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Federal Prosecution Of Financial Fraud Falls To 20-Year Low, New Report Shows

Financial Fraud

First Posted: 11/15/11 07:38 PM ET Updated: 11/16/11 08:56 AM ET

Public mistrust for banks may be at an all-time high, but federal prosecution for certain financial crimes is down to a 20-year low.

The federal government is on track to file just 1,365 prosecutions for financial institution fraud in fiscal year 2011, according to a new report from a watchdog group. That would be the lowest number of such prosecutions in at least two decades.

The report, from the Transactional Records Access Clearinghouse at Syracuse University, comes at a time when the protest movement known as Occupy Wall Street has gained nationwide visibility -- and no small degree of public support -- by criticizing what its members see as a close relationship between big banks and the federal government.

The falling number of fraud prosecutions is striking given what many claim is a strong pattern of financial-sector misconduct in recent years, culminating in a housing crisis characterized by alleged rampant mortgage fraud and improper foreclosure, as well as the weakening of the national and global economy.

The TRAC report, which compiles Justice Department data obtained through the Freedom of Information Act, notes that 2011's relatively low number of financial fraud prosecutions is only the continuation of a trend spanning more than a decade.

Every year since 1999, the number of such prosecutions has gotten smaller and smaller, the report states. This means, for example, that there were more prosecutions in any given year during the presidency of George W. Bush than in any year during the presidency of Barack Obama.

David Burnham, a co-director of TRAC, told The Huffington Post that the fall-off in financial fraud prosecutions most likely does not reflect a fall-off in financial fraud itself.

"The fact that prosecutions go up or down is almost never an indication of whether that particular crime is going up or down," Burnham said.

Though the government has pursued a number of smaller institutions this year -- including Illinois bank First Midwest Securities and Long Island-based Salomon Whitney LLC -- critics say it has been remiss in investigating possible improprieties among the nation's largest banks in the years leading up to the mortgage crisis.

The declining number of fraud prosecutions in 2011 may reflect the increasingly widespread use of deferred prosecution agreements, a less-aggressive legal strategy that allows companies to voluntarily report their own misconduct and avoid harsh consequences in court. Since 2008, the Justice Department and the Securities and Exchange Commission have both adopted deferred prosecution tactics and put less emphasis on punitive measures for financial crimes, according to The New York Times.

What the report says is a broader, decade-long trend toward fewer fraud prosecutions may stem in part from more federal resources being directed toward anti-terrorism efforts in the wake of the Sept. 11 attacks, as suggested in a 2008 New York Times article about declining stock fraud cases.

Besides losing personnel to counterterrorism agencies, regulators have had to contend with political opposition and difficulty getting funding, which may have also played a role in limiting their ability to pursue cases. Congressional Republicans have made a number of attempts to weaken organizations like the Consumer Financial Protection Bureau and the Commodity Futures Trading Commission. This week, the CFTC's 2012 budget was slashed by about $100 million as a result of congressional pressure. Earlier this year, the House Appropriations Committee cut the 2012 budget request for the SEC by $222.5 million.

While financial fraud cases are down by more than half from where they were a decade ago, a number of cases are currently active or have been recently settled, including multiple prosecutions for mortgage fraud, insider trading and embezzlement.

Jeffrey Connaughton, former chief of staff to Sen. Ted Kaufman (D-Del.), who chaired the Congressional Oversight Panel for reviewing the Troubled Assets Relief Program, used the language of Occupy Wall Street when speaking to HuffPost about the decline in financial fraud prosecution.

"I wouldn't blame anyone who believes they're part of the 99 percent of Americans who has to follow the law, while 1 percent of the country doesn't," Connaughton said. "And a big part of the reason for that is lawyers and accountants are failing in their role as gatekeepers, and the Justice Department is too often deferring to these lawyers and accountants, which is like outsourcing the interpretation of the fraud laws."

CORRECTION: A previous version of this post mistakenly said Ted Kaufman is the chair of the Congressional Oversight Panel. Kaufman chaired the panel from 2010 to 2011.
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