How did they get away with it? That is the question at the heart of today's conference on financial crimes at John Jay College of Criminal Justice. Twenty-one journalists from across the nation were selected as fellows to attend this McCormick Foundation Specialized Reporting Institute.
Julia Dahl reports live from the event.
5:14 p.m. Sassen said that, “the idea of a subprime mortgage is a fine thing, giving a modest income household the chance to get a house, but that is very different from financializing them.”
She ended by saying that she hoped the audience of journalists would take away “the extent to which it’s not enough to just look at fraud, but also to look at risky instruments.”
Voigts spoke about new technology helping expand some of the riskier financial products and complicating enforcement.
William Black said “[these instruments] were sold on [the idea] that they were going to reduce risks…We have to find out what went wrong. It’s as if after planes crashes, we say that what went wrong is really very technical, so let’s not look at it. Planes don’t come down a lot precicely because we don’t take that approach. Our stress testing in the financial sphere is farcical.”
4:41 p.m. Panelist Peter Turecek , senior managing director of Kroll, said that it can be more difficult to catch criminals who initially intend to perpetrate fraud, as opposed to people who fall into it trying to bolster numbers, because they tend to cover their tracks fastidiously.
Panelist Jan Voigts, a supervising examiner at the Federal Reserve Bank of New York, advised journalists on the hunt for money laundering to ask financial institutions “do they know their customers? How do they verify their customers are who they say they are?”
Panelist Saskia Sassen, professor of sociology at Columbia University, spoke about her work on shadow banking, which she said “is legal, it’s just a problematic legality.” She showed a slide illustrating the exponential growth of credit-default swaps, which grew from approximately $ 1 trillion in 2001 to more than $60 trillion in 2007 — “more than total GDP.”
“They were sold as derivatives but meant to be insurance, but they weren’t regulated like insurance,” said Sassen. “Here we have the making of a bomb, really, within the law. This isn’t about fraud, this is within the law.”
3:59 p.m. The day’s final panel, “Penetrating the Shadow Economy: Money Laundering and Other Abuses,” was moderated by David Brotherton, department chair and professor of Sociology at John Jay.
Panelist William Black, Associate Professor of Economics and Law at the University of Missouri, Kansas City, laid out the mortgage fraud landscape and how the massive number of fraudulent loans make it practically impossible for the FBI to investigate more than a small percent.
“In fiscal year 2007, there were 50,000 criminal referrals [from banks regarding bad mortgages] to the FBI,” said Black. “By fiscal year 2008, it was 63,000. But the FBI is clearing just 400 – 500 cases a year. Do you see how absurd that is? They’ve been overrun.”
The picture is even bleaker, said Black, when you factor in that “we think they discover fraud less than 25 percent of the time.”
Black spoke about Fitch, one of the smaller rating agencies, who looked at loan files and found “evidence of fraud in nearly every file.”
“Can you go after the ratings agency for fraud?” asked Black. “I think you can.”
3:03 p.m. Randall LaSalle, Associate Professor of Economics at John Jay, said journalists need to get used to using “the f-word”: fraud.
“What is the definition of fraud?” LaSalle asked the audience. “Fraud starts with a false statement or false representation.”
He went on to talk about how law enforcement needs to develop specialized tactics to deal with financial crimes: “The fundamental difference between street and white collar crime is that when someone robs a bank, we know a bank's been robbed, the issue is who did it. With white collar crime, it's exactly the opposite. We know the person, but we don't know if it's a crime yet.”
2:48 p.m. Former Chicago Tribune reporter Elaine Carey, who now works as a private investigator for Control Risks, spoke about how journalists might go about digging up the next Madoff or Stanford in their own city:
“Look at a company’s culture, that'll give you a clue where to poke further.” If the CEO is preaching “hard work and being honest, but he goes out and buys $1,000 shower curtains” that sends a message to the people working for him.
Carey said most material fraud perpetrators are middle aged white males. “Ask yourself, who has access? It’s not the guy in the mail room.” White collar criminals, she said, “rationalize. They think, I’m owed it because I didn’t get that promotion. Or, I’m not hurting anyone, I’m taking from a company, not a person. A lot of people divorce the two in their mind in order to justify what they’re doing.”
Carey also said that “most significant frauds go 18 months before they’re uncovered,” often by a whistleblower.
