Home > Risk > Should executives be in jail for mortgage fraud and related reporting?

Should executives be in jail for mortgage fraud and related reporting?

December 12, 2011 Leave a comment Go to comments

I didn’t see the 60 Minutes segment on Prosecuting Wall Street until this evening, but it is shocking to hear that not a single prosecution has yet been brought.

I strongly recommend viewing the segment (available in two YouTube segments) and I welcome your views on the following:

  1. Did the segment make the case that there should have been prosecutions under SOX? They didn’t explain how material the over-valuation of the mortgages were to Citi and Countrywide, but I suspect the numbers were material and the internal control weaknesses should have been classified as material.
  2. Do you agree that persuasive evidence of deliberate fraud might have been difficult to obtain?
  3. Should the board have taken action?
  4. Should internal audit have been more prominent?
  5. Shouldn’t the risk officer have been more actively engaged?
  6. There seems to have been a defect in the control environment, the tone at the top and the corporate culture. Shouldn’t this have been identified as an issue by the external auditor?

I don’t have inside knowledge and am not a lawyer. But I found the segment disturbing and suspect you will as well.

  1. December 12, 2011 at 6:03 PM

    Until White Collar crime is viewed as a crime, we will continue to have this conversation in the United States.

  2. December 12, 2011 at 7:55 PM

    I found this clip equally disturbing Norman. In response to your questions:

    1. I think that if the representations made in the clip along with the supporting documentation would make a fair case for prosecutions under the Sarbanes-Oxley Act.

    2. I DO NOT agree that persuasive evidence of deliberate fraud might have been difficult to obtain, especially if the Chief Auditor had sufficient authority and support from the Board and Senior Management.

    3. YES, the Board should have taken action along with the Chief Executive, Chief Auditor, and SVP of Risk, whom were all copied on the SVP of Underwriting’s e-mail indicating that internal controls were broken. The SVP of Underwriting substantiated this by finding that approximately 60% of mortgages within his division were defective in 2006.

    4. YES, Internal Audit Should have been much more prominent.

    5. YES, the Risk Officer should have been more actively engaged.

    6. YES, the External Auditors should have identified issues with the Tone at the Top, the Culture, and the defect in the control environment.

    I find the timing of this 60 Minutes expose rather interesting. On November 28, 2012 the Honorable Jed Rakoff, a New York District Judge, refused to approve a settlement deal between the SEC and Citigroup for allegations that Citigroup dumped dubious assets onto investors whom lost $700MM, while Citigroup profiteered $160MM in the deal. In a 15-page order Judge Rakoff says, “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated.” The trial date is set for July 16, 2012. Read the full order here >>> http://www.scribd.com/doc/74269926/Judge-Rakoff-Opinion-regarding-SEC-and-Citigroup-Settlement-28-Nov-2011

  3. December 13, 2011 at 6:36 AM

    In an effort to echo Mr. Scaramazzo’s comments, the difficulty with prosecuting financial, compliance, and operational crimes is proving an executive had a guilty mind – or “mens rea”. The Sarbanes 302 executive sign off should have been enough to show a guilty mind or willful blindness to a judge or jury; but, as the 60 Minutes expose showed, no one in government wants to use that tool. Maybe this is a microcosm of why trust in our government is at an all-time low: http://www.npr.org/templates/story/story.php?storyId=126002349

    A final point: the only effective Sarbanes victory that I have found is not in executive sign off complaints, but a whistleblower complaint by BB&T employee Amy Stroupe, CFE. I encourage you to read her story – http://www.fraud-magazine.com/article.aspx?id=4294968657

  4. Joseph A Mutungama
    December 13, 2011 at 7:09 AM

    The question is the make up , competencies and status of the Internal Audit and Risk Team in these organisations. Did they have enough clout , where they listened to and did they have effective governance overisght group such as Audit and Risk Committees who should have been idependent and with good understnding of the key risky areas of the business.

    I think few people if any understood these risk undertakings by a few “cowboys” and the rest of the business people were other scared to ask ( fear of being seen as ignorant) or were hoping this would just go away.

    There is a reputation issue on Internal Audit and Risk Management and they should do lots to convince the markets, regulators and investors at large that they should be taken seriously. AT present this does not seem to be the case.

  5. Peter Goodchild
    December 13, 2011 at 8:44 PM

    I’d further recommend the movie documentary “Inside Job” as compelling viewing focusing on the circumstances that created the mortgage debt crisis. In summary seems to have been:-
    * Deregulation of the US financial system
    * Appointment to US treasury of ex CEOs of the large investment banks (who have subsequently helped negotiate the SEC settlements and included clauses preventing further court action against the banks)
    * Fraud/dodgy ethics of investment banks who purchased the sub prime debt from Countrywide etc and repackaged them as CDOs (knowing they were dogs), which they then resold to investors with the complicity of the ratings agencies. Even more galling it seems that Goldman Sachs took out insurance against losses on these CDOs that they no longer owned knowing the values would fall (helping bring down AIG).

  6. Ian Lyall
    December 14, 2011 at 4:27 PM

    Hi Norman

    The main learning for me is that there is no point in blowing the whistle. The personal cost siginificantly outweighs the negligible contribution to the public good.

    While executives may have a defence when it can’t be proved they directed the fraud they lose that defence when they are told about and don’t do anything.

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