Federal judge asks: Why haven't any top executives been prosecuted for financial crisis?

As the five-year statute of limitations nears for crimes that led to the Great Recession, a federal judge wants to know why no high-level executives have been prosecuted.

U.S. District Court Judge Jed Rakoff said he could not be sure whether intentional fraud was committed in any particular case, but he pointed out that government agencies had found significant evidence to suggest wrongdoing in their own investigations.

“The stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary,” Rakoff writes in the New York Review of Books. “For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word ‘fraud’ no fewer than 157 times in describing what led to the crisis, concluding that there was a ‘systemic breakdown,’ not just in accountability, but also in ethical behavior.”

He dismissed claims by Department of Justice officials that proving intent would be too difficult, pointing out that federal prosecutors routinely did so by establishing that defendants acted in willful or conscious disregard of the law.

“A top-level banker, one might argue, confronted with growing evidence from his own and other banks that mortgage fraud was increasing, might have inquired why his bank’s mortgage-based securities continued to receive AAA ratings,” Rakoff writes. “And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?”

Rakoff expressed outrage that Justice Department officials, including Attorney General Eric Holder, had shown a reluctance to prosecute top-ranking financial executives out of concern for the economy.

“To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse -- sometimes labeled the ‘too big to jail’ excuse -- is disturbing, frankly, in what it says about the department’s apparent disregard for equality under the law,” he writes.

Rakoff concedes that there aren’t enough prosecutors to pursue lengthy and complicated investigations into alleged fraud by high-level financial executives, but he also pointed out the government encouraged risky investment through deregulation and other policies.

“The government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a CEO who might, with some justice, claim that he was only doing what he fairly believed the government wanted him to do,” he writes.

The judge expressed irritation at the shift in recent decades from prosecuting individuals, who often go to trial, to corporations, which usually settle out of court.

“Companies do not commit crimes; only their agents do,” Rakoff writes. “And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent. Moreover, under the law of most U.S. jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?”

He said investigations of top-level executives work the same as a mobster or gang kingpin – from the bottom up – but investigations of corporations are usually conducted by former U.S. attorneys hired by the targeted companies themselves, and the results are then handed over to prosecutors to help broker a settlement.

“I suggest that this is not the best way to proceed,” Rakoff writes. “Although it is supposedly justified because it prevents future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.”

Besides, he said, prosecuting corporations is both technically and morally suspect.

“Under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager?” Rakoff asks.