Criminal Affirmance: Going Beyond the Deterrence Paradigm to Examine the Social Meaning Expressed by Exercising Discretion to Decline

Prosecution of Elite Crime

Professor Mary Kreiner Ramirez* Washburn University School of Law

*Professor Ramirez is a thirteen-year veteran of the Department of Justice, having worked as a Senior Trial Attorney with the U.S. Attorney's Office for the District of Kansas, and as a Trial Attorney for the DOJ Antitrust Division.

Recent financial scandals and the relative paucity of criminal prosecutions in response suggest a new reality in the criminal law system: some wrongful actors appear above the law and immune from criminal prosecution. As such, the criminal prosecutorid system affirms much of the wrongdoing giving rise to the crisis. This

leaves the same elites undisturbed at the apex of the financial sector. and creates perverse
incentives for any successors. Furlher, this underrmnes the legitimacy of the rule of law and encourages even more lawlessness among the entire population. These considerations transcend deterrence as well as retribution as a traditional basis for criminal punishment. Affirmance is far more costly and dangerous with respect to the crim of powerful elites
that control large organi~ations than can be accounted for under tradit nal nations of

deterrence. Few limits are placed on a prosecutor's discretionary deci ion about whom to prosecute, and many factors against prosecution are available, especia ly in resourceintensive white collar crime prosecutions. This article asserts that pro ecutors should not exercise that discretion without considering its potential a f f i a n c e of krime Abstract & Table of Contents
I.
11.

ii
4

Introduction Theories of Punishment, or Why We Punish Social Meaning and the Expressiveness of Law Discretion and the Prosecutor Expressing the Message o Affiimance f A. B. Direct Physical Harni Direct financial Harm

11 1.

W.
V.

VI.

Conclusion

"Governmental actions such a criminal that and ~itualperfornwnces dLsignate the content symbolize the public ajirmatiok of social ideals

1
I

be seen as ceremonial

I.

Introduction
The financial crisis

earlier than first reported warning of a financial market him for disbursement in October 2008, to the trillions of dollars trading in den may not have known that the subprime
in bailout funds were handed to

American may not have been alerted in virtually unregulated market^,^ and industry was handing out liar's loans

FRANCIS T. CUlLEN ETAL., CORPORATE UNDEXATIACK: THE FIGHTTO CRJhiINAIAIIZEBUSINESS VIOLmTCE 365 (2d ed. 2M)6) (referencing ~ o s e Gusfield). ~h

4
I
I

See Treasury k Bailour Proposal. CNNMONE~COM, 20, 2009, Sept.

(last visited Apr. 23,2011); Cri.,? Spiraled, Ahrm LC. t Action. N.Y. TtMF,S, Oct. 1,2008, at A 1. o Joe Nocera, A , Cr~dir

See FINANCIALCRISIS INQUIRYCOMMISSION, HE FINANCIALCRISIS INQUIRY COMMISSION REFORT xviii (2011) [hereinafter FClC Report].
Derivatives are financial contracts whok prices m e determined by or "derived" from, thc value of some underlying asset, rate, inhex, or event. They are not used for capital formation or investment, as are securitiks, rather, they are instruments for hedging business risk or for speculating on ~nprices, Interest rates, and the like. common are over-the-counter swaps and Derivatives come in many forms: the fmm may hedge its price risk by entering into exchange-traded fuhlres and of price movements. Losses suffezed because a derivatives contract that offsets the of price movements can be recouped thlougb gains on the derivatives contract.

d . . .

See andre douglas pond cummings, StiU "Ain'tha Glory In Pain": How the Telecommunications Act of 1996 and Other 1990s Deregulation ~ a c i l i t a f e d kMarker Crash of 2002,12 FORDHAMC R . &FIN. L. h J. O P

467.529-536 (2007).

like candy bars on all owe en.^ Nevertheless, there were early indications that something was amiss.6

As early as 1998, Commodities, Futures Trading Commission ("CFTC")

Chairwoman Brooksley Born registered concern about the expansion in the unregulated derivatives markets and related losses, and sought to impose regulations on the derivatives market7 Not only were her efforts derailed, but Treasury Secretary Robefi Rubin, Federal Reserve Chairman Alan Greenspan, and Securities and Exchange Commission ("SEC") Chairman Arthur Levitt lobbied successfully to prohibit derivatives trading from being regulated: and ultimately affirmatively removed derivatives from coming within the purview of the CFTC.' Their efforts to derail derivatives regulation were nearly foiled by the meltdown of Long-Term Capital Management in Scptcmber
1 9 9 8 ,but despite a glimpse of catastrophic losses that could arise from the unregulated ~

' S e e Joe Nocera, In Prison.for Takrng a Liar Lnan, N.Y. T m , Mar. 26,20111, at Dl; RICHARD B m R ,
CONFESSIONS OF ASLTBPRIME LWER: kN INSIDER'S TALE OF GREED, FRAUD,AND IGNORANCE 80-96 (2008) (describing "the art of creativc fmancing" i n aubprime mortgage lending to qualify borrowers for

mortgage loans, which the author termed as ''making chicken salad out of chicken shit") .
6

Commodities, Futures Trading Commission, Over-the-Counter Derivatives, Concept Release, May 1998, (last visited Apr. 12, 2011).

Frontline: The Wanzing (PBS television broadcast Oct. 20,2009) (Interview with Brooksley Bom, former Chairperson, CFTC), (lagt visited Apr. 12, 2011).

'

See Press Release, Treasury Dep'f Joint Statement by Treasury Secretary Robert E. Rubin, Federal Reserve Board Chairman Alan Greenspan, and Securities and Exchangc Commission Chairnun Arrhur Levitt (May 7, 1998); FClC REPORT. rupra note 3, at 47-48 (in October, 1998, Congress passed a moratorium on the CFTC's ability to regulate over-the-counter derivatives, as requested by Rubin, Greenspan, and Levitt): cummings, supra note 4, at 530-31. See FClC REFORT, supra note 3, at 56-58. Long-Term Capital Managanent ("LTCM") is a hedge fund devastating Losses on its $125 b i i o n portfolio after Russia defaulted on part of its national debt, causing a panic in junk bonds and emerging market debt. See FClC RFPORT, suprn note 3, at 57. LTCM had a high-risk leveraging strategy that borrowed $24 for every $1 of investors' equity, so that when
that experienced
9

derivatives trading,'' Congress was persuaded to place a moratorium on the CFTC's ability to regulate OTC derivatives, and in December 2000, it "in essence deregulated the OTC derivatives market and eliminated oversi&t by both the CFTC and the SEC.""

In

2004, Federal Bureau of Investigation ("FBI") agents were asking for more investigators
to address fraud in thc mortgage industry; their pleas were ignored.''

In 2006, New York

University economist Nouriel Roubini warned the audience at an International Monetary Fund mccting in Washington, D.C., of a coming crisis, and he was not alone.13 In August

the capital market panicked, the fund lost 80% of its equity ($4 billion) resulting in $120 billion in debt. Id. at 56-57. LTCM also had derivative contracts worth about $1 trillion, and the concern was that because of the limited equity in the firm, it could fail if the fnnd's counterparties attempted to liquidate their positions simultmeously. Id at 57. Behind-the-scenes emergency maneuvering by the Federal Reserve Bank of New York organized 14 of the largest financial institutions with large exposures to LTCM (Iatcr central players in the taxpayer bailout of those banks) to inject $3.6 billion into LTCM in return for 90% of its stock. Id. AU but one (Bear Stems declined to contribute) of the 14 institutions contributed bctwecn $100 million and $300 million. Id.

See FCiC REPORT,.supra note 3, at46-48 (noting the "wave of significant losses and scandals [that] hit the market" between 1994 to 1998 after the CITC exempted "certain nonstandardized OTC derivatives" kum wading on a regulated exchange); Privare-Sector Refimncing of the Large Hedge Furul, hag-Term Capital Managements: Hearing Before the H.Comm on Banking and Financial Services, 105" Cong., 2"' Sess. (Oct. 1, 1998) (prepared testimony of Federal Reserve Chairman Alan Greenspan, Federal Reserve Chairman).
II

I"

See FClCREPOFT, supra note 3, at 46-48; Commodity Futures Modernization Act of 2000. Pub. L. No. 106-554, 114 Stat. 2763 (2000); cuuunings, strpru note 4, at 529-536.

l2 As early as 2004, the FBI suspected fraud in the mortgage and subprime mortgnge market, but did no1 pursue the investigation due to a lack of funding and staffing, after overall FBI staff~ng decreased between 2001 and 2007 and resources were shifted to post-September 11,2001, national s e a i t y priorities. See Eric Lichtblau et al., EB.1. Struggling to Handle Wave ofFinance Cases, N.Y T m , Oct. 19, 2008, at A1 (reporting a loss of 625 agents (36% of the FAl's 2001 level<)) Execotives in the private sector also complained of "difficulty. . . in attracting the bureau's attention in caves involving possible frauds of millions of dollars." Id.

See NOUIUELROUBINI & STEPHEN MUM, CRISIS ECONOMICS: ACRASH COURSE W THE FUTURE OF F w m c ~1-3 (2010). Koubini and Mihm identify a number of respected experts who issued warnings of
coming disaster: Robert Shiller [of Yale University], was far ahead of almost everyone in warning of the dangers of a stock mnrkct bubble in advance or the tech bust; m e recently, he was one

2007, more warning bells sounded whcn credit markets tightened.14 Prior to their
collapses, several of the banks showed stress.15 By the time Paulson approached the

President of the United States, George W. Bush, in 2008 to sound the alarm, losses were
in the trillions of dollars.16 The bailouts of banks, investment companies, mortgage

companies, insurance companies, and others, all in an effort to save the U.S. financial

ot the fmt economists to sound the alarm about the housing bubble. . . . In 2005 University of Cbicago finance professor Raghuram Rajan told a crowd of high-profile economists and policy makers in Jackson Hole, Wyoming, that the ways banbers and traders were being compensated would encourage them to take on too much risk and leverage, making the global financial system vulnerable to a severe crisis. . . . Wall Street legend James Grant warned in 2005 that the Federal Reserve had helped create nne of "the greatest of all credit bubbles" in the histary of finance; William White, chief economist at the Bank for International Settlements, warned about the systemjc risks of asset and credit bubbles; financial analyst NassimNicholas Taleb cautioned that the financial markets were woefully unprepared to handle "fat tail" events that fell outside the usual distribution of risk; economists Maurice Obstfeld and Kenneth Rogoff warned about the unsustainability of current account deficits in the United States; and Stephen Roach of Morgan Stanley and David Rosenberg of Merrill Lynch long ago raised concerns about consumers in the United States living far heyond their means. The list goes on.

j4 See Les Christie, Mongage Meltdown Contagion: A Grim Forecast Has Economists More Pessim~stic over How Far the Collapse Will Spread to the Re.~t the Economy. CNNMONEYCOM, Aug. 13,2007, of (last visibd Apr. 21.2011).

See JOSEPH E. SllGLIlZ, FREEFALL 136 (2010) (in the ft~st weeks of August 2007. the European two Central Bank and the Fed supplied "massive liquidity to the market" with the European Central Bank injecting around $274 billion, and the Fed injecting $38 billion "at the first signs of problems"); Shawn Nov. Tully, Wall StrectZ Money Machirte Breukr Down, FOKTUNE, 12,2007, (last visited Apr. 18,2011).
16

''

See Richard Frost & Kyung Bok Cho, Asian Stocks Rallx Treasuries Dm,) on Fumie, Freddie Tnkeover,

BWMBERD, Sept. 8,2008,

(last vislted Apr. 18,2011) (reporting that '[mlore than $17 trillion in global equity value has been wiped out since Octnher as the collapse of the subprime dcbt market and a U.S. housing recession slowed global 255-56 (2010) economies); HENRYM. PAUISON, JR., ONTHEBRNK

markets, totaled $11 trillion by November 2009." One insurance company, responsible for insuring a large amount of derivative trading, received $182 billion alone.l8 While the fmancial markcts careened toward disaster and narrowly escaped total collapse due to taxpayer-funded bailouts, unemployment skyrocketed to near Great ~ Depression l e v e ~ s . 'Unemployment benefits wzre cxtcnded several times in an effort to address high long-term unemployment rates." Housing values fell to thc point that over 25% of all homes owned in the United States are worth less than the outstanding amount of the mortgages remaining on those homes.'' The Mortgage Bankers' Association

warned consumers that walking away from mortgage obligations was irresponsihleZZ only

I'

See David Goldman, CNNMoney.com5s Bailout Tracker, CNNMONA'.COM, h ~ p : l l m o n e y . c o n . c o m / u e ~ I ~ t o ~ y s (last p p l e ~ 19,2011) (Lracking ~ ~ visited Apr. the various federal programs to bailout the economy, using sources born the Federal Reserve, Treasurq; FDIC, CBO, and White House, as of Nov. 16.2009: $11 trillinn had been committed for bailouts, and of that amount, $3 trillion had been invested by that date); Steven A. Ramirez, Subprime bailout.^ and the Predator Stafe, 35 U . DAYToNL. REV. 81 (2009). See Christian Plumb, U.S. rops Criminal Pmbe ofAIGExecutives, REUTERS. May 23,2010 at 22, . Among those companies that received bailo ts, some of it has been repaid. See Goldman, supra note 17.
IR

