Why Wall Street Sharks Swim Free

It’s no secret that the feds have gone soft on busting Wall Street titans and other executives at the center of the credit crisis.

In fact, cases brought by the Securities and Exchange Commission against firms involved in creating the toxic securities that hurtled the economy to near ruin rarely name executives as defendants, the New York Times reported last Friday. Such cases include a recent settlement with JP Morgan Chase for wrongly selling a mortgage security that went bad.

Remember the dark days for corporate America after the tech and Internet bubble burst in 2000? In the following years, senior executives from Enron, WorldCom, Tyco, Adelphia, Rite Aid and ImClone were convicted and imprisoned for their roles in scamming investors.

Those executives did the crimes, then they did the time.

Not so in the aftermath of the credit crisis. It’s been three years since the federal government had to bail out Wall Street after it almost destroyed the global economy, and no prosecution has emerged against a key figure atop any of the banks or mortgage firms.

But now we know why the feds at the Justice Department and the SEC have gone soft. According to the Times, the Justice Department in 2008 adopted a practice known as “deferred prosecution agreements” as an official alternative to seeing a case go the distance to guilty or not guilty.

Such agreements mean that if companies decide to play nice and conduct their own investigations when the feds knock on the door looking for information about bad guys, the feds can delay or cancel prosecutions if companies promise to change.

Lawyers for the big banks love the new guidelines. According to the Times, one major law firm that represents Wall Street said in a 2008 memo that the policy signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors.”

There’s one huge risk to playing patty-cake with investment bank sharks. They’ll simply bite and gnaw and maim again.

“If you do not punish crimes, there’s really no reason they won’t happen again,” a law professor and former assistant U.S. attorney told the Times. “I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space.”

Meanwhile, leaders in Washington seem content to dither and split hairs over the all-important issue of making a stock broker a fiduciary. A fiduciary is obligated to act in the client’s best interest at all times. Currently, stock brokers sell products under a much less strict standard.

Rep. Barney Frank (D-Mass.) recently said that last year’s financial reform legislation did not intend to “encourage” the SEC to impose on broker-dealers the tougher fiduciary standard that investment advisers must adhere to.

In other words, it’s not necessary to create a tougher standard of care for Wall Street to meet when it sells products, despite the ruin of the credit crisis.

Such news from Washington only emboldens Wall Street sharks to bite. Again and again.

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