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November 11, 2014


My research base for this essay is based upon accounts from Rolling Stone Magazine and Credo Action.

Prosecutors such as the Attorney General of the United States cannot be forced to prosecute ABC bank for financial fraud even if the evidence is clear that a fraud was committed. They have what is known in the trade as “prosecutorial discretion,” i.e., they can decide not to prosecute even though they have clear and convincing evidence that the bankers actively practiced serial fraud upon unsuspecting investors in the mortgage securities market. Prosecutors in such cases can “settle” these otherwise criminal cases calling for time in jail for money, i.e., fines. Time after time in cases of mortgage securities fraud practiced by the big Wall Street banks on the investing public within the last decade, that is precisely what has happened. The government gets money, the fraudulent bankers walk, the defrauded investors receive chump change from the settlement made, and justice is not done. Even the reputations of the bankers remain as clear as new fallen snow thanks to “confidentiality agreements” negotiated along with the monetary “settlement.” The crooks not only walk; their reputations remain unsullied – by confidentiality contract! Charles Manson should have had such a good deal!

I have blogged on this pathetic failure of justice several times before, naming JP Morgan Chase Bank and its CEO, Jamie Dimon, as unindicted beneficiaries of the AG’s exercise of “prosecutorial discretion” in one case after another. This is the same bank that, in addition to its serial mortgage securities fraud practiced on investors in this country, ADMITTED to bribery of Chinese corporate owners in order to gain lucrative banking contracts for its branches in China. This is precisely the sort of crime that is in clear contravention of a federal criminal statute known as “The Foreign Corrupt Practices Act.” E-mails from the bank’s internal communications were unearthed in which the bank’s officers were bragging about how they beat out other banks in this bribery competition. In my opinion, not only should JP Morgan Chase Bank have been criminally indicted, but investigators should have ferreted out who their bribery competitors were with a view toward their indictment as well. So what happened? Nothing of substance. The bank coughed up some chump change, the AG “settled” the case, and with (I presume) confidentiality contracts in place so that they can continue to teach Sunday School, the bribers walked. Justice was once again denied.

At least JP Morgan Chase learned one thing from the Chinese experience, and it is this: Never use e-mail in internal communications about sensitive matters which could provide a paper record within reach of subpoena. How do we know that? We know because of an ongoing investigation of JP Morgan Chase Bank in a case the bank thought was “settled.” A new set of investigators appears to have restarted the investigation of JP Morgan Chase after talking to Fleischmann, and who is Fleischmann? She is a Cornell University-trained securities lawyer who worked for the bank but turned whistleblower since she couldn’t stand the stench of fraud any longer. She is Alayne Fleischmann, an ex-employee of JP Morgan Chase Bank, who told government lawyers and regulators her story. She was in a position to know about the value of the mortgages undergirding the securities the bank was selling since she was a diligence manager whose job it was to evaluate mortgage securities for her employer, JP Morgan Chase Bank.

She, for instance, found that 40% of one pool of mortgages were based on overstated incomes or had already defaulted and made it known to her superiors that the bank could not sell a security based on those mortgages without telling prospective customers of its content because otherwise it would be fraud (all of which she detailed in a written memo to her superiors, which she thought would end the practice). The bank’s response? Her superiors pressured their diligence workers to revise the number downward to 10%, which gave the resulting securities based on such mortgages a misleading credit rating. Thus not only were investors defrauded; so were the credit agencies, who relied on the diligence of the bank in evaluating the mortgage securities the bank was selling to unwitting investors. The securities market, of course, crashed as the mortgage market (unsurprisingly) went south, and defrauded investors wanted regulators to make them whole. So what happened?

Fleischmann says that the AG’s Sacramento Office was about to indict the bank based on her testimony, but that didn’t happen. Why not? The press conference scheduled to announce the prosecution was cancelled after the CEO of JP Morgan Chase, Jamie Dimon (per press reports at the time) called Tony West, the third-ranking official of the Justice Department, and offered to settle out of court. The case settled. The bank paid $13 billion in fines and all of its people walked. Your AG and mine bragged about the big settlement as a major victory, when really it was chump change compared to the income the bank realized from the sale of such tainted if not worthless securities, and defrauded investors were not made whole, and furthermore, it was not $13 billion that was paid, it amounted to less than $9 billion. Worst of all, the bank was able to write off the penalty on its taxes, which means that you and I helped the bank pay its bill for fraud since we have to make up for what the bank did not pay into our treasury!.

I wrote a blog on this problem of settling these fraud cases for money months ago and asked who was regulating our regulators? It appears that I can now ask who is keeping an eye on our prosecutors. I think they have taken this prosecutorial discretion a bridge too far. I am especially incensed that JP Morgan Bank could plead guilty to a felony (Chinese bribery), pay a fine and walk. I pointed out then that if you or I rob a bank, we don’t walk. We do hard time.

I asked why bankers are privileged defendants and why there is no equal protection of the laws, and why punishment for guilt has turned out to be a matter of who you are rather than what you did. I here renew these complaints. I have heard the AGs both Democrat and Republican talk about the damage the banking industry will suffer if board members of banks go to jail. I am not impressed. What damage has the banking industry brought upon itself with its almost daily litany of new revelations of lawlessness? These AGs are 50 years behind the times. Big banks today have no “reputation” to protect.

In sum, we know from wholesale foreclosures over the past several years in case after case that mortgage originators and big banks conspired to fake documentation and then sell off bad loans based on phony evaluation of the underlying collateral, and Fleischmann’s testimony can prove it in at least one of JP Morgan Chase’s markets. The AG should criminally indict JP Morgan Chase Bank and its officers and executives who initiated or condoned such fraud, and even if the government should lose the case, it would still have the beneficial effect of reducing banker fraud in the market as hard time becomes possible and “confidentiality contracts” are passé. Let’s save our banks from the bankers.   GERALD   E


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