See, e.g., Eleni Theodossio &Steven E Hipple, Bureau of Labor Statistics, Unemployment Remains High in 2010, Monthly Labor evlew Online, Mar. 2011. Vol. 134, No. 3, available at (reporting that" the number of long-term unemployed quarter of 2010, and that the 9.6% unemployment rate was the first reached a record high" in the improvement in the rate since 2007-09 recession, "down born a 26-year high of 10.0 percent a year earlier"); STIGLm! supra not 15, at 63-66 (calculating th& the economy lost 8 million jobs between b December 2007 and October 09, and hat, givcn the number of new enwants to the ~ o markets, 12 million jobs would b e requir to restore the economy to Full employment). See Carl Hulse, Senate is ~ eto Extend Aid lo the Jobless, N.Y. TIlMES, July 20,2010, at A1 !
2'

19

See Brlh Braverman, Homeowners Abandoning Houses En Masse, CNNMoney.com, Apr. 30,2010, (last

From Your Mortgage!, N.Y. TIMES, .Ian. 10,2010, at MM15. In May reported on "strategic defaults" in which borrowers walked away

onc month berore it reportedly "refused to provide the terms of a deal it made with creditors" after vacating its new facilitie~.~' Foreclosures since the crisis have reached record numbers, with more waiting to be processed.24 Banlcruptcies also hit record levels as businesses failed due to lack of ready credit,25while the bailed-out banks hoarded funds due to the need for liquidity,z6favorable interest rates from the federal reserve,27 and the lucrative investment opporh~nities the derivatives in
2010, cows

from mortgage obligations when the valuc of the property fallb significantly below the obhgations, also known as "being underwater" on one's loan. 60 Minutes: mortgage.^: Walking Away (CBS television broadcast May 9,2010) (last visited Apr. 18, 2011). The Wall Street Journal har also reported on strategic defaults. Dawn M'otapka, So you're Underwater, what!^ Next? WSl.com, Nov. 24,2009, http://blogs.~j.com/developments12009/111241so-youre-undemater-wbats-next/ visited Apr. 18, (last 2011).
See James R. Hagerty, Mongage B0nker.v SellBuilding at a Loss, WALLST. J., Feb. 8,2010. Mortgage Bankers purchased the Washington, D.C. building for $79 million, and sold to C o S m Gmup for a mere $41.3 million, moving five blocks away into rental space. id. See RealtyTrac Reports Foreclosure Activity Dips 15 Percent in Q of 2011, I NationalMo~tgageProfessional.mm. Apr. 15,201 1,
24

23

(last visited Apr. 18,2011) (March 2010 had the highest monthly total of foreclosure notices in the United States: 367,056 homeowners received a foreclosure notice), in the f m t quarter of 2011, foreclosures fell to a three-year low, with lio every 191 U.S. housing units rccciving aforeclosurc filing. Id.
See, e.g., Christine Dugas, Small Rruinmses Wtnl to Econortic Recovery Go Bankrupt. USATODAY, Jun. 30,2M)9, at (citing the diicully in getting small business loan due to the credit crunch and the inability to rely upon crcdit cards among reasons Tor the bankruptcies); General Growth Properties Files for B a n h p t c y . nytinles.com. Apr. 16,2009, http:lldealbook.nytimes.~0n~/2009IO4/16/general-growthproperties-files-for-banlrmptcyl (last visited Apr. 22,2011) ("'citing the unprecedented dis~uption the in rral eadle financing markets and the need to extend maturing debt' as the reason the company filed").
2h

25

See Ramirez supra note 17, at 97-99.

''See STIGLITZ, supra note 15, at 138 (2010) (suggesting that the Federal Reserve's decision to begin paying interest on bank reserves held in deposit at the Federal Reserve was "cnunterpraductive" because it aucouragr*l banks to keep the money at the Fbd rather than leiding it out to borrowel-s).
28

See Matt Wirz & Serena Ng, Subprime Bondr Are Bark, W h p i L T .J . , Apr. 1,2011 (repoiting that banks, ST. and even bailed-out insurance giant, A1G have returned to inJpsting in suhprime and other residential

began to realize that banks and then representatives had beck using forged documents and fraudulent affidavits to foreclose on properties in thous4ds of cases.29 Rathcr than contrite, the executives of the bailed out companies gave thebselves and their top managers generous bonuses for 2008,2009, and 2010.~'
I

Over at the SEC, beginning in May 2000 and continuhg to 2008, regulators ignored repeatedly the persistent claims by a citizen whistlebiower named Harry Markopolis, that Bernie Madoff, founder of Bernard L. ~ a d d p ~ n v e s t m eSecurities, nt was running a Ponzi scheme." Though Markopolis' efforts th gain the attention of SEC and included his own

investigators continued over a period of eight and a half

undercover investigation and supporting documents to aid the SEC, Madoff was not

mortgage bonds because the higher risk associated with those bonds also drovides the opportunity for I h~gher yields on the investments).
I
29

See, e.g., Joe Rauch &Clare Baldwin, BOA, W e l h Citi See Foreclosure Probe Fines, REUTERS, Feh. 25, z011, (reporting that the biggest U.S. mortgage lenders in the United States "are being investigated by 50 state attorneys general and L.S. regulators for foreclosing on homes without hajing proper paperwork in place ! or without having properly reviewed paperwork before signing it").
!

See, e.g., Stephen Grocer, Bank7 Set for Record Pay, WALLST.J . , Jan. 15,2010, at^ A l ;Snc,l,nz.rupm note 15, at 56; Eric Dash & Louise Story, Citigroup:~ Executives to ~ o k '08o Top ~ Bonuses, N.Y. TIMES, Jan. 1,2009, at B l . See also ROUBNI & MMIHIII, supra note 13, at 68-69 (eFplaininghow the financial industry's reliance upon honuses as a compensation mechanism crcated thd moral hazard of encouragiug excessive risk-taking to incur short-term profits that would enhance bonuds).
1 1

30

See Assessing the Madoff Ponzi Scheme and Regulatory Failures: ~ c a r i & Beforc the Subcomu~. on Capital Mkts., Ins., and Gov't Sponsored Enten. of the H. Comm. on Fin. Servs., 111th Cong. 10 (2009) Chartered Financial Analyst [hereinafter Hearing on Regulatory Failures] (statement of Harry ~arkopo\os, md Certified Fraud Examiner) at 5; David Gelles & Gillian Tett, From Beqind Barn, MadojfSpins H s i Story, FINANCIALTIMES, Apr. 8, 2011, available at 1 ! (last visited Apr. 12.2011) (the f was founded in 1960 and Madoff claims that the Ponzi scheme f h t began in the early 1990's, m whereas Irving Picard, the trustee seeking to retrieve assets for Madoff's viktims, asserts that the fraud ) began as early as 1983) .

investigated by the SEC until after he confessed spontaneously to his sons.32 By then, the losses had grown to an estimated $50 to 65 billion.33 Madoff, who in 2009, at age 70,
pled guilty to eleven counts of fiaud, money laundering, perjury, and theft, is serving a

150 year federal

Madoff's prosecution can hardly be claimed as a success

story given the many years he operated his scheme unabated and the amount of financial losses to his victims. Hindsight may be 20-20, but tbe facts above demonstrate hindsight was not required to stave off the calamitous events in the financial markets over the past five years. Some criminals will persist in obtaining their fortunes no matter the risks, while others are opportunistic players who jump in the game when the risk of punishment for their acts is diminished. There were some early opportunities to shut down subprime misconduct, and the f-dure to do so arguably emboldened both groups, delivering tremendous financial rewards to them and affuming their actions with every dollar that they made.

32 See Amir Efrati,

Toy, Broker Accused o $50 Billion Frau f

Hearing on Regulatory Failures, supra note 31; see also note 31 (placing the value of the Ponzi scheme at $65
34

,WALL ST. J., Dec. 12,2008, at A1

supra note 32; Gelles & Tett, supra

See Diana B . Henriques &Jack Healy, MadoffGoes to 2009, at A l ; Diana B. Henriqucs, Madoffis Sentenced t o 2009, at A l .

Guilty Pleas, N.Y. TIMES, Mar. 13, for Ponii Scheme, N.Y. 'TIMES, June 30.

Classic theories of punishment identify utilitarian35and retributivi~t~~ justifications for punishing criminal wrongdoing. Deterrence, a utilitarian principle, suggests that by punishing the wrongdoer, he will learn that criminal behavior has consequences; moreover, others will see the criminal punished and also take away the message that crime doesn't pay.37The retributivist justifies punishment somewhat similarly, and more formalistically. The wrongdoer must pay for his crime because of the breach of society's rules. Sometimes, however, the wrongdoer is not punished. In fact, the wrongdoer is not criminally pursued. No charges are brought, no h i d heard, no conviction assessed, and no punishment imposed. Indeed, for most crimes, this is the situation. A victim may fail

"Jeremy Bentham, Principk.~ f P e m l Law, in I THE WORKS OFJER~YBENTHAM (John Bowing ed. o 383 1962) ("General prevention ought to be the chief end of punishment as it is its real justification. If we could consider an offence that has been committed as an isolated fact, the likes of which would never recur: punishment would be useless. It would be only adding one evil to another.").
IMMANELKANT, THE PHILOSOPHY OF LAW: AN EXPOSWION OF 'ITE n n u O M N ' I A L PRWCLPLES OF JURISPRUDENCEASTHESCIENCEOFRIGHT 195-98, trans. W. Hastie (Clark, 1887) (rejecting criminal punishment as a means to promote further good to society, but rather. asserting that punishment must be meted out to one convicted of a crime because the individual has committed that crime); John Rawls, Tu,o Concepts ofRuk,v, PHILOSOPHICALREV. 7 (1955) ("retributiooists have rightly insisted . . .that no man can he punished unless he is guilty [of having] broken the law").
36

Deterrence as a theory of punishment seeks to alter human behavior by reminding iudividuals that o breaches of the law will be punished. Nonetheless, it is difficult t create an empirical study to prove the efficacy of deterrence, since if it is effective, there is no means by which to identify those who might otherwise have breached the law. See TED HONDERICH, PUNISHMENT: THE SUPPOSED JUSTIFlCATION REVISmD 79-82 (2006) (identifying various alternative explanations aside from deterrence as to why individuals may choose to not break the law). Nevertheless, Honderich identifies '%its of evidence of a different k i n d to support the efficacy of deterrence. In 1944 the Danish police were deported by the German occupying forces, leaving behind only a local guard force that waq unable to address the immense rise in property crimes -robberies, theft, fraud - although "there was no comparable increase in murder or sexual crimes." HONDWCH, supra, at 82. 'The change in crime levels in 1944 Denmark might suggest that deterrence is more effective against certain crimes while having virtually no impact on crimes that tend to involve "strong passions or deep psychological problems." HoNDERICH, supra, at 82 (citing HOWARD JONES, C W A N D THE PENALSYSTEM 140 (1956).
37

to report the crime, the police or other governmental investigative arm may choose not to pursue a complaint or may decide to abandon pursuit, the prosecutor may determine not to seek or file charges. Each decision not to pursue criminality, is an exercise of discretion. Reasons for exercising discretion against pursuing criminality may be ~ a r i e d . ~ " For the victim, personal embarrassment, fear, or hopelessness may underlie the decision.39 Lack of suspects or leads, other more pressing cases, lack of resources, lack of credibility of sources, discouragement, bad publicity, or simply lack of motivation are
. just a few of the myriad of reasons for failure to investigate.4 0F~nally, the prosecutor, for

a weak case, an overload of cases, resource considerations, or more compelling cases, to Beyond these reasons, lay other name a few, may factor into the discretionary de~ision.~'

'"ee generally T . KEXNETH MORAN &JOHN L COOPER, DISCRETION AND THC CRtMINAL JUSTICE P R O a S S (1983).
39
40

See id at 18-21.

