[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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63-555 PDF WASHINGTON : 2011
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20402-0001
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
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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.]