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Federal Prosecutors Pursue Criminal Charges Against Banking Executives

Department of Justice logo Reuters news service reported yesterday that federal prosecutors are pursuing criminal charges against executives at two banks for allegedly marketing mortgage-backed securities loaded with faulty loans after warnings by coworkers. If so, this would be the first cases of criminal charges against bankers.

Citing an article in the Wall Street Journal, Reuters reported possible criminal investigations at both JPMorgan Chase & Company (JPMorgan), and at the Royal Bank of Scotland (RBS):

"Prosecutors are scrutinizing a $2.2 billion deal that repackaged home mortgages into bonds in 2007 at RBS and two people who worked on a different residential-mortgage deal at JPMorgan, the Journal said. JPMorgan, RBS and Department of Justice declined to comment. JPMorgan said in a filing in November that it was responding to an investigation by the DoJ's criminal division.

It would seem that the news reports in May 2015 covered in this blog were largely accurate. At that time, news reports mentioned possible charges against five banks. Also in May, a federal court ruled that the Japanese bank Nomura Holdings and the Royal Bank of Scotland had misled Fannie Mae and Freddie Mac while selling them mortgage bonds that contained errors and misrepresentations.

J.P.Morgan logo JPMorgan has a colorful history, part of which is worth reviewing. In January 2015, it was one of four banks that settled illegal foreclosure charges with the Massachusetts Attorney General with a $2.7 million payment. In November 2014, both RBS and JPMorgan were part of a group of banks that paid $4.2 billion in fines to U.S., U.K., and Swiss regulators for rigging the foreign exchange, or FX, market. In December 2013, JPMorgan paid $515.4 million to the Federal Deposit Insurance Company (FDIC), $300 million to the California Attorney General, and $13 billion with the U.S. Justice Department to settle charges about the misrepresentation of offering documents for residential mortgage-backed securities (RMBS).

December 2013 was a big month. JPMorgan Chase announced a data breach that affected half a million prepaid card customers. U.S. taxpayers also learned that month that much of the huge fines JPMorgan paid were tax-deductible and reduced the bank's tax payments. in September 2013, the Consumer Financial Protection Bureau (CFPB) ordered both Chase Bank USA, N.A. and JPMorgan Chase Bank, N.A. to refund about $309 million to more than 2.1 million customers for illegal credit card practices, where customers were enrolled in credit monitoring services without their authorization and charged for services not delivered.


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Chanson de Roland

And, if you think that JPMorgan has a colorful history, you should review the history of UBS and Credit Suisse Group.

Given this litany of wrongdoing by the major banks, I think that it is long past time for several of these banks to be deemed criminal enterprise and indicted and convicted under RICO (Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961–1968). Section 1961 of RICO expressly makes financial-institution fraud a RICO crime, and other provisions of Section 1961 would comprehend the many of several banks' wrongful acts as RICO crimes. Several provisions of Section 1962 would make the actions of several senior banking executives crimes and would prohibit them from being involved in the management of any bank or financial institution; other provisions of Section 1962 would also be applicable.

For these bad acts RICO provide powerful civil and criminal sanctions, some of which, such as liquidating the major banks and winding up their affairs, no judge in his right mind would do. But other provisions that would permit civil damages to make victims whole and other provisions, both criminal and civil, would permit a judge to appoint a special master to reform a guilty bank by reforming its business practices, reforming its culture, and replacing its management, all of which could be done without jeopardizing the operations, assets, liabilities, revenues, and/or profits of any guilty bank, unless one is of the view that these banks are not profitable when operated as legal enterprises. And what is very appealing are the powerful sanctions that can be had against bank executives who have committed predicate crimes that would also constitute a RICO violation.

If we can't justly and judiciously use RICO against banks that satisfy its elements of action, then we have a RICO statue that can only be used against, as a law professor of mine put it, those with Italian sir names. But that isn't the law; RICO should be applied wherever it is applicable. And it looks to be applicable against several of the big banks and their senior leadership.

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