See, e.g., Carrie Johnson, SEC Ellforcement Caces Decline 976,WASH. P S , Nov. 3,2006, at D3 OT (reporting on recent budget cuts and hiring freezes at the SEC); Lichthlan, supra note 12 (reporting on a loss of 625 agents (36% of its 2001 levels) for white collat-crime investigations as the administration shifted its focus to antiterrorism). "[E]xecutives in the private sector say they have had difficulty attracting the [FBI's] attention in cases involving possible frauds of millions of dollars." Lichtblau, supra. (2010) bereillafter See U.S. DEP'TOFIUSTICE, U.S. ATIDRNEYS'MANIJAI. $9-28.000 & 9-29.000 U.S.A.M.] (Principles of Federal Prosecution & Principles of Federal Prosecution of business Organizations, respectively). The U.S. Department of Justice has explicit policies regarding considerations for initiating and declining prosecution. See U.S.A.M. 3 9-27.200, Initiating And Declining ProsecutionProbable Cause Requirement; U.S.A.M. $ 9-27.220, Grounds for Commencing or Declining Prosecution; U.S.A.M. 5 9-27.230, Initiating And Declining ChargesSubstantial Federal Interest; U.S.A.M. 1927.240, Initiating And Declining ChargesProsecntion in Another Jurisdiction; U.S.A.M. 9-27.250, Non-Criminal Alternatives to Prosecution; U.S.A.M. 5 9-27.260, Initiating And Declining ChargesImpermissible Considerations; U.S.A.M. $ 9-27.270, Records of Prosecutions Declined. See also Stephen Holmes, The Spiderk Web: How Government Lawbreakerr Routinely Elude the Law, in WHEN GOVF.RNMENTS BREAKTHELAW: RULE OF LAW THE AND nm PROSECUTION OF THE BUSH ADMINISTRATION 121, 130-35 (Austin Sarat & Nasser Hussaiu eds. 2010). Holmesobsemes:

possibilities, such as community remedies, civil alternatives to criminal punishment, or perceived blameworthine~s.~~

Whatever the reason, one casualty of the decision not to pursue justice in the face of a crime, is the message that "crime doesn't pay." A minor message, perhaps, in minor crimes; however, if the crime is costs billions of dollars or more, or involves abuse of power, the more likely message is one of to both thc wrongdoer and the reat of us, that is one of "affiance": crime does pay.43 Indeed, even in those cases where the wealthy or powerful-governing elites-are pursued criminally, the discretionary decisions in plea

negotiations may still be affirming if they lead to a result viewed as under-punishment for the crime.44

" n general, individuals who are plugged into especially powerful networks receive considerable I
advantages through the legal system administered by members of privileged networks, who went to the same universities, belong to the same congregations and clubs, vacation in the same locales, and so forth. The same cannot be said for their socially marginalized or dispossessed cocitizens. Wellconnected insiders usually receive more indulgent treatment than poorly connected outsiders, even in the case of undeniable lawbreaking. The effect of Ulis skewed distribution of leniency and severity on legal liability of government malefactors goes without saying. An important exception to impunity for the rich and powrCul occurs when a member of a socially influential network seriously injures a member of the same or another socially powerful network. (Bernie Madoff is a recent example.)"

42

See Darryl Brown, Street Crime, Corporate Crime, & the Contingency o Criminal Liubility, 149 U f PENN. L. REV. 1295, 1297 (2001).

MrcHAn. LFJWlS, THE BIG SHORT xiv-xv (2010). In thc prologue to The Big Short, Lewis reflecled on the response to his fust book, Liar ?rPoker, which described his experience in the bond market as an
" See

associate working at Salomon Brothers on Wall Street from 1985-1988. While Lewis anticipated that the talc of rcckless speculation io the bond market yielding lucrative salaries to associates but massive losses to investors would warn young people against careers in the financial markets, six months after the h w k was published he was inundated with letters from college students using bis book "as a how-to manual" and asking him to share additional secrets about Wall Street. Id.
54

I3nancial scandals from the 1980's bear this out. Michael Milken, attributed with creating the junk-bond market, plead guilty to six counts of securities fraud violations and agreed to over $500 million in fines and

14

This article argues that "affirmance" is as critical to appropriate criminal law decision-making as any of the extant theories of pu~~hrUent. as the belief that Just punishment restores order to society or communicates messages that may deter future wrongdoing, affirmance stands for the proposition that not pursuing or punishing crime adequately can undermine the rule of law,45diminish confidence in g ~ v e r n m e n tand~ ,~ promote further costly criminality.47While applicable to crimes generally, affirmance as discussed in this article will focus upon "elite crimes" (particularly corporate and
a ten-year term of imprisonment; however, he served only twenty-two months in jail and walked away with TRUSTED CRMNALS 164-65 (3d ed. 2007). a fortune. See, e.g., DAVID 0.FREDRICHS,

The rule of law is undermined when misconduct is reinforced through benefits gained to the perpetrator supra note 15, at 135 (2010) (describing how the repeated by shirking the rules. See, e.g., STIGL~~Z, bailout? of banks in the 1980s, 1990s, and 2000s "sent a strong signal to the banks not to worry about had lending, as the government will pick up the pieces"). See also B.R S m , SCIENCEAM) HUMAN BEHAVIOR (1953) (explaining that operant conditioning changes or establishes behavior by reinforcing an individual's response to events or stimuli in the environment). Areinforcer, or operant, is an environmental response to an individual's behavior that increases the probability of repeating the behavior; ultimately strengthening the behavior and its frequency. Id.at 3-50. Positive reinforcement occurs when a rewarding environmental stimulus or consequence follows an individual's behavior. Id Negative reinforcement occurs when the environmental consequence allows the individual to avoid an unpleasant consequence when the individual's behavior occurs. Id Reinforcement differs from punishment, which intends to weaken or eliminate a response, rather than increase a behavior's frequency through gained benefits. Id. at 90.
46

45

Confidence is diminished when members of the group perceive that the rules are unfairly applied. See FRANS DEWAAL, THE AGE OF EM PA^ NATURE'S LESSONS FORA KINDER SOCIETY (2009); ,see, e.g., Steven M . Sheffrin & Robert K. Triest, Can Brute Deterrence Backfire? Perceptions and Anifudec in Tmpayer Compliance, in WHY PEOPLE PAYTAXES: TAXCOMPLIANCEANDENFORCEMEXI 193.212-13 (Joel Slemrod ed., 1992). 47C. . nmnality is promoted in two ways. First, the risk of punishment is lessened, so that a moral hazard is created; the criminal actor pursues criminal conduct because no deterrent measures are expected so the actor reaps the gains from the criminal act, while the losses are borne by the victims. In the case of massive fraud or environmental destruction requiring taxpayers to b e a the losses, the hazard extends even further H because the failure to prosecute is widely viewed as undermining the rule of law. See generally GARY . STERN &RONALDI. -MAN, TOO BIG TO FAIL: THE HAZARDS OFBANK BAILOUTS 6-7 (2004) (describing how insurance policies create a moral hazard because they may encourage risk-taking by the insured, since the losses will he borne by the insurer). Second. had behavior is modeled for others, who may face greater risk of punishment bul disregard that risk because of an expectation of fair play. See ALBERTBANDURA&EMLLIO RE3FS-WTA, ANALYSIS OF DELWQUENCYANDAGGRESSION 24-28 (1976).

financial elites) committed by those who may be perceived to be "above the law" due to the position held at the time the crime was committed, to favorable socioeconomic status, or to political ties to power.

Part II briefly discusses the punishment theories underlying criminal justice.

Central to understanding affiimance is recognizing that it goes beyond concepts of retribution or deterrence. Part UI considers the social meaning behind the choices of who is punished and what crimes are punished. The converse is also considered-who is not

punished and what ideas are expressed by decisions declining criminal investigation or

at punishment. P r IV surveys the numerous factors imbedded in prosecutors'

discretionary decisions, some explicit and others implicit in the process. These factors take into account competing demands for resources, case-specific sufficiency assessments, ethical obligations, and community interests in alternative non-criminal resolutions, among others. P r V evaluates the message of &"imance, as expressed at through the discretionary decisions madc regarding what to investigate, whether to pursue criminal charges, and the amount of punishment meted out to white collar individuals acting through powerful corporations. Whether the individuals' actions result in the death of customers or employees, the destruction of an ecosystem, or the financial ruin of families or countries, under-punishment or failure to pursue criminal charges against these actors, affims their behavior and further invites moral hazard. This article concludes by suggesting that prosecutors must exercise their discretion to decline prosecutions, accept plea bargains, or offer non-criminal alternative sanctions bearing in mind thc affiimance effecl of thal decision, particularly in elite

crimes. Ignoring affirmance to gain politically expedient

resolution^^^ expresses a social

meaning at odds with a cohesive criminal justice system, and thercby undermines the opportunity to positively shape society through

In past articles, I have proposed

that the Department of Justice create a Corporate Crimes Division to focus resources and

I expertise on fighting white collar crime with minimal political interferen~e.~' have also
recommended judicial education to improve awarcncss about bias and group affinity in such cases to combat judicial discomfort with incarcerating white collar cri~ninals.~' In this article, I turn to the prosecutor's role, urging discretionary choices that encompass the role of affirmance in expressing the rule of law. Mimance raises concerns not typically addressed under the deterrence theory of punishment. When the richest and most powerful elements of society enjoy official
affimance of their crimes through non-prosecution, the rule of law erodes because all

48

See Gretchen Morgenson & Louise Stow, In Financial Criris, No Prorecutions of Top Figures, N.Y. TIMES, Apr. 14,2011. at A1 (reponing that Treasury Secretary Timothy Geithner met with then-New York Attorney General Andrew M. Cuomo to express concern about the fragility of the financial system and a desire to calm markets, "a goal that could be complicated by a bard-charging attorncy general").

49

Paul Horwitz observes there is a distinction "between the rule of law as an ideal, and the implernentarion

of the nile of law," and whatever the absolutc statc of thc rule of law demands, '71 still requires

implementation in practical forms, and those mechanisms of implementation may vary depending on the O S BREAKTHELAW 153, context." Paul Horwitz, Dentocracy a s the Rule of Law, in WHWr G I57 (Austin Sarat & Nasser Hnssain eds. 2010). In a democracy, the people define the rules of the game, but may also redefine those rules through voting, legislation, or even constitutional amendment. See id. More signifcantly, for purposes of this article, is that in a democratic society, the mles of the game must ultimately he subject to popular control in order "to command the respect and obedience of the people who are subject to it." Id. at 159-60. A f f i a n c e , through prosecutorial discretion, undermines democratic society.
See Mary Kreiner Ramirez, Prioritizing Justice: Combating Corporate CrinleJrom Task Forre to Top Priority, 93 MARQ. L. REV. 971 (2010). See Mary Kreiner Ramirez, Into the Twilight Zone: lnfonning Judicial Discretion in Sentencing, 57 m L. REV. 591 (2009).
50

citizens now face added temptation to skirt laws and regulations. After all, if one group is above the law then the sway of the rule of law morally diminishes for all. Similarly, when the most powerful may act with impunity to enrich themselves at the expense of society in general, their continued control over society's most concentrated sources of economic wealth (public corporations and large banks, for example) becomes downright hazardous in ways beyond the conception of mere deterrence. Criminality achieved through the abuse of positions within great economic organizations can crash capitalism, destroy ecosystems, and disperse great risks to human health and safety, so long as the
powerful individuals in control of such entitics rakc in great wealth. Despite the accrual

of great wealth-even hundreds of millions of dollars-to

these individuals, the dead

weight loss to society may mount exponentially to billions or trillions of dollars, as shown again and again. A f f i c e comprehends these enormous knock-on losses, as well as the loss of moral suasion inherent in the rule of law, in ways that extend beyond mere deterrence.

I. I

Theories of Punishment. or Why We Punish

Civil law holds individuals accountable for their actions by demanding that they

pay for the harm imposed on others. In contrast, criminal law punishes individuals.52 It may also require payment or accountability, but at its core, it is society's decision that the acts performed by the accused are sufficiently reprehensible to a well-ordered society that the actor should be punished and also labeled "a criminal."
Henry M. Hart, Jr.. The Aim7 of the C r i r n i w I L a ~ ; LAW& CONTEMP. 23 PROBS. 401,404 (1958) ("What distinguishes a criminal from a civil sanction and all that distinguishes it, it is ventured, is the judgment of community condemnation which accompanies and justifies its imposition.").
j2

18

In creating criminal laws, society must decide that certain conduct requires criminal punishment, and cannot be sufficiently addressed by civil penalties. Theories of punishment identify reasons a society punishes through 'ximind laws.53 The theories fall into two broad categories: retributive and utilitarian reasons.54 Retributive theories are backward-looking assekng the need for affirmative punishment deserved by the individual for breaking societal Under this label, several theorists have further

expanded upon the type of message and need for the message; affirmative ret~ibution,~~ negative r e t r i b u t i ~ nand assaultive retr~bution*~ focus on the message conveyed to ,~~ al l the law-breaker. Affirmance of the crimes of the rich and powerful convey a message as well. The message acknowledges that despite the obvious and extensive harm imposed upon others,
53
54

Id. at 410 (discussing why it is diff~cnlt have only one theoty of criminal law) to

Kent Greeoawalt, Punishment, 3 EKCYC~PEDIAOFCRTMEAND JUSTICE 1282,1284 (Joshua Dressler, ed., 2d ed. 2002).

