Legal
Jail Time for Wall St. Crime? Senate Considers It
With the Goldman Sachs securities fraud case in the background, a Senate hearing considered Tuesday whether tougher criminal and civil laws were needed to discourage wrongdoing on Wall Street and whether the prospect of jail time was an effective deterrent.
At issue is whether Congress should impose some sort of fiduciary duty of care on broker-dealers and investment banks, forcing them to act in their clients’ best interest at all times. Currently, broker-dealers owe no such duty of care (except under special circumstances and in the state of California).
“The people who I have talked to have said ‘this is wrong I know it’s wrong — you should go to jail if you did what Goldman Sachs did,’” Senator Ted Kaufman, Democrat of Delaware, said at the Senate Judiciary subcommittee hearing. “But they can’t go to jail now because it’s not against the law.”
While the Justice Department is reported to be looking into the Goldman case, only the Securities and Exchange Commission has brought charges so far in its civil fraud complaint, which would not lead to criminal penalties including jail time. At worst, Goldman and some of its traders would face fines, which would most likely be a small fraction of the firm’s overall earnings.
Senator Arlen Specter of Pennsylvania, the Democratic chairman of the subcommittee on crime and drugs, wants to beef up the current financial regulatory bill to make sure that broker-dealers side with their clients at all times as matter of law and not because it is considered good business practice.
“A fundamental hole exists in the financial reform proposals now before Congress that this bill fills,” John C. Coffee Jr., a securities professor at Columbia Law School, said at the hearing, referring to Mr. Specter’s proposed legislation. “Although no statute can eliminate all conflicts of interest, the proposed statute — with some modest proposed revisions — would compel investment banks to address them more carefully and cautiously.”
Nevertheless, laws are only as good as their enforcement and interpretation. Andrew Weissmann, the former director of the Enron Task Force, which helped investigate and prosecute wrongdoing at the company, leading to the conviction and jailing of its top executives, argued that more rules could be problematic when it came to regulating fiduciary duty. He was concerned that there could be some confusion as to what constitutes a breach of fiduciary duty and that the term is itself “exceedingly ill-defined.”
“Better to regulate the conduct at issue directly if there is a perceived problem than to use the criminal law to impose a vague stricture that would leave the government with unwarranted discretion and the public without the certainty of clear rules,” Mr. Weissman said at the hearing.
Mr. Weissman noted that civil regulation was in many ways sufficient to discourage wrongdoing, noting that regulatory agencies currently have at their disposal numerous serious civil sanctions, like the barring of brokers and securities firms from the industry, a move that he believes could be far more painful than criminal indictments. What is of concern is how the regulators actually enforce the current laws.
“Putting yet another law on the books might sound good to the public in that Congress is interested in making sure something happens, but it won’t assure that someone actually implements it,” Mr. Weissman said. “So Goldman, assuming there was wrongdoing there, could happen again without the S.E.C. and the Department of Justice being vigilant about oversight with the current tools that they have.”
Getting the regulatory agencies to actually enforce the current civil and criminal laws was a major concern for the witnesses at the hearing.
“One of the biggest concerns about this legislation, which we support, it relies on its success on regulators to do, effectively, what they did very poorly in the run up to this crisis,” Barbara Roper, director of investor protection at the Consumer Federation of America, said at the hearing. “So there is a job to be done after this regulation has passed to hold them accountable.”
Ms. Roper believes that there needs to be more done in protecting consumers from financial fraud, noting that civil fines levied against financial firms have been a “drop in the bucket” compared to the profits that they had made from engaging in those activities. The threat of criminal sanctions would be far more powerful in bring about change, she said.
– Cyrus Sanati
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