[Senate Hearing 111-835]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-835

   WALL STREET FRAUD AND FIDUCIARY DUTIES: CAN JAIL TIME SERVE AS AN 
               ADEQUATE DETERRENT FOR WILLFUL VIOLATIONS?

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON CRIME AND DRUGS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 4, 2010

                               __________

                          Serial No. J-111-88

                               __________

         Printed for the use of the Committee on the Judiciary







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                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
ARLEN SPECTER, Pennsylvania          JON KYL, Arizona
CHARLES E. SCHUMER, New York         LINDSEY GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland         TOM COBURN, Oklahoma
SHELDON WHITEHOUSE, Rhode Island
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
AL FRANKEN, Minnesota
            Bruce A. Cohen, Chief Counsel and Staff Director
                  Matt Miner, Republican Chief Counsel
                                 ------                                

                    Subcommittee on Crime and Drugs

                 ARLEN SPECTER, Pennsylvania, Chairman
HERB KOHL, Wisconsin                 LINDSEY GRAHAM, South Carolina
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         JEFF SESSIONS, Alabama
RICHARD J. DURBIN, Illinois          TOM COBURN, Oklahoma
BENJAMIN L. CARDIN, Maryland
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
               Hannibal Kemerer, Democratic Chief Counsel
                  Walt Kuhn, Republican Chief Counsel









                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Kaufman, Hon. Edward E., a U.S. Senator from the State of 
  Delaware.......................................................     2
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   130
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Breuer, Lanny A., Assistant Attorney General, Criminal Division, 
  U.S. Department of Justice, Washington, DC.....................    34
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia 
  Law School, New York, New York.................................    18
Pontell, Henry N., Professor of Criminology, Law & Society, 
  University of California-Irvine, Irvine, California............    20
Ribstein, Larry E., Mildred Van Voorhis Jones Chair, Associate 
  Dean for Research, University of Illinois College of Law, 
  Champaign, Illinois............................................    24
Roper, Barbara, Director of Investor Protection, Consumer 
  Federation of America, Pueblo, Colorado........................     2
Silvers, Damon A., Policy Director and Special Counsel, AFL-CIO, 
  Washington, DC.................................................     6
Verret, J.W., Assistant Professor, George Mason University, 
  Arlington, Virginia............................................    22
Weissmann, Andrew, Partner, Jenner & Block, New York, New York...     4

                       SUBMISSIONS FOR THE RECORD

Black, William K., Associate Professor of Economics and Law, 
  University of Missouri, Kansas City, Missouri, statement.......    49
Blumenthal, Richard, Connecticut Attorney General, Hartford, 
  Connecticut, statement.........................................    80
Breuer, Lanny A., Assistant Attorney General, Criminal Division, 
  U.S. Department of Justice, Washington, DC, statement..........    84
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia 
  Law School, New York, New York, statement......................   106
Cummings, Andre Douglas Pond, Visiting Professor of Law, 
  University of Iowa College of Law and Professor of Law, West 
  Virginia University College of Law, statement..................   118
Galbraith, James K., Lloyd M. Bentsen, Jr., Chair in Government/
  Business Relations, Lyndon B. Johnson School of Public Affairs, 
  The University of Texas at Austin, statement...................   127
Pontell, Henry N., Professor of Criminology, Law & Society, 
  University of California-Irvine, Irvine, California, statement.   132
Ribstein, Larry E., Mildred Van Voorhis Jones Chair, Associate 
  Dean for Research, University of Illinois College of Law, 
  Champaign, Illinois, statement.................................   141
Roper, Barbara, Director of Investor Protection, Consumer 
  Federation of America, Pueblo, Colorado, statement.............   152
Silvers, Damon A., Policy Director and Special Counsel, AFL-CIO, 
  Washington, DC, statement......................................   165
Verret, J.W., Assistant Professor, George Mason University, 
  Arlington, Virginia, statement.................................   172
Weissmann, Andrew, Partner, Jenner & Block, New York, New York, 
  statement......................................................   174

 
   WALL STREET FRAUD AND FIDUCIARY DUTIES: CAN JAIL TIME SERVE AS AN 
               ADEQUATE DETERRENT FOR WILLFUL VIOLATIONS?

                              ----------                              


                          TUESDAY, MAY 4, 2010

                                       U.S. Senate,
                           Subcommittee on Crime and Drugs,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:30 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Arlen 
Specter, Chairman of the Subcommittee, presiding.
    Present: Senators Specter, Whitehouse, Klobuchar, and 
Kaufman.

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Chairman Specter. Good morning, ladies and gentlemen. The 
Judiciary Subcommittee on Criminal Law will now proceed with 
this hearing on the issues of alleged Wall Street fraud and 
what is the appropriate governmental response.
    The issues have come into sharp focus recently with the 
filing of charges by the Securities and Exchange Commission 
against Goldman Sachs. We have seen an economic crisis gripping 
the country for many months, enormous loss of jobs, enormous 
loss of gross national product, problems that are worldwide, 
and serious issues have been raised as to the connection 
between the so-called mortgage bubble and what has happened.
    In the allegations by the Securities and Exchange 
Commission, they have focused on packaging of mortgages, 
subprime mortgages, then bundled and then securitized with the 
stock being sold backed up by those subprime mortgages. The 
allegation has been made that the player who put together the 
mortgages then engaged in short selling. But a question arises 
as to what the duty, if any, is owed by the participants in 
this kind of an arrangement where investments are sold, what 
reliances on the part of the purchasers that there is a sense 
of a solid investment, while at the same time they are being 
sold short, which is a bet that they are going to go down in 
price. Some defenses have been raised, but we are dealing here 
with sophisticated buyers, and we are going to inquire into 
that.
    There are complicated arrangements with a variety of 
definitions and classifications, different duties owed as to 
someone who is defined as a broker, someone who is defined as a 
dealer, someone who is defined as an investment adviser. And 
the final resolution of duties really depend upon how Congress 
sees it. We have the authority to define those relationships 
once we understand them. An extraordinarily complex field.
    I have long believed that it is insufficient to have fines 
for fraud. For corporate fraud, if you have a fine, it is 
calculated as part of doing business. And even where you have 
$1 billion fines, it is a relative matter where you have 
corporations which have $85 billion in net proceeds and very, 
very substantial profits.
    I had experience as a public prosecutor years ago and found 
that criminal convictions worked as an appropriate measure of 
punishment and worked as a deterrent to others. This 
Subcommittee has the responsibility for making recommendations 
to the full Committee and in turn to the full Senate as part of 
a legislative package as to what kind of penalties ought to be 
imposed.
    The Assistant Attorney General of the Criminal Division had 
a conflict this morning, but we will have an afternoon session 
to hear his testimony. We have very distinguished witnesses and 
a great deal of testimony, so I am going to keep this opening 
statement brief.
    I turn now to my distinguished colleague Senator Kaufman.

 STATEMENT OF HON. EDWARD E. KAUFMAN, A U.S. SENATOR FROM THE 
                       STATE OF DELAWARE

    Senator Kaufman. Yes, Mr. Chairman, I want to tell you I 
have rarely seen a hearing that had better timing than this 
one. I mean, talk about being at the right place at the right 
time, and it is not unusual for the Chairman to do that. I 
think he has been one of those people that has constantly 
looked out for how we can change things, how we can make things 
better, and how we can better make sure that the law is 
enforced.
    So thank you for holding the hearing today, and I am 
looking forward to the testimony.
    Chairman Specter. Thank you very much, Senator Kaufman.
    Our first witness is Ms. Barbara Roper, the Director of 
Investment Protection for the Consumer Federation of America, 
an alliance of approximately 300 pro-consumer organizations 
representing approximately 500 individual consumers. Ms. Roper 
has extensive experience conducting studies of abuses in the 
financial planning industry and is an adviser on financial 
reform. Ms. Roper earned her bachelor's degree from Princeton 
University, a frequent witness before Congressional committees.
    We welcome you here, Ms. Roper, and look forward to your 
testimony.

 STATEMENT OF BARBARA ROPER, DIRECTOR OF INVESTOR PROTECTION, 
        CONSUMER FEDERATION OF AMERICA, PUEBLO, COLORADO

    Ms. Roper. Thank you very much. Mr. Chairman, members of 
the Committee, I greatly appreciate the opportunity to testify 
before you today on an issue that I have been working on since 
I first joined CFA in 1986, which is the need to hold brokers 
to a fiduciary duty to act in the best interest of their 
customers.
    At CFA, our primary focus has been on protecting average, 
retail investors. But as last week's hearing in the Permanent 
Subcommittee on Investigations made clear, institutional 
investors are also in need of protection from Wall Street's 
increasingly predatory ways. And it is that aspect of the issue 
I will be talking about today.
    In examining the root causes of the financial crisis, many 
have observed that Wall Street firms no longer exist to 
primarily serve the needs of their customers. Indeed, the 
Goldman Sachs executives who testified last week seemed 
bewildered at times at the notion that anyone would expect them 
to do so. In their world, it appears that everyone takes it for 
granted that customers who cannot look out for their own 
interests are simply sheep waiting to be shorn and that the 
only imperative they recognize is the imperative to maximize 
the firm's profits. While no single approach can offer a 
panacea, extending the fiduciary duty to brokers and to their 
dealings with institutional investors has the potential to 
significantly improve the culture on Wall Street.
    So what would it look like if these Wall Street firms were 
required to act in the best interests of their customers?
    For starters, it would be considerably more difficult to 
sell a product that you had specifically designed in order to 
move risks off your own balance sheet and in order to make a 
bet against it. At the very least, you would have to at least 
disclose the reasons for believing the securities were in the 
best interest of the customer, the nature of your role in that 
transaction and the conflicts of interest, and the risks that 
the client might be exposed to in the deal. Providing 
boilerplate disclosures that you might be either long or short 
the transaction would not suffice. And a firm's proprietary 
trading practices generally would have to be accompanied by 
more robust disclosures and enhanced protections to ensure that 
the transactions truly benefited the customer. In other words, 
fiduciary duty could help to significantly rein in the kinds of 
abuses that were highlighted in last week's hearings.
    Fiduciary duty could play a similarly beneficial role in 
targeting the kind of abusive practices that have been used to 
sell local governments all around the country on derivatives 
and other swaps arrangements. For example, it is hard to see 
how an investment bank could sell a swap designed to help a 
county hedge its interest rate risks that expose that county to 
greater risks--risks that were far greater than the risk that 
they were actually hedging, as has been experienced in 
communities all over the country. And what about those multi-
million-dollar surrender fees that clearly benefit the 
investment bank, but what about the customer? At the very 
least, all of these features would have to be disclosed, 
including such factors as the firm's financial interest in the 
trade and the maximum exposure of the customer would have to 
disclosed under a fiduciary duty. And if the customer would be 
better off in a traditional fixed-rate bond or variable-rate 
bond, then that is what the investment bank would have to 
recommend.
    In considering whether to expand fiduciary duty, Congress 
would need to decide when and to what that duty should apply. 
The legislative proposals currently under consideration offer 
several different approaches. The financial regulatory reform 
bill that passed the House requires the SEC to adopt a 
fiduciary duty for brokers when they provide personalized 
investment advice to retail investors, and it permits the 
agency to extend that fiduciary duty to institutional 
investors. Unfortunately, the Senate bill, which started out 
stronger than the House bill, now does nothing to strengthen 
the fiduciary duty for investment advice. Senator Akaka and 
Senator Menendez have indicated that they plan to offer an 
amendment to fix that problem by substituting the House 
language, which is something that CFA strongly supports.
    On the other hand, the derivatives package in the Senate 
bill does include a fiduciary duty for swaps dealers in their 
dealings with Government entities, pension plans, endowments, 
or retirement plans. Because it covers derivatives, this 
provision fills an important gap necessary to reach the full 
range of Wall Street abuses that contributed to the crisis. 
Furthermore, because derivatives are among the most opaque and 
complex investments, they represent an area where all but the 
most sophisticated institutional investors are at an extreme 
disadvantage in their dealings with Wall Street and most in 
need of the fiduciary protection.
    As with any regulation, imposing a fiduciary duty on 
brokers will be only as effective as the regulatory enforcement 
that backs it up. Regulators, therefore, need to be prepared to 
impose fines that are commensurate with the damage to the 
customers, to hold supervisors accountable for the actions of 
those they supervise, and to pull the licenses of individuals 
who commit serious violations. But given the potential profits 
at stake in this area, as you have noted, fines are rarely 
going to be heavy enough to serve as a true deterrent. Holding 
out the possibility of jail time for violations has the 
potential to provide that deterrent. Moreover, tying criminal 
sanctions to willful violations would set an appropriately high 
bar to ensure that only the most egregious abuses result in 
jail sentences. As such, we believe that expanding the 
fiduciary duty and imposing criminal sanctions for willful 
violations could serve as a truly effective deterrent to the 
kinds of abuses that brought the global economy to the brink of 
collapse.
    Thank you.
    [The prepared statement of Ms. Roper appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Ms. Roper.
    Our next witness is Mr. Andrew Weissmann, from the firm of 
Jenner & Block, co-chair of the White-Collar Defense Unit 
there. Mr. Weissmann served as director of the Enron Task 
Force, was the chief of the Criminal Division of the United 
States Attorney's Office for the Eastern District of New York, 
later special counsel to the Director of the FBI; a graduate of 
Columbia Law School.
    We welcome you here, Mr. Weissmann, and the floor is yours.

  STATEMENT OF ANDREW WEISSMANN, PARTNER, JENNER & BLOCK, NEW 
                         YORK, NEW YORK

    Mr. Weissmann. Thank you, Senator Specter, Senator Kaufman, 
and staff. As the former director of the Enron Task Force, I 
see certain parallels between the response to Enron and the 
issues being addressed today regarding the financial crisis. 
Now, as then, for instance, we have learned that the stability 
of the institutions we regarded as most robust may be illusory. 
But while comparisons are tempting, we have yet to see in the 
current crisis the kind of systemic fraud that occurred at 
Enron.
    I am not convinced at all that all or even the core of the 
conduct that we find most troubling on Wall Street now is 
properly considered criminal.
    Of course, Wall Street is not immune from criminal 
activity, but to the extent there is misconduct, there are 
abundant tools at the Government's disposal to address the 
problem now. Thus, even if jail time for certain Wall Street 
misconduct is the best prescription for the current crisis, 
that goal does not require additional Federal crimes. I will 
make three points.
    First, before we add more criminal statutes to the Federal 
code, we should examine those that are already available to 
prosecute financial crime. Here, an anecdote of my own may be 
illustrative. I was a Federal prosecutor for 15 years, and when 
I switched from prosecuting organized crime bosses in New York 
City to going after financial fraud on Wall Street, I sought 
advice from a senior prosecutor regarding what I thought were 
intricate securities fraud statutes. His advice to me was get 
to know the mail and wire fraud statutes really well and not to 
worry about the rest. That is all embroidery.
    That advice was a recognition that in our technological age 
it is hard to see what criminal conduct at a financial 
institution would not satisfy the jurisdictional hook of the 
mail or wire fraud statutes. Any e-mail or SEC filing in 
service of a scheme to defraud could suffice. Even if we were 
to define new fiduciary duties, it is difficult to imagine what 
kind of material breach would not involve a misstatement or 
omission and, thus, be covered by at least one and probably 
several of the existing Federal criminal statutes. And if the 
misstatement is not material or the intent not willful, it is 
not evident that the conduct can or should be considered 
criminal.
    Another point that I would like to make is that a statute 
that criminalizes the breach of fiduciary duties could be 
struck down by the Court as impermissibly vague. Inquiries into 
the existence and scope of fiduciary duties can be a highly 
fact-specific project. If fiduciary duties are imported into 
the criminal context, their vagueness may take on 
constitutional significance.
    The Supreme Court is currently considering this issue in 
three cases involving the so-called honest services statute, 
which criminalizes the use of the mail or wires to deprive 
someone of ``the intangible right of honest services,'' a 
statute that some have criticized as criminalizing everything 
from defrauding a client to an employee calling in sick for a 
day.
    Imposition of criminal liability for breaching fiduciary 
duties would raise similar concerns about notice and fairness. 
For instance, would it be a Federal crime for a broker to fail 
to read diligently a prospectus or call a client daily about 
the market? Would every breach of a duty of care now become a 
crime?
    Given the pending Supreme Court decisions on the honest 
services statute, it would be wise to wait at least for the 
Court to speak before initiating legislation criminalizing 
conduct in this area.
    But there are other reasons not to leap to criminalizing 
conduct that is not now the subject of even civil liability. 
The line separating criminal conduct from all other is 
society's starkest boundary between right and wrong, and it 
should continue to be reserved for the most egregious 
misconduct.
    Second, it would be better to regulate problematic conduct 
directly or to first define the scope of specific fiduciary 
duty obligations in the civil context than to impose a vague 
criminal stricture that would leave the Government with 
unwarranted discretion and the public without the certainty of 
clear rules.
    Finally, the case for regulatory weapons, new ones, has not 
been made. Current law provides civil regulatory agencies with 
numerous tools. Executives and brokers can be barred from the 
industry by the SEC; corporations can lose their license to 
sell securities or to contract with the Government; and 
corporations' profits can be wiped out by both the SEC and the 
Department of Justice.
    To the extent that one believes that the SEC, in spite of 
some contrary examples, has been a toothless tiger, the remedy 
is to encourage the SEC and the Civil Division of the 
Department of Justice to make greater use of their enforcement 
authority, not to rush to criminalize new conduct.
    Thank you.
    [The prepared statement of Mr. Weissmann appears as a 
submission for the record.]
    Chairman Specter. Thank you, Mr. Weissmann.
    Our next witness is Mr. Damon Silvers, associate general 
counsel for the AFL-CIO, where his responsibilities include 
corporate governance, pension, general business law issues. He 
was part of the AFL-CIO legal team that won severance payments 
for laid-off workers from Enron and WorldCom. He graduated from 
the Harvard Law School and has an MBA from the Harvard Business 
School.
    Welcome, Mr. Silvers, and we look forward to your 
testimony.

  STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR AND SPECIAL 
                COUNSEL, AFL-CIO, WASHINGTON, DC

    Mr. Silvers. Thank you and good morning, Chairman Specter, 
Senator Kaufman, and staff. I am Damon Silvers. I am now the 
policy director of the AFL-CIO, a recent promotion, and I serve 
as the Deputy Chair of the Congressional Oversight Panel for 
TARP. My testimony before this Committee is on behalf of the 
AFL-CIO and not on behalf of the Congressional Oversight Panel, 
its staff, or its Chair.
    The financial crisis that began in 2007 has had a 
devastating effect on working Americans. The U.S. economy lost 
8 million jobs. Pension funds saw their asset values decline by 
close to $3 trillion, a drop of 30 percent, driven by broad 
equity market declines in the 40-percent range, from which the 
markets have yet to fully recover.
    Mass home foreclosures, which not so long ago were a 
distant memory of the Great Depression, now seem to be a 
permanent feature of American life, running this year at the 
rate of 2.8 million foreclosures a year.
    Finally, the American public had to foot the cost, yet 
unclear, of rescuing the financial system.
    As a general matter, the AFL-CIO believes that proper 
structuring and implementation of financial regulation is key 
to protecting the public from the consequences of financial 
boom and bust cycles, and we support strengthening and passing 
the Wall Street Accountability Act of 2010.
    We have always been skeptical of the line that we heard 
from then President Bush after Enron that everything was fine, 
just a few bad apples in the barrel that needed to be weeded 
out and prosecuted. In that sense, jail time, or the threat of 
jail time, for willful acts is not an adequate deterrent for 
financial misconduct, nor is the criminal law in and of itself 
adequate to police our financial system.
    However, we also believe that the fundamental fairness of 
our society is at issue when we look at the application of the 
criminal law to securities fraud and other types of business 
cases.
    There is a public perception in the wake of the events of 
2008 that unfortunately has some justification that a small 
number of wealthy and powerful Americans did vast damage to our 
country and to the lives of millions of families with 
relatively no personal consequences. A double standard with 
respect to willful illegal activity should not be acceptable in 
a democracy.
    Now, recently we have seen action by the Securities and 
Exchange Commission on a major case related to the financial 
crisis involving Goldman Sachs, which Barbara Roper referred 
to, and the press is reporting that the Justice Department has 
opened a criminal investigation. The legal arguments associated 
with this case have revealed a paradox with implications for 
the criminal law. Many Americans seek financial advice from 
their stockbrokers. Yet the reality is that the legal 
obligations of a broker are simply limited to recommending 
securities that are suitable and reasonable for their clients, 
not putting their clients' interests first. There is also no 
obligation for brokers to avoid or disclose conflicts of 
interest.
    The AFL-CIO supports a clear fiduciary standard for both 
broker-dealers and investment advisers, as was provided in the 
original draft of Chairman Dodd's Wall Street Accountability 
Act. I have attached to this testimony a letter from SEC 
Chairman Mary Schapiro to Chairman Dodd which discusses this 
issue in further detail. We particularly support requiring 
dealers in derivatives, when dealing with institutional clients 
such as pension funds and municipalities, to meet a fiduciary 
duty standard.
    In the context of adopting such a clear uniform standard, 
Congress should adopt companion language in the criminal code 
addressing willful breaches of fiduciary duty by brokers, much 
as the criminal code addresses willful acts of securities fraud 
or intentional breaches of fiduciary duty in the ERISA context. 
I would submit there is nothing particularly exotic about 
criminalizing intentional breaches of fiduciary duty. It is a 
well-known feature of our pension law today.
    There is another gap in our system of accountability for 
Wall Street, a gap you, Mr. Chairman, have taken the lead in 
addressing, for which we commend you, and that is the area of 
aiding and abetting securities fraud. While the aiding and 
abetting problem is a civil issue and not a criminal issue, it 
has consequences for the enforcement of the criminal securities 
laws. Effective deterrence of both civil and criminal 
securities fraud has always been in part reliant on the ability 
of investors themselves to pursue those who defraud them, and 
thus to draw the attention of the SEC and the Justice 
Department. This chain of events simply does not occur when 
private parties have no ability to pursue investment banks and 
other third-party actors in securities fraud cases.
    The AFL-CIO has long taken the view that the financial 
system needs to be regulated not with an assumption that the 
system is populated either by saints or villains, but by 
ordinary people subject as all of us are to economic and 
organizational pressures. Strong, comprehensive regulation is 
the right approach to such a system today as it was in the days 
when our securities laws were first enacted. But the criminal 
law is a necessary part of such a system, as my fellow 
witnesses have pointed out, for the most egregious acts.
    Thank you very much for the opportunity to testify before 
this Subcommittee.
    [The prepared statement of Mr. Silvers appears as a 
submission for the record.]
    Chairman Specter. Thank you, Mr. Silvers.
    We will proceed now with 10-minute rounds of questioning. 
We may have to modify depending upon how many Senators arrive 
in terms of the length of the hearing, but we will start at 10 
minutes.
    Ms. Roper, how would you classify Goldman Sachs on the 
scale of definitions in the transaction being pursued by the 
SEC?
    Ms. Roper. Well, in the transaction, the Abacus transaction 
that is at the base of the SEC case, the issue in dispute is a 
very narrow technical one. Did Goldman Sachs, when they 
supplied all of that information about ACA's involvement in 
selecting the mortgages, misrepresent the facts by leaving out 
John Paulson's role? And, you know, I do not have the expertise 
to judge that decision. What I do know is that in the series of 
transactions that were described in that hearing, the Goldman 
Sachs executives continually said, ``We are just market makers. 
We are just market makers. We are providing liquidity. We are 
bringing buyers and sellers together.''
    But the evidence in their e-mails and the evidence in their 
own statements suggests that that is clearly not the role--they 
were not limited to playing that role. They were actively 
moving securities off their books onto the books of their 
customers. They were looking to get out from under risk. They 
were packaging these products for a particular intent. And in 
several cases, they specifically stepped back from their role 
of market maker. For example, when they had a customer who 
wanted to short a stock, arguably what a market maker would do 
would be to bring those customers together. They retained the 
right to short it instead. They stepped ahead of their 
customers. When they had customers who wanted them to support a 
transaction, they refused because they knew it was a bad deal.
    So, you know, their conduct may well--I mean, their conduct 
in many of these instances may well have been perfectly legal, 
which is the first problem we have to solve. We need to create 
an obligation for brokers to act in the best interests of their 
customers to recognize that the notion, in light of the 
complexity and opacity of products today, the notion that 
institutional investors, that the majority of institutional 
investors can look out for their own interest is simply a 
fiction.
    Chairman Specter. Ms. Roper, what standard applied to 
Goldman Sachs in this transaction? What duty of care?
    Ms. Roper. Well, if they were acting as a broker and if the 
sale was not a private placement where--well, even if it were a 
private placement, they would have had a suitability 
obligation, they would have had an obligation that particularly 
in this context is really barely removed from a fraud standard. 
In other words, they would have needed to make sure that the 
customer was permitted to engage in this transaction. They 
would have needed to make sure that the customer wanted a 
security that roughly resembled what they were offering, but 
then they would not have had to take the next step of saying 
among all of the things I have available to sell that fill the 
bill, you know, that fit those qualifications, is this the one 
that is best for the customer?
    Chairman Specter. Ms. Roper, would you say they had a duty, 
as you characterize it, to act in the best interests of the 
customer?
    Ms. Roper. Well, I think they had a moral duty to do that, 
but I do not think they necessarily had a legal duty because of 
a basic gap in our current laws.
    Chairman Specter. I understand that Senator Kaufman needs 
to go to the floor at 10. Let me yield to you at this point, 
Senator Kaufman.
    Senator Kaufman. Thank you. I would just like to deal with 
one point. There are a lot of things I would like to deal with, 
but unfortunately in this job you do not get to say where you 
are going to be.
    Anyway, Mr. Weissmann raised a good point that a lot of 
people raised. He says that the regulators had the ability to 
do this, everybody has got a right, we really don't need to 
change the law and just let things go on the way they are. And 
I would like to ask each one of you: Isn't our responsibility 
to make sure this does not happen again? We went through 8 
years where we had regulators that basically did not enforce 
the law, and not because they were bad, they just did not think 
that we should have laws on regulation. I mean, they were quite 
clear about that from top to bottom.
    So one of my concerns as we move forward on this--and I 
think that Senator Specter's idea of criminalizing this thing 
just--since I am not going to be here for a long time, I agree 
with what Mr. Silvers says--that there really is a crisis in 
this country, and I do not think it is a populist statement. I 
just think there is a crisis in terms of people thinking there 
are two different rules. So basically I am for, you know, doing 
something about it.
    But starting with Mr. Weissmann, then others, don't you 
think it is important that the Congress give the regulators 
clear law on this since the regulators had the ability, as you 
said so well, to do so many of these things and they did not do 
it? Just in regard to this one question of criminalizing 
things, and I would like Ms. Roper and Mr. Silvers to make a 
comment.
    Mr. Weissmann. I agree with the sentiment and I agree that 
there is an issue with respect to the public viewing there as 
being two worlds and two different systems that are going on. 
But I think that creating a new criminal statute, which was 
similar to some of what was done post-Enron, will not cure the 
problem. You can look at Goldman--and I do not think we know 
the facts yet--but if there was a misrepresentation in terms of 
the disclosure, that can be prosecuted civilly, and if it is 
intentional, that can be prosecuted criminally.
    The answer is to have oversight of the Department of 
Justice and the SEC to be taking those actions. Putting yet 
another law on the books might sound good to the public, and 
that Congress is interested in making sure something happens, 
but it will not assure that somebody actually implements it.
    So Goldman, assuming that there was wrongdoing there, could 
happen again without the SEC and the Department of Justice 
being vigilant about oversight with the current tools that they 
have.
    Senator Kaufman. Ms. Roper.
    Ms. Roper. You know, it is no mystery you all have a huge 
task before you in dealing with the current crisis. The number 
of things that went wrong to create this crisis is really sort 
of mind-boggling. And in addressing it--I mean, yes, you have 
to regulate where we have in the past chosen not to regulate, 
so, for example, in the over-the-counter derivatives markets.
    Where there are things that were not illegal that should 
have been illegal, we need to make it clear that they are 
illegal. And I think the conduct in this area is one of those 
areas.
    The system did not work because there were sort of 
structural flaws in the system because we had institutions that 
were too complex to be effectively regulated or to be handled 
when they started to fail. We need to fix those aspects of the 
problem. And, yes, we need to make it clear to regulators what 
it is that we expect them to do in enforcing the laws, and then 
we need to hold them accountable for doing it.
    One of the biggest concerns about this legislation, which 
CFA strongly supports, is that it relies for its success on 
regulators to do effectively what they did very poorly in the 
run-up to this crisis. And so there is a job to be done after 
the legislation is passed and holding them accountable, and 
providing them with clear guidance in terms of the laws you 
expect them to enforce makes that easier.
    Senator Kaufman. Mr. Silvers.
    Mr. Silvers. I will make two points, one about the specific 
legal issues involved in the broker-dealer area and what the 
problem is. The problem lies in what my fellow witness Mr. 
Weissmann said about a misrepresentation. My understanding of 
the Goldman case in a nutshell, it is like if you went to buy a 
car, and you said to the dealer, ``Is this car safe?'' And the 
car dealers says, ``Yes, the car is safe.'' And the dealer may 
or may not have made a misrepresentation to you, but what the 
dealer did not tell you is that the car has been selected for 
you by someone who has taken out a life insurance policy on 
your life.
    Now, not telling you that is not a misrepresentation. I do 
not know--and I think no one in this country at the moment 
knows--whether not telling you that in the context of a 
derivatives transaction by a broker-dealer constitutes fraud. 
That is going to be the subject of extensive litigation. It is 
unquestionable, though, that if we had a fiduciary standard, 
any fiduciary standard, that not telling you that in that 
context would breach that fiduciary standard.
    The criminal issue is if you did not tell somebody that 
intentionally, if you had e-mails saying, oh, you know, we 
better not tell the customer what we are doing because if they 
found out they would behave differently, and we really want 
them to buy this and that sort of thing, if you had that type 
of intentional, willful conduct, should that be a crime? I 
suspect that if you think about it in the context of the auto 
analogy I drew, most of us would say that feels like a criminal 
act.
    The point of my testimony is that it is--in order to have 
sort of consistent fabric of the law, willful, intentional, 
egregious breaches of fiduciary duty in general in our legal 
framework are crimes.
    Now, Senator, you raised the much broader and more 
difficult problem of what do we do about regulators and 
enforcement agencies that do not do their jobs. I think there 
is an easy answer and there is a hard answer. The easy answer 
is we ought to at least fix the structural problems that make 
it very unlikely they will do their jobs. The AFL-CIO's view is 
that it is dysfunctional to ask prudential regulators to 
protect consumers, that those two missions are in profound 
conflict, and we support an independent consumer financial 
protection agency for that reason. So that is a structural fix.
    We do not view the SEC, the Securities and Exchange 
Commission, as having a structural problem. We are pleased with 
the general direction of its leadership. But I think we have to 
recognize that as long as large financial institutions wield 
the kind of political power that they do in our society 
currently, the efficacy of our regulatory agencies is always in 
jeopardy. And I think that is one of the reasons why the AFL-
CIO very strongly supports your efforts, along with Senator 
Brown's, to do something about the size of those institutions.
    Senator Kaufman. I just want to say that we had the 
meltdown in 1929. In 1933, we came and we passed good laws, 
hard laws, Glass-Steagall and others, that lasted us for 
generations. I think the Chairman here--I want to cosponsor 
your bill. I think the Chairman is on to something in terms of 
the fact--and I do not feel like a populist when I say that. 
The fact that the vast majority of Americans could not 
understand what Goldman Sachs was doing in the testimony, but 
everybody that knew and follows what goes on knew what they 
were saying, and it all had to do with this broker-dealer 
relationship. But I think every single person I have run into 
since that hearing says, ``That was wrong,'' and we know that 
is wrong. It is the Potter standard. We know it when we see it. 
And guess what? If I am an auto dealer and I do that or I am 
someone that is in another business and I do that, where I am 
basically, you know, misrepresenting what it is that I am 
doing, that the other side, I do not let them know what my real 
personal position is in what I am doing, every American knows 
that is wrong, and every American knows in just about every 
other industry and business we are in, if you do that you go to 
jail.
    So I support what--I do not think that is--I do not 
believe--now anything that says something like that is 
populism. I do not think that is populism, because the people I 
talk to that are upset about it are not populists or anything 
else. The people I talk to that watched what went on said, 
``This is just wrong. I know it is wrong. Everybody knows it is 
wrong. You should go to jail when you do something like what 
Goldman Sachs did.'' They cannot go to jail now because it is 
not against the law.
    So, Mr. Chairman, I support totally what you are doing. I 
think we need strong laws. Great fences make great neighbors. 
And I think that we need some kind of a criminal statute to 
deal with this.
    Chairman Specter. Thank you very much, Senator Kaufman.
    Ms. Roper, we are on a point before I yielded to Senator 
Kaufman where I was asking you whether you thought that Goldman 
Sachs acted in the best interests of the customer.
    Ms. Roper. No. I mean, I do not think you can remotely 
conclude from the evidence that has been put forward that they 
were looking to act in the best interests of the customers or 
recognized any obligation to do so.
    Chairman Specter. Mr. Weissmann, what duty, if any, do you 
think Goldman Sachs owed to the customers?
    Mr. Weissmann. Well, I do not think we know yet enough 
about the intricacies of that case. But one thing that we do 
