Looking Back on the Prosecution Failures after the 2008 Wall Street Crash By James A. Kidney: August 30, 2018 ~ (Editor’s Note: James Kidney was a trial attorney at the SEC for 25 years until his retirement in 2014.)
http://wallstreetonparade.com/2018/08/looking-back-on-the-prosecution-failures-after-the-2008-wall-street-crash/
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Khuzami is now a deputy U.S. attorney for the Southern District of New York, after a stint with a large law firm. But he was the director of the Division of Enforcement of the Securities and Exchange Commission from 2009 to 2013, when several Wall Street banks were subjected to fines for their conduct bringing on the 2008 crash, but no senior, or even middle level, individuals were sued for violating the securities laws.
I was one of several trial lawyers at the SEC involved in the Commission’s investigations into conduct of the big banks and their employees. I can say, based on my experience and that of other trial lawyers, that
there was an inexplicable reluctance on the part of the Division of Enforcement to utilize conspiracy theories to investigate – let alone sue – higher ups at Goldman Sachs, Bank of America, Morgan Stanley and other large banks.
Yet, it was obvious to many talented lawyers at the SEC, both senior and junior, that the products offered by these banks to investors were developed cooperatively and approved by knowledgeable men (almost exclusively men) of Wall Street far above the levels of those few who were unfortunate enough to be sued. It is very likely that at least some participated in a scheme to defraud – a conspiracy.
But the Division of Enforcement under Khuzami chose to pursue cases almost exclusively on a much narrower “false statement” theory, which courts have increasingly interpreted to mean liability solely for the individual who actually misrepresented to an investor a fraudulent product.
In effect, the SEC applied at the outset the narrowest legal theory available to restrict the investigation and, therefore, protect higher-ups from questioning, let alone possible charges. Conspiracy theories were rejected at the outset of most investigations and not pursued.
Let me be clear. We cannot know if higher ups on Wall Street were civilly liable for – or criminally guilty of – a scheme to defraud under the securities laws, i.e., a conspiracy.
There was no stomach for investigating such liability, so any such conclusions are lost to history. Lessons that could have been learned for the next time are lost. There will be a next time.