I tell my teenage children, who are starting to plan for the future, “If you are lucky enough to do what you love and love what you do, and you work very hard, you will be happy and successful.” It took me a long while to find my calling (I tell people I was on the 10 year university plan), but Private Wealth Management has been my first and only career, one that has been changing, exciting and challenging.
I was interested in finance and economics from an early stage, and during Law School, my buddy Phil and I waited each day to buy the only two copies of the New York Times at the kiosk and flip right to the Business Section. As we studied in Montreal, there was no Wall Street Journal and it was 1987 – before the internet took hold.
Two seminal events stuck with me from that era and shaped our respective paths, at least for a while: the Leveraged Buyout of RJR Nabisco (subject of the must-read book, Barbarians at the Gate) and the successful prosecution of gangster, Manuel Noriega. Phil was intrigued by the LBO and he has gone on to succeed as an M&A attorney, investment banker and now partner in a prominent asset management firm. Having studied the Lost Generation and the history of American gangters in college, and bank secrecy, criminal procedure and securities regulation in law school, I could not get enough of the capture and trial of “Pineapple Face” Noriega.
My dream was to become a white-collar criminal prosecutor, pursuing bank, securities and wire fraudsters. To this day, having dinner in Miami with Miles Malman, the District Attorney who won Noriega’s conviction on tax evasion—a modern day Al Capone story—was one of my most cherished memories. Having him sign a copy of his final summation was like having Derek Jeter sign his rookie card. I was a giddy law geek and did not care!
Here we are, 22 years after graduating, and the US Attorney General, Eric Holder, is talking tough about a new breed of modern day rogues–large banks. Holder said recently that he is personally overseeing major financial institutions and that his department is on the verge of laying criminal prosecutions.
While that may sound like a shark with big teeth, lurking beneath the surface, to date, there has been little bite –virtually no arrests, let alone incarcerations. According to prosecutors, the goals in bringing criminal charges are threefold: forcing structural changes, punishing bad behavior and pursuing individuals. In fact, deferred prosecution agreements prevail, where companies promise to reform and pay large fines in lieu of a guilty plea.
First, let us look at the crimes. I say “crimes” and not “alleged crimes”, as the banks have admitted liability. Acknowledged acts include abetting tax evasion, money laundering, price fixing and bribery, to name a few. The same firms bend the rules as well, inflating the price of commodities and colluding on interest rates.
The punishment for individuals engaged in such activities would likely be imprisonment. Most insiders who are caught trading on insider information go to jail. These other crimes similarly create illegal profits, and should be prosecuted and sentenced the same way.
In reality, these firms have “gotten away with” paying fines to various government departments without anyone serving jail time. And who pays the fines? Not the execs, but the shareholders. Considering that the role of these institutions is to safeguard deposits and investor capital, provide credit, advice and smooth capital markets, you would think execs would be prosecuted, fired and ostracized.
Ironically, a large firm recently admitted having miscalculated the way securities are valued on its balance sheet, wiping out $4 Billion from its reserves, squelching it ability to raise its dividend and buy back stock, and causing the stock to decline 8% over the next few trading days. My first thought was, “Isn’t the very definition of a financial services firm one that is made up of people who know finance?” Since the CEO’s pay was increased substantially in 2013 based on the firm’s alleged vigor and “growing” reserves, my second thought was, “The CEO should take a pay cut for sure or the CFO should be fired.” I was wrong on all counts: at the shareholder meeting a week after the admission, shareholders gave the CEO and CFO a pass and raised CEO pay by 17% to $14 million.
Recently I served jury duty in New Jersey. During the selection process for a personal injury case, prospective jurors were asked, “Do you know what tort reform is?” I was a bit surprised that almost none of my peers knew what it was and I wondered if they did would they be in favor or opposed. You can imagine that by not knowing, they were much more attractive jury candidates for the case! I was not. I told the attorneys and judge that in addition to being an attorney, I know full well what tort reform is. The judge asked me if I was for or against. When I resoundingly answered in favor, I was nicely excused from the case.
I bring this up because while there is pressure on the DOJ to bring criminal prosecutions on financial services firms, it seems the public and shareholders are complacent. Laws are written to create social order, protect the rights and freedoms of citizens, promote justice and deter crime. It stands to reason then that breaking laws harms society as a whole. Trillions of dollars, millions of jobs, lives and families were lost and destroyed by greed and crime leading up to, during and after the credit crisis. Stylizing deviant acts in Scorsese’s The Wolf of Wall Street does not begin to cure the loathsome behavior of the perpetrators, so either the government is toothless, or perhaps unmotivated.
In the end, deferred prosecutions are the Malibu rehab of Wall Street: a well-intentioned but naïve form of tough love. In order to cure the addiction to greed, nothing promotes cold turkey like the unpromising clink of prison bars.