know is the laws that they are currently subject to. If they, 
in fact, misrepresented the role of one of the people who was 
going to be influential in picking securities in the Abacus 
deal, then that is currently a civil and criminal offense, 
criminal obviously if it is done with the requisite intent.
    Chairman Specter. Well, what if it is a failure to disclose 
that participation?
    Mr. Weissmann. If there was no misrepresentation and they 
simply did not disclose it, but they were serving as a market 
maker, then that is something that is legal.
    Chairman Specter. Do you think Congress ought to change 
that if that conduct is legal?
    Mr. Weissmann. No, I do not. I think that there is a place 
for caveat emptor. If I as a buyer want a heightened duty at a 
financial institution, there is currently a clear mechanism for 
doing so. You can have a discretionary account. You can pay 
that financial institution to be an investment adviser and have 
them--you can choose to have a different type of relationship 
where you are not going to just give the institution 
instructions, and then they have a fiduciary duty currently to 
carry it out and to offer you suitable securities. But if you 
decide to have a relationship where they are going to be 
exercising any form of discretion, then there currently is a 
fiduciary duty requirement, certainly in New York where I am 
from.
    Chairman Specter. Well, let us explore that for just a 
minute. Is there no implicit representation when Goldman Sachs 
sells these securities that Goldman Sachs does not have an 
intent to bet against them to, in effect--wait until the 
question is finished.
    Mr. Weissmann. Sorry.
    Chairman Specter. Wait until Goldman Sachs is, in effect, 
of a mind that these securities are going to go down in value, 
when you talk about a misrepresentation, how would you 
distinguish that kind of a mens rea that the value is going to 
go down according to Goldman Sachs, isn't that really a 
misrepresentation?
    Mr. Weissmann. I think that is a great question, and I 
think it is very fact specific. If the issue is what is being 
implicitly represented when somebody is a market maker, I think 
that people who deal with market makers implicitly understand--
and I think this was, in fact, in Goldman disclosures--that the 
market maker could be taking all sorts of different positions, 
that there could be people including Goldman Sachs that are 
thinking that it is a foolish thing to be on one side of the 
deal versus the other. I think that is, by definition, what a 
market maker is.
    Chairman Specter. Well, how about the participation of Mr. 
Paulson as alleged? And I agree with you, we do not know all 
the facts yet. But as alleged, Mr. Paulson was the person who 
put these subprime mortgages together, and he is a major hedge 
fund operator. And as it worked out, he, according to the 
allegation, selling them short, made $1 billion. How can even a 
sophisticated investor exercise diligence to go into a bundle 
of subprime mortgages and figure out what they are when the 
person who is putting them together knows what they are and 
thinks they are going to go down in value? How about that?
    Mr. Weissmann. I agree with you, if those are the facts, if 
it turns out that that is what Mr. Paulson was doing, and 
Goldman knew it and was representing otherwise, then that 
clearly is not only a civil problem, but it could be a criminal 
problem. I think that my point earlier is that----
    Chairman Specter. It could be? When you say Goldman knew 
what Mr. Paulson was doing?
    Mr. Weissmann. The only reason I say it could be a criminal 
problem is, as a former prosecutor, one looks for criminal 
intent and whether one can prove that beyond a reasonable 
doubt. But assuming those set of facts, you would look at civil 
liability and to make a criminal case in connection with 
misrepresentations about the fact that a person was choosing 
undisclosed--in fact, a misleading statement was made about 
that person's role in the security that was being marketed. 
That would be very different and raises--I think that is the 
reason there is such a strong reaction to the Goldman Sachs 
allegations by the SEC. It is not simply the market maker 
factor. It is the issue of whether the disclosure was 
misleading about what Mr. Paulson's role was going to be. And 
if those bear out, then I think everyone has good reason to be 
upset about what happened.
    Chairman Specter. Well, how about the nondisclosure? Isn't 
nondisclosure sufficient to establish culpability? 
Nondisclosure of a very material fact?
    Mr. Weissmann. That could be. Under the current securities 
laws, a material omission can be prosecuted civilly, and it can 
be prosecuted criminally under the current civil laws and 
criminal laws.
    Chairman Specter. Mr. Silvers, Mr. Weissmann is moving 
along here. He is, I think, conceding that there is criminal 
liability here on the facts as represented. Maybe we do not 
need to change the law at all. What do you think?
    Mr. Silvers. Well, I think you need to follow very 
carefully these distinctions between misrepresentations, 
misleading statements, and omissions. My understanding is that 
the question of an omission under current law for a broker-
dealer or a market maker is at best unsettled, and that that 
really is the nub of this discussion; the question of whether 
the general securities law standard that Mr. Weissmann referred 
to at the end of his comments, which is the standard that would 
apply to an issuer of securities--or an investment adviser who 
has fiduciary duties. An issuer has a set of statutory duties 
that are non-fiduciary. The adviser has fiduciary duties.
    Chairman Specter. How would you classify Goldman Sachs in 
this transaction?
    Mr. Silvers. Well, Goldman Sachs appears to have been a 
broker-dealer acting as a market maker. It is unclear to me 
whether or not in the context of doing that they were rendering 
investment advice. If they were rendering investment advice, 
their defense is going to be they are not covered by the 
Advisers Act because it was incidental to their market-making 
function.
    Chairman Specter. Well, when you say rendering investment 
advice and that is the fiduciary standard, Congress has the 
authority to define what investment advice is. But if you have 
Goldman Sachs selling these securities knowing that they were 
in a bundle of subprime mortgages put together by an individual 
who thinks they are going to go down in value, isn't that 
sufficient to the customer, when you talk about a fiduciary 
duty, to tell them what is happening? Fiduciary duty is a big 
fancy word, but, in effect, to tell them what is going on?
    Mr. Silvers. Mr. Chairman, I think what you are pointing 
out here is that the reality of behavior today by broker-
dealers is that it involves both sort of old-fashioned sort of 
market-making caveat emptor type behavior where a customer 
shows up and says, ``I want a particular security. Sell it to 
me, please. Quote me a price,'' which is, I think, what the 
framers of the securities laws in the 1930s had in mind. It 
also involves investment advice. The customer who calls up and 
says, you know, ``Tell me, Mr. Broker, what would you suggest I 
buy today,'' or ``What do you think my portfolio mix ought to 
look like?'' They do not have discretion over the account, but 
they are rendering advice.
    And a third thing which I think is really the key to 
understanding the Goldman situation, which is something that 
looks sort of like being an issuer, which is you are packaging 
a security. Goldman knew something about the internal workings 
of these securities, according to the allegations at least, 
that a customer could not possibly have known in a way that a 
traditional market maker would not.
    Chairman Specter. Even a sophisticated investor?
    Mr. Silvers. What Goldman knew, apparently, according to 
the allegations was that John Paulson, who had a short 
position, was putting the package together.
    Chairman Specter. Mr. Silvers, is it adequate to deal with 
this kind of conduct with a fine? I note a media report that 
Goldman's value declined some $21 billion. Is it sufficient to 
impose a fine? Or what kind of a fine would be big enough to be 
punishment? What kind of a fine would be big enough to be a 
deterrent to others? Is there any fine sufficient to equate a 
jail sentence in terms of deterring other people?
    Mr. Silvers. Well, Mr. Chairman, I am reluctant to comment 
about the details of this case for the same reason as my fellow 
witnesses are. But I will comment in detail about what your 
question is in general.
    It has been a mystery to me throughout my involvement in 
these issues why it is that fines in the area of securities 
fraud and other investment issues are as small as they are in 
relation to the firms and the conduct involved. But it is a 
feature of our system that they are very small in relation to a 
firm like Goldman Sachs.
    Chairman Specter. Well, is any fine sufficient compared to 
a jail sentence?
    Mr. Silvers. I think there is a qualitative difference.
    Chairman Specter. Ms. Roper, is a fine sufficient? Do we 
need jail sentences here as a deterrent?
    Ms. Roper. I agree that white-collar criminals should face 
the same risk of going to jail, arguably, that they do much 
greater damage. And if you look at the history of the fines 
that are imposed, even the most, you know, extensive fines that 
have been imposed in recent years, they are a drop in the 
bucket compared to the profits that the firms are making on 
this activity. And as a practical matter, we will not get fines 
at the level that would inflict that kind of damage.
    If you look, for example, in the issue of JPMorgan's sales 
of swaps to communities around the country which have left 
towns, school boards firing people in debt, it was the criminal 
investigation into price fixing in that market that ultimately 
convinced JPMorgan to shut that unit down. It was the threat of 
jail time, which one JPMorgan employee actually did a little, 
that really sort of got their attention. And I do not think, 
given the kind of profits that they were making in that 
business that you could have done it with the traditional 
tools.
    Chairman Specter. Mr. Weissmann, would fines have been 
sufficient in the Enron case, or don't you really need jail 
time to have a deterrent?
    Mr. Weissmann. I agree with you that there are cases where 
you need jail time to have a sufficient deterrent. I think it 
is a complicated question. First, for corporations, there is no 
jail time, so the kinds of--to answer your question about what 
can be an adequate deterrent, sometimes a fine is not going to 
be sufficient, and other measures, such as a monitor barring 
the company from engaging in certain types of transactions, 
either permanently or for a temporary period, can serve a 
deterrent value.
    Individual prosecutions criminally can serve a deterrent 
value, but not necessarily for corporations because they can 
simply cut loose that employee and not really take to heart 
what that means in terms of systemic change at the institution. 
So when you deal with corporations, the issue of jail time is 
really illusory, and you have to sort of figure out what else 
one can do other than a fine to get the company's attention 
when you really have egregious conduct.
    Chairman Specter. Mr. Weissmann, I want to shift to a 
little different subject. The Supreme Court has said that 
aiding and abetting does not give rise to civil liability under 
the securities acts. I have introduced legislation, cosponsored 
by others, to change that. Congress, of course, has the 
authority to change the laws, or the Supreme Court 
interpretation on something other than a constitutional issue. 
Aiding and abetting is a crime. How can you have conduct 
defined as a crime, which is a much tougher standard to prove a 
crime, than civil liability? Wouldn't it logically follow that 
there ought to be civil liability for aiding and abetting?
    Mr. Weissmann. I think that the current state of the law is 
certainly unusual in that you have a criminal aiding and 
abetting statute, but it is not true that there is no civil 
liability. It is a question--the Court, I think, interpreting 
what Congress had done, determined that the SEC has enforcement 
power. And I think, candidly, what was going on----
    Chairman Specter. Unusual? Do you know of any other case 
where conduct is defined as criminal conduct but does not give 
rise to a civil claim?
    Mr. Weissmann. Not off the top of my head. I am sure there 
are, but not sitting here right now.
    Chairman Specter. Let me move to one other subject because 
I want to bring in the second panel. You omitted the paragraph 
in a revised statement which you submitted that--it is a long 
one, but I think it is a very important issue, and I want to 
read it. This was in your first statement and omitted from your 
second statement.
    ''Likewise, to the extent that civil lawsuits brought by 
private individuals have also failed to create a sufficient 
deterrent effect, the problem may well be that the likelihood 
of civil liability is too low rather than civil sanctions are 
too weak. In particular, prior to imposition of new criminal 
liability, it may be worth examining whether some of the road 
blocks erected to prevent civil strike suits have been 
unintended consequences of blocking legitimate civil claims, 
particularly when they concern complex financial instruments. 
For example, it has been made intentionally difficult to comply 
with pleading requirements that dictate that the initial 
complaint must spell out the specifics of the civil fraud even 
prior to taking discovery. This may be unwarranted when the 
securities involved do not trade on a transparent open market--
many structured financial products do not--and the practices of 
the financial institutions are not seen by the investor. 
Similarly, even in cases of blatant fraud, victims may find it 
difficult to overcome case law that almost automatically deems 
buyers so-called sophisticated investors even if they 
understand little about the complex securities marketed to them 
and even if they were told the securities were not complex at 
all.''
    Now, that is pretty complicated for C-SPAN viewers, but the 
people in the field will understand it. Aren't you really 
saying there that the law has gone too far and that the 
decisions, Congressional decisions, the 1995 Private Securities 
Litigation Reform Act requiring particularity when the 
plaintiff really cannot know the facts and has gotten them 
traditionally by discovery but cannot now, and that the 
limitations on the pleading rules on the recent Supreme Court 
decision have gone too far, and that there ought to be greater 
latitude in the civil lawsuits? You are suggesting that if 
there were that latitude, that might deal with the issue as 
opposed to criminal liability. Should we reduce the 
particularity necessary for a plaintiff----
    Mr. Weissmann. Yes----
    Chairman Specter [continuing]. And revise the pleading 
standards as interpreted by the Supreme Court?
    Mr. Weissmann. Well, I think that the Supreme Court was 
correct in the Stoneridge decision in recognizing a difference 
in terms of who would be bringing the lawsuit and trusting that 
the SEC would be looking after the public interest with the 
concern that many lawsuits are brought as strike suits where 
they are not meritorious. And the issue is how to screen out 
the so-called strike suits that, frankly, are a tax on all of 
us because they are not meritorious, and you have corporations 
spending a fortune defending them.
    The reason for the change in what I submitted was because 
the issue of how to best regulate, how to best deter conduct. I 
do not think comes from bringing more private civil lawsuits. I 
do not think that is a mechanism for effecting change. I think 
that there are other ways to do it, but I do not think 
corporations respond to that. I think that what you get, 
because there are so many frivolous lawsuits like that, is 
corporations spending a lot of money and correctly viewing the 
vast majority of those cases as not meritorious.
    Chairman Specter. Mr. Weissmann, can you answer yes or no? 
If you can, I would like you to do that. If you cannot, I 
understand. But can you answer yes or no that there ought to be 
greater latitude on pleading?
    Mr. Weissmann. I think the answer is----
    Chairman Specter. To avoid a motion to dismiss.
    Mr. Weissmann. I am sorry. I did not hear you.
    Chairman Specter. To avoid a motion to dismiss.
    Mr. Weissmann. I do not actually know, but I do not think 
that the current standard is inappropriate as set forth by 
Stoneridge and recent Supreme Court cases.
    Chairman Specter. Why did you take the paragraph out of 
your resubmitted statement?
    Mr. Weissmann. Precisely for the reason I told you, which 
is that the issue of how to best regulate conduct, how to 
best--what I understood this hearing was about was what is the 
best way, when there is wrongdoing at corporations, to get them 
to change.
    Chairman Specter. What did you think was the best way to 
regulate conduct when you submitted your first statement?
    Mr. Weissmann. Exactly what I wrote. When I looked at that 
paragraph, I realized that that did not address----
    Chairman Specter. Did you change your mind on the best way 
to regulate conduct?
    Mr. Weissmann. Yes, I did.
    Chairman Specter. OK. Thank you very much, Ms. Roper, Mr. 
Weissmann, and Mr. Silvers. I appreciate your testimony.
    Chairman Specter. We will move now to panel two: Professor 
John Coffee, Professor Henry Pontell, Professor Verret, and 
Professor Ribstein.
    Without objection, we will insert into the record the 
written statements of the witnesses unavailable for this 
hearing.
    [The statements appear as a submissions for the record.]
    Chairman Specter. Our first witness is Professor John C. 
Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia, 
also the director at Columbia of the Center on Corporate 
Governance. Professor Coffee has a very distinguished record as 
a member of the Legal Advisory Board of the New York Stock 
Exchange and NASD and a member of the Economic Advisory Board 
of Nasdaq. He has been a professor at an amazing array of law 
schools--Harvard, Stanford, Virginia, Michigan. Is that 
correct, Professor Coffee?
    Mr. Coffee. I have been a busy professor at all the ones 
you just named.
    Chairman Specter. Wow, a lot of law schools. And he has the 
most widely used casebooks on securities regulation and 
corporate law. The Adolf A. Berle Professor of Law Chair at 
Columbia is named after an extraordinarily distinguished 
professor who wrote the casebooks and the treatises for many 
years. Professor Coffee is a graduate of Amherst and the Yale 
Law School.
    The floor is yours, Professor Coffee. Five minutes.

 STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF 
          LAW, COLUMBIA LAW SCHOOL, NEW YORK, NEW YORK

    Mr. Coffee. Thank you, Chairman Specter and members of the 
staff. My message is simple and direct: A fundamental hole 
exists in the center of the pending financial reform 
legislation that is now wending its way through Congress, and 
it will continue to exist unless and until Congress tells 
broker-dealers and investment banks basically that the client 
comes first, or in the language of lawyers, that broker-dealers 
and investment banks owe a fiduciary duty to the investor.
    Conflicts of interest played a key role in causing and 
intensifying the 2008 financial crisis. I study financial 
history. That is not unusual. Conflicts of interest have played 
a key role in most of our major financial meltdowns.
    We saw, we have seen already this morning--I will not 
rehash the history of what happened with investment banks and 
credit rating agencies giving inflated ratings and selling 
products that they were personally betting against. But I want 
to take you back just 10 years ago when we had Enron and 
WorldCom. At that time, we found that securities analysts were 
making inflated recommendations which they in contemporaneous 
e-mails discounted and showed they disbelieved. At that time, 
an iconic securities analyst, a man called Jack Grubman at 
Citicorp, told the world that what others called a conflict, he 
called a synergy. I think that was symptomatic. He was 
underplaying the role of conflicts.
    That same attitude was prevalent last week when there was 
another symptomatic moment. At a critical point in last week's 
Goldman hearings, Senator Susan Collins asked a panel of 
Goldman executives did they have a fiduciary duty to act in the 
best interests of their clients. They were sort of stumped by 
that question and gave somewhat halting answers, but one of 
them eventually said that he did believe that ``we have a duty 
to serve our clients.''
    Now, whatever he meant by that, the correct answer is 
simple and unambiguous: Except in a very few States, like 
California, broker-dealers owe no fiduciary duty, no general 
fiduciary duty to their clients. That defines the problem, and 
that makes possible the continuation of serious conflicts of 
interest.
    What brokers today owe is a much lesser dilute standard set 
forth in something called the suitability rule. The suitability 
rule is passed not by Congress, not by the SEC, but by self-
regulatory bodies that began with the Stock Exchange and the 
NASD, and it is now a rule of FINRA, but it requires only that 
the broker not believe on facts that the client has disclosed 
to him that this particular security is unsuitable, is contrary 
to their needs given the information they have disclosed to the 
broker. That is a much lesser standard. A fiduciary duty 
requires that you act in the best interests of the investors. 
So the difference is between today a standard that says do not 
recommend a security if it is clearly unsuitable on facts the 
client has told you versus act always in the best interests of 
the customer.
    Acting in the best interests of the customer, is that a bad 
idea? Several panelists in their prepared statements will tell 
you and have set forth in their statements that a fiduciary 
duty is inefficient, vague, ambiguous, and liability-laden. I 
think basically these are a laundry list of Chicken Little 
reasons telling us that the sky will fall in if we mandate that 
you act in the best interests of the customer. Let me make some 
basic points about whether or not the sky will fall in.
    First of all, the securities laws contain a number of 
specified fiduciary duties and have done so since 1940. If you 
look at the Investment Company Act of 1940, it has a Section 36 
which last month a unanimous Supreme Court interpreted to 
continue to set forth the fiduciary duty that governed. The 
Supreme Court reversed the decision of the Seventh Circuit that 
had sought to eliminate that fiduciary duty. So that is what 
all mutual funds are subject to today, a fiduciary duty about 
setting their own investment contracts.
    There was a major hearing in front of a body called the 
Investment Company Institute 3 weeks ago. I was the keynote 
speaker at their lunch, and at that lunch they all agreed that 
they could live with the Jones v. Harris standard that the 
fiduciary duty recognized by the Supreme Court was not going to 
be a significant business problem for them. My point is the sky 
is not falling in in that field.
    Now let us talk about the Investment Advisers Act of 1940, 
a different statute. All investment advisers are subject to a 
fiduciary duty, and most of the major investment banks already 
live with that standard in at least part of their activities. 
So much of what they do, they do live with the fiduciary duty. 
Chairman Schapiro at the SEC has proposed a uniform standard. 
The House Committee did and with no strong objection from FINRA 
at the time of that proposal.
    My point is that the world is living with fiduciary duties 
today. The sky is not falling in. And I think the key issue for 
Congress is: Is it going to accept the current world, which is, 
as some described it, caveat emptor in terms of what can be 
done in the private world of placement agents? Or is it going 
to insist on a fiduciary duty? That is for Congress to answer. 
I do not have time to go into all the issues about the criminal 
law, but I would point out that because the Supreme Court is 
certain, almost absolutely certain to be invalidating the 
existing honest services fraud statute--which is an overbroad, 
overripe statute that I previously criticized. But because they 
are unlikely to invalidate that statute, there is a need for a 
more focused, specialized statute dealing with just the 
fiduciary duties of a broker-dealer and not the fiduciary 
duties of all people at all times, which is what the honest 
services fraud statute was.
    You are going to have an empty slate, not the slate that 
everybody has been describing as having many laws. The 
principle on a services statute would be invalidated, and you 
do need something to replace it.
    So at this point, let me stop and just say that I think the 
key issue is the fiduciary duty, and I congratulate you for 
being on that right track.
    Thank you.
    [The prepared statement of Mr. Coffee appears as a 
submission for the record.]
    Chairman Specter. Thank you, Professor Coffee.
    Our next witness is Professor Henry Pontell, teaches 
criminology and law and society at the University of California 
at Irvine, has a bachelor's degree and master of arts and 
Ph.D., all conferred by the State University of New York at 
Stony Brook. He has devoted three decades of academic 
scholarship to the problem of financial fraud and white-collar 
crimes, served as vice president of the American Society of 
Criminologists and president of the Western Society of 
Criminology.
    Thank you for coming a long way, Professor Pontell, and we 
look forward to your testimony.

STATEMENT OF HENRY N. PONTELL, PROFESSOR OF CRIMINOLOGY, LAW & 
  SOCIETY, UNIVERSITY OF CALIFORNIA-IRVINE, IRVINE, CALIFORNIA

    Mr. Pontell. Thank you, Chairman Specter, staff, and thank 
you for the invitation to discuss policy issues related to the 
use of criminal punishment to deter financial fraud.
    White-collar and corporate crimes impose an enormous 
financial burden on citizens, and it must be appreciated that 
they constitute a more serious threat to the well-being and 
integrity of our society than traditional kinds of street 
crime. As a Presidential Commission put the matter, ``White-
collar crime affects the whole moral climate of our society. 
Derelictions by corporations and their managers, who usually 
occupy leadership positions in their communities, establish an 
example which tends to erode the moral base of the law.''
    There are several major themes that I want to address in 
this brief presentation which summarizes my longer written 
testimony, and I will stick closely to the issue of deterrence 
through criminal punishment, which I was asked to concentrate 
on, versus the larger issues of the crisis.
    First, I want to support the infliction of criminal 
penalties on white-collar and corporate criminals who violate 
criminal laws. The current spate of financial sanctions is no 
more than an additional and mildly bothersome cost of doing 
business.
    Second, I want to emphasize that persuasive anecdotal 
evidence indicates that particularly for potential white-collar 
offenders the prospect of criminal penalties can be effective 
deterrents. There is no definitive empirical evidence to prove 
this. To mount a satisfactory experiment on the subject would 
violate ethical standards. But we know that upper-class 
businesspersons fear shame and fear incarceration. They are 
rational calculators par excellence.
    Third, I would endorse the notion that regulatory agencies, 
most notably the Securities and Exchange Commission, be 
empowered to mount criminal prosecutions with internal 
personnel. Too often interagency agendas that must be 
negotiated between an agency and the Department of Justice 
inhibit effective deterrent responses to white-collar and 
corporate crime.
    Fourth, I believe the public is growing increasingly 
restive about the failure of the criminal law to be tied to the 
crimes of those who engaged in them. The war on drugs snared a 
horde of financially marginal people. There has been no similar 
war on financial thugs. To make a decisive move toward 
deterring fraud in the higher echelons of business, a 
significant influx of enforcement resources is necessary to 
allow investigators and prosecutors to bring major cases.
    Fifth, besides considering harsher penalties, Congress 
needs to seriously consider having chief criminologists and 
fraud experts as central officers of regulatory agencies, just 
as there currently are chief legal counsels and economists. A 
fraud analysis should be conducted before any new regulatory 
legislation is enacted so that we can avoid repeating mistakes 
of the past.
    Given the low probability of apprehension and the 
likelihood of no or light punishment, white-collar crime is 
seen as a rational action in many cases. The comparative 
leniency shown white-collar offenders has been attributed to 
several factors related to their status and resources, as well 
as to the peculiar characteristics of their offenses.
    Empirical evidence supports the leniency hypothesis. A 
study of persons suspected by Federal regulators in Texas and 
California to be involved in serious financial crimes during 
the savings and loan crisis of the 1980's revealed that between 
only 14 percent and 25 percent were ever indicted. The study 
also examined the sentences imposed in S&L cases involving mean 
losses of a half million dollars and found that the average 
sentence was 3 years--significantly less than the average 
prison terms handed to convicted burglars and first-time drug 
offenders tried in Federal court.
    Some financial writers have labeled past reactions of 
politicians to corporate scandals as ``hysterical,'' arguing 
that ``penalties for failure are not merely lower earnings, but 
lawsuits, prosecution, huge fines, and long prison terms.'' 
They may be correct about failure causing lawsuits and even 
fines; but they are mistaken about prosecution. Long prison 
terms are not caused by mere failure; they are caused by 
serious criminal behavior.
    A central problem that underlies deterrent strategies is 
that despite some high-profile cases, the Government has 
trivialized criminal fraud to the point that it is routinely 
dealt with at the lowest offense levels, and when larger cases 
are discovered they are more likely to be pursued civilly and 
not criminally. We can look at a key example in the current 
crisis. The FBI publicly announced in 2004 that there was the 
potential for ``an epidemic of mortgage fraud,'' yet Attorney 
General Michael Mukasey declined to create a task force to 
investigate the root causes of the subprime debacle, likening 
the problem to ``white-collar street crime'' that could best be 
handled by individual United States Attorneys' Offices. The 
lack of Government response after the alarm had been sounded 
stands in direct contrast to the Government's response to the 
savings and loan crisis--a financial disaster that was 
approximately 1/30 the size of the one we are currently 
experiencing. The central issue here is strong, proactive 
policing.
    In conclusion, in August 2009, Maurice (Hank) Greenberg, 
former AIG chief executive officer, and Howard Smith, the 
company's former chief financial officer, paid $15 million to 
the SEC to settle the charge that they had misstated the 
financial condition of the company. Regarding the dynamics of 
white-collar crime, it was noteworthy that Greenberg did not 
admit guilt and insisted that had he been charged criminally 
with securities fraud, he would have fought the case rather 
than settle. This might be regarded as a piece of evidence 
favoring the view that the most effective tactic against white-
collar offenders is the criminal charge. They find notably 
onerous and oppressive the stigma associated with a criminal 
label, while a financial penalty can be written off as not much 
more than the relatively small price of doing business--
especially monkey business.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Pontell appears as a 
submission for the record.]
    Chairman Specter. Thank you, Professor Pontell.
    Our next witness is Professor J.W. Verret, assistant 
professor of law at George Mason University, where he teaches 
corporate and security law. Prior to joining the faculty at 
George Mason, Professor Verret was an associate in the SEC 
enforcement defense practice at Skadden Arps in Washington. He 
has his bachelor's degree from Louisiana State University, a 
master's from Harvard's Kennedy School of Government, and his 
law degree from the Harvard Law School.
    Thank you for coming in, Mr. Verret, and the next 5 minutes 
are yours.

  STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR, GEORGE MASON 
                UNIVERSITY, ARLINGTON, VIRGINIA

    Mr. Verret. Thank you, Chairman Specter and Ranking Member 
Graham, and distinguished members of the Subcommittee. I 
appreciate the invitation to testify today. As you said, my 
name is J.W. Verret. I teach securities law at George Mason, 
and I also work with the Mercatus Center at George Mason. I 
also direct the Corporate federalism Initiative, a network of 
scholars who are dedicated to studying the intersection of 
State and Federal authority in corporate governance.
    Considering new legislation requires that we compare the 
costs of the new law against its benefits. This is typically a 
very complicated process. For today's proposal, however, the 
exercise is fairly simple. A criminal fiduciary duty standard 
for securities brokers would impose inordinate costs on the 
securities markets that would be passed through to investors 
while doing little to stop future financial crises.
    I will also note that comparing today's topic to the 
Goldman Sachs controversy is inappropriate. That case is 
complex and that case awaits a final verdict. I certainly do 
not need to remind the Committee on the Judiciary that it would 
be foolhardy to make new legislation under the assumption that 
wrongdoing occurred without a full trial on the issue.
    If it is ultimately determined that Goldman Sachs did 
engage in wrongdoing, the Department of Justice already has the 
necessary tools to prosecute securities fraud under Section 
10(b) of the Securities Exchange Act of 1934. The legislation 
under consideration today, then, would not assist in 
prosecuting fraud of the sort alleged in the Goldman Sachs 
case, if indeed fraud occurred in that case in the first 
instance.
    My work focuses in part on fiduciary duties in State 
corporation law. I was privileged to clerk for the Delaware 
Court of Chancery, one of the sources of American corporate 
law. The concept of fiduciary duties we are discussing today 
emerged from that court in many ways.
    The challenge for judges reviewing business investments, 
under a fiduciary duty standard and after the fact, is that it 
is too tempting to decide whether a decision was fair at the 
time it was made in light of how the investment ultimately 
performs. Business decisions, like purchases of investment 
products, are highly risky. That is why they can be so 
profitable. But in administering fiduciary duty laws, it is 
nearly impossible to avoid being influenced by the perfect 
vision of hindsight.
    Such Monday morning quarterbacking would, however, chill 
the securities markets in a significant way at a time when they 
are already under severe strain.
    Getting fiduciary duties right in the civil liability 
sphere is difficult enough. Making fiduciary duty violations 
into criminal violations would pose an even greater challenge.
    There are a wide variety of different relationships between 
securities brokers and their clients. Some securities brokers 
act as counselors; some merely facilitate transactions at the 
client's direction. Some brokers cater to large institutional 
investor clients; others cater to individual retail clients. 
The contracts governing these relationships are equally 
diverse. A global fiduciary standard for all of these 
relationships would limit investors' flexibility to design 
contracts appropriate for their particular needs.
    By way of analogy, consider for a moment the market for 
foreclosed housing. Foreclosed homes are more likely to need 
significant refurbishment and have high maintenance costs. 
Banks foreclosing homes do not have the resources to inspect 
all of those foreclosed homes. So foreclosed homes sell ``as 
is'' at a deep discount. Buyers with the skills to gauge the 
risk are willing to buy those foreclosed homes, without 
requiring absolute guarantees from the banks that are selling 
them because they offer the possibility for generous profit, 
but also, of course, in tandem, they offer the possibility of 
significant risk.
    Now, if we were to mandate that banks selling foreclosed 
homes issue an absolute guarantee on the homes they sell, there 
would no longer be a market for those homes, and a recovery in 
the housing market would be all but impossible.
    The same thing would happen in the securities markets if we 
made brokers, through an unprecedented criminal fiduciary duty 
standard, absorb all of the risk of the financial products that 
they sell, particularly given the protections of 10(b)(5) in 
this area. The securities markets would freeze up. Brokers 
would operate under the possibility of prosecutions that, 
through hindsight bias, targeted them for selling products that 
lost money despite being fair risks at the time that they were 
sold.
    A criminal fiduciary duty standard for securities brokers 
is a misguided idea. A civil fiduciary duty standard also poses 
the risk of significant cost. Now, should this Committee decide 
to institute a civil standard for securities brokers, I would 
urge an exemption permitting brokers and their clients to opt 
out of fiduciary liability to permit transactions for which all 
of the parties to the transaction feel fiduciary duties are not 
entirely appropriate.
    I thank you again for the opportunity to testify, and I 
look forward to answering your questions.
    [The prepared statement of Mr. Verret appears as a 
submission for the record.]
    Chairman Specter. Thank you, Professor Verret.
    Our next and final witness on this panel is Professor Larry 
E. Ribstein, who occupies the Mildred Van Voorhis Jones Chair 
in Law at the University of Illinois College of Law. Professor 
Ribstein is the author of leading treatises on limited 
liability as well as two business association casebooks. From 
1998 to 2001, he was co-editor of the Supreme Court Economic 
Review and has written or co-authored approximately 140 
articles on corporate securities and partnership law. He has a 
bachelor's degree from Johns Hopkins and a law degree from the 
University of Chicago.
    We appreciate your being with us, Professor Ribstein, and 
we look forward to your testimony.