55

HoNDERlCY supra note 37, at 17. Honderich is critical of retributive theories of punishment as

'"concephlally inadequate" in part because they "fail to give an adequate or real reason for punishment" and "presuppose free will." Id at 201.
56

Michael S Moore, The Moral Worth afRetribution, in RESPONSIBILITY, CHARACTER, AND THE EMOTIONS: NEWESSAYS INMORALPSYCHOLOGY 179-182 (Ferdinand Schoeman, ed. 1987) ('The distinctive aspect of retributivism is that the moral desert of an offender is a sufficient reason to punish him or her . . . .").
HONDERICH, supra note 37, at 20-21 (observing that negative retributivejustice entails the ideas that one "who has obeyed tbe law must not be made to suiler even if this would have the good effect . . . of keeping him from committing offenses he is otherwise thought likely to commit," and that "an offender's penalty must notbe increased over what is deserved for his action even i f . . . a more severe penalty is needed as an example to detel- oolers").
57

JAMES FrruAMES STEPHEN, A HISTORY OF THT;CIUMNALLAW OFENGLAND 80-82 (1883) (maintailling that it is 'Xghly desirable that criminals should be hated, [and] that the punishments inflicted upon them ? should be so contrived a to give expression to that hatred); JEFRIEMURPHY & JEAN HAMPMN, FoRGIVENesS khTD MERCY 4 (1988) (criminals should be treated as "noxious insects to he ground under the heel of society").
5R

they act above the law and will not pay aprice to society for disrupting its rules or imposing suffering on others. They are assured that they can take risks with other people's lives or livelihoods, their money or their environment, and reap the great rewards in costs savings, large pay bonuses for short-term gains in profits, promotions or corporate board appointments. If their actions cause harm, it will not rcach them personally; at best, the organizations they control suffer losses. Even if some economic harm is incurred, the benefits will far outweigh those costs, and may even be used as a shield to claim that they, too, have suffered. Utilitarian principles are forward-looking, seeking to maximize the utility of society through punishment of the individual, so that punishment is worthy only if the pain causcd through punishment will result in greater benefit to society.59 Thus, through incapacitation, the law-breaker is imprisoned to protect society from his acts.60 Rehabilitation permits society to focus on the characteristics of the individual offender to teach the law-breaker to be a better person ho is wihng or able to follow the law.61 Specific deterrence aims to convey to the ldw-breaker that punishment wiU follow his breach of the laws, thereby improving soci ty by influencing the future behavior of the individual to choose pleasure over pain.
19

I 1,

. .

"

YIk

neral deterrence punishes the individual

be the chief end of punishment as it is its real committed as an isolated fact, the likes of which be only adding one evil to another."). Bentham to incapacitate, to deter individuals and others,

Beutharn, supra note 35 ('General prevention justification. If we could consider an offence th would never recur, punishment would be useles identified three ways to prevent crime through and to reform or rehabilitate. See HONDE

'" TERANCE D. MIETHE& HONG LU, PUN1

(2005).
61

ALPERSPECTIVE 17-18

Id at 22-23. Id. at 20.

62

law-breaker, so that society is remindW to avoid deviance and assured that breaking the rules incnrs puni~hment.~"

Affirmance is a utilitarian approach to criminal justice in that it too is forwardlooking. Just as specific deterrence encourages the law-breaker to follow the law and thereby choose pleasure over pain, affirmance encourages the law-breaker to break the law because there is much pleasure and little or no pain. Likewise, just as general deterrence illustrates to others that lawlessness has a price, a&rmance reminds others that criminal law is weak against the hands of the rich and powerful and thus encourages lawless complicity, or simply, lawlessness. Often the criminal prohibition of conduct and the assigned options for punishEtent may fit into several theories of punishment, so that by imprisoning one for a crime, such as sexual assault, society may convey the retributive idea that one must be punished for breaching societal rules, the utilitarian idea that the individual must be incapacitated to remove the danger he poses to the public, the rehabilitative idea that through mandatory counseling in prison, he wiU improve his life once freed from prison, and the specific and general deterrence ideas that his experience with imprisonment will encourage him to abstain from similar acts in the future and convince society to also abstain from engaging
in such acts and thereby avoid similar punishment.h4 Thus, in the sexual assault example

above, punishment conveys a message tbat women are valuable members in this society, and their right to be free from physical and emotional assault in the most intimate of

See generally H.L.A. HART,PLWISHMENTAND RESPONSIBII.ITY: ESSAYS ! THE PHILOSOPHY OFLAW 3 N (2nd ed. 2008) ("dierent principles [of punishment] are relevant are different points in any morally acceptable account of punishment").

settings is worthy of protection. If such conduct routinely went unpunished, rapists' conduct would be affirmed, and in so doing, lawlessness toward women in particular, but likely violence in general would be encouraged. Moreover, the message of women's worthlessness would be stark. When criminal laws are created and potential penalties assigned to breaches of the law, society has (theoretically) considered what message to convey to the law-breaker so that the law-breaker and non-law-breaker alike can see that meaning is attached to our decision to punish. When society's rules are broken, we convey our disapproval, and the law-breaker and other would-be law-breakers can see we mean business. Law, and punishments for breaches of law, convey social meaning.65 As discussed below, failure to punish conveys meaning as well-and one of those meanings, is affimance.

In.

Social Meanin9 and the Expressiveness of Law

The construction of criminal laws to convey these purposes of punishment is so

well-accepted in American society that when legislators create new criminal laws, they do not necessarily identify which theories of punishment are furthered by the new legislation. Instead, the social meaning is understood, so that by labe$ng an act as "criminal" society intends to convey its disapproval of the conduct, to apply the negative label of 'Telon" in perpetuity, and to subject the criminal actor to limitations on his liberty or other puni~hInentS identified by the government on behalf of the society it as
-

" See Lawrence Lessig, The Regulation ofSocial Meaning, 62 U . CHI. L. REV. 943,951-52 (1995). Lessig
defines "social meanings" as "the semiotic content attached to various actions or inactions, or statuses, within a p&icular context. If an action creates a stigma, that stigma is a social meaning. If a geshlre is an insult, that insult is a social meaning. . . . [Use of the term "social"] emphasize[s] its contingency on a particular society or group or community within which social meanings occur." Id.

governs.@ Cnminal laws empower the government to label and punish individuals in a meaningful way, and constrain individuals from breaching these laws.67 The strength of a social meaning is that it is so accepted as a part of a culture that the understandings or expectations associated with the idea "appear natural or necessary."68 The lack of discussion regarding the purpose of punishing a particular criminal act Ilighlights the invisibility of the social meaning attached to the criminal label due to society's accepted understanding of why we criminalize and punish. Lawrence Lessig, in
The Regulation of Social Meaning, thus observes the following two points:

The more [understandings or expectations] appear natural, or necessary, or uncontested, or invisible, the more powerful or unavoidable or natural social meanings drawn from them appear to be. The converse is also true: the more contested or contingent, the less powerful mennings

Because of the social meaning attached to labeling one a criminal, an alternative for those with political clout is to change the label from criminal to uegulatoly. See,e.g., ~~ARSHALLB. CWAKD, ILLEGAL CORPORATE BEHAVIOR 22 (1979); EDWINSUl'HERLIWD, WHITE COLLAR m : THE UNCLW VERSION 13C 14.45-53 (Yale University Press 1983); G Hoberg, North American Environmental Regulation, in Changing Regulatary Institutions in Britain and Nonh America (G.B. Doem & S. Wilks, eds., 1998) (discussing changing labels to replace environmental "crime" with permits or licenses to pollute).

I6

See Lessig, supra note 65, at 955. The passage of laws, criminal and non-criminal, are inherently political; the true question is whether laws are the result of social consensus or powerful interests. Laureen Snider, Rrsearching Corporate Crinae, in UNMASKNGTHECRIMESOFTHE POWERFUL: SCRWUYIZING STATES&CORPORATIONS 45455 (Steve Tombs & Dave Whyte eds., 2003). See also FClC REPDRT, supra note 3, at xviii (rcportin~g thul the Commission was not surprised that "an industry of such wealth and power would exert pressure on policy makers and regulators" to weaken regulatory constraints on [financial] institutions. markets, and products"). The Commission observed, "[from 1999 to m08, the financial sector expended $2.7 billion in repotted federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions." Id. at xviii, 55.
68

''

See Lessig, supra note 65, at 960

appear to be. Social meanings carry with them, or transmit, the force, or contestability, of the presuppositions that constitute themfi9 While many accept the retributivist idea that it is moral or just to punish those who violate the criminal laws and impose their criminality upon others, the lex t a l ~ n i s ~ ~ approach is not universally accepted.71 Likewise, while many accept the utilitarian theory that criminals must be punished to influence thcir future behavior and that of society, that view is disavowed by the Kantian Because punishment can be

justified by more than one theory, the legal philosophers need not reconcile their

difference^.^'

The retributivists accept criminal punishment pursuant to the justifications

69 Lessig,

supra note 65, at 960-61 (emphasis added)

' " t h tenn for 'law of reialiation," sometimes explained as "an eye for an eye" from the Biblical passage, Exodus 21 :23~27.
supra note 37, at20-29 (2006) (highlighting the circularity of arguing that one deserves is punishment for breaking the law because he broke the law). "Circular retributii~i.sm an instance of the fallacy where the supposed reason is identical with the supposed conclusion." Id at 24.
" HONDERICH,
71

KANT, supra note 36, at 195-97 ("Juridical punishment can never be administered merely as a means for

promoting another good either with regard to the criminal himself or to civil society, but must in all cases he imposed only because the individual on whom it is inflicted has commitreda crime. For one man ought nevev to be dealt with merely as a means subservient to the purpnw of another . . . .").
l3 Congress statutorily required that in determining the appropriate sentences under the U.S. Sentencing Guidelines, the Sentencing Commission was to take into account the purposes nf sentencing. See 18 U.S.C. $ 3553(a) (2000 &West Supp. 2002). Thus, in determining the particular sentence to be imposed. the courts must consider, among other things, "the need for the sentence imposed . . . [t]o provide just punishment for the offense; . . . afford adequate deterrcncc to criminal conduct; . . . [plrotect thr. public from futher crimes of the defendant; and. . . [plrovide . . . educational [training], . . . vocational training, . . . medical care, . . . or other correctional treatment." 18 U.S.C. 9 3553(a)(Z)(A)-(D). The Sentencing o Commission recognized that, as l he competing philosophies underlying the purposes of punishment, different purposes have greater or lesser value with different defendants. See Steven Breyer. The Federal Sentencing guideline,^ and the Key Compromises Upon Which They Rest, 1.7 HOFSTRA L. REV. 1, 15-18 (1988) (stating that when faced with advocates of deterrence and those of "just deserts,'' listing criminal behavior in rank order of severity and applying punishment, the Sentencing Commission focused on typical, or average, actual past practice in punishment).

they find acceptable, while the utilitarians accept punishment for its prospective impact on society.74 Professor Dan Kahan examined the connection between social influence, social meaning and deterrence from crime, concluding that law can shape "how individuals' perceptions of each others' values, beliefs, and behavior affect their conduct, including their deciqionq to engage in crime."75 Thus, therc is thc broadly observed phenomena that while a community may generally support prosecuting and punishing one who would murder another individual, lynchings were permissible forms of community activity in some parts of the United States, typically with no criminal charges brought against the perpetrators of the violence, despite thousands of complicit spectators attending these The spectacles of lawlessness and di~order.'~ failure by law enforcement to pursue subsequently the instigators of the lynchings, criminal acts committed before the very community in which they lived, conveyed a clear social meaning to everyone in that community about the value of persons of color in the eyes of the law. That those crowds did not rise up against the neighbors who performed the lynchings demonstrated that this

74 But See PAULH. ROBEVSON; DISTRIBUTIVE PRWCIPLES OFCRIMWALLAW: WHO SHOULD BEPUNISHED AND IIoW MUCH? 50-58 (2008) (suggesting that the aggregated-effect studies of deterrence do not "demonstrate a capacity to reduce crime rates as would justify the deterrence orientation that dominates criminal mle-making").
75

Dan M. Kahan, Social Influence, SocialMeaning, and Deterrence, 83 VA. L. REV. 349,350-51 (1997).

7 9 e e ,e.g., Leslie Friedman Goldstein, The Second Amendment, the Slaughter-House Cases f1873), and United States Cruikshank (1876), 1 ALB. GOV'TL. REV. 365 386-90 (2008) (describingthe wide-spread anti-black violence in the anti-bellum South and the limits of the federal government's capacity to curb such violence in the absence of state government will). See also Kahan, supra note 75, at 353-54. Professor Kahan identifies looting and rials as other mob activities that draw individuals without prior criminal records. or differing socio-economic backgrounds from those who live in the affected area. Id.

conduct was culturally bound up in the community, and that the law sanctioned punishing some without due process while absolving thousands without charges. Though the days of lynching are largely over, the law continues to express the social meaning of a community through the manner nf its enforcement. The use of racial incongruity as a basis for reasonable suspicion, in conjunction with Terrj stops, permits law enforcement to express the message that neighborhoods have a color, where some individuals belong and others do not." For those who fail to discern this meaning, most often law-abiding minorities who are forced to suffer the indignity of a police encounter. potentially with a frisk, or even handcuffs, the lcsson is hard-earned. The message to stay out of certain neighborhoods and away from certain people may be delivered less violently than in the past, but the "stops, coming from the state, suggest apublic discounting of worth, an asterisk on our protestations of equality, a caveat to our rhetoric about applying strict scrutiny to the state's use of racial

distinction^."'^

Discretionary enforcement of law that conveys a negative message of inequality that some law-abiding citizens are less valued concurrently conveys the message that some citizens are more valued.79 This hydraulic effect creates both suspicion pitting each class against the other, and competition regarding who will be made master, and who will

Bemett Capers, Policing, Race, andPlnce, 44 1lARV.C.R:C.L. L. REV. 43, 72 (2009)

''Id at 68 ("[Llaw-abiding minorities in predominantly white communities face disproportionate stops by

a~ld ulcounlers with the police, and law-abiding whites in minority communities face disproportionate stops by and encounters with the police. The officers in effect function as de facto border control, deciding who is scrutinized, stopped, questioned, or frisked.").
79

See William J. Stuntz, Race, Class and Drugs, 98 C o m . L. REV. 1795, 1835 (1998).

bow to the legal code. Every citizen contact with the discretionary features of the criminal justice system strengthens or erodes the meaning of a legally ordered society.'0 Perception of fairness in the law is critical to compliance with the law." Indeed, the retributivist's moral imperative to comply with law may be undermined by the perception that one is being taken advantage of or playing the fool by complying with the law. Thus for example, as Professor Kahan observes, one may conclude that one's adherence to the law is "more servile than moral," when others fail to reciprocate in the societal compact to pay their fair share of taxes." Moreover, even government's

attempts to assure the injured taxpayer that it will crack down on the unrepentant tax cheat has been shown to have the unexpected effect of less compliance rather than more compliance, as the announcement c o n f m s what the taxpayer already fears: that the taxpayer truly is carrying an unfair share of the tax load due to the unwillingness of other community members to contribute and the government's failure to enforce the law.83 This realization and reaction is activated by inherent evolutionary driven responses as well as reflecting norms and institutions that have emerged over the course of human

" Brown, supra note 42, at 1306-07.

