Judge Rakoff Sees Resistance to Fraud Prosecutions

Judge Jed Rakoff told attendees at the Association of Certified Fraud Examiners' Annual Global Fraud Conference in Las Vegas that prosecutors are falling short on prosecuting fraud.

“I am regretfully increasingly convinced that the federal government and the federal system of justice has somewhat retrogressed over the past couple of decades in its prosecution of fraud, or at least in its prosecution of fraud when it’s perpetrated by people at the highest levels of the financial establishment,” said Rakoff, who received the Cressey Award from the ACFE. “And I have to further add that the federal courts have played a role in this regard in erecting unnecessary barriers to the successful prosecution of fraud at these levels.”

He pointed to the wave of fraud prosecutions in past decades and contrasted them to the reluctance of the Justice Department and the Securities and Exchange Commission to pursue mortgage fraud cases in the wake of the financial crisis.

“Beginning in the late 1960s, the SEC, at the impetus of the then director of enforcement Stanley Sporkin, expanded the scope of securities fraud prosecutions to reach high-level corporate executives, big-firm accountants and so-called white-shoe attorneys who had perpetrated substantial fraud,” Rakoff said during a keynote address Monday. “In turn, the U.S. Attorney’s Office, under the leadership of Robert Morgenthau in the Southern District of New York in the 1960s, brought criminal prosecution against these individuals. And finally the Second Circuit Court of Appeals, under the aegis of many judges, but particularly the very famous judge Henry Friendly, proved receptive to affirming these prosecutions and overcoming any legal barriers to their effectiveness.”

He recalled an accounting fraud case during the 1960s that he helped prosecute in which they were able to convict the CEO, the company’s general counsel, outside auditors and many others. “We never thought of going after the company,” said Rakoff. “That wasn’t what we needed to do. We needed to go after the people who actually personally committed the fraud.”

However, many prosecutors now are hesitant to pursue the individuals who perpetrated mortgage fraud, interpreting statutes in a narrow way that gives them higher hurdles to overcome before tackling a case. The Justice Department may have been discouraged by an unfavorable decision in a 2008 case involving midlevel executives at the failed investment bank Bear Stearns, one of the early casualties of the financial crisis.

“Not every case winds up being decided on the merits,” said Rakoff. “But historically the government has won the great majority of criminal cases it has brought, including white collar cases. To let a single defeat deter the government from prosecuting what appears to many as clear cases of high-level fraud seems irrational, and maybe it’s just possible that this provided a handy excuse for declining prosecution of cases in which the government had done so much to help create the conditions that led to the fraud.”

Rakoff acknowledged that the courts too have made it increasingly difficult to prosecute fraud cases. “The common theme of many of these decisions is to impose impediments to actions against fraud that are nowhere to be found in the language of the anti-fraud statutes themselves,” he pointed out. “This is particularly striking when one remembers that for at least 50 years, the accepted mode of statutory construction has been that the statutory language controls, and if that language is unambiguous, nothing more is required. Yet in the cases I’m referring to, the federal courts have read one or another of the anti-fraud statutes as imposing requirements that are nowhere to be found in the statutory language, and the effect has been to saddle prosecutors and litigants with burdens difficult to meet.”