   STATEMENT OF LARRY E. RIBSTEIN, MILDRED VAN VOORHIS JONES 
  CHAIR, ASSOCIATE DEAN FOR RESEARCH, UNIVERSITY OF ILLINOIS 
              COLLEGE OF LAW, CHAMPAIGN, ILLINOIS

    Mr. Ribstein. Thank you, Senator Specter, for the 
invitation to testify today. My testimony focuses on whether 
securities professionals, including investment bankers, should 
have fiduciary duties and whether there is a criminal liability 
for willful breach of these duties.
    In summary, I believe this is the wrong tool or these are 
the wrong tools for dealing with any problems that might exist 
in the investment banking industry or the securities industry 
generally.
    A fiduciary duty is one of the most amorphous concepts in 
the law, and that is not a Chicken Little statement. That is 
simply a statement of fact. Courts and commentators have used 
fiduciary language to describe many duties arising in a 
bewildering variety of circumstances, from doctor-patient to 
shareholder-director. It is not clear, for example, precisely 
how fiduciaries differ or whether they include a duty of care, 
implied contractual covenant of good faith and fair dealing, 
duties arising out of contractual relationships, duties imposed 
only because of unequal sophistication, information, or 
bargaining power.
    Fiduciary duties in their strict sense of a duty of 
unselfish conduct are appropriate only in a limited case where 
one party delegates open-ended management power over his 
property to another. This is the classic situation for imposing 
fiduciary duties. This is the situation that Justice Cardozo 
referred to when he called for duties stricter than the morals 
of the marketplace, and it is far removed from the usual 
situations involving investment bankers, broker-dealers, and 
investment advisers.
    Fiduciary duties, I would also remind the Committee, are 
predominantly a matter of State law. There is no general 
Federal common law on which courts can draw to determine the 
dimensions of a new Federal statutes or a fiduciary duty.
    A general fiduciary duty applicable to a broad range of 
investment banker dealings could leave significant uncertainty 
as to the nature of the duties in each specific context. For 
example, it may not be clear under a general fiduciary duty 
what types of conflicts of interest are permissible, what types 
of compensation investment bankers are entitled to earn, when 
contracts waiving fiduciary duties are enforceable, whether 
disclosure of conflicts is sufficient to avoid a fiduciary 
duty, what types of information must be disclosed, how material 
omitted information must be to trigger liability, to whom a 
duty is owed, and what the remedy for a breach of duty should 
be.
    Professor Coffee raised the existing fiduciary duties under 
the Investment Company Act and the Investment Advisers Act as 
an indication that these are unfounded fears, but I would point 
out that in the case of the Investment Company Act, in the case 
that was recently decided by the Supreme Court in Jones v. 
Harris, that duty, which is actually fairly specifically 
defined in Section 36(b) of the Investment Company Act, is 
still unclear after 40 years of litigation and not a single 
plaintiff victory at trial. There is also an ambiguous, ill-
defined duty for investment advisers defined by case law and, 
again, not very clear. So I think those are examples rather 
than counter examples of the problems that we might be facing 
by imposing a fiduciary duty.
    Disclosure duties are, in fact, generally sufficient 
without resorting to inventing a new investment banker 
fiduciary duty, and that would include the situation involved 
in the Goldman Sachs case. If those omissions, those 
misrepresentations were material, there is, in fact, a remedy 
under existing law. If they were not material and there was no 
material nondisclosure, then there should be no remedy.
    Any new investment banker duty should not be imposed as 
part of a general fiduciary duty, and it should emerge from 
careful study, which the current financial reform bill pending 
before Congress requires for new standards of care for broker-
dealers and investment advisers.
    I would add that the application of criminal penalties 
would significantly exacerbate the problems of applying 
inherently vague and ambiguous fiduciary duties, possibly 
violating constitutional rights. Vague criminal duties may 
actually result in less deterrence of misconduct than would be 
accomplished by more precise remedies by failing to inform 
parties of the conduct that they must avoid.
    We also must keep in mind--and this is the closest I am 
really going to get this morning to a Chicken Little 
statement--that criminal fiduciary duties may overdeter by 
threatening punishment even of socially valuable behavior. 
Legitimate firms seeking profits over the long haul will give a 
very wide berth to behavior that poses even the slightest risk 
of criminal sanctions that could put them out of business or 
send individual employees to jail. This could impose 
significant social costs by inhibiting innovation, among other 
things.
    Broad criminal liability for breach of fiduciary duty could 
encourage abusive prosecutorial power. We have seen examples of 
this in recent back-dating cases. Without defining the duties 
that give rise to criminal penalties, we give powerful weapons 
to prosecutors, and I think we should keep this in mind.
    In conclusion, whatever problems exist in the securities 
markets--and I am not one to say that there are no such 
problems and that no remedies are called for--criminal 
fiduciary duties are the wrong tool to deal with them.
    Thank you again for the invitation, and I welcome any 
questions.
    [The prepared statement of Mr. Ribstein appears as a 
submission for the record.]
    Chairman Specter. Well, thank you, Professor Ribstein.
    Professor Coffee, is it practical to define fiduciary duty 
in a criminal context with sufficient specificity to avoid the 
problems of due process of law being vague and indefinite?
    Mr. Coffee. Well, two responses to that. First of all, this 
statute is much narrower than some of the criticisms suggest it 
is. It does not just say you are a fiduciary, go out and 
observe a punctilio of an honor the most sensitive. It is 
focused on a special context: the broker-dealer giving 
investment advice or the broker-dealer soliciting purchases or 
sales. That is really going to be the context, which is also 
the Goldman context, of the broker-dealer functioning as a 
placement agent, selling securities that it has packaged to its 
investors. Now, that is a context that the statute does address 
because your statute--and I have made some suggestions to 
narrow it further--only addresses the broker-dealer giving 
investment advice or soliciting purchases or sales. And in that 
context, we know what is going on. I think that is not a 
general duty. It does not mean you will be liable for 
negligence, and it will only be a willful violation. Willful 
violation in the Federal criminal law means a conscious intent 
to defraud the investor and receive a gain at the investor's 
expense.
    Now, taking that all together, I think that the standard of 
fiduciary duty is very much like the standard of 10(b)(5). You 
are going to be trying to cheat someone. The difference between 
the two is that while we have been told by everyone, including 
Mr. Weissmann in the prior panel, that 10(b)(5) is sufficient, 
10(b)(5) does not reach all contexts. 10(b)(5) does not reach, 
for example, the context where there is not a purchase or sale, 
and the Supreme Court said that in the Merrill Lynch v. Dabit 
case. That is the context that the fiduciary duty standard 
would reach. So there are areas that the fiduciary duty 
standard would reach that nothing else reaches.
    Finally, I would say the most important thing for Congress 
to do is to specify the fiduciary duty standard, not so much 
the criminal penalty, because we cannot tell regulators to 
enforce the law without first telling the subject people in the 
private sector what their duties are, what you must do is put 
the interests of the client first; what you must do is act in 
the best interests of the client in giving investment advice or 
in soliciting purchases or sales. I do not think that 
approaches being vague at all.
    This is not the problem of the honest services fraud 
statute, which did not tell you whether it was addressing 
Federal law, State law, and it was subject to every possible 
interpretation so that the Boy Scout oath could be brought into 
the honest statute.
    This is very narrow. Selling or giving investment advice, 
you must act in the best interests of the customer. It does not 
affect the mere market maker who is quoting a two-sided market. 
It requires you to do something much more specific, and I think 
there is no serious void for vagueness problem.
    And, finally, the SEC is given express authority to draft 
exemptions, interpretations. They can add a great deal of 
density, extending the law, explaining where it applies and 
where there are exemptions. And I have suggested some revisions 
to your statute that would give the SEC greater authority to 
give exemptions and safe harbors, all of which will curb the 
problems of overdeterrence.
    So that is my long answer to your short question.
    Chairman Specter. Professor Ribstein, doesn't that 
delineation in the parameters of the proposed legislation 
pretty much answer the issues which you have raised?
    Mr. Ribstein. I do not think so, Senator. The standard best 
interests of the client is actually pretty close to a broad 
fiduciary standard. It could be interpreted to extend all the 
way to refraining from all kinds of unselfish--all kinds of 
selfish conduct, which is really what the fiduciary duty does, 
but it extends that to a situation that is not really the 
situation that is governed by that strong fiduciary duty 
generally, the mere rendering of advice, rather than the 
turning over of complete delegation of control, which is 
normally the situation where the fiduciary duty of 
unselfishness applies.
    So what we would have under that standard is, again, 
decades of litigation, just like we had with the fiduciary duty 
in Section 36(b) of the Investment Company Act, where courts 
eventually might define a standard, but until they do, parties 
would not know exactly what standard, what kinds of conduct are 
forbidden them. And, again, we get the problems of 
overdeterring innocent, socially productive conduct, and 
possibly underdeterring conduct that we really want parties to 
refrain from.
    Chairman Specter. Professor Ribstein, would the existing 
laws impose criminal liability on Goldman Sachs for what is 
alleged by the SEC?
    Mr. Ribstein. If they are guilt of what they have done--and 
I would go back to Andrew Weissmann's testimony earlier today--
they did it willfully, they did it with scienter, they engaged 
in fraud, then yes.
    Chairman Specter. Professor Verret, you said on an analogy 
to housing that brokers would have to conduct widespread 
investigations. Is that really so? We are talking 
illustratively in the context of the SEC complaint against 
Goldman Sachs. These are things Goldman Sachs knew. Now, this 
is not a matter of telling the party in that line to go and 
investigate matters. These are things they knew and failed to 
disclose, acts of omission. Isn't that significantly different 
from the consideration you raised?
    Mr. Verret. Well, I would offer first that this statute 
would not be limited solely to the Goldman fact situation, so 
it would be used much, much more broadly. And I think, frankly, 
contrary to Professor Coffee's analysis, I would offer that, 
you know, we have seen a number of pieces of language and 
legislation become very, very widely defined by the SEC, and I 
would offer as an example the definition of ``offer'' under the 
registration statement rules and how offer has come to mean not 
just offer, but any communication of any kind.
    And so I am still concerned about the uncertainty in the 
fiduciary duty standard, and, you know, the fact patterns that 
would be subject to the statute would be much wider than the 
Goldman scenario. And even in the Goldman scenario, I would 
point out one difficulty, which would be that if you are a 
fiduciary to a wide variety of different, potentially 
conflicting interests, you could be in a very difficult spot. 
Let us remember, you know, you change the fact pattern a little 
bit or even in the Goldman scenario, if Goldman had had 
fiduciary duty to the investors who lost money, let us remember 
they might have had a fiduciary duty to Mr. Paulson as well. So 
what if Paulson comes to Goldman and says, ``Here is some 
information I have got through my own investigations and here 
is why I think housing is going to go down? '' If Goldman had 
an obligation to share that information with other investors, 
they might be violating their duty of confidentiality to Mr. 
Paulson.
    So putting someone in a fiduciary duty situation that is 
already subject to a variety of different conflicting interests 
might just set them up to fail without any malicious intent.
    Chairman Specter. Professor Verret, how about the issue of 
adequacy of fines? Don't you think that to have some deterrent 
effect there have to be jail sentences at the end of the 
rainbow?
    Mr. Verret. Well, under the securities laws already, we 
have a number of different jail sentences for securities fraud. 
And so I think--I do not think we need to add new legislation 
for fines. I think we already have a lot of fines on the books 
and a lot of jail sentences on the books for this type of 
activity.
    Chairman Specter. So you would agree that jail is 
necessary, but it ought to be imposed under existing law?
    Mr. Verret. It depends on the situation. It depends on the 
situation. And I do not want to say that I think that the 
Goldman situation deserves jail time or not because it is just 
way too early to tell.
    Chairman Specter. I was not putting Goldman in the 
question.
    Mr. Verret. OK.
    Chairman Specter. Professor Ribstein, how about it? Are 
fines sufficient as a deterrent?
    Mr. Ribstein. They may or may not be, Senator. I think we 
have to take into account both the costs and benefits of 
imposing criminal liability. If we want----
    Chairman Specter. You have Professor Pontell's example of a 
$50 million fine willingly paid with the statement that had 
there been a criminal prosecution, it would have been 
vigorously defended.
    Mr. Ribstein. If we define the criminal liability 
appropriately, then a criminal penalty is justified. My problem 
is----
    Chairman Specter. A criminal penalty could be fine or jail. 
I am asking you whether you think that it would be 
indispensable to move to jail as an effective deterrent.
    Mr. Ribstein. What I meant to say earlier is if we define 
the criminal conduct appropriately, then a criminal penalty is 
also appropriate. but my concern in what we are hearing today--
--
    Chairman Specter. Well, criminal penalty again, but I am 
asking about jail differentiated from fine, which is a criminal 
penalty.
    Mr. Ribstein. If we define the criminal conduct 
appropriately, then I think a criminal penalty could be also 
appropriate. My concern today is defining a breach of fiduciary 
duty criminally without adequately specifying what that breach 
entails.
    Chairman Specter. Well, I have asked you several times 
whether criminal penalty means jail, and I will not ask you 
again.
    Professor Pontell, if $50 million is not enough as a 
deterrent, willingly paid as opposed to contrasting a defense 
had there been a criminal charge as opposed to a civil charge, 
is there any fine sufficient to act as a deterrent?
    Mr. Pontell. That is difficult to determine, Mr. Chairman. 
The amount of fines varies, and, you know, depending on the 
offender, on the resources of the offender and/or the offending 
corporation, some fines may amount to what citizens may 
consider parking tickets. I mean, $15 million to Maurice 
Greenberg is, you know, a considerable fine; $600 million to 
Michael Milken was a very considerable fine, but not a major 
