03/03/2011 05:11 pm ET | Updated May 25, 2011

Making the Case Against Mortgage Banksters, Part One: Legalities

Federal prosecutors have trotted out three reasons why they aren't prosecuting mortgage banksters: difficulty gathering evidence, the cases are too complex for a jury, and it's too hard to prove intent. No lawyer I've spoken to agrees. Nor do I. This is an analysis of why the criminal cases can be made.

The first two excuses are summed up in Shahien Nasiripour's article of 2/4/2011, which quotes former SEC enforcer Stanley Sporkin:

They're handicapped by the fact that they're looking at potential violations not while they're in the act, but long after they were committed. And they deal with complicated transactions that could be difficult to explain to juries, rendering their efforts to take cases to trial more challenging.

"These are tremendously difficult cases to make," said retired federal judge Stanley Sporkin, who worked at the SEC for 20 years, seven of them as head of the commission's enforcement division.

Momentarily shelving the fact that Sporkin himself successfully made many prosecutions during his SEC years, let's look at the issue of complexity first.

In the 1980-90s savings and loan failures over 1,000 executives were convicted of felonies, all based on jury presentations assembled by prosecutors. Today the groundwork is done, because the WWW provides a ready source of explanations that a jury can readily understand – there are numerous videos on YouTube explaining mortgage fraud at an 8th-grade level, easily found by searching "CDOs explained" or "CDSs explained."

For juries that prefer print, this excerpt from The Looting of America by Les Leopold clearly and simply explains that "tranche" is a French word meaning "a slice [of a pie, cake, quiche – or mortgage]." With the French translated, the web page quickly makes the mortgage-slicing shell game transparent with a three-tier graphic of wine glasses, showing the banksters' glasses brimming over in the top tranche, while the suckers wait in vain for the spillover at the bottom tranche.

As to the second difficulty in prosecuting, gathering evidence on stale crimes: this is part of policing. That's why police departments have detectives – because not everyone conveniently robs the 7-11 just as the beat cop stops for a cup of coffee. It's called "legwork."

In this the WWW helps again, since many white-collar criminals don't seem to fully understand that an email is like a postcard, readable by anyone who lays hands on it – and erase it though they may from their hard drives, copies are lurking in Internet mail servers all over the U.S. – including "anonymous" Hotmail accounts.

The careless ones certainly don't follow former Louisiana Governor Earl Long's rules, "Don't write anything you can phone. Don't phone anything you can talk. Don't talk anything you can whisper. Don't whisper anything you can smile. Don't smile anything you can nod. Don't nod anything you can wink." Earl Long would not have used email much, and anyone who sends email that does more than wink is riding for a fall. (Other banksters are careful in email, and criminal cases against them may fail on either facts or intent.)

On the third difficulty, intent, both prosecutors and media have been wringing their hands about the failed DOJ case against Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, with a sort of vague prophecy that this hamstrings prosecuting financial cases.

However, if the prosecution had gotten a conviction, the case still would not have been on point (a good legal precedent) for the mortgage meltdown fraud. This was two hedge fund managers acting like excitable day traders – or typical hedge fund managers – alternately gloating and panicking about market fluctuations that were largely beyond their influence. That they may have concealed all their misgivings from their clients would simply make them stock hypesters on a grand scale.

By contrast the mortgage meltdown involved planned, controlled, systemic fraud by a huge number of perpetrators at many levels in the chain of fraud, some actively making bad loans under fraudulent circumstances, others packaging and selling those toxic loans as prime investments. This constitutes a pattern of abuses on the part of both individual participants and companies. (The felony of conspiracy to commit fraud may be harder to prove, because in an industry like real estate, loosening lending standards to the point of insanity was message enough. Wall Street and Fannie Mae didn't have to tell the brokers and other local lenders in the fraud chain to run amok – they would have done that on their own just to get the mortgage commissions.)

This brings us back to Sporkin, who in Nasiripour's article was cited again,

Sporkin's team, he said, looked for laws that enabled them to go after what they viewed as fraudulent activity.

This sounds like what was described as "creative prosecution" in the Department of Justice by the 1980s, but by any name has been going on a long time. Long before RICO racketeering laws allowed prosecutors to cast a broad net for patterns of behavior, in a pinch they would call on good old crimes like tax evasion, which was used to put away gangster Al Capone when he couldn't be nailed for his main businesses of bootlegging and prostitution.

Is creative prosecution ethical? Often it's not, particularly when used to destroy political enemies by the spaghetti theory, throwing a lot of charges at the defendant and hoping something sticks. In this case, however, there is not much doubt about the massive criminality of the mortgage banksters.

That said, it appears that Federal prosecutors intend to do little, simply cutting deals with the banksters for fines. A plea requiring no admission of guilt, a few million dollars in easily-affordable in fines, and the banksters walk – not the perp walk, but on to their next crime.

Part 2 will look at how state Attorneys General offices can deliver some genuine punishment to the criminals.

Legal annotations to this article.