Financial fraud


A Loan Fraud War That’s Short on Combat
by Gretchen Morgenson
New York Times Opinion, 2014-03-16


[L]ast week, a report from the inspector general of the Justice Department, Michael E. Horowitz, set the record straight. Sure enough, the report told us how hard the nation’s law enforcement officials had been investigating these cases. That is, hardly at all.

The report, called “Audit of the Department of Justice’s Efforts to Address Mortgage Fraud,” covers the period from 2009 to 2011. It vindicates anyone who ever questioned the government’s claim that the reason there weren’t more mortgage-related fraud cases is because the cases just weren’t there to be made.

Most of all, the report is depressing because it indicates that the Justice Department, our nation’s top law enforcement agency, is simply unequipped — or unwilling — to combat complex financial frauds.

Here is one of the report’s conclusions: “We found that, despite public statements by the Financial Fraud Enforcement Task Force and the department about the importance of pursuing financial fraud cases, including mortgage fraud, the F.B.I. Criminal Investigative Division ranked complex financial crimes as the lowest of the six ranked criminal threats within its area of responsibility, and ranked mortgage fraud as the lowest subcategory threat within the complex financial crimes category. Additionally, we found mortgage fraud to be a low priority, or not listed as a priority, for F.B.I. field offices in the locations we visited, including Baltimore, Los Angeles, Miami, and New York.”

Got that? Complex financial crimes were the lowest priority for the criminal investigative division.

Even when investigators decided to pursue cases, they wound up closing many of them after doing little work. In fiscal 2011, for example, F.B.I. field offices closed 747 mortgage fraud cases without prosecution, the report found. Most were shuttered “with minimal or no investigation conducted.”

Here’s another troubling data point: While the Justice Department assigned staffers to become mortgage fraud coordinators, these people were not dedicated solely to mortgage cases. They had to work on other matters as well.


Adam J. Levitin, a professor at the Georgetown University Law School, said the report was troubling not only because of what it revealed about past cases, but also because it suggests that there will be few consequences for those who commit financial fraud in the future.

“The I.G. report confirmed what’s been clear for quite a while — that the D.O.J. has never taken mortgage fraud seriously,” Professor Levitin said. “There is going to be no comeuppance for crimes committed during the financial crisis. This sets a really bad precedent for future crises because we’re seeing that there is going to be no deterrent effect of criminal law.”


Then again, the American people
probably don’t need an inspector general’s audit
to tell them how ineffectual the Justice Department was
when it came to criminal prosecutions
of the large, complex financial crimes that led to the crisis.

As [Edward E. Kaufman, the former senator from Delaware
who had tried unsuccessfully to get the Justice Department
to move aggressively on financial-crisis cases] said:
“The report fits a pattern that is scary for a democracy,
that there really are two levels of justice in this country,
one for the people with power and money and one for everyone else.
And that eats at the heart of what I think makes this country great.”

The Hidden Cost of Trading Stocks
‘Best Execution’ and Rebates for Brokers

New York Times Editorial, 2014-06-23

There’s no escaping the conclusion that the stock market is not a level playing field where all investors, large and small, have an equal shot at a fair deal.

A recent groundbreaking study found that undetected insider trading occurs in a stunning one-fourth of public-company deals. Experts have long debated the pros and cons of high-frequency trading, another pervasive practice, but there is no doubt that it gives superfast traders the jump on others in trading stocks. And the very idea of trading on a public exchange, where stock prices and trading volumes are visible to all, is being eclipsed by private trading of public stocks in off-exchange venues, called dark pools, usually operated by banks.

These are not the only ways in which big market players make money at the expense of other investors. The Senate Permanent Subcommittee on Investigations recently held a hearing on “maker-taker” pricing in which stock exchanges pay rebates to brokers for sending them buy-and-sell orders. The practice has been around for years, as a growing number of exchanges — there are now 11 public exchanges in the United States — have battled for business. What is new is the compelling evidence that the rebates are corrupting.

Under federal trading rules, brokers must provide “best execution,” which usually means finding the best stock prices for clients who pay them to buy and sell shares. But the rules also recognize that for some trades, getting the best price is only one part of best execution; the speed, size and cost of a trade must also be considered.

Research presented at the Senate hearing showed that under the guise of making subjective judgments about best execution, brokers were routinely sending orders to venues that paid the highest rebates.

In the last quarter of 2012, for example, the brokerage TD Ameritrade sent all nonmarketable customer orders — those that can’t be completed immediately based on the market price — to the one exchange that paid the highest rebate. In the first quarter of 2014, it sent nonmarketable orders to two venues that paid the highest rebates.

Senator Carl Levin, the subcommittee chairman, rightly called it “a frankly pretty incredible coincidence” that the firm’s judgment on best execution for tens of millions of customers had invariably led it to use the venues that paid the highest rebates. Under questioning, Steven Quirk, an executive of TD Ameritrade, conceded that in the trades cited by Mr. Levin the firm had virtually always used exchanges that paid the most. He also estimated that the firm made $80 million last year from maker-taker rebates.

Meanwhile, many brokerages promote their low trading costs. But the fees to trade stocks do not include the hidden costs that are incurred when investors don’t get the best price. A study from 2012 estimated that rebates cost individual investors, mutual funds and pension funds as much as $5 billion a year.

Securities regulators clearly need to better enforce the best execution requirements on brokers, and require better disclosure on brokers’ routing decisions and the rebates they earn. If Congress won’t provide more resources for enforcement, rebates need to be passed along to the customer or eliminated altogether.

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