The news leaked over the weekend: Hedge-fund baron Steve Cohen and SAC Capital Advisors were about to pay a monster fine for a decades worth of insider trading and failed supervision of traders. Some prefer the term “expert networks,” but – po-TAY-to, po-TAH-to.
The rules have changed, and so have the penalties. The lessons of the post-crisis era are clear:
• Laws are made to be broken
• Steal Big or don’t bother.
• Always reserve 10% of your criminal proceeds for your newest partner, Uncle Sam, to settle all claims, both civil and criminal.
This is a huge shift in the mentality of prosecutors, defense attorneys, accountants and constitutional scholars.
Lack of criminal prosecutions for bankers, hedge funds managers and other moguls has altered the calculus — huge fines are now a cost of doing business.
Whether you enjoy foreclosure fraud or find insider trading profitable or made money by reckless lending of subprime mortgages to people you knew would default or found your calling creating structured products designed to implode, the Rule of Law no longer applies to you.
Better make some hay while the sun is shining! It’s the newest form of tithing, between Uncle Sam and any financial mogul caught with his hand in the cookie jar.
By all appearances, the once-fierce visage of the Securities and Exchange Commission and the Justice Department has altered radically. Formerly the scourge of white-collar criminals, the prosecutorial apparatus has now morphed into a supersized meter-maid. The goal is no longer discouraging reprehensible behavior or stopping criminal activities; nor is it encouraging confidence in the markets. Rather, the former enforcers of the law have become a giant revenue collecting organization — Rule of Law be damned.
We have seemingly forgotten why we put people in jail in the first place. As public service, a brief reminder:
In the U.S., we have civil and criminal statutes. We create different levels of penalties for punishing different types of behavior. As a society, we want people to understand exactly what is and isn’t allowable. Some behaviors are frowned upon, and when those laws are violated, a monetary penalty is exacted. Driving faster than the speed limit or making false and misleading statements in the sale of a security leads to a fine, and a blot on your record.
There are other behaviors that are so reprehensible, so dangerous to all of society, that in response we impose a loss of liberty to any who are convicted of committing these crimes.
We make a very clear distinction between the two types of laws, and what the penalties are for violating them. At least, we used to.
Nowadays, so long as you can write a large enough check, you can escape criminal prosecution. Yes, it’s a lot of money and a blot on your reputation. But that’s what CIVIL prosecutions are supposed to be for.
When trying to reduce or eliminate a behavior with extremely negative repercussions for society, we bring out the big stick: Jail time.
At least we used to. Today, not so much.
Decades from now, when legal scholars try to pinpoint the moment when the U.S. abandoned the Rule of Law, they will point to 2008 crisis as a turning point.
The greatest innovation of the financial sector is not the ATM machine or interest-bearing checking accounts or securitization: It was convincing the powers that be that prosecuting them for their actual crimes would (once again) bring the economy to the edge of the abyss.