part of their overall wealth or assets. So, I mean, paying 
those fines is, again, a cost of doing business.
    Chairman Specter. Thank you, Professor Pontell.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman. Thank you for 
hosting and holding this hearing. I think it is an important 
one, and I appreciate your directing the Committee's attention 
to this.
    Just to follow up on the discussion that we have been 
having, I recall the pharmaceutical industry being hit with 
literally billions of dollars in fines for marketing 
pharmaceutical products for off-label uses and unapproved uses, 
and they went right back at it again because the fines were 
simply a cost of doing business. I am not remembering the 
numbers off the top of my head, but it was several billion 
dollars in fines, but they were making several tens of billions 
of dollars in profits from the marketing, and so the conduct 
continued, and they kept being brought back in to pay more 
fines, and it was just a cost of doing business.
    So I think when you look at the way many of our monetary 
penalties are structured and you compare that to the vast 
wealth, the huge numbers of dollars that are often involved in 
these major transactions, you can easily get to a situation in 
which monetary penalties alone simply by definition are 
inadequate. And unless people are looking at an actual sentence 
of incarceration, you are never going to have serious 
enforcement behind it. So I appreciate what you are doing.
    I wanted to ask the Committee's view. We have talked a 
little bit about the Goldman allegations, which suggest that in 
a transaction Goldman was designing the product with the 
assistance of an investor who was going to bet against the 
product, and the question is: Should the person who was being 
sold the product also be given kind of fair dealing knowledge 
that this was not just a Goldman-designed product, this was a 
product that was designed with the assistance of somebody who 
would then be betting against it? And I have heard anecdotal 
stories of similar sorts of transactions where products were 
being resold, securitized in tranches, and the bottom tranche, 
often an equity tranche, became the sort of signal to the rest 
of the market for whether the higher-rated tranches were 
marketable and were valid and people should invest in them, and 
they would look first to the bottom tranche and see how that 
went. And I have heard anecdotally stories of Wall Street 
houses selling off the equity tranche or the worst-rated 
tranche in order to open the market for the other ones, but 
having cut a side deal with the buyer of the equity tranche, 
that takes away any risk of the equity falling.
    And so, in effect, you had a sham equity buyer whose job--
if the allegations are true, a sham equity buyer whose job was 
to come in and look like a legitimate equity buyer who had made 
an independent assessment of the risk of the product and 
thought it was investment worthy, when, in fact, they were 
propped up with this side deal that said to them if it goes 
wrong, we will stack you with a lot of shorts on this other 
stuff so that you come out fine.
    Again, that raises the same question. Should the investors 
in the other tranches have been made aware that there was more 
to that deal than met the eye?
    And so a lot of this, I think, comes down to a question of 
what disclosure is fair, and that raises questions of whether a 
fiduciary duty is appropriate to prompt that disclosure. It 
also raises just more general questions about whether somebody, 
anybody structuring a deal should be transparent about who is 
in on the deal and what all the terms of it are, not just the 
apparent terms that the public sees. And I would love to hear 
your comments on that question. Professor Coffee had his finger 
up first.
    Mr. Coffee. I think what you have just described is 
something known as the liquidity put. You actually sold the 
equity tranche, but the big bank gave an option to resell it, 
gave a put agreement. They would buy it back if you lost 
liquidity, and you, the hedge fund that bought the equity 
tranche, could not sell it. What that shows is that these 
conflicts of interest can happen, often come back and even 
haunt the original bank that is subject to the conflicts. These 
liquidity puts put billions of dollars of liabilities onto the 
balance sheets of our major commercial banks and partially 
necessitated the TARP bailout. So conflicts of interest----
    Senator Whitehouse. Hoist with their own petard, would you 
say? Wasn't that Shakespeare's phrase?
    Mr. Coffee. That may be true, but the injury flows through 
to the American investor who had to bail them out. When 
conflicts get too prevalent, we find that everybody starts 
losing in a very opaque, nontransparent world. I think if you 
had a fiduciary duty standard, you would not design 
transactions in that way. You would not let one side write or 
pick the portfolio and sell it to the other side.
    This can be dealt with partly through a disclosure 
standard, but I think the fiduciary duty standard, first of 
all, tells the operative managers what they are supposed to do, 
and that is the first obligation of the law, to----
    Senator Whitehouse. Let me ask you to follow up on a point 
you just made that I find very interesting. You just made the 
point that when there is a sort of risk, at least, of a 
systemic loss of confidence, the fact that these products are 
not transparent causes, the immediate financial result back to 
the bank of having to buy it back and get hit with it, but it 
also is something that people looking at the financial system, 
thinking that they understood it, thinking that they were 
comfortable with the way it was, suddenly think, ``Oh, my gosh, 
this is a lot weirder than I thought. Until this settles out, I 
had better get my money out,'' so it could actually contribute 
to system instability to have all of this off the books, sort 
of nontransparent back-door dealing going on when it becomes 
apparent to the public that they have been sort of left out of 
the real equation.
    Mr. Coffee. I think there were elements of a financial 
panic in 2008, and I think the lack of transparency always 
increases the possibility of that sudden revelation that 
produces a panic.
    Certainly, Lehman fell because of a panic, and everyone 
backed away because they did not know what the full liabilities 
were.
    Senator Whitehouse. Yes. Transparency has stability value 
then.
    Professor Ribstein, you wanted to say something?
    Mr. Ribstein. Well, Senator, the Goldman transaction, I 
think, really points out some of the problems that we run into 
with imposing a broad fiduciary duty here, because there is a 
question about what needs to be disclosed by whom to whom that 
arises out of this transaction.
    Now, it turns out that, in fact, the buyer of the 
securities, as alleged in the complaint, IKB, was a bank that 
was, in fact, remarketing these securities, as I understand it, 
through a subsidiary, so it was engaged a little bit in what 
Goldman is being accused of doing. It was in effect insuring 
this block of securities. Warren Buffett was quoted as saying 
yesterday that----
    Senator Whitehouse. That does not excuse the original 
person. Under the criminal law, if you are a fence----
    Mr. Ribstein. Well----
    Senator Whitehouse [continuing]. And you sell something to 
somebody who then fences it, that does not excuse the first 
fence.
    Mr. Ribstein. No, Senator, I was not trying to indicate 
that. What I was saying is that we had a very sophisticated 
party on the other side, and there has to be a difference 
between the duty to disclose to this sort of party and what the 
duty to disclose is to other sorts of parties. And I think that 
these are the kinds of questions that need to be addressed and 
are not necessarily addressed by a broad standard about best 
interests of the client or fiduciary duties or whatever broad 
statement you want to use.
    Senator Whitehouse. Well, I appreciate the witnesses being 
here. I appreciate Senator Specter holding this. What I see is 
that in my State the damage that began on Wall Street and then 
washed like a financial tsunami across the country, we are 
still digging out from, and we are in no mood to allow this to 
happen again, and I think it is very important for hearings 
like this to look into ways in which the criminal law can be 
used to discourage the kind of Wall Street misconduct that has 
taken ordinary families in Washington and Rhode Island and 
subjected them to really grievous personal suffering from 
unemployment, from loss of their health insurance, from loss of 
their jobs, from loss of their financial security. So thank you 
very much.
    Chairman Specter. Thank you, Senator Whitehouse.
    I want to insert into the record the article published by 
the McClatchy Newspapers way back on November 1, 2009, where 
they pointed out that in 2006 and 2007, the Goldman Sachs 
Group--this is their article--``peddled more than $40 billion 
in securities backed by at least 200,000 risky home mortgages, 
but never told the buyers it was secretly betting that a sharp 
drop in U.S. housing prices would send the value of those 
securities plummeting. Goldman's sales and its clandestine 
wagers completed at the brink of the housing market meltdown 
enabled the Nation's premier investment bank to pass on most of 
its potential losses to others before a flood of mortgage 
defaults staggered the U.S. and global economies. Only later 
did investors discover that what Goldman had promoted as AAA-
rated investments were closer to junk.''
    Without objection, the full article will be made a part of 
the record.
    [The article appears as a submission for the record.]
    Chairman Specter. Just a few more questions on related 
subjects. Professor Coffee, as you know, the Supreme Court of 
the United States has held that aiders and abettors are not 
liable under the securities laws, and I and others have 
introduced legislation to change that decision. Congress has 
the authority to do that where it is not based on the 
Constitution. The criminal law imposes sanctions for aiding and 
abetting. Do you know of any case where the standard of the 
criminal law is met but does not give rise to a claim for 
relief or a cause of action under civil law?
    Mr. Coffee. You asked that same question of Mr. Weissmann 
earlier, and I was thinking then----
    Chairman Specter. Well, I did not get an answer. That is 
why I am asking----
    Mr. Coffee. I do not know of another instance like that. As 
you know, I have testified in favor of your aiding and abetting 
legislation, and I am not generally a fan of what I will call 
stock-drop litigation. But I think aiders and abettors are a 
particularly good target for private enforcement to focus on, 
because they are the gatekeepers.
    Chairman Specter. You heard the questions that I asked 
about the missing paragraph in the second submission by Mr. 
Weissmann. With respect to the issue of whether there could be 
some reasonable enforcement by private lawsuits if the 
standards of pleading were relaxed so that there did not have 
to be the specificity which has traditionally been obtained, 
the facts and materials in discovery, do you think that those 
limitations go too far?
    Mr. Coffee. Well, of course, I was asked by the White House 
in 1995 what I thought of that statute, and I and Professor 
Langford both wrote a letter to the President at his request 
which said that we thought the statute did go too far, and my 
view from 1995 has not changed that dramatically.
    I would suggest that if you made one change in this area, 
it would be not to repeal the pleading rule, but to give the 
Federal district court, which is right on top of the case, 
discretion to permit limited discovery in cases where it 
thought there has been some showing made of irregularity or 
fraud. That would give discretion to the court rather than 
letting either side. Now, we have an all-or-nothing rule. 
Either you show fraud with particularity, or you get no 
discovery. And it is hard to show fraud without discovery.
    If you gave the district court a little bit more 
discretion, allowing it to order some limited discovery before 
it ruled on the motion, I think that might deal with the 
intermediate case and let there be justice on the specific 
facts and circumstances.
    Chairman Specter. So you wrote to the President?
    Mr. Coffee. In 1995, I was requested to by the White House 
Counsel's Office.
    Chairman Specter. I wrote to the President, too, in 1995 
suggesting that he veto it. Now, do you think he vetoed it for 
your letter or mine, or neither or both?
    Mr. Coffee. I do not suggest I had any impact, but my view 
was the same then and now.
    Chairman Specter. Just an irrelevant short story. I was in 
my condo at about 10:30 one night when I got a call from the 
White House, and the President was on the line, and he said, 
``Do you have time if I read to you part of my veto message?'' 
And I said I did, and your letter was probably close to mine. 
He had a number of the elements in the veto message.
    One final question for you, Professor Coffee, and that is, 
I and others have introduced legislation to change the Supreme 
Court ruling on pleading, going so far from what had been the 
traditional interpretation of the Federal Rules of Civil 
Procedure. What do you think of those Supreme Court decisions 
of limited----
    Mr. Coffee. You are talking now about Iqbal and Twombly, 
the two Supreme Court cases.
    Chairman Specter. Yes.
    Mr. Coffee. I think it is judicial legislation. It is not 
usually what the Court does. I am not a fan of the old 1938 
civil rules which gave the plaintiff maybe too much ability, 
and I think Iqbal and Twombly, outside of the securities law 
context, will screen out some meritorious cases as well as some 
non-meritorious cases.
    Inside of the field of securities law, Iqbal and Twombly do 
not mean that much because the PSLRA has a much more protective 
provision in it than Iqbal--Iqbal and Twombly only require 
plausibility. The PSLRA requires that there be strong evidence 
of fraud shown before discovery.
    Chairman Specter. I note your Yale Law School background. 
Was Judge Clark teaching Civil Procedure when you were there?
    Mr. Coffee. He taught me Constitutional Law, not Civil 
Procedure.
    Chairman Specter. I did not know that Judge Clark taught--
--
    Mr. Coffee. I am sorry. I thought you said Judge Bork. Did 
I mishear you?
    Chairman Specter. I said Clark. I did not say----
    Mr. Coffee. Oh, Charlie Clark had retired by the time I 
went to law school. You went there before me.
    Chairman Specter. Oh, I do not think so at all.
    [Laughter.]
    Mr. Coffee. All right. I take that back. But he was 
retired.
    Chairman Specter. Judge Charles Clark did teach my class 
Civil Procedure, and he led off with the case of Dioguardi v. 
Durning, which I will remember forever because he was so 
effective, about an immigrant who wrote some things down on a 
slip of paper, sent him to the Federal court, and it was held 
that that was a notice pleading. Quite a change from what Judge 
Clark said writing the Rules of Civil Procedure as to what the 
Supreme Court has recently said.
    Well, thank you very much, Professor Verret, Professor 
Pontell, Professor Coffee, and Professor Ribstein. I very much 
appreciate your coming in. This is an ongoing issue, and we 
thank you.
    That concludes the hearing.
    [Whereupon, at 11:25 a.m., the Committee recessed, to 
reconvene at 2 p.m., this same day.]
    AFTERNOON SESSION (2:02 p.m.]
    Chairman Specter. Good afternoon, ladies and gentlemen. The 
Criminal Law Subcommittee of the Committee on the Judiciary 
will now continue the hearing. We heard from seven witnesses 
this morning, and the Assistant Attorney General in charge of 
the Criminal Division, Hon. Lanny A. Breuer, was in New York, 
and we appreciate his coming back because he has really key 
testimony to provide as the chief law enforcement officer in 
the Criminal Division. So welcome, Mr. Assistant Attorney 
General, and we look forward to your testimony.

