[Congressional Record (Bound Edition), Volume 156 (2010), Part 5]
[Senate]
[Page 6118]
[From the U.S. Government Publishing Office, www.gpo.gov]




                   IMPROPER PRACTICES ON WALL STREET

  Mr. SPECTER. Madam President, I thank the Chair. I have sought 
recognition to comment briefly on a hearing which will be held by the 
Criminal Law Subcommittee of the Committee on the Judiciary on May 4 
concerning allegations of improper practices on Wall Street.
  In light of the allegations of misconduct on Wall Street in recent 
years and the consequential damages to the economy of the United States 
and worldwide, serious consideration should be given to whether civil 
liability and fines are sufficient or whether jail sentences are 
required to deal with such conduct and as a deterrence to others. With 
civil liability or a fine, the companies or individuals calculate it as 
part of the cost of doing business, but a jail sentence is enormously 
different.
  The charges brought by the Securities and Exchange Commission 
accusing Goldman Sachs of securities fraud in a civil lawsuit has 
brought intense public concern to conduct on Wall Street which has long 
been questioned. According to the SEC complaint, Goldman permitted a 
client who was betting against the mortgage market to heavily influence 
which mortgage securities to include in the portfolio. Goldman then 
sold the investments to pension funds, insurance companies, and banks. 
The client was betting the securities would decline in value based on 
his knowledge of the underlying value. Similar practices have been 
defended by investment bankers on the ground that the investors are 
sophisticated and have a duty to protect themselves without relying on 
the investment counsel. There is a contention that the only issue is 
whether the investments are suitable, with the denial that there is a 
fiduciary duty. That defense further contends that there is no conflict 
of interest.
  Some of the issues to be considered at the hearing to be held by the 
Criminal Law Subcommittee of the Judiciary Committee on May 4 are the 
following:
  First: Precisely what are the structures of the complex commercial 
transactions involving securitizing mortgages, selling short hedge 
funds, derivatives, et cetera?
  Second: Under what circumstances, if any, do the investment bankers 
have a fiduciary duty to the investors?
  Third: Where, if at all, do conflicts of interest arise in such 
transactions?
  Fourth: Is there a legitimate distinction between the investment 
council's duty to provide only a ``suitable'' investment without a 
fiduciary duty involved?
  Fifth: When the investment banker recommends or offers an investment, 
is there an implicit representation that it is a good investment?
  In my judgment, Congress should examine these complicated 
transactions with a microscope and make a public policy determination 
as to whether such conduct crosses the criminal line. Congress should 
investigate and hold hearings to find the facts. Congress should then 
define what is a fiduciary relationship, what is a conflict of 
interest, and what conduct is sufficiently antisocial to warrant 
criminal liability and a jail sentence.
  As a starting point, it should be emphasized that the SEC complaint 
contains allegations which have yet to be proved. The numerous 
newspaper stories and other media reports are hearsay, so the task 
remains to find the facts. These inquiries on Wall Street practices are 
being made in the context that they triggered or at least contributed 
to a global financial crisis.
  Larry Summers, on March 13, 2009, said:

       On a global basis, $50 trillion in global wealth has been 
     erased over the last 18 months. That includes $7 trillion in 
     the U.S. stock market wealth which has vanished, $6 trillion 
     in housing wealth which has been destroyed, 4.4 million jobs 
     which have already been lost, and the unemployment rate now 
     exceeds 8 percent.

  In the intervening year, a total of 6.5 million jobs are now the 
total lost, and the unemployment rate stands at 9.7 percent.
  I have long been concerned about the acceptance of fines instead of 
jail sentences in egregious cases. There are many illustrative cases, 
but three will suffice to make the point. In each of these cases, I 
registered my complaint with the Department of Justice.
  First: On September 2, 2009, Pfizer agreed to pay $2.3 billion to 
resolve criminal and civil liability for committing health care fraud 
for selling Bextra, for off-label uses the FDA declined to approve 
because they were unsafe. For a company with revenues in excess of $48 
billion and an income in excess of $8 billion in fiscal year 2008, it 
was chalked off as the cost of doing business.
  The second case: On December 15, 2008, Siemens AG entered guilty 
pleas to violations of the Foreign Corrupt Practices Act and agreed to 
pay $1.6 billion in fines, penalties, and disgorgements with no jail 
sentences. Again, that amounts to a calculation as part of the cost of 
doing business for a company which had revenues of $104 billion and a 
net income of $2.5 billion in fiscal year 2008, after the penalty.
  The third case, briefly: On May 8, 2007, Purdue Pharma agreed to pay 
$19.5 million to 26 States to settle complaints that Purdue encouraged 
physicians which prescribed excessive doses of OxyContin in violation 
of an FDA ruling which resulted in numerous deaths. Company officials 
paid fines, nobody went to jail; again, part of the cost of doing 
business.
  From my days as district attorney of Philadelphia, where my office 
convicted the chairman of the Housing Authority, the Stadium 
Coordinator, the deputy commissioner of Licenses and Inspections, and 
others, my experience has convinced me that criminal prosecutions are 
an effective deterrent.
  The deterrent effect of prison was succinctly stated by Mr. William 
Mercer, chairman of the Sentencing Guideline Subcommittee of the 
Attorney General's Advisory Committee, on behalf of the Department of 
Justice, in a 2003 publication. He said:

       [W]e believe that the certainty of real and significant 
     punishment best serves the purpose of deterring fraud 
     offenders and particularly white collar criminals. 
     [O]ffenders usually decide to commit fraud and other forms of 
     white collar crimes not with passion, but only after 
     evaluating the cost and benefits of their actions. If the 
     criminally inclined think the risk of prison is minimal, they 
     will view fines, probation, home arrest, and community 
     confinement merely as a cost of doing business. We aim to 
     remove the price tag from a prison term. We believe that if 
     it is unmistakable that the automatic consequence for one who 
     commits a fraud offense is prison, many will be deterred, and 
     at least those who do the crime will indeed do the time.

  These are some of the considerations which will be taken up at the 
subcommittee hearing.
  I thank the Chair and I yield the floor.

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