure of any grand jury proceedings arising from fraud in the sale of RMBSs, and would be thrilled to be corrected. It’s true we don’t know if he is investigating any individuals, but it would be surprising if he were and there were no leaks.

Third, Bharara claims that responsibility is diffused across so many people that he cannot prosecute. That is laughable. The NCUA alleges that JPMorgan knew they were not following the underwriting guidelines they describe in their offering materials, and did not disclose that fact. I feel quite certain that no lawyer told them that would be legal. The only question is which employees knew. A good starting place is the people who signed off on the deal. I bet they would be happy to tell their story and name the higher-ups who instructed them to proceed.

Packer reports that Raymond Lohier was the head of Bharara’s securities fraud unit. Lohier now sits on the Second Circuit Court of Appeals. In his nomination hearings, Lohier testified that his top priority was cyber-security. Packer concludes this section of the article by saying

Perhaps indictments couldn’t be brought against top bank executives, but Bharara could take down Rajaratnam,, and he went out of his way to give the case a high profile.It was his best chance to deter the pervasive corruption of Wall Street.

As far as I am concerned, Bharara refuses to investigate and prosecute because deep down he believes that fraud on credit unions, foreign banks, and US pension plans is not a crime, that it is perfectly all right.