STATEMENT OF HON. LANNY A. BREUER, ASSISTANT ATTORNEY GENERAL, 
 CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC

    Mr. Breuer. Thank you, Mr. Chairman, and it is always good 
to be with you, and thank you for inviting me to be part of the 
hearing and giving me the opportunity to discuss the issue of 
fraud on Wall Street and how most effectively to deter it.
    Let me begin, Mr. Chairman, by assuring you that the 
Department of Justice, together with its law enforcement 
partners, shares your determination to root out, prosecute, and 
punish financial fraudsters. These crimes erode the public's 
confidence in our markets and institutions, siphon billions of 
dollars from hard-working Americans, and have convinced many 
that Wall Street is somehow above the law.
    In many respects, we are better positioned now than ever 
before to uncover and prosecute financial fraud. As you know, 
Mr. Chairman, the Financial Fraud Enforcement Task Force is 
spearheading our efforts. The task force provides a unique 
forum to discuss trends, develop data and intelligence-driven 
enforcement strategies, offer training and coordinate sweeps, 
and other cooperative and creative enforcement initiatives.
    The task force's leadership is joined by action on the 
ground. As you know, the Department has been deploying 
increased resources to combat financial fraud, and it has been 
more forward leaning in terms of its investigative techniques 
and its efforts to coordinate and cooperate with our law 
enforcement counterparts, both here and abroad.
    At the same time, we have been unwavering in our commitment 
to ensure tough but fair penalties for corporations and 
individuals alike. These penalties have included and they must 
include jail time in appropriate cases.
    Since I appeared before the full Committee in December, 
there have been several new prosecutions by task force members 
that are worth noting. In March, the President of Park Avenue 
Bank in New York was charged with attempting to fraudulently 
obtain more than $11 million in taxpayer rescue funds from the 
Troubled Asset Relief Program, TARP. Just 2 weeks, the U.S. 
Attorney in Newark charged the chief executive of Capitol 
Investments USA with a $880 million Ponzi scheme stemming from 
the solicitation of investors in a purported grocery 
distribution business. Last Thursday, the former treasurer and 
senior executive vice president of Doral Financial Corporation 
was convicted after a 5-week trial for his role in a scheme to 
defraud investors that caused a $4 billion decline in share 
value.
    And just yesterday, Mr. Chairman, after a month-long trial, 
our prosecutors in the Fraud Section, along with our partners 
in the Oklahoma U.S. Attorney's Office, secured a conviction of 
a lawyer and his colleague in a massive fraud, a securities 
fraud, a pump and dump. Right after the verdict, the defendants 
yesterday were detained until their sentencing in late August.
    The Department's commitment to vigorously identify and 
pursue any wrongdoing in our corporate boardrooms and on Wall 
Street will not and does not end with the indictment. As I 
mentioned a moment ago, our prosecutors and agents are 
determined to ensure that wrongdoers are punished and that 
potential wrongdoers are deterred. This means seeking jail time 
whenever appropriate. Thus, the Department has sought 
significant prison sentences against white-collar criminals.
    For example, since I appeared before the full Committee, 
since then the Department secured a 50-year sentence for Tom 
Petters for a $3.7 billion Ponzi scheme, and just last week, a 
117-month sentence for Charles ``Chuck'' E. Hays for a Ponzi 
scheme involving stock, index, and other futures.
    We obtained a 7-year sentence for the principal outside 
attorney for Refco for his role in executing Refco's more than 
$2.5 billion fraud, and we secured a 5-year sentence for former 
Credit Suisse broker Eric Butler.
    In addition to seeking prison sentences for individual 
offenders in appropriate cases, an essential part of our 
criminal enforcement strategy is to hold corporations 
accountable as well. The Department believes that corporate 
guilty pleas and deferred prosecution agreements, fines, and 
the imposition of independent compliance monitors in 
appropriate cases serve the important criminal enforcement 
goals of specific deterrence, general deterrence, and 
rehabilitation. It is not our experience that companies treat 
such resolutions as a cost of doing business. It is our 
experience that corporate resolutions have a very real 
deterrent.
    In sum, the financial crisis has demanded an aggressive, 
comprehensive, and well-coordinated law enforcement response. 
The Department and its partners on the Financial Fraud 
Enforcement Task Force are committed to this effort. We will 
look at all allegations of financial crime closely, follow the 
facts where they lead, bring our resources to bear to prosecute 
those who have committed crimes, and seek appropriately tough 
sentences for individuals and corporations alike.
    Mr. Chairman, I want to thank you for your interest and 
commitment to all of this, and I would be happy to answer any 
of your questions.
    [The prepared statement of Mr. Breuer appears as a 
submission for the record.]
    Chairman Specter. Well, thank you very much, Mr. Breuer.
    The case which you cite with a 50-year sentence, that is a 
long sentence. What were the facts of the case?
    Mr. Breuer. So in the Petters case, that was a businessman 
in Minnesota who was involved, Mr. Chairman, in a massive 
commodities fraud, Ponzi scheme, where he induced investors to 
invest money with him under the understanding that they were 
making reasonable, conservative investments in commodities that 
were then going to be resold. In reality, what this fellow was 
doing was anything but that, Mr. Chairman. He was simply doing 
a classic Ponzi scheme where he would take the investments of 
the latter investors, provide some money to the early 
investors, and would keep this Ponzi racket going forward.
    Chairman Specter. Do you know whether there was any 
publicity given to that sentence?
    Mr. Breuer. There was some, Senator. There was. I mean, I 
would have to go back to see how much and whether it was 
sufficient. But there was some publicity given to it. I can go 
back and let you know how much.
    Chairman Specter. There has been some comment that the 
prosecutions which have come out of the Wall Street fraud have 
been on minor participants contrasted with the savings and loan 
matters a few years back. The case you mentioned does not 
appear to be a matter of Wall Street fraud. Or was it?
    Mr. Breuer. Well, Senator, it was not a matter of Wall 
Street fraud in the sense of it was not literally on Wall 
Street and it was not, for instance, a financial institution. 
But to the degree we are talking about a fellow who purported 
to be an investor--an investment person who was seeking 
investment to the degree that he was seeking and getting 
investments for many both retail and perhaps some institutional 
investors, I think if we take a more expansive view of what we 
mean by Wall Street, which is those who we bring into our 
confidence, those who we provide money to, and those who have 
in one way or another acted criminally, then in the broader 
sense I think it was.
    Chairman Specter. Well, tell me what the facts were on the 
case where you got 117 months.
    Mr. Breuer. So the 117 months, Senator, was also a fellow 
by the name of Hays. From what I remember, he also was involved 
in a Ponzi scheme.
    Chairman Specter. Was it a Wall Street matter?
    Mr. Breuer. Again, he was not based in New York. He was out 
in the Midwest, Senator, I think as well in Minnesota. And, 
again, it was a fellow who was seeking investments, structuring 
transactions to avoid reporting requirements. And so, again, 
Senator, I would say it would not be, as I think you are 
thinking of, a classic Wall Street case; rather, I would say it 
is more of a national case dealing with those who, once again, 
have preyed upon the----
    Chairman Specter. And the 7-year sentence in the Refco 
case?
    Mr. Breuer. Right. So the Refco case--and it will take me a 
moment. I think the Refco case, Senator, was one of the lawyers 
involved in that case, and I guess that was a case of 
securities fraud and had to do with false reporting. So I do 
think that--again, it is a little hard to define, but it deals 
more broadly with financial fraud and this administration's 
commitment to prosecuting all types of financial fraud and 
holding those accountable.
    Chairman Specter. Was it any of the cases involving 
prominent Wall Street operators?
    Mr. Breuer. Well, Senator, I know what you are saying, and 
let me be clear here. I am not disputing the premise of what 
you are suggesting. But, of course, there is----
    Chairman Specter. Well, I do not have any premises----
    Mr. Breuer. But let me begin by----
    Chairman Specter. I am just asking questions.
    Mr. Breuer. There is the Credit Suisse case. In the Credit 
Suisse case, you had a Credit Suisse official who 
misrepresented--he and another misrepresented the securities 
that they were selling. They claimed that the securities that 
they were selling were secure securities that were backed by 
investment-grade securities. I think the suggestion was that 
they were investment grade and perhaps dealt with student 
loans. In reality, they were not investment grade. They were 
mortgage-backed securities that underlay the investment and 
were, in fact, extraordinarily risky. In that case, one was a 
plea, one was a conviction in the Eastern District of New York, 
and the defendant was convicted and is now in jail.
    Chairman Specter. And what was the sentence?
    Mr. Breuer. I think it was 5 years. Yes, it was 5 years.
    Senator, I would say--I am sorry.
    Chairman Specter. The Subcommittee would be interested in 
knowing about what prosecutions have been brought in the course 
of the past couple of years as we have seen evidence on Wall 
Street fraud. We are trying to deal here with what deterrent 
effect there is, and that is why we are on this looking at the 
kind of situations that are before the public today. And in 
order to have the deterrent effect, the case obviously--you are 
an experienced prosecutor; I have had some experience at it--
has to be in the realm where others are similarly situated, has 
to have sufficient notoriety, and that really turns on the 
positioning of the person, whether they are an underling, 
whether they are in a prominent position, whether they are one 
of the lead names in the profession.
    Do you have any examples of that kind of a case----
    Mr. Breuer. Well, let me give you a few examples, Senator--
--
    Chairman Specter. Let me finish the question.
    Mr. Breuer. I am sorry.
    Chairman Specter. Any examples of that with a tough 
sentence.
    Mr. Breuer. Well, let me do my best and give you a few 
examples, and then you can let me know if you think that they 
fit the bill at all.
    Last week, the former treasurer and senior executive vice 
president of Doral was convicted of securities and wire fraud, 
Mr. Chairman, after a 5-week trial, and that trial dealt with a 
scheme to defraud investors and potential investors with 
respect to the stock of his Puerto Rican-based company.
    Chairman Specter. Wall Street?
    Mr. Breuer. Well, it was publicly traded, sure, a publicly 
traded company.
    Chairman Specter. Was the defendant a Wall Street 
operative?
    Mr. Breuer. Well, I think the defendant was the senior vice 
president and treasurer, and I think he was based in Puerto 
Rico, Mr. Chairman. But his actions led to a $4 billion decline 
in share value, so we think of that as an important case and a 
case that occurred just last week. And, of course, there has 
been no sentence yet.
    And then----
    Chairman Specter. What will you be looking for there?
    Mr. Breuer. Well, I am not the--I do not yet know what the 
Department will be seeking. It will be seeking, I am sure, a 
very, very significant sentence, I am sure.
    Chairman Specter. Mr. Breuer, how are the sentence 
recommendations determined? For example, to what extent do you 
play a role in them? Are there any cases which reach the 
Attorney General on sentencing?
    Mr. Breuer. Well, the Attorney General is keenly interested 
in this issue, very interested.
    Chairman Specter. Well, does he make decisions on 
sentencing?
    Mr. Breuer. In significant cases, I will brief him 
typically on what the case is, the status of the case. He will 
often ask about the strength of a case or where we are on a 
case where he is aware of the investigation stage. And though I 
do not think he will ever be the person who will weigh in on a 
specific sentence, I think his orientation is always known.
    And then, Mr. Chairman, when I will weigh in is in various 
circumstances. There are many cases where the Criminal Division 
partners up with the U.S. Attorneys around the country. We do 
that very often. And in those cases, I will be briefed by the 
lawyers and will weigh in as to what we are seeking in a 
sentence. That is not atypical at all.
    And often the prosecutors in the case, of course, who have 
been living and breathing the case will have a very reasoned 
and a very strong view, and it will virtually always be within 
the realm of the advisory sentencing guidelines.
    For the kinds of cases we are talking about, Mr. Chairman, 
of this value, typically the sentences are very, very stark and 
very, very high. But we do seek very stiff sentences in these 
kinds of cases when appropriate, and it often is appropriate.
    Chairman Specter. Are you familiar with the Siemens 
prosecution, Mr. Breuer?
    Mr. Breuer. I am, Senator. To a degree I am familiar with 
the Siemens prosecution.
    Chairman Specter. Well, that is a case where Siemens, 
according to the information provided to me, agreed to pay a 
total criminal fine of $450 million and a disgorgement of $350 
million in profits, and nobody went to jail. Siemens' income, 
according to the information I have, was $104 billion, and 
income in excess--or approximately $2.5 billion in fiscal year 
2008. Did that conviction arise during the course of the 
current administration?
    Mr. Breuer. It did, Senator. It did, Mr. Chairman. It was 
an ongoing investigation, and you are right. Let me just add a 
little to what you say.
    First, Siemens, its total monetary penalties were actually 
$1.6 billion. That would include both from the U.S. and in 
Germany. The company was incredibly cooperative and very, very 
helpful in the information it provided over an extensive 
period.
    In making Siemens' plea, we made it as an absolute explicit 
provision that there was absolutely no protection for any of 
the individuals of Siemens. And, therefore, the individuals, 
executives, and others who were involved remain exposed, and 
the matter is not closed. Simply all that we have done is have 
a plea against a corporation. We have not closed out nor have 
we claimed to have closed out investigations with respect to 
individuals. They are ongoing.
    And, Mr. Chairman, I agree with you. I think the hallmark 
of an effective criminal justice plan must be that we will 
prosecute individuals when appropriate and ongoing. And I 
should say in that vein, Mr. Chairman, just 2 weeks ago we 
received the longest sentence in an FCPA case in the history of 
the FCPA when we obtained an 87-month sentence against a fellow 
who had violated and was convicted of the FCPA. So we will 
continue to pursue that.
    Chairman Specter. Well, you are saying that even though the 
case was concluded against the corporation, the matter is 
ongoing as to the individuals? Ordinarily, a case is wrapped up 
once and for all. Before a corporation will pay a fine, they 
want to know that that is the limit of their liability.
    Mr. Breuer. Right.
    Chairman Specter. And there is obviously a motivation to 
not have the jail sentence and for the corporation to pay a 
fine. And this morning, we heard very extensive testimony--not 
that it was surprising--that fines are added into the cost of 
doing business. One testimony related to one defendant who paid 
$50 million and said if it had been a criminal prosecution, he 
would have fought it tooth and nail. But you are saying that 
you are really going to go after some people in this Siemens 
matter?
    Mr. Breuer. Well, Mr. Chairman, what I am saying is that--I 
do not want to say whether we are or not for the reasons that I 
know you understand well. But what I will say is the following: 
We are not willing--and you are absolutely right, corporations 
do want to settle these cases, they do want to pay money, and 
they do want the assurance that the matters will be closed 
against the individuals of their company. We did not allow that 
to happen in that case, and we will not let it happen for the 
reasons you said.
    Now, in the Siemens case, I do want companies to feel an 
enormous incentive to come in and to disclose, and in Siemens, 
they did come in, they did disclose, and they provided us with 
an enormous amount of information. And so there was a real 
judgment that there was a real merit to having closure with 
respect to that and for the company to be rewarded for 
providing us with almost unparalleled cooperation.
    Chairman Specter. Did you start the prosecution before they 
made the disclosures?
    Mr. Breuer. I do not think so in that case. I think, 
Senator, I will have to go back--that is a good question.
    So my colleague is right. In this case, of course, one of 
the challenges that I was going to go into is in this 
particular case the prosecution began in Germany, and then we, 
of course, as we try now more and more to deal with the 
challenges we have, are working closely with our international 
colleagues and partners. That was a case where it began with 
the German prosecutors, and, of course, many of the individuals 
involved are in Europe. But there, nonetheless, it began in 
Germany. The company--we reached out, I believe. The company 
provided us with an enormous amount of information, and----
    Chairman Specter. Mr. Breuer, what I am getting at is, Did 
they provide you with information after you already had the 
case?
    Mr. Breuer. No. I mean, Mr. Chairman, in a case like this, 
these are very complicated cases, and this, of course, was a 
massive example of violations of the FCPA in different 
countries. And so there, there is no question that the law firm 
providing us and Siemens providing us with information were 
able to provide us with information that we would not have had 
but for them giving us the information. It was all over the 
world. Frankly, we would not have had the resources to have 
investigated to the degree that the company provided us the 
information. And so they did get a benefit for that. The 
benefit they got was certainty in the resolution of the 
corporate deal. What they did not get was closure for the 
individuals.
    Chairman Specter. Well, keep us posted as to what you are 
doing there.
    According to a story published last night by David Heath on 
the Huffington Post called ``Too Big to Jail,'' bank regulators 
like the Office of Thrift Supervision in the context of the 
current financial crisis have made no criminal referrals to the 
Department of Justice concerning fraud by the financial 
institutions. Do you know whether that is correct?
    Mr. Breuer. Mr. Chairman, I, as you know, just came back 
from New York, and someone just told me about that Huffington 
Post article. I do not know if that is correct. What I can say, 
if this is of help--and I will get back to you right away about 
that--is that what I can tell you is that we have required and 
ensured that our relationships with the regulators are robust 
and active. I meet regularly with the head of the SEC 
enforcement, as do my colleagues. I meet regularly now with the 
head of the CFTC enforcement. And, indeed, Mr. Chairman, since 
we last appeared before you, we now have two CFTC lawyers who 
are actually detailed to our Fraud Section so that we can 
ensure and move as quickly as we can when those kinds of cases 
ought to be prosecuted criminally.
    With respect to that particular regulator, I do need to get 
back. I just do not know if we have received any referrals or 
not.
    Chairman Specter. Are you familiar with the OxyContin 
settlement, Mr. Breuer?
    Mr. Breuer. I am generally aware of it, Mr. Chairman. I am.
    Chairman Specter. Well, that is a case where OxyContin 
agreed to pay $19 million to 26 States on giving inaccurate 
information on dosages, which resulted in deaths. Three 
executives entered guilty pleas. The company's president paid 
$19 million in fines, top lawyer $8 million. Paul Goldenheim, 
medical director, paid $7.5 million. Nobody went to jail. Was 
that handled by the prior administration?
    Mr. Breuer. It was, Mr. Chairman. Nonetheless, I am happy 
to give you a little bit of background. As I understand that 
case, it was a misbranding case where Purdue claimed that its 
product, OxyContin, that the slow-release version of that 
product had less negative consequences than other types of the 
similar drug. So the issue was what their claims were with 
respect to the slow-release formulation.
    The company pled, of course, to the felony. The individuals 
pled to the misdemeanor, as I recall, for misbranding, which in 
essence is a strict liability--it is a strict liability 
provision, Mr. Chairman. I do not think there was proof--and, 
of course, it was not under my watch, but I do not think there 
was proof that the senior executives, including the general 
counsel and others, were aware of these particular 
representations that were being made by Purdue.
    The company itself forfeited in total monies to State, 
Federal, civil suits hundreds and hundreds of millions of 
dollars, and right now the executives have been barred from the 