Panelist Josh Rosner, managing director of Graham, Fisher & Co., discussed the importance of “questioning assumptions” about the market: “We’re calling this a housing crisis, but it’s really a credit market crisis.” He also said that “cyclical shifts in social policy are the periods in which one really needs to look and see if standards held in prior cycles continue to hold.”
2:23 p.m. After lunch (fried plantains! Spanish rice!), the first of three journalism workshops commenced, this one entitled “Investigating Fraud: From Wall Street to Main Street.”
Panelist Sean Haran, Former Deputy Chief of the Business Crimes and Securities Fraud Section of the U.S. Attorney’s Office, Eastern District, said that there was “a symbiotic relationship between enforcement and regulation and the press,” and that he’d personally opened cases after reading about something “strange or fraudulent.”
Haran has not worked on the Madoff case, but spoke about what he “expects” is happening in that ongoing investigation: “I suspect they were able to build a case [against auditor David Friehling] on some specific misstatements he made. They don’t have to necessarily prove that he knew the scope of the fraud. The way to make a federal case is to build a wedge. I suspect there is a lot of pressure on that auditor right now. I suspect his lawyer is telling him to go talk to his wife and think about whether he wants to go to jail for 15 or 20 years, or if he wants to talk to law enforcement about what he knew and when he knew it.”
“I like to share information with the press — when I can,” said Haran.
1:55 p.m. Keynote speaker Walter Ricciardi, who was the Deputy Director of the SEC between 2004-2006, reminisced about starting work at the SEC’s Boston office in 2004 and realizing there was no searchable database of ongoing investigations.
“The division gets thousands of tips every day and it's not humanly possible for them to follow up on every one — dark secret,” said Ricciardi.
Ricciardi was asked why the SEC doesn’t work more closely with the Department of Justice, and said, “the SEC and the criminal authorities do work quite closely. A lot depends on DOJ policy and how strongly they want to pursue white collar crime. For a while there were no resources there. But the vast majority of the cases that the U.S. Attorneys bring are usually referred by the SEC.
“When I was running Boston, there was a matter we called the U.S. Attorney about and he said he didn’t have the resources, so we tried the case. I didn’t get a ‘stat,’ but we put in jail a very bad person who the local attorney didn’t have the resources to put away.”
Speaking of resources, Ricciardi said that while he was at the SEC he was told not to publicly state he lacked resources to pursue the cases he wanted it. “I was told, we have Katrina, we have a war, don’t be crying about resources — do the best with what you can.”
12:29 p.m. When asked how journalists might go about interviewing criminals, Sam Antar said, “Everybody who you interview has an agenda. A lot of people will give you false or tainted information and it's your job as a journalist to sort it out. The most important thing you should learn is skepticism. Don't always trust your sources.”
Antar was also asked what motivated him to speak so openly about his crimes. He answered, “I’ll give you three responses: I’m redeemed and I want to educate the public; I want to brag; or I’m creating a wall of false integrity…”
Panelist Deirdre McAvoy, Deputy Chief of the Criminal Division (White Collar) in the U.S. Attorney's Office, Southern District of New York, NY., was asked where prosecutors draw the line between stupidity and illegality, specifically relating to the issuance and bundling of bad mortgages.
McAvoy said, “It all comes down to intent. At the end of the day, if an individual committed fraud, we still have to make a determination of whether the individual was willful in doing it …That is a very hard judgment call…there are many cases I've investgated where technically fraud was committed, but we decided not to prosecute because we didn't believe they had the intent to defraud.”
Panelist Barry Koch, Associate General Counsel at JP Morgan Chase, said that “the only reason most [financial] crimes are being reported today is because of the bad economy.”
12:03 p.m. Jock Young, Distinguished Professor of Criminology at John Jay, discussed the similarities between upper and lower class criminals, particularly how they fit into the notion of the American Dream and their “prioritization of ends over means.”
“Bernie Madoff is a bit of a conundrum for criminologists who are used to peering down the class structure,” said Young. “He's the wrong class, the wrong ethnicity, the wrong age. I'm not one for a general theory of crime, but there are some parallels.” Young used the example of a street con, with the victim, the con man, and the shill – who he compared to chief compliance officers.
