Financial CEOs led the unholy war against adoption of the whistle-blower provisions of the Dodd-Frank Act. Once the Act became law their principal goal became perverting the SEC rules implementing the provision to deny any financial reward to whistle-blowers unless they alert the firm before they alert the SEC to the senior officers’ fraud. That prior warning would allow fraudulent senior officers to coerce the whistle-blower to try to prevent him from alerting the SEC, allow the officers to cover up the evidence of the fraud, and alert the officers so that they would not make any admissions that might be overheard by the whistle-blower or through electronic surveillance. Both Republican SEC Commissioners voted against the rule because it rejected the industry’s demand for a rule requiring the whistle-blower to first alert the senior officers that he had discovered their frauds. That effort to pervert the Dodd-Frank whistle-blower provision into a rule that would aid elite frauds will succeed if the Governor Romney wins the election.
The fact that the business community fought ferociously against doing anything to encourage whistle-blowers is an example of what we call “revealed preferences” in economics. Honest CEOs should encourage whistle-blowers. CEOs often say that they encourage whistle-blowers. Their SEC filings reveal their true beliefs.
We have far too few whistle-blowers and because of the worst epidemic of accounting control fraud in history and the death of criminal referrals by the banking regulatory agencies our need for whistle-blowers has never been greater. Indeed, our federal prosecutors are the people who most desperately need to encourage whistle-blowers to come forward who worked at the financial control frauds.
Given that desperate need how would a rational administration respond? The President and the Attorney General would hold a press conference with a group of whistle-blowers. He would praise their performance, give a few specifics of how valuable the information they provided was to the nation, urge the tens of thousands of Americans who have information about other frauds to come forward, provide a web site for future whistle-blowers to use, and help arrange a publicity tour in which the select group of whistle-blowers appeared on a series of major television and radio programs where their efforts could be extolled and they could ask others to follow their lead.
The DOJ web site would extoll whistle-blowing and give examples of how their actions helped the nation. It would showcase video interviews with whistle-blowers that could be picked up by You Tube.
The DOJ would hold rallies outside buildings that had (or do) house the worst frauds featuring the whistle-blowers who had come forward and asking others to follow their lead. The President would host a White House dinner for the whistle-blowers and bestow a medal on some of the most praiseworthy. That is what an administration devoted to holding the elite frauds accountable would do.
Instead, Presidents Bush and Obama and their Attorney Generals have ignored the whistle-blowers. They have never urged Americans to come forward with information on the elite frauds who became wealthy by driving the crisis. Bharara, in a PR piece he knew would be read by hundreds of reporters, did not thank O’Donnell and did not call upon Americans to come forward with information about the elite frauds.
The federal fraud task force, which has failed to indict any of the elite Wall Street frauds that drove the crisis, does have a web site where citizens could report elite frauds. Here are the instructions and choices provided on the site:
Fraudulent activities should always be reported to your local law enforcement office. The following is additional information on how specific types of fraud complaints or cases of suspected fraud can be submitted to federal agencies.
I Want To Report:
- Bankruptcy Fraud
- Computer-Based Fraud
- Cyber Crime
- Elder Fraud
- Health Information Privacy Violations
- Housing Discrimination
- Identity Theft
- Commodities, Investment and Securities Fraud
- Mail Fraud
- Mass Marketing/Telemarketing Fraud
- Medicare Fraud
- Mortgage Fraud or Loan Scams
- Recovery Act Fraud
- Rescue Fraud
- Residential Mortgage Backed Securities (RMBS) Fraud
- Retirement Plan Abusive Transactions
- Social Security number misuse
- Student Loan Fraud
- Tax Fraud
- Unfair Competition
The Department of Justice once had as a major priority the prosecution of Financial Institution Fraud. Financial Institution Fraud (FIF) is an official DOJ category. Here is a chart showing the prosecutorial record over time for FIF prepared by Syracuse University.
Click for larger, sharper image.
Conservative economists (and “law and economics” scholars) have long embraced Gary Becker’s claim that the key to dealing with crime is deterrence through increasing the likelihood and severity of criminal sanctions. They should cite this chart. If one dramatically reduces the risk of prosecution of the most elite financial frauds the result is likely to be an enormous increase in elite financial institution fraud and a catastrophic financial crisis.
We were told by Obama and Holder that they created the Task Force to reverse the disaster displayed in Figure 1. So we can doubtless turn to the list on the Task Force’s web site where the public can report frauds for the category “Financial Institution Fraud.” Except that there is no category. Perhaps they feared that “Financial Institution Fraud” was too complex a term and might confuse potential whistle-blowers. “Bank Fraud” would probably be their choice if the designers of the web site were worried about confusing the public – it is a short and clear phrase. Except that there is no such category. There is also no general category labeled “other.” Whistle-blowers that wish to report fraudulent financial institutions need not bother to use the Task Force’s “report fraud” feature. It’s almost as if FIF prosecutions were not a priority of the Obama administration. A Great Recession and at least $12 trillion in losses apparently do not outweigh the lure of lobbying lucre.
The sad fact is that the toothless Task Force is an improvement over the Bush administration. Attorney General Mukasey famously refused to create a task force to investigate the elite frauds that were driving the U.S. into the Great Recession, saying that mortgage fraud was the equivalent of “white-collar street crime.”
It is useless to report financial control frauds “to your local law enforcement office.” Try this thought experiment: you invent a time machine and travel back to Houston, Texas in 2000. You call the Houston Police Department to warn them that something terrible is happening at Enron and beg them to treat it as an emergency and send in a team of detectives to tear apart their books. You begin to tell the officer about Enron’s Special Purpose Vehicles (SPVs). If you are lucky, they will refer you to the FBI. The far more likely result is that they will decide you are crazy and hang up on you. What they will not do is investigate Enron’s fraudulent accounting.
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About the Author
William K. Black, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House Governance Committee on the regulation of executive compensation. He was interviewed by Bill Moyers on PBS, which went viral. He gave an invited lecture at UCLA’s Hammer Institute which, when the video was posted on the web, drew so many “hits” that it crashed the UCLA server. He appeared extensively in Michael Moore’s most recent documentary: “Capitalism: A Love Story.” He was featured in the Obama campaign release discussing Senator McCain’s role in the “Keating Five.” (Bill took the notes of that meeting that led to the Senate Ethics investigation of the Keating Five. His testimony was highly critical of all five Senators’ actions.) He is a frequent guest on local, national, and international television and radio and is quoted as an expert by the national and international print media nearly every week. He was the subject of featured interviews in Newsweek, Barron’s, and Village Voice.