industry for an extended period of time. So I think that is a 
little bit of what happened in that particular case.
    Chairman Specter. Well, when you say they entered a plea to 
a misdemeanor, as we know from our joint experiences, that is 
often a compromise, does not indicate that there was not 
evidence of a felony. And the critical point is that there were 
deaths, that they were controlling officials, and nobody went 
to jail.
    Mr. Breuer. Right.
    Chairman Specter. Do you think that was an appropriate 
disposition on the sentencing issue?
    Mr. Breuer. Well, Mr. Chairman, it was not under my watch. 
I would want to know the facts better before I gave you a 
specific answer with respect to that. More generally, I am 
concerned. I do believe--and I very much agree with your 
thesis, Mr. Chairman--that responsible individuals who break 
the criminal laws and who are executives ought to go to jail.
    In a case with a strict liability statute--and, again, I do 
not know what gave rise, but just I know that they did a plea 
to the strict liability statute in essence. There, obviously, I 
think that would give us all more pause before we----
    Chairman Specter. You have said that twice about strict 
liability, and that raises the suggestion that there was no 
intent. But on these facts, that does not look like an 
exoneration. I do not know the details either, and I would like 
you to report back on that, whether there was evidence of mens 
rea, whether they could have been prosecuted for something 
else, and that was an accommodation. But the critical thing is 
you can go to jail for a case without specific intent.
    I am way past my time. I have been filibustering, Senator 
Klobuchar, just a little bit. I had some experience at that.
    What I would like to do, Mr. Breuer, is I would like to set 
up an ongoing review process so that we can keep track of the 
cases which you are handling and see what is going on with 
them. I have a long portfolio of cases which were egregious, 
giant corporations, fines, no jail sentences, minuscule 
compared to net profits, and a real question. This is a problem 
that I have seen my entire tenure here, that in the litigation 
process there is just too much of a tendency to resolve the 
case, a fine which looks good in a sense but I think is 
meaningless. I think that was the conclusion of the two panels 
which we had this morning. There were people on the other side. 
We had balanced panels, and some were defending Wall Street. 
But very overwhelming testimony from a professor from UCLA at 
Irvine, a criminologist, about deterrence. Of course, you do 
not really need to know that jail deters people and fines do 
not. You do not need to know that at all. But I would like you 
to keep this Subcommittee posted on what happens, especially 
out of the Wall Street line.
    Mr. Breuer. Mr. Chairman, I will. And if I may just comment 
for a moment, in my 1 year as AAG, I would like to think that 
we have been going full bore. We have indicted 46--we have had 
46 indictments just in the FCPA area in that 1 year, Mr. 
Chairman. That is more than in the entire history of FCPA. That 
is of individuals. As I mentioned to you before the other 
Senators came, we just 2 weeks ago got the largest and longest 
sentence in the FCPA area in the history of that statute, 87 
months. We have strike forces now in health care. We are in 
more than half a dozen cities. We will be in 13, we hope, by 
the end of the year, and in 20 by the next year. We are 
bringing real cases. We have probably had over a dozen trials. 
So if you do not plea to what we demand, we have been asking 
and going to trial, and we have gotten convictions in every one 
of those cases. Those people are going to jail, and with 
respect to Wall Street, we are looking hard at those.
    We are also doing this with respect to mortgage fraud where 
we are creating strike forces and partnerships with not just 
the U.S. Attorneys but with State and local governments as 
well.
    So I am delighted to let you know what we are doing. We are 
recruiting great people to our Fraud Section in the Division, 
but it is a very dynamic time, and I do not want the 
misimpression to be that the Criminal Division is not working 
in all areas. It is. I know you are not suggesting otherwise, 
but whether the cases are very big, Mr. Chairman, or smaller, 
you have my word that we are working tirelessly at them, and we 
are seeking jail time in the great preponderance of these 
cases.
    Chairman Specter. Well, those are impressive statistics, 
and I accept what you say. And we would like to pursue them, 
and we would like to see the level of defendant, whether they 
are minor figures in the overall scheme or whether they are 
prominent, whether the sentences relate to something which is 
an effective deterrent. And that is the function of the 
Judiciary Committee on oversight.
    Senator Klobuchar, would you be willing to accept the 
gavel?
    Senator Klobuchar. I can just stay for a good 5 to 10 
minutes, but I can do it for that amount, and then maybe 
Senator Kaufman can do it.
    Chairman Specter. Well, you can pass the gavel on.
    Senator Klobuchar. I will do that.
    Chairman Specter. We had a lengthy hearing this morning. 
Senator Kaufman was present.
    Senator Klobuchar [presiding]. I realize that. Very good. 
Thank you. Thank you, Senator Specter.
    Thank you, Mr. Breuer, for being here today, and I am most 
interested, after we did the Fraud Enforcement Recovery Act--as 
you know, Senator Kaufman was very involved in that as well--
how things are going with that. I wanted to thank you and the 
Justice Department for the good work you did on the Tom Petters 
case, which is know was mentioned before I got here. That was a 
huge case, just hundreds of millions of dollars lost. I think 
next to the Bernie Madoff case, it was the second biggest case, 
and it was located in our State of Minnesota, and a lot of 
people lost a lot of money. So I appreciate the good work and 
the strong sentence that the Minnesota U.S. Attorney's Office 
was able to get in that case.
    I wondered, first of all, just an update on FERA, the Fraud 
Enforcement Recovery Act. How are you using that money? I think 
it nearly doubles the FBI's mortgage and financial fraud 
budget, but how is law enforcement in general targeting fraud 
with that money?
    Mr. Breuer. Well, it has been incredibly helpful both in 
the way that the statute and the amendments were made to 
encompass conduct that before was not so easy to address.
    With respect to resources, Senator, they are being used 
wisely. I meet every week with the head of the Criminal 
Investigation Division of the FBI, Kevin Perkins, and often 
with his superior, T.J. Harrington. And among the issues that 
are at the very top is the issue of going after financial 
fraud, mortgage-related fraud.
    We have right now probably over 1,000 people charged around 
the country for mortgage-related frauds, from the most basic to 
the most advanced and complicated, and that we could not do 
without the additional resources that we have received.
    In our Fraud Section, we have additional attorneys. The 
U.S. Attorneys have additional attorneys, and the FBI, of 
course, is doing it. So it is very robust. There are strike 
forces throughout the country. The Financial Fraud Enforcement 
Task Force, President Obama's task force to address all 
financial crime, benefits enormously from these additional 
resources, and the various working groups, whether those are 
working groups dealing with mortgage fraud, rescue fraud, 
recovery fraud, or securities and commodities fraud, the added 
resources are being deployed in all those areas.
    Senator Klobuchar. Thank you. A witness who testified this 
morning--Andrew Weissmann--was skeptical about imposing a 
fiduciary obligation on brokers or an increased focus on jail 
time on bad actors. I disagreed with some of his testimony. But 
there was one point that I thought was worth exploring with 
you, and that was whether and how we can increase enforcement 
of existing statutes and remove road blocks to civil liability.
    One of his points was that regulatory agencies could punish 
bad actors through civil sanctions more frequently than they 
do. For example, the SEC could bar executives and brokers from 
the industry in some circumstances. The SEC and DOJ can assign 
Federal monitors to corporations. Obviously, banning 
individuals from an industry is a very serious sanction that 
would send a strong message.
    Do you have any idea how frequently these kinds of 
punishments are used? And is there a role for Congress to 
encourage agencies to use these kinds of serious civil 
sanctions more? And do you think that that would, just like 
jail time, create a different culture?
    Mr. Breuer. Well, Senator, I do not know the numbers of how 
often the regulators do it, but I absolutely think that robust 
tough regulators are essential. And I think right now the folks 
who are in charge at the SEC and the CFTC are just that. They 
are robust and they are tough, and they take their assignments, 
I know, very seriously. And I do think that those kinds of 
sanctions have real clout.
    I do not think those sanctions are a replacement for the 
Department of Justice pursuing appropriate cases criminally. I 
think we have to do that, and we must do that. But I do think 
that there is a role for a tough regulator. I think there is a 
very big role for the Department, and I think our ongoing 
dialog--I meet regularly with the head of enforcement at the 
SEC, regularly with the head of enforcement at the CFTC. My 
fraud chief, Dennis McInerney, behind me does the same. And I 
think that that dialog is essential. There are cases where we 
should both do them together. There are cases where, frankly, 
we should only do them, where there is just sheer criminality 
and perhaps not a regulatory component. And, of course, there 
will be the others, which maybe Mr. Weissmann was referring to 
this morning, that ought to get a regulatory response.
    Senator Klobuchar. So do you think that is something in 
addition to potential jail time that would be helpful if we 
looked at that more?
    Mr. Breuer. Absolutely.
    Senator Klobuchar. OK. In your testimony, back to the 
Financial Fraud Task Force, the task force has established a 
financial fraud coordinator in every U.S. Attorney's Office 
across the U.S. to facilitate uniform and aggressive 
enforcement. How does this work, and how do they work with 
their local law enforcement people?
    Mr. Breuer. So it is essential that the Nation and our 
citizens have a right to know that as an administration we are 
acting in a coordinated manner and in an appropriately 
aggressive manner. What we are trying to do is get our arms 
around what we are prosecuting and what the dilemmas and 
problems are and what are good strategies and lessons. So the 
task force does everything, Senator. It keeps track of 
prosecutions. It comes up with theories for prosecutions. It 
comes up with theories of training. And, frankly, in many cases 
like in the health care area that I referred to, the strike 
forces, we sometimes find the very same bad actors. First, 
maybe they were in Minnesota, and when we are on them in 
Minnesota, they move on.
    What these financial coordinators do in the U.S. Attorney's 
Office is ensure that each U.S. Attorney has one point of 
contact so that every U.S. Attorney's Office knows what we want 
to hear back from them and also has one person who can collect 
the information. This way we can track do they have sufficient 
resources, are they using their prosecutors in the best way, 
and what can Main Justice do. And so that is really what they 
are doing.
    And then, of course, the task force itself is probably an 
unprecedented example of State and local and Federal 
coordination, and in part, that is also what these coordinators 
will do. They will be the people on the spot to ensure whether 
they do it or their colleagues in the U.S. Attorney's Offices, 
that they are having real partnerships with the Attorneys 
General or others. And that is the role.
    Senator Klobuchar. OK. What steps have you taken to 
implement the changes and like what are people saying out in 
the field about how it is going?
    Mr. Breuer. Well, it is a little self-serving. I think 
people think we are doing a lot. I really do. I mean, some of 
these cases are going to take longer, but when you are bringing 
as many health care fraud cases as we are and Medicare fraud 
cases as we are, when you have over 1,000 people charged with 
mortgage-related fraud, when you have an unprecedented number 
of cases against the FCPA, when we have this robust training 
program--we have brought TARP-related cases already. We are 
dealing very closely with Earl Devaney, the Chairman of the 
Recovery Board. I think people feel that we are playing a very 
active and real role.
    Having said that, I am keenly aware that there are those 
who are wondering why certain types of cases have not yet been 
brought, but overall, I think any objective view would say that 
this is an unprecedented time of prosecutorial and regulatory 
action and oversight.
    Senator Klobuchar. Well, it was much needed, so thank you 
very much, Mr. Breuer.
    Mr. Breuer. Thank you, Senator.
    Senator Kaufman [presiding]. Mr. Attorney General, 
Assistant Attorney General, I just want to associate myself 
with Senator Specter's question. I am sorry it is on such short 
notice, but I just found out about it. But this is pretty 
devastating. Mr. Black alleges that during the savings and loan 
crisis--which you and I have talked about and everyone has 
talked about. One of the keys to kind of find out what is going 
on are whistleblowers and referrals. And he alleges in the 
article in the Huffington Post whereas during the S&L crisis 
there were thousands of referrals, there have not been any on 
this. That would be very, very, very disturbing. So I do not 
know. It may turn out that way.
    But I will tell you what. It does not strike me, after 
sitting reading and following all this stuff, but especially in 
the Permanent Subcommittee on Investigations when you have 
regulators like the Office of Thrift Supervision, the head of 
the Office of Thrift Supervision did not realize that 90 
percent of the home equity loans at Washington Mutual were 
stated income loans and 63 percent of the ARMs were stated 
income loans and 50 percent of the subprime were stated income 
loans. This is after the same head of the Office of Thrift 
Supervision--I think his name is Mr. Reed--said that stated 
income loans are anathema to the banking industry, and where 
the Inspector General Thorson from Treasury said that these 
percentages of stated income loans are a target-rich 
environment for fraud. It is not hard to think that maybe the 
regulators did not--I mean, are there any regulators on the 
Financial Fraud Enforcement Task Force?
    Mr. Breuer. Many. For instance, if we just use one example, 
in the Securities and Commodities Working Group--and, really, 
the task force, it is the working groups that are really the 
enforcement component. The co-chairs are myself, the U.S. 
Attorney from the Southern District, Mr. Bharara, and Rob 
Khuzami, the head of enforcement at the SEC. And the CFTC is 
very involved as well, so many regulators--I think there are 
two dozen agencies represented by the task force.
    Senator Kaufman. That is why it makes it so hard. Again, I 
can well believe--and I do not even want to know about 
referrals that are still secret. I am not saying that. But it 
just seems hard to believe that this far down the road we have 
not had significant enough referrals from the regulatory 
agencies. After all, that is what they are supposed to do.
    Now, again, I realize that the regulatory agencies that 
were in place while most of this went on have turned out to be 
folks that believed in no regulation. I mean, essentially it is 
clear that the feeling was let the market kind of work it out 
and let us not regulate. And I think--I know--I am not--I do 
not want to go over this too much, but it is such a key point 
to this thing.
    Mr. Breuer. Right. Senator, the one thing I will say--and, 
look, I cannot address that, of course.
    Senator Kaufman. Right.
    Mr. Breuer. And I have not read the article, but what I can 
tell you--and I may have mentioned it before. I do not know if 
you were in the room. We are meeting, I am personally meeting 
regularly and my most senior people are meeting regularly with 
the top people at the SEC, the top people at the CFTC. We are 
meeting with regulators throughout in all different areas, and, 
frankly, we will continue to. The head of the TARP, the IG, Mr. 
Barofsky, we are meeting with him.
    Senator Kaufman. Good.
    Mr. Breuer. And others. So we are on top of it, and we will 
call it--I will call this agency as well, and I just do not 
know if they have or have not referred, but we will find out.
    Senator Kaufman. I am talking about that basically his 
allegation was nobody is referring.
    Mr. Breuer. Right.
    Senator Kaufman. And that, in fact, one of the key ways we 
were successful during the S&L crisis was the matter of 
referrals. And, remember, the other problem is we had at the 
time of the S&L, we had a lot more people involved in the 
Justice Department. Now that is the reason we passed FERA. FERA 
is--the main objective of FERA, as you and I have talked 
about--and we have talked about it in these hearings. I really 
appreciate what you are doing on mortgage fraud. I think that 
is important. But the FERA funds primarily were to go after the 
folks, the kingpins, kind of like when we passed the drug 
legislation to go after the drug kingpins, not the drug 
dealers. So we are really interested--and I am not saying 
``we'' like the imperial ``we,'' like me.
    Mr. Breuer. Right.
    Senator Kaufman. I am just saying it is clear when you look 
at the debate and the discussion of this bill, this is 
primarily targeted at--and not any kind of retribution. This is 
not about retribution. This is just--I mean, I am absolutely 
convinced, after the hearings we had on the Permanent 
Investigations Subcommittee and the studies I have been doing 
for this bill, that there is rampant fraud in these cases. I do 
not see how you can explain behavior other than there was a 
concerted effort to be engaged in fraud. I am not talking about 
any specific case.
    Let me ask you something. The stated income loan, things 
like that, you know, when you get big numbers, aren't they--do 
they merit--and I am not talking about Washington Mutual, just 
in general. Where you have a system where people are accepting 
less than--I mean, much, much less than what is generally 
recognized as good marketing practice in order to package 
together these mortgage fraud things and then ship them off and 
to sell them to somebody else, doesn't that seem like that 
would be an area that at least we can look at--that Thorson was 
right, that this is like a target-rich environment?
    Mr. Breuer. Senator, I want to be careful about saying what 
we are going to look at or not look at.
    Senator Kaufman. Sure.
    Mr. Breuer. But what I will say is that no matter how 
important or high up you are, we will look at the conduct, your 
conduct, and if we conclude that there was criminal intent in 
what you did, we will pursue it. Sometimes that may mean in 
these structures that it is going to take us longer because of 
all the reasons we all understand.
    Senator Kaufman. Right. We talked about that. I totally 
agree with that.
    Mr. Breuer. Right. But let me be clear here. We are 
incredibly invested, my team is incredibly invested, the 
Attorney General is, and that is not just the Criminal 
Division, but it is the U.S. Attorneys throughout the country. 
And in any scenario, if we can develop the facts and we can 
establish criminal intent, we will absolutely prosecute cases.
    Senator Kaufman. And, by the way, and to be absolutely 
clear, I look on the Justice Department as kind of a black box 
on this, that I do not want to know what is going on inside the 
black box, I should not know what is going on in the black box. 
That is why it is so scary when you hear someone allege that we 
are not getting referrals from the agencies, which you know 
that and whistleblowers are our two best sources. That is why 
it is so scary, because I do not want to get into the black 
box. I do not want to get into how you are making decisions. I 
do not want to get into any of those kinds of things. We do 
know that it is incredibly difficult. These are complex cases.
    Mr. Breuer. Senator, one thing I want to make sure we are 
clear, I do not want to talk about a particular regulator, the 
one you----
    Senator Kaufman. Sure.
    Mr. Breuer. But we are absolutely getting referrals from 
regulators.
    Senator Kaufman. OK.
    Mr. Breuer. We have strong relationships with regulators. 
We are meeting with the regulators. And we have been getting 
referrals from the regulators, and we are going to continue to 
get referrals. And when we do not get referrals, I and my 
colleagues are at the regulators complaining and whining and 
yelling and cajoling. We want these cases, and we are 
aggressively going after them.
    Senator Kaufman. I think this is a good point to adjourn 
the hearing. Thank you very much.
    I have a couple housekeeping things. Chairman Leahy has 
submitted a statement for the record which, without objection, 
I would offer. I do not see any objection.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Senator Kaufman. The record in this matter will remain open 
for 1 week.
    Thank you very much for your testimony, and the hearing is 
adjourned.
    Mr. Breuer. Thank you, Senator.
    [Whereupon, at 2:51 p.m, the Subcommittee was adjourned.]
    [Submissions for the record follow.]



    
                                 
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