May 29th, 2012
Econintersect: With financial fraud rampant in the modern age banking, Chris Whalen, senior managing director at Tangent Capital Partners, Bill Rochelle from Bloomberg News and Bloomberg Law's Lee Pacchia have proposed that recovery of loses due to fraud should be a part of bankruptcy proceedings. This is how bankruptcy was pursued for most of the past 100 years or more but recent changes in bankruptcy law have basically provided a shield of protection for fraudsters. Many cases of fraud have not been pursued and the fraudster's still have their ill-gotten gains, according to Whalen and Rochelle.
Follow up:The problem is the so-called in pari delicto defense stops trustees from suing for fraud in cases such as Lehman Brothers, MF Global and Bernie Madoff. Whalen argues that appointing equity receivers, a popular remedy 100 years ago, in these cases would allow court appointees to pursue third parties on behalf of victims for fraud. The question is whether Congress is willing and able to change the law.
Here is an 8-minute video of the discussion: