New York, March 4, 2013—Fraudulent accounting is endemic in some of the nation’s “most reputable” banking institutions and regulators are loath to recognize the problem, fraud litigation expert William Black said at a recent Columbia Law School panel discussion on the topic.
“People who wear nice suits and sit in the CEO’s office can be… criminals,” said Black, an associate professor at the University of Missouri-Kansas City and former head of the Institute for Fraud Prevention. Black cited a February Columbia Business School study
that found lender fraud in 10 percent of mortgage loan sales.
Black discussed the issue with former regulators, economists, and fraud experts at a seminar organized by the Columbia Law School Democrats and the Columbia Business Law Association. The seminar, titled “Rent-Seeking, Instability and Fraud: Challenges for Financial Reform,” was the seventh in the “Modern Money and Public Purpose”
series organized by Rohan Grey ’14. The series aims to present new perspectives and progressive policy proposals on a range of contemporary issues facing the U.S. and global macroeconomy.
The Feb. 26th discussion centered on control frauds, or frauds perpetuated by a lender, but the talk shifted quickly to why regulators aren’t prosecuting more of such cases and lessons from the response to the savings and loan crisis of the 1980s and 90s.
Former head of the Securities and Exchange Commission Harvey J. Goldschmid
'65, Dwight Professor of Law at Columbia Law School, moderated the panel which also included economist and private trader Michael Norman and forensic accounting expert and former chief SEC accountant Lynn E. Turner.
As deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement, Black was a central figure in the more than 1,000 felony convictions of financial executives reached after the S&L crisis. The group had a 90 percent conviction rate. But, he emphasized, it also brought 3,000 enforcement actions and roughly 800 civil suits.
Black said it is up to other regulatory agencies to bring possible criminal referrals to the attention of Justice Department attorneys, which may then launch an investigation and, down the road, file charges.
Turner, managing director of litigation consulting firm LitiNomics and an expert on financial reporting requirements, says litigation is only one piece of what needs to be accomplished. He said the Dodd Frank Act needs to be fully implemented and that the 1933 Glass-Steagall Act, which separated commercial and investment banking but was repealed in 1999, should be reinstituted. But even if this was accomplished, the brazen behavior of executives and directors, which causes excessive risk and fraud, would continue, he said.
He recalled talking with a friend who was a director on the board of AIG in August of 2008, just months before the company would disclose $60 billion in losses due to writedowns on a variety of assets. At the time, Turner had read AIGs disclosures and studies that projected big losses, but in the company’s earnings statement, the directors said they would not “have a single dollar of loss.”
“And you know what? They didn’t,” Turner said. “They had over a hundred billion dollars of loss.”
The panelists also took questions from the audience.
“You can’t just think about scalps,” said Goldschmid, in response to one question. “Too big to manage and too big to regulate are things we have to focus on and figure out in the coming years. But you’ve got to ask, is there a real viability [in bringing a big case].”