'I

See PAULH. ROBINSON & JOHN M. D.~RLEY, JUSTICE,LIABUITYANDBLAME:COMMUNITY VIEWSAND THECRIhlINALLAW5-6,201-03 (1995); TOM R . W & WHY PEOPLE OBEY THELAW 25 (1990).
R2 Kahan,

supra note 75, at 358. Professor Kahan relies upon empirical studies suggesting "a suong correlation between a person's obedience [to law] and her perception of others' behavior and attitudes toward law [so that] a person's beliefs about whether other persons in her situation are paying their taxes, for example, plays a much more significant role in her decision to comply than does the burden of the tax or her perception of the expected punishment for evasion." Kahan, supra at 354; see Harold G.Grasmick & Donald E. Green, Legal Punishmenr, Social Disapproval and Internalization as Inhibitors of Illegal Behnsior, 71 J. CRIM. L. &cRIMtNOUXiY 325 (1980). "See Sheffrin & Triest, .supra note 46, at 212-13.

history that demands fair play.8d With so many law breakers in the mix, the taxpayer derives the social meaning that only fools pay their taxes, and they will no longer play the fool. Beyond the social meaning attached to why we punish, is the meaning attached to who gets punished and who does not.85 Animal behaviorists have observed in a number of species an evolutionary fair play at
This understanding is that animals

recognize when one of its rnemhers refuse to observe the culmral mlcs of fair play of the clan and then they work to communicate to the rebel to either conform or exit the Confidence is diminished when members of the group perceive that the rules are unfairly applied." 8 a lager society, research by social scientists supports the conclusion that world religions encourage fair play that pennits such societies to engage in market growth and other aspects of a complex society.89A marked indicator of higher intelligence in humans is empathy, a capacity to imaginatively project a subjective state upon another and vicariously experience another's feelings.90 The capacity to understand

Joseph Henrich, et. al, Markers Religion, Communiry Size, and the Evolution of Fairness and Punishment, SCIENCE, Mar. 19,2010, at 1480-84 (reporting on research supporting that markets and participation in a world religion positively covaries with fairness in large-scale societies suggesting th?t modem societies are not solely the prodi~ct innate psychology). of "See RoBUiSoN,supra note 74, at 2 ("each purpose of punishment when used as a distributive principle gives a quik different distribution of punishment").
lui

84

See DEWAAL,.mpra note 46. DeWaal recognizes that "'one can't derive the goals of society from the goals of nahlre," but observes that "nature can offer information and inspiration." Id, at 30.
" S e e DEWAN, supra note 46
"See DEWAAL,rupra note 46: Frans DeWaal, Animal Fair Play, SC~ENTIFIC R I C A N , 2010, at M
R9 See

Henrich, et al, rupra note 84 DEWAAL, supra note 46, at 84-117.

9U See

others also creates an ability to harm or deceive another deliberately because cruelty relies on the propensity to imagine how one's own behavior animals exhibit their aptitude to empathize, which reveals i ts another.g1 Many al social behaviors to

humans and is an avenue to understanding our own human social behaviors, such as bonding, forming alliances, and conflict r e s ~ l u t i o n .Studying the same social behaviors ~~ in these empathetic animals exemplifies the survival value of "fair play" in evolution, as it developed early on the evolutionary scale, is widespread and prominent?3 Members who disregard legal restrictions and are not phished become models of bad behavior that are then followed by others who no longer pkrceive a negative risk to misconduct.94 Social learnlng theory posits that modeling-l&ing imitation-curs by observation and

after the observer is exposed to a cerIain behavior?' First, the observer

must have the capacity to understand the significant features of the behavior, such as Second, in order to reproduce the behavior, t i e observer must encode the observed information into long-term memory for later retrieval if they are capable of reproducing the behavi0r.9~ Most importantly, the final factor in modeling behavior is the
<

9'

See id. at 211.

92

See id. at 122-25

93

See DEWAAL, supra note 46, at 4-7. But see Henrich, el al., supra note 14 (reporting on study spanning fifteen diverse populations suggesting that modem prosociality regarding fair play and punishment "is not sokly the pruduct of innate psychology, but reflects norms and inslitutions," such as larger-scale market integration and world religions, "that have emerged over the course of histo*."). See BANDURA&RIBEs-WEST& supra note 47, at 24-28; Kahan, supra note 75. at 354.

95

See BANnIJRA & RmES-LVZSm, supra note 47,at 24 28 See id. at 24-28. See id. at 24-28.

96
97

observer's motivation, or reinforcement, where they anticipate a Asitive result, o reward for the observed behavior.98 Once modeling is cncoded, and the n gative reinforcement of a positive result or reward becomes engrained behavior, the risk is a breakdown of the so thnt thcrc is a loss of good behavior from previous1 law-abiding hus, the tlueat of retribution for violation of the law is clipsed by the bad behavior affirming that one can flaunt the legal t

1a
f

at and get away with e prevalent if

conducl that appears occasional and isolated may bec s not vigorously pursued.'01

se benefitting from collecting fees generated through!subprime mortgage lending

d credit default swaps, disregard for longstanding rules and practices became

See also RICHARE R. B o o m , ETAI, PSYCHOJBGY TODAY (1991); LARUE AILEN & T E CONTEXTS OF BEHAVIORALPSYCHOUHiY- (1993). H

s DeWaAL, OUR INNERAPE-.

DeWaal described a zookeeper who used bananas to lure an apc out into the zoo yard. Unforrunately, when the other apes observed h i s exchange, dley the difficult ape was being "rewarded" for his conduct with prized banana treats and the rest of to perform as e x p t d without similar reward. Id. at -. en, et a]., Joywalking ns a Function of Model Behavior, 16 PERSONALITY & SOC. 320, 324,327 (1990). Lawlessness is contagious so that a law-abiding individual is more laws when in the presence of peers wllo break the law. See ALBERTBANDuRA, IALLEARNlNG ANALYSIS 104-07 (1973) (reviewing studies suggesting violent crimes such as serial killings and kidnappings); Knhan, supra note 75, at 354-55 es on increased instances of mob violence and looting).

lo' S ~ P , . , Stephen Joyce, Inrider Troding Violations Now Evolving info "Actual Business Model, " ex Oficial Say., 6 WCR 258, BNA, Mar. 25,2011, available at

(last visited Mar. 25,2011) ("Insider trading conduct is changing from all, single episodes of illegal behavior to an "actual business model," where rings of businesspeople from several distinct industries repeatedly break the law to reap huge illicit ties and Exchange Commission Associate Regional Director David Rosenfeld said March

11.").

so profitable that others took notice and joined i." n'

Once the bad behavior became so

wide-spread and the monumental financial costs of that behavior manifested in the financial crisis of 2007-2009, the federal government focused its attention on stopping the panic in the financial markets rather than punishing the initiators of the

ond duct.''^

The urgency of the need for a fmancial fix was optimal for the initial wrongdoers, since the attention shifted from those at fault to those able to assist the fix.lM With so many actors misbehaving, it was easy for those who benefitted financially the most to lay blame at the doors of others. The failure to pursue these wrongdoers further affirms their

Im See Floyd Norris, Eyes Open. WaMu Still Failed, N.Y. nMEs, Mar. 25,101 1, at B1. In 2008, Washington Mutual (WaMu) became the largest bank failure in American history. Id Although internal officers warned the CEO, Kerry K. Killinger, and the board of directors of impending disaster tom risky lending.practices and regulators were made aware of the problen~s early as 2006, no efforts were made at as the bank to reign in risk and regulators resisted taking any enforcement action until it was too late. Id. Norris observes that WaMu "had identified Countrywide Financial as a model to emulate, and any other course would have surrendered market share, not to mention immediate profits that financed huge paychecks fbr executives." Id See aLvo STEVEN A. RAMTREZ, REIMAG~GCAPITALISM, 11-12 ch.7, m.38-47 (forthcoming 201 1); Steven A. Ramirez, Lessonsfrom the Subprime Debacle: S r s Testing CEO tis ~ u f o n o i ~ ST. LOUIS U. L.I. 1 , 2 4 2 5 (2009) (describing the reckless loan practices at Countrywide and 54 , the role that its CEO, Angelo Mozilo, played in the its demise).

"'' See PAmoN, supra note 16, at 253-62 (describig his push for an immediate bailout and his insistence
that Congress did not have the luxury of debating appropriate consequences for the financial industry due to the impending financial meltdown after the collapse of Lehman Brothers, which he declared as "the economic equivalent of war").
I M Paulson resisted suggestions that any bailout legislation include compensation restrictions, asserting that banks would be unwilling to accept bailouts if such conditions were in the package, and he wanted to "encourage maximum participation" in the bailout so that the banks would unload the toxic assets. See PAWON, supra note 16, at 260-61.

See, e.g., Nocem, supra note 5 (reporting the extreme and persistent measures taken by an IRS agent to investigate an individual, prosecuted for two "liar's loans" after he came to the LRS Special Agent's attention because he appeared in a documentary fdm in which he ran across the Sahara in I I I days causing the agent to wonder about his sources of income).

I05

The use of criminal sanctions may "referl:] to more than one meaning of the term
use."'"

Legislatures may authorize the use criminal sanctions in statutory language, but

the use of such sanctions depends upon their application by administrators of the law.ln7 This article focuses not on the propriety of the rules, that is, criminal laws, but rather on their use or non-use by prosecutors and the consequential expressive message affirming criminal misconduct. The oft-stated maxim that "no one is above the law," ignores the "unsavory details . . . about the specific, content of laws or about who makes them, interprets them, and applies them for what purposes."108 If laws are perceived as being applied unfairly so that persons of wealth or power are permitted operate above the law, the rule of law is undermined.lDg
106

See Hany V Ball & Lawrence M. Friedman, The Use of Criminal Sanctions in the Enforcement of . Economic Legislation: A Sociological View, 17 STAN. L. REV. 197,199 (1965).
lo'

See id. See Holmes, supra note 41, at 123.

'OX

Io9 The "rule of law" is a general notion defined in a myriad of ways, some of which are contradictory. See Horwitz, supra note 49, at 153-56. Horwitz cites numerous examples by authors both acknowledging the differences in definition, as well as contrasting anthors'definitions. Id at 154 0.4, 155-156. This article recognizes that at a minimum, the "mle of law" encompasses Richard Fallon's summary of five elements generally present in modem definitions of the rule of law: the capacity of legal rules to be understood, efficacy, stability, the supremacy of legal authority, and the availability of impartial legal procedures." See Richard H . Fallon, Jr., "TheRule of Law" as a Concept in Constitutional Discourse, 97 COLUM. L. REV. 1, 8-9 (1997) (emphasis added). Fallon described these concepts as follows:

(1) The f ~ selement is the capacity of legal rules, standards, or principles to guide people in the t conduct of their affairs. People must be able to understand the law and comply with it. (2) The second element of the Rule of Law is efficacy. The law should actually guide people, at least for the most part. In Joseph Raz's phrase, "people should he ruled by the law and obey it." (3) The thud element is stability. The law should he reasonably stable, in order to facilitate planning and coordinated action over time. (4) The fourth element of the Rule of Law is the supremacy of legal authority. The law should rule officials, including judges, as well as ordinary citizens. (5) The fiial element involves instrumentalities of impartialjustice. Courts should be available to enforce the law and should employ fair procedures.

32

IV.

Discetion and the Prosecutor

The nature of criminal law is such that it is impossible to define

every possible combination of facts that might be defined as a crime.''' have long recognized that legal systems compromise between the certain+ of rules and
I

the discretion of "informed" officials based upon particular facts."' Con equently, the prosecutor is given broad discretion in making criminal charging decisio s."'

as there is probable cause to support the charges, prosecutors can decide ow many counts to bring, the severity of the crime to charge, and which suspects to use as witnesses and which to charge as

1
t

"So long

defendant^.""^

Many factors impact th prosecutor's

decision. Some factors are explicit and often set forth in prosecutorial gu delines, ethical rules, or court opinions; other factors are

such as racial bias or relationships among supervisors and suspects. These latter implicit factors are often not readily identifiable i a paaicular instance (although a trend may be discernible), but the explicit factors provi e easy cover for any decision the prosecutor

I 4 I

I='
'

plicit, possibly even unrecognized factors

Id at 8-9. This article would procedures by courts to including status of the cnizens.
111,

justice" to go beyond employing fair impartial to the political or fmancial

MORAN & COOPER,supra note 38, at 10 (1983 ("It is now fiimly believed by those who work in the

process, and by those who observe it, that strict a erence to the rules of law, precisely as they are narrowly laid down, certainly as it relates to the criminal la would be socially intolerable. This is to say that society, not the cnminal justice system, would not tand for full enforcement of the laws. Here is clearly a basis for a high degree of discretion in the process.")

''I

See H.L.AHART.TECONCEm'OFLAW 127 (1961)

WAYNE R.L F V E A , CRIMINAL PROCEDURE 680 (4th ed. 2004) (The notion that the prosecutillg AA E T L attorney is vested with a broad range of discretion in deciding when to prosecute and when not to is fmmly
'I2

entrenched in American law.").

"' ERWIN CHEMERINSKYLAURIE LEVENSON, CRIMWAL See & L. PROCEDURE: ADJUDICATION 29 (2008)

might make. When wealth or power are implicit factors, the prosecutor must consider the affirmance effect. Every prosecutor must consider the sufficiency of the evidence in assessing whether a crime should be charged and what crime can be proved beyond a reasonable doubt. Depending upon the size of a particular prosecutor's office, charging guidelines may be expressly stated or informally applied, but these constraints are not typically s t a t ~ t o r i l ~ - b o u n d . ~ ~ ~ because the probable cause standard required to charge a Further, crime is less than the proof beyond a reasonable doubt standard required to convict a defendant charged with a crime, prosecutors may vary considerably in their charging models. Three decision-making models that have been identified as governing prosecutorial choices along the charging continuum, are the legal sufficiency model, system efficiency model, and trial sufficiency model."' Prosecutors fitting the legal sufficiency model make charging decisions based upon the minimum level of proof necessary to meet the elements of the crime charged. The success of this model relies upon the expectation that many cases will plead before trial, thanks to plea bargaining, and thus most cases will not be tested by the high burden ~ of proving the charged crime beyond a reasonable d ~ u b t . " The risk of a type I1 error, that is, failing to reject a criminal charge when the defendant is not guilty, is highest with

'I4 See MARC .MILLER & RONALD F. WRIGHT, CRIMLNAL PROCEDURES: PROSECUTION AND L ADJUDICATION 164-84 (3rd ed. 2007).
' I 5 See Joan E.Jacoby, The Charging Policies ofProsecutors, i T n m PROSECUTOR 75 (William F. McDonald ed.. 1979).

'In Id.

this model."'

The costs of such an error are borne by the defendant to a large extent

(cost of defense, potential loss of reputation or employment, loss of Liberty if defendant loses at trial or plea bargains to gain a plea discount in charges or punishment), but also by the public generally (cost of prosecuting and punishing the wrong person, failure to identify, prosecute and punish the actual wrongdoer, undermining support for the rule of law). Prosecutors employing a trial sufficiency model evaluate cases more closely to assess the weight of evidence and the likelihood of success at trial. 'I'his more cautious approach promotes a high rate of success for the prosecutor in that only those cases that are likely to result in conviction or plea bargain are charged. Here, the risk of a type I error is greatest in that an early decision not to charge risks permitting the guilty to go free, uncl~allenged.Inevitably, prosecutors screening cases with a view toward trial sufficiency are less likely to pursue those whose guilt is more diicult to prove.118 The third model, system efficiency, falls in the middle of the continuum, relying on early screening to weed out difficult cases of proof, and incorporating a strong dose of

"There are two types of mistakes that can be made when deciding whether or not to accept a hypothesis. A type 1 error is rejecting a ttue hypothesis, that is, one there is really no good reason for rejecting. A type U error is accepting a false hypothesis: that is, accepting it as true when it should really have been rejected. When hypothesis testing there is a trade-off between the two types of error. The best combination to choose depends on the losses arising from mvlring the two types of error; in economic decisions these are frequently asymmetrical." The Oxford Dictionary of Economics,

117

This model is often adopted by federal prosecutors in the United States Attorney offices. See Jacoby,' supra note 115, at 75; U.S.A.M., supra note 41, Principles of Federal Prosecution, 69-27.220, mrailable at (last visited Feb. 16,2011).

118

plea bargaining, to some degree less than the legal sufficiency model.119 This mixed model works well in urban communities where prosecutors face heavy case loads.120 In affirming white collar crimes committed by the rich or powerful, sufficiency of evidence is a likely place to hang the prosecutor's hat. If a corporation is involved, there may be many actors who have touched on a part of the activities, making relevant decisions or affirming those decisions. The complicated relationships of a large corporation regarding who has the authority to hire, fire, promote, and compensate the various actors assures that an investigation into potentially fraudulent activity will also require the time- and resource-consuming tasks of assessing whether all of the actors conspired to breach the law, whether some actors recognized that their activities supported lawlessness, or whether all actors believed eir conduct was lawful because it
-/

was affirmed by others who held expertise and should ave been expected to alert them of likely misconduct. Even worse, communicating thi complexity and cutting through it to present a case to a jury takes skill, patience, and res urces. Those using the corporation to shield a scheme to defraud investors or to inflate profits are well aware that adding complexity to trans tions further muddles both the investigation and any eventual jury trial. The prosecu 'on's ability to locate evidence of wrongdoing may require sorting through thousands of ocuments and hundreds of witnesses in numerous locations. Once pieced togeth the prosecutor must organize the

P I t

information in a cohesive and straight-forward mann to a jury to gain a conviction.

119
120

See Jacoby, supra note 115, at 75.

See JefErey B. Bumgamer, Community-Related Correlatesio rosecutorial DecisionsRegarding Accidental Killer.?:An Examination of Child Hyperthermia Auto bile Death?) 2003-2006,44 N o . 5 Crim Law Bulletin ART 2 (2008).

I I

t I" 4

Moreover, for lower-level employees in the corporate food chain, who were involved in the misconduct, the complexity adds cover to their claims that they were just doing their jobs unaware of the law-breaking. Unlike the drug kingpin conspiracies where jurors may be swayed by the violence inherent in the drug trade and rationalize that the low level actors still sold drugs, jurors may also view themselves as low level actors in the corporate food chain and thus empathize with the clerical or white-collar worker, making them less likely to convict a low-level employee as the prosecution works its way up the ladder through prosecutions or cooperation agreements. Finally, complexity in structured transactions or industry-driven decisions (for example, deepwater oil drilling) typically require expertise, such as forensic accountants or engineers, adding another layer of resource demands and another courtroom obstacle as the obscurity of the experts' industry-laden language confuses jurors and the battle of the experts creates doubt. It is fair to conclude then that the precise basis for exercising discretion may differ somewhat from jurisdiction to jurisdiction. In addition to the sufficiency question, other considerations come into play in exercising prosecutorial discretion. In the federal criminal justice system, prosecutors have exclusive power to bring criminal charges. 121 The U.S. Department of Justice sets forth its policies in the U.S. Attorney's Manual for exercising prosecutorial discretion to charge or decline prosecution.122 In those cases which meet the trial sufficiency standard, the prosecutor may decline prosecution

See Judiciary Act of 1789, ch. 20, 8 35, 1 Stat. 73,92 ("And there shall be appointed in each district a meet person learned in the law to act as attotney for the United States in such district, . . . whose duty it shall he to prosecute in such district all delinquents Eor crimes and offences, cognizable under the authority of the United States . . . .").
j2'

"'See U.S.A.M., supra note 41, Principles of Federal Prosecution, 99-27.220.

because: "(1) No substantial Federal interest would be served by prosecution; (2) The person is subject to effective prosecution in another jurisdiction; or (3) There exists an adequate non-criminal alternative to prosecution."'23 Further instruction is offered for plea bargaining.Iz4 The policies are intended to guide the exercise of prosecutorial discretion, but do not create a "right or benefit, substantive or procedural, enforceable at law by a party to litigation with the United states,"" and may in fact, be modified by

United States Attorneys "in the interests of fair and effective law enforcement within the district.Iz6 The ABA Standard for Criminal Justice offers further guidance regarding the charging decision and is explicit in its instruction regarding the need to allow the prosecutor broad exercise of discretion.'"

See id. See id. at 59-27.430, providing that with certain narrow exception, when a prosecution is concluded pursuant to a plea agreement, the prosecutor should require the defendant to plead guilty to a chxge "[tlhat is the most serious readily provable charge consistent with the nature and extent of [the defendant's] criminal conduct." The Principles of Federal Prosecution of Business Organizations also directs federal prosecutors to "seek a plea to the most serious, readily provable offense charged." Memorandum from Paul J. McNulty, Deputy Attorney General, U.S. Dep't of Justice, to Heads of Department Components, United Section Q: XU1 (Dec. 12, States Attorneys, Principles ofFederal Proecution of b'lcsiness Organizarion~, 2006) aizailahle at (hereinaper McNulry Memorandum) (last visited Mar. 17, 2011); Dep't of Justice, Press Release #06-828, U.S. Deputy Attorney General Paul T McNulty Revires Charging Guidelinerfor Prosecuting Corporate Fraud (Dec. 12, 2006). . See U.S.A.M. $9-27.150 (explaining that the principles have been "developed purely as [a] matter of internal Departmental policy and is being provided to Federal prosecutors solely for their own guidance in performing their duties"). ""ee U.S.A.M. 5 9-27.149 (requiring approval by the Assistant Attorney General and the Deputy Attorney General if there is "[alny significant modification or departure contemplated as a matter of policy or regular practice").
'1 2
125

ABA Standards for Criminal Justice provides the following standards for prosecutors:

The second factor imports affirmance considerations in that it permits declining prosecution "for good cause consistent with the public interest." Affirmance is very much about the public interest. The public interest in having an equitable rule of law, applicable to all, is central to democratic ideals. Thus, while sufficiency of evidence alone may not require prosecution, instances where it would appear that the government is permitting onerously burdensome harm to society through lawlessness by the favored wealthy and powerful would surely undermine the public interest. Permitting those few to reap great rewards from their criminality while imposing such oppressive harm on society, creates a moral hazard of repeated lawlessness by that group while undermining the rule of law to all. The public has a deep, abiding interest in decisions declining to prosecute or failing to pursue criminal investigations of elite crime. Prosecutors, thus, are ethically bound to consider affirmance because it is central to the public's interest. In addition to the above factors informjng the discretion of prosecutors, along List of factors is typically part of the decision-making process. Prosecutors consider the following, among others: the nature of the crime; the gravity of the offense; the history of the defendant, including the defendant's age, background, and prior offenses or contact with law enforcement; economic realities such as administrative costs, and other
(a) "A prosecutor should not institute or move forward on a case where the charge is not supported by the evidence or where there is insufficient evidence to support a conviction;" (b) A prosecutor "may for good cause consistent with the public interest decline to prosecute notwithstanding. . . sufficient evidence" to support a conviction; (c) "Aprosecutor should not he compelled by [a] supervisor to prosecute in a case where [the prosecutor] has a reasonable doubt about the guilt of the accused;" and (d) A "prosecutor should give no weight to personal or political advantages or disadvantages" to the prosecutor or which may "enhance his or her record of prosecutions." ABA, STANDARDS PDRCRIMWALJUSTICE, 3-3.9(a)-(d).

available resources; the need for the defendant's cooperation; the impact on victims, law enforcement, and the community; and punishment goals and civil alternati~es.'~~ Finally, excuse,130 justification13' may factor into a prosecutor's or considerations of mercy,lZ9 charging decision.13' As discussed above, investigations and prosecutions of elite crimes are often resource-intensive. The decision to pursue a singje case may take years to investigate, incurs thousands of dollars in expenses, consuFe weeks of coua time, and yield uncertain results due to the high burden of proof and omplexity of issues and evidence. Consequently, the economic reality is often that bursuing an elite crime may

12' See Wayne R. LaFave, The prosecutor!^ Discretion in the United (1970). See also Letter from Brian A. Benczkowski, Assistant

18 AM. 1. COW. L. 532,533-39 General, U.S. Dep't of

prosecutorial discretion by the Department of Justice).

See Bumgarner, supra note 120 (observing that the exercise of pros prosecution in favor of mercy can he an agent of goodness when there cases where a parent has accidentally killed a child and neither deterre reasons to punish). Needless to say, mercy is an unlikely issue in elite
Excuse defenses may he raised by defendants in cases where the is able to establish all

129

duress. L M A ~ E T A L supra note 112, at 448. ., Justification defenses, such as self-defense or necessity, arc raised when the harm caused by the defendant "is outweighed by the need t avoid an even greater harm or t further a greater societal o o interest." 1 PAULROBINSON, CR~MINALLAWDEFCNSES $24(a) (1984); LAFAVEETAL., supra note 112, at 447; see, e.g., Tony Dillof, Unraveling Unknun,ing Jusrification, 77 N o m DAhlE L. REV. 1547 (2002); Joshua Dressler, New ThoughtAbout the Concepr ofJusfifiation in the Cfirninal Law: A Critique of Fletcher'.~ Thinking and Rethinking, 32 UCLAL. REV 61 (1984).
13'

132 Alternatively, if charged by the prosecution, the jury or trier of fact may later decide against punishment Ulrough jury nullification or acquittal. See William J. Skuntz, Unequal Jush'ce, 121 HARV. L. Rev. 1969, 2036-38 (2008); RANDALLKWNEDY. RACE, CRIME,ANDTHELAW 305-06 (1997); Paul Butler, Racially Based Jzrrq. Null@cation: Black Power in the Criminal Justice System, 105 YALEL.J.677 (1995).

draw those resources from dozens of other cases. Moreover, the suspects are often pillars of their communities, with no criminal felony record, active in charitable organizations, and generous with the resources of the corpora& entities they run. They are gainfully employed (unless they've been asked to resign), and they are able to marshal significant personal resources-and often corporate resource-to their defense. All of these factors

may weigh heavily in favor of declining prosecution. On the other hand, the nature of the offense is often a breach of trust or abuse of power (such as fraud), and is motivated by greed or power rather than need or misfortune. More importantly, the gravity of the harm and the impact on the community can be extensive. When Enron finally collapsed under the weight of its criminality, it had caused power outages throughout California, emptied pension funds, and decimated the Houston community. In the BP Deepwater oil rig explosion, eleven people died from the explosion, millions in communities surrounding the Gulf of Mexico where the explosion occurred were subjected to contaminated water, loss of businesses in the fishing and travel industries, and destruction of marine life and environs. In the financial crisis of 2007-2009, the global economy crashed, unemployment sky-rocketed, and millions lost their homes to foreclosures. A number of civil alternatives to criminal prosecution have evolved, especially in the white collar crime arena. Private parties may bring civil actions for tortious conduct or other civil violations of law. Moreover, private paaies may bring qui tam actions on behalf of the government under the False Claims Act, when the defendants have

defr ded the government.'33 Additionally consumer fraud class actions may be used agai st corporations or individuals. The government also has a number of non-criminal tools in its litigation kit. Many white collar criminal federal statutes provide for or have Consequently, government agents may choose to fde civil suits civil ~unterparts.'~~ rathe than criminal charges.'35 Many administrative agencies have authority to press admihistrative proceedings to address individual or corporate misconduct. Often, parallel

6 I
t t
I
I

c r i d a l prosecutions are possible, however, a skilled defense attorney may be able to avoid such risks through a global settlement that resolves the risk of criminal charges usind tools such as deferred prosecution or non-prosecution agreements.136Civil asset

!
forfeitures, state License revocation proceedings, professional disciplinary proceedings, ! and ;elf-regulatory organization enforcement proceedings are additional alternatives (or paraliel processes) to criminal prosecution.'37 Although all of these measures have the
I

abilitb to obtain some measure of compensation from the wrongdoers, that compensation
I I

may kome from the corporate treasury rather than require personal funds, it may refund

~ losses of those willing to take legal action but not sanction the misconduct, or in direct
133 ~ a l b Claims Act, 3 1 U.S.C. e

the c k e of governmental civil actions, it may impose fines without requiring admission

8s 3729,3730.

see=, e.g., Racketeer Influenced and Cormpt Organization Act, 18 U.S.C. $8 1963, 1964; Sherman Act, 15 u.$.c. 1 (antitrust laws); United States v. Stringer, 531 F.3d 119 (9'h Cir. 2008) (discussing i overlapping civil and criminal parallel investigations for violations of securities laws); Clean Au Act; 42 U.S.C~7413; Water Pollution Contml Act, 33 U.S.C. 1155; Clean Water Act, 33 U.S.C. 8 1251-1376. Q
13' 136

134

~ e 1. KELLY STRADER, UNDERSTANDING WHITE d COLLAR CRIME 5-7,365-66 (2d ed. 2006)

s ~ JEROLLl H. ISRAEL,ELLEN J PODGOR, PAL&D. BOFMAN,AND PETERJ. HENNING, WHITECOLLAR

I

~ d - L A W A N D PRACTICE 670 (3d ed. 2009); U.S.A.M.,

137 sed

supra note 41, at $5 9-22.000.

I R E , ETAL., at 643-47,676-77,679-80. SAL

of wrongdoing. Each of these instances may exact something from the elites or their companies, but it leaves their reputation and often their ill-gotten riches intact. Given that the benefits of the elite crimes are the wealth or power acquired, the civil alternatives

fm further a f the lawlessness and remind others that the criminal law does not so easily
avoid their misconduct. "[Tlhe power to be lenient is the power to di~criminate."'~~ Given the vast numbers of crimes that are available to charge, "the substantive criminal law amounts to 'an arsenal of weapons to be used against such persons as the police or prosecutor may deem to be a menace to public safety."'39 The standards described above were developed to guide the prosecutor's discretion but tend to focus on circumstances discouraging the prosecutor from abusing prosecutorial power by prosecuting upon less than sufficient evidence. Nonetheless, "there are-as a practical matter-no comparable checks upon

his discretionary judgment of whether or not to prosecute one against whom sufficient evidence exists."lM Moreover, such discretionary power may hinge "unjustifiably on the relative weakness or strength of the networks to which perpetrator and victim belong."14' By permitting the prosecutor so many factors to consider in exercising the discretion to charge or not to charge, an ambiguous reality emerges in which the decision not to charge can be based on any one or more of the factors, so that any underlying
LAFAVEETAL., supra note 112, at 683.
Id.; Thurman h o l d , Law Enforcement-An Attempt at Social Dissection, 42 YALEL.J.1, 17 (1932)

j3'

j3'

LAFAVEETAL.,supra note 112, at 685. See, e.g., Wayte v. United States, 470 U.S. 598,607-08 (1985); United States v. Goodwin, 457 U.S. 368 (1982).
14'

140

See Holmes, supra note 41, at 126.

attitudinal aversion to attacking the powerful through criminal charges cannot be adequately detected or isolated.142When civil alternatives to criminal prosecution are factored into the decision to prosecute, further ambiguity arises since those with strong networks may advance construction of any number of civil alternatives to punishment, especially in the corporate and white collar arena where regulatory action is often a potential alternative offered to support the decision against criminal prosecution.'4' Prosecutors are permitted to forge forward with virtually no limit on discretion not to charge since the party not charged will not challenge the decision; and parties favoring charges against another generally lack standing to raise the issue in litigation.'@

142

See Lessig, supra note 65, at 1010-12.

'"See U.S.A.M., supra note 41,SS 9-22.000,9-28.200 (Principles of Federal Prosecution of Business Organizations, General Considerations of Corporate Liability, respectively). In addressing general considerations for corporate criminal liability, the U.S. Attorneys' Manual states the following: "In certain instances, it may be appropriate, upon cousideration of the factors set foah herein, to resolve a corporate criminal case by means other than indictment. Non-prosecution and deferred prosecution agreements. for example, occupy an important middle ground between declining prosecution and obtaining the conviction of a corporation. Tbese agreements are discussed further in USAM 9-28.1000. Likewise, civil and regulatory alternativm may be appropriate in certain cases, as discussed in USAM 9-28.1100." U.S.A.M., supra note 41, $5 9-22.200 (2010). See also Jay Martin, Ryan D. McConnell & Charlotte A. Simon. Plan Now or Pay Later: The Role of Complia~lce Criminal Cases, -U. Hous. INT'LL.J. -(2010) in available at at 41,47 (last visited Mar. 18,2011) (describing the use of DPAs and NPAs by the DOJ as a '%teak from the binary choice of indict or decline'' that also limited some of the collateral consequences of corporate indictments and convictions); Letter from Benczkowski, to Congressmen Stup& & Dingell, supra note 128. See, e.g., United States v. B.P. Products North America, Inc., 610 E Supp. 2d 655 (S.D. Tex. 2009). In response to a plea agreement to a criminal information filed under seal after an ex pai-te order gained by ibe prosecution to limit advance notice of the charges and plea to victims of an oil refinery explosion that killed 15 and injured many others, a group of victims filed a petition for a w i t of mandamus requesting the district court reject the plea agreemenl, allegedly reached in violation of the Crime Victim Rights Act, 18 U.S.C. 5 3771(e), and because the victims maintained that the plea by the BP subsidiary was insufficient. 601 E Supp. 2d at 669-70. The Fifth Circuit found that the district court had violated the CVRA in permitting the prosecution to alter the statutory requirements for notice to the victims, but denied the writ as "not appropriate under the circumstances" because the district court bad permitted the victims to
144

44

The U.S. Supreme Court has recognized the prosecutorial freedom in exercising discretion, placing limits on that discretion in extremely limited circumstances. 145 Indeed, the only parties able and available to challenge decisions not to charge are those who challenge their own charges claiming an abuse of prosecutorial discretion to charge a crime: vindictive prosecution in violation of due process;'46 or selective or discriminatory enforcement in violation of the equal protection clause of the fifth and fourteenth amendments.14' Beyond such specific and identifiable instances of review of

participate in the plea hearing and could consider the victims' concerns about the agreement in deciding whether to accept or reject the plea. In re Dean, 527 E3d 391,395-96 (5' Cir. 1008). In finding the district CVRA, the Fifth Circuit recognized that the CVRA 1-ecognizedthat "victims have a right court violated tl~e to inform plea negotiation process by conferring with prosecutors before a plea is reached." 527 E3d at 395. Nevertheless, this was insufficient to grant the writ, and the district conrt accepted the corporation's plea and stipulated sentence of a $50 million fine and three years of probation and other conditions, because if the case were tried, the fine might he limited to $500,000 maximum, 610 F. Supp. 2d at 681-85, the government would have a difficulttime at trial establishing the necessary causal links among the defendant's charged criminal conduct, liability for the explosion, and the victims' losses or defendant's gain, 610 F. Supp. 2d at 688-89, and furthermore, calculating tlie gain or loss would unduly complicate or prolong the sentencing process. 610 F Supp. 2d at 690-95. .

The U.S Supreme Court has concluded that "a citizen lacks standing to contest the policies of the prosecuth~g authority when he himself is neither prosecuted nor threatened with prosecution." Linda R.S. v. Richard D., 410 U.S. 614,619 (1973); but see Inmates of Attica Correctional Facility v. Rockefeller, 477 E2d 375,378 ( W .C k 1973) (recognizing that the prisoner plaintiffs in this case face "a more immediate and direct danger of injury resulting from nonenforcement," than the plaintiff in Linda R.S., hut denying plaintiffs' claim because substitution of a court's decision to compel prosecution would he unwise) . Some states provide procedures by which an individual initiate the criminal process. See, e.g., Neb. Rev. Stat. 8 29-404; Ohio Rev. Code $5 2935.09 & 2935.10 (2006); Wis. Stat. gi 968.02(3); Leeke v. Timmerman, 454 U.S. 83,87 n.3 (1981).
I49ee,e.g., United States v. Goodwin, 457 U.S. 368 (1982) (affording prosecutors wide latitude in reevaluating charging decisions, even after defendant has exercised his constitutional right to request a jury trial); Blackledge v. Peny, 417 U.S. 21 (1974) (presuming vindictive prosecution where state responded to defendant's successful exercise of his statutory right lo appeal by bring a more serious charge against h i n ~ prior to the trial de MVO); Bordenkircber v. Hayes, 434 U.S. 357 (1978) (finding no presumption of vindictiveness when prosecutor threatens to increase charges if defendant rejects plea offer). See. e.g.,Yick Wo v. Hopkins, 118 U.S. 356 (1886) (defendant may demonstrate that prosecutorial discretion of a law is "directed so exclusively against a particular class of persons. . . with a mind so unequal and oppressive [that it effects] a practical denial" of equal protection of the law); Waj'te v. United
147

45

prosecutorial discretion for violations of constitutional protections, the Court has expressed a reluctance toward further inquiry because "factors such as the strength of the case, the prosecution's general deterrence value, the Government's enforcement priorities, and the case's relationship to the Government's overall enforcement plan are not readily susceptible to the kind of analysis the courts are competent to undertake."148 Mandamus is thus deemed an inappropriate remedy in this context because of the longstanding acceptance of the notion that a prosecutor has discretion in deciding when to prosecute. Some courts identify the separation of powers doctrine as another reason to decline interfering with prosecutorial discretion. 149 Yet, reliance on the separation of powers reasoning as a justification for refusing to interfere in the prosecutor's exercise of discretion has been criticized by some scholars for ignoring the many Supreme Court decisions claiming entitlement to judicial review of the exercise of executive dis~retion,'~~ for accepting that prosecution is exclusively an executive f~nction.'~' and

States, 470 U.S. 598 (1985) (discretion is broad, but not unfettered; the defendant must show not just the discriminatory effect but also the discriminatory purpose of punishment). Wayte v. United States, 470 U.S. 598,607-08 (1985). In Wayte, the Court fiutl~er elaborated on its conviction that "the decision to prosecute is particularly ill-suited to judicial review. . . . Judicial supervision in this area, . . . entails systematic costs of particular concern. Examining the basis of a prosecution delays the criminal proceeding, threatens to chi1 law enforcement by subjecting the prosecutor's motives and decisionmaking to outside i n q u j s and may undermine prosecutorial effectivenessby revealing the Government's enforcement policy." Id
LAFAVEETAL., supra note 112, at 686-87. See, e.g., United States v. Friday, 525 F.3d 938,960 (10th Cir. 2008); United States v. Cox, 342 F.2d 167, 171 (5th Cir. 1965).
148

'''See Rebecca Gauss, The Theory of Prosecutorial Discretion in Federal Law: Origins and De~~elopments,SEXON HALL CIRCUIT REV. 1, 12-13 (2009); KENNETH C L D VS DISCRETIONARY 6 U P A I, JUSTICE: APRELMINARYINQUIRY 210 (1969) (criticizing the court's reasoning in United States v. Cox, 342 E.2d 167, 171 (5th Cir. 1965). and observing that "more than a hundred Supreme Courl decisions spread

46

In exercising discretion, prosecutors consider numerous factors, some explicit and others implicit in the process. These factors take into case-specific sufficiency assessments, ethical obligations, competing demands for resources, and community interests in alternative non-criminal resolutions, among others. Legal limitations upon such decisions are few, and courts will seldom interfere with the process and only in narrow circumstances. Most significantly, the decision not to investigate or prosecute is even less susceptible to interference. Consequently, no mechanism exists to require the prosecutor to reflect upon the a f f i a n c e effect of declining prosecution. Nevertheless, the social meaning of such declinations persists in elite crimes, affirming the misconduct and undermining the rule of law.

