You remember Fabrice Tourre, the only human being sued by the toothless SEC in the Goldman Sachs ABACUS case. Tourre, a mid-level executive, didn’t settle, and is currently scheduled for trial in July, 2013. Dealbook’s white collar crime writer, Peter Henning, recently explained the current legal situation. The trial court dismissed parts of the complaint on the ground that the transactions didn’t occur in the United States, but somehow in the Cayman Islands.
Two of the ABACUS investors were foreign, so the district court followed an earlier Supreme Court decision and held that federal securities laws don’t apply. Henning reports that in a recent case, an appeals court held that it is enough if the transaction closed in the United States. ABACUS closed in New York, and therefore, says the kittenish SEC, we should be able to go after this guy we picked out of the entire Goldman Sachs team.
The dismissal is a perfect example of what’s wrong with courts: ignoring substance and going directly to the paperwork. In this case, the paperwork shows that the securities were sold by a foreign company to a foreign company. The court couldn’t bring itself to think about the purpose of the securities laws and look at the substance of the deal: Goldman Sachs created a shell entity in the Cayman Islands and used it to cheat people. The judge says that the two alien investors should sue in the Cayman Islands, and use their majestic courts to enforce their claims of fraud under whatever laws there are in that tax shelter haven.
This magical thinking pervades the entire structure of the United States judiciary under the sway of the political hacks on the Supreme Court. Look at the words, says Antonin Scalia, look at the words and weep, for you will never get fair treatment if we can help it. Knowing this, the amoral crowd of lawyers and other semi-professional helpers that populate Wall Street figure they can evade fraud laws by setting up shell entities off shore.
Look how easy it would be, even under the later court opinion. Underwriter finds a new mark. They get together in New York for a discussion of the deal. Underwriter explains that this is how people like Mitt Romney does things. They agree on terms. Underwriter sets up a shell corporation in the Cayman Islands for its side, and helps the mark create a limited partnership for the investment in the Cayman Islands, conveniently located in the same cabinet drawer. Investor funds the partnership. The parties take a vacation to the Caymans, and go out on the Underwriter’s yacht to sign up. The entire deal is offshore. Presto, no jurisdiction. Antonin Scalia would be so proud.
The parasites who plan these deals know that courts just love those obfuscations, and hate to impose liability on such nice people as those investment bankers. Those judges come from the same social and business circles as the lawyers and bankers, and understand the thinking that motivates those machinations. Judges don’t give equivalent consideration to the interests protected by the securities laws. This disparate treatment is widely known. How else do you explain the simple fact that no top level executives on Wall Street have been indicted or even sued? Tourre may or may not be responsible for the ABACUS deal, but there were a number of similar deals. That means that higher ranking people at Goldman Sachs and other firms approved the general format of the deals, and the disclosures, and the way the matters were handled. No civil cases. No indictments.
People don’t like to see underlings singled out for prosecution and Tourre’s lawyers are going to make that case to the civil jury. It worked for Brian Stoker. It may work again.
The only thing that really works is criminal prosecution, as Rowan Bosworth-Davies reports at Naked Capitalism. His studies show that civil cases do not impact either the business or social relationships of cheats and frauds. A criminal conviction will end both business and social relationships. I’ll add a caveat: unless the courts don’t strip the malefactor of wealth.
His work adds to the conclusions of prior studies showing the favorable treatment of business fraudsters. Bosworth-Davies quotes at length from pioneer work of Edwin Sutherland in the late 1940s on the disrespect of the business community for law enforcement and regulation. Sutherland agrees that social connections are an important contributor to the refusal of courts to enforce the criminal laws against businesspeople.
The political hacks on the Supreme Court and the Federalist Society judges on lower courts agree that the market is the best cure for business crime, continuing a traditional mindset from the early 1900s as Sutherland reports. They enforce this by insuring that the forms and words chosen by the cheat will control the outcomes. Justice is indeed blind: to reality.