“What has occurred part in the world of finance is that these are cultures that are very, very into risk, cultures that constantly verge on the edge of legitimacy…The only other group of people who go near the edge all the time and often go over is the military.”
“My name is Sammy Antar and I'm a crook,” said Antar. “The only reason why I'm here is because I got caught.”
“Capitalism is based on trust,” said Antar. “Guess what, criminals love trust, too. Trust gives us the initiative to commit our crimes. Criminals consider your humanity as a weakness to be exploited in the execution of our crimes…You can steal more with a smile than you can with a gun.”
“Most accounting students learn about internal controls in one six-hour auditing course,” said Antar who says education is key to catching white-collar criminals.
As he stepped down, Antar said, “check your pockets.”
10:58 a.m. The second panel, Crime in the Corner Office, was moderated by AARP financial columnist and former Washington Post reporter Martha Hamilton.
Hamilton referred to her recent piece in the Columbia Journalism Review which discussed her view that there was good reporting in the lead-up to the financial meltdown, but that “nobody was able to really pull it all together.”
10:13 a.m. David Shapiro, Assistant Professor of Economics at John Jay, discussed investigative accounting.
“It's not an accident that Ponzi schemes occur in environments like this,” said Shapiro. “For better or for worse many of the people who make the most money make it by betting on the success or failure of various institutions.”
Shapiro used the example of John Paulson, founder of the hedge fund Paulson & Co., who, according to a recent Reuters article, took home near $2 billion in 2008.
“The way to approach a story like this is not to marvel at John Paulson's genius at making so much money, but to find out how he knew to make that bet,” said Shapiro. “We have to step back from idolizing people because they got rich quick.”
Shapiro, who repeatedly reminded the audience that he was not accusing Paulson of anything untoward, then went on to discuss his theory of “alpha fraud.”
“When somebody tells you're they're doing way better than the market, that's a yellow flag,” Shapiro said. “Anybody who does way better than the market on a consistence basis, you have to be a genius, a seer, or you get inside information. Did Paulson use public information? If he did, and came to this great wealth, how come so many of us lost so much money?”
9:51 a.m. Patrick Carroll, Supervisory Special Agent in the FBI's New York Office, took the podium and discussed the work his office does on exposing frauds like Madoff's.
“They were always there and I think they will always continue to be there,” said Carroll. “The question is, how do we figure out when one's going on?”
Solomon Wisenberg, a partner at Barnes & Thornburg, LLP, and co-chair of the White Collar Crime Defense Practice Group, introduced his blog, Letter of Apology, which is focused entirely on white-collar crime.
“There's a never-ending effort by the business community to eviscerate the regulatory framework,” said Wisenberg.
“When I read a story that SEC has been investigating this and I don't see in the same story the DOJ is looking at it, I think what's wrong?” he said. “I don't want to say that anybody who runs afoul of SEC regulations is a criminal. You can clearly violate SEC rules and not be guilty of fraud. However…the only difference is in the criminal context you've got to have willfulness.
“If the SEC is looking at something, my view is the minute they see a serious red flag, somebody on the criminal side needs to be brought in. The problem is that the examiners are not trained to think criminally, to think, wait, what's going on here?”
9:29 a.m. The first panel, entitled “The Casino Economy: Tackling Ponzi Schemes,” was moderated by Dean Starkman, Managing Editor of the Columbia Journalism Review's The Audit.
“My take is that there is kind of a struggle over how to explain what's happened,” said Starkman. Some people see the vast instances of fraud as the “unfortunate but inevitable action of a system that lost control of its risk modeling.” But Starkman himself sees the crisis itself as being “amplified by massive amounts of wrongdoing.”
Starkman said that wrongdoing in the financial sector can be broken down to the “specific and the systemic.” He calls the Madoff affair an instance of a specific fraud, and the problems in the mortgage industry and on Wall Street as more systemic.
9:11 a.m. On the sixth floor of John Jay's Tenth Avenue building, today's conference began with opening remarks by John Jay President Jeremy Travis and CMCJ Director Stephen Handelman.
“We're really blazing a new path,” said Handelman. “We've been living with white collar crime and bubbles throughout our history…The question before us this time was whether the swindling, the Ponzi schemes we saw were an element that was central…or whether it was the automatic and natural effect of having a bubble mentality. We'll also focus on whether journalists missed the story.”