Prosecuting Individual Fraudsters is Fine, But What About Their Employers?

If there were an index showing the status of the financial profession in U.S. society, today would be recorded as a plunge. Three separate legal developments together convey the message that asset management, mortgage banking and private banking are all riddled with corruption.

In New York, two previously high-flying hedge fund managers at Bear Stearns were arrested by the FBI, handcuffed, subjected to a humiliating perp walk and indicted on criminal charges of fraudulently misleading investors about their exposure to subprime mortgage-backed securities.

In Washington, Deputy Attorney General Mark Filip announced that a nationwide investigation of mortgage fraud has resulted in the filing of charges against more than 400 individuals.

In Fort Lauderdale, Bradley Birkenfeld, a former official in the private banking operation of Swiss bank UBS, pleaded guilty to charges of conspiring to help wealthy U.S. clients evade taxes by concealing assets. There have been reports that Birkenfeld may divulge the names of thousands of other clients who also cheated Uncle Sam.

Apart from corruption, what these cases have in common is that prosecutorial zeal is being directed at individuals alone and not the institutions whose interests they were serving. Prosecuting bad apples is all well and good, but the Justice Department needs to be reminded that in many cases the barrel itself is corrupt.

In the case of mortgage fraud, at least, the FBI may be on the right track. Director Robert Mueller announced today that the bureau is investigating some “relatively large companies,” including mortgage lenders, investment banks, hedge funds, credit-rating agencies and accounting firms.

Let’s hope this investigation is for real—and that it results in some serious charges rather than deferred-prosecution-agreement slaps on the wrist. Maybe then the financial sector will begin to clean up its act.

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