V.

E m m i n e the M e s e e of AfTirmance
In one of the earliest cases imposing imprisonment sentences on individuals

engaged in economic crimes,15' "the court described the defendants' conduct as a 'shocking indictment of a vast section of our economy' that 'flagrantly mocked the image of the economic system of free enterprise which we profess to today as a free-world alternative to state control and eventual dictatorship.rri153 The U.S. Attorney General characterized the defendants' conduct even more starkly, as "a serious threat to
over a cenhlry and threequarters will have to be found contrary to the Constitution" if the judiciary is barred from reviewing executive decisions).
15' The historical accounts suggest that the U.S. Constitution did not compel executive control over prosecutors. See, e.g., Lawrence Lessig & Cass R. Sunstein, The President and the Administration, 94 COLUM. L. REV. 1, 15-16 (1994).

United States v. Westinghouse Elec. Corp., 1960 Trade Cas. 76753 (E.D. Pa.) (often referred to as the "Electrical Equipment Antitrust Ca3esn).

152

'" Ball & Friedman, supra note 106, at 198 (1965) (citing N.Y.Times, Feb. 7, 1961, p. 26, co1.3)

democracy."154What message is sent then, when a case is not pursued criminally? The general public is unlikely to be able to fairly assess whether the cost of moving forward with a criminal prosecution is outweighed by the benefits of a decision to drop the case, move forward with a civil case instead, or simply impose a regulatory fine; yet, given the multitude of considerations factoring into the decision to prosecute, is it possible to identify cases where the prosecutor has exercised discretion poorly so that one can be certain criminal charges that were not filed should have been filed against an individual? In instances where a corporation negotiates a deferred prosecution agreement,I5' a non-prosecution agreement, or a civil alternative to criminal charges, it would be difficult to prove that but for political connections or a well-financed legal team, these negotiated deals demonstrate certitude that criminal charges could have, or more to the point, should

Ball & Friedman, supra note 106, at 198 (1965) (citing a television interview with Attorney General Robert Kennedy (quoted in J. Fuller, Tbe Gentlemen Conspirators 176 (1962)).

'" Tbe deferred prosecution agreement pennits a corporation to resolve a criminal investigation by agreeing
t similar terms that might be included in a corporate criminal sentence, including terms such as restitution, o fines, additional auditing measures, termination of responsible individuals, and probation. See U.S.A.M., srcpra note 41, $5 9-22.010 to 9-22.200 (pretrial diversion progmm); Martin, et al., supra note 143

(discussing the prevalence of deferced prosecution agreements and non-prosecution agreements since 2002 and providing a table listing the numerous corporations that have obtained a DPA or NPA since 2005); Steven R. Peikin, Outside Counsel; DeferredProsecurion Agreernen2.s: Standard for Corporate Probes, N.Y. L.J., Jan. 31,2005, at 4; F. Joseph Warin & Jason C. Schwartz, DeferredProsecution: The Need for Specialized Guidelinesfor Corporate Defendants, 23 J. CORP. 121 (1997). DPAs were developed to L. avoid the criminal process in resolving investigations of individuals involved in minor crimes, deter future criminality, provide restitution For victims, and conserve prosecutorial and judicial resources. Wain & Schwastz, supra, at 123. The DPAs offer corporations the opportunity to avoid the collateral consequences of a CI-iminal conviction, while offering the prosecution the opportunity to set fines and collect restitution outside the limits of the judicial process and the opportunity to gain the corporation's cooperation. See Mary Kreiner Ramirez, The Science Fiction of Corporate Criminal Liability: Conraining the Machine Through the Corporate Death Penally, 47 ARE. L. REV. 933,94445,952-53 (2005). Both parties benefit from resource savings. Id at 953.

48

have been brought against individuals.'"

Certainly when charges are brought against a

corporation for criminal conduct but not against any individual actors there is at least some confidence in asserting that individual liability should also exist; a corporation cannot act except through its agents,15' so someone has broken a criminal law. Another possibility is that charges are brought against or a plea negotiated with a corporate entity associated with the parent entity, but the plea appears to grossly understate the criminality or under-punish because it includes a low fine amount,'" or requires a non-participating

156

Early studies of white collar crime included both civil liability as well as criminal liability cases.

CLWARD, supra note 66, at 22; SUT~RLAND, supra note 66, at 13-14.45-53. But see Leonard Orland, Reflections on Corporate Crime: Law in Search of Theory and Scholarslzip, in CORPORATF?AND WHITE

Co~CRtME: ANTHOLOGY 127, 129 (edited by Leonard Orland 1995) (criticizing the empirical work AN
of Edwin Sutherland and Marshall Clinard and his associates for including adverse adjudications by civil courts and non-criminal administrative agencies against corporations and classifying them as crimes). These early sociological studies of white collar crime refused to accede to the labels placed by legislators designating certain fraudulent actions as "crimes" while others were labeled "violations." See Snider, supra note 67, at 51. Snider observes: The underlying assumption of th[e] critique. . .of Sutherland's . . . views, is that "crime" is areal thing that legislators, informed by science and law, discover. If they haven't discovered a paaicular act, it is therefore not crime. Sutherland argued against only one half of this equation, pointing out that power (not to mention self-interest, political lobbying, media-generated moral panic, and a myriad of other factors) sometimes prevented legislators from criminalizing the harmful acts of business. Thus the fact that anti-competitive practices and false advertising were proscribed, albeit through regulatory or administrative statute and not criminal law, was sufficient the to ~ndicate "real" intentions of legislators, and to justify studying these acts as criminal.
Id at 51. See also FClC REPoRT, supra note 3, at xviii, 52-56 (2011) (concluding that the financial industry, which had contributed generously to political campaigns from 1999 to 2008, was able to use its wealth and power to weaken key regulatory constraints); Mary Kreiner Ramirez, Just in Crime: Guiding Economic Crime Reform A f e r the Sarbanes-Oxley Act of 2002,34 Lou. U. CHI. L.J. 3 5 9 , 3 7 2 ~ 7 2 (2003) (describing the difficulty in reaching a consensus as to what conduct should be included in the term "white collar crime").

IKATHIEEN F. BRICKEY, CORPORATECRJMINALLIABIL~A' $5 3:01-3:11, at 89-126 (2d ed. 1984) (describing theories by which corporate criminal Liability may be imputed through the acts of a corporation's agents).

'" See, e.g., Nate Raymond, Rakoff B1ast.v SEC Settlements Again Because Defendarrts Admit No Wrong,
N.Y.L.J., Mar. 24,2011 (reportu~g district court judge in 2009 bad previously rejected an SEC that

49

subsidiary to enter a plea rather than the initial corporate target,IS9or includes additional misconduct as covered in the plea for which no charges are filed.'"

proposed consent judgment with Bank of America Corp. because the agreed fine of $33 million was too low ("neither fair, nor reasonable. nor adequate"), but later accepted a revised agreement of $150 million in 2010, despite the fact that the fine was still small); SEC v. Bank of America Corp., 09 Civ. 6829 (JSR) (S.D. N.Y., Sept. 14,2009) (finding the proposed consent judgment inadequate because a $33 million fine is a "trivial penalty for a false statement that materially infected a multi-billion dollar merger, and that it is not even "remotely" fair in that the court is left with "the distinct impression that the proposed Consent Judgment was a conbivance designed to provide the S.E.C. with the fagade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry-all at the expense of the sole alleged victims, the shareholders."); Noeleen G Walder, A Reluctant Judge RakoffDefers to SEC in Accepting BofA Deal, N.Y.L.J., Feb. 23,2010, (last visited April 6, 201 1). See, e.g., Kurt Eichenwald, HCA to Pay $95 Million in Fraud Case, N.Y. TIMES,Dec. 15,2000, at C1 (reporting that "[a]lthough the (fraudulent] practices involve widespread criminal actions in HCA's hospital system, the guilty pleas will be formally entered by two inactive subsidiaries"). By pernlitting the subsidiaries lo plead guilty, HCA avoided debarment from government contracting, which would have supra note 155, at 949-50 (describing effectively put the corporation out of business. Id. See also Ran~irez, provisions applicable to healthcare providers and suppliers that could lead to exclusion or debarment from federally funded programs); Amy Schofield &Linda Weaver. Health Care Fraud, 37 AM. GRIM. L. REV. 617,621 (2000).
IM See Massey Finn to Plead Guilty in Mine death^, CHARlE.smN GAZETTE, Dec. 23,2008 [hereinafter Mas.sey Firm to Plead Guilty] (reporting on global settlement by Massey Energy Co. that resolved over 13M)violations of the Fedcral Mine Safety and Health Act at Massey energy subsidiaries). One of the oftcited purposes of a plea agreement is to provide certainty. See MoRAN & COOPER, supra note 38, at 60 (1983). Another justification for plea agreements is a mutually beneficial exchange in terms of lesser charge bargaining or sentencing bargaining for the defendant and conservation of resources for the government. See, e.g., U.S.A.M. 9 9-27.400:
159

n ~ basic policy is that charges are not to be bargained away or dropped, unless the prosecutor has e a good faith doubt as to the government's ability readily to prove a charge for legal or evidentiary reasons. There are, however, two exceptions. First, if the applicable guideline range from which a sentence may be imposed would be unaffected, lcadily provable charges may be dismissed or dropped as part of a plea bargain Second, federal prosecutors may drop readiiy provable charges with the specific approval of the United States Attorney or designated supervisory level official for reasons set forth in the file of the case. This exception recognizes that the aims of the Sentencing Reform Act must be sought without iguoring other, critical aspects of the Federal criminal justice system. For example, approvals to drop charges in a particular case might be given because the United Slates Attorney's ofice is pam'cularly over-burdened, the case would be time-conswning to hy, and proceeding to nial would signifiantly reduce the total number of cases disposed of by the ofice.

50

Each of the above possibilities carries the perception that the government is not seeking adequate accountability from a powerful wrongdoer.'61 Perhaps then, one need not choose any one of the above instances over another. Elites who violate the law and benefit greatly from those vi ations without incumng personal punishment model bad behavior for others. Perception becomes reality in the long run. Observers perceiving a lack of fair play, will assess for themselves whether the costs outweigh the benefits of following the rule of law.162Ironically, those who follow the law may actually be placed at a competitive disadvantage relative to those who break the law because they forgo

Id. (emphasis added). One key difficulty in prosecuting white collar crimes is that the evidence to support such charges is often found by piecing together information gleaned from hundreds of documents, e-mails, invoices, and interviews. See Ramirez, supm note 50, at 107-08 (2010) (proposing a Corporate Crimes Division of the Department of Justice to centralize expertise and resources necessary to address complex litigation associated with corprate and white collar criminality); Darryl K. Brown, The Prohlenlaric & Faintly Promising Dynamics o f Corporate Crime Enforcement, I OHIO ST. J. CRM. L. 521,527-28 (2004) (discussing the difficulty in detection of criminal activity, the complexity of financial records, and the comparatively overwhelming resources of corporate conglomerates as compared to government resources to fight corporate crime). Thus the hallmark of a white collar crime case is that it will be time-consuming r. to ty When compared to a simple drug bust or violent offense that can he uied in a day or disposed of by plea agreement without dmpping charges, most major corporate and white collar crime prosecutions are likely to significantly reduce the total number of cases disposed by the office. Thus, this exception to the rule has the potential to swallow the rule.
''I See, e.g., Raymond, supra note 158 (reporting on remarks by U.S. District Court Judge Jed Rakoff regarding the practice in SEC civil settlements alleging "terrible wrongs" but allowing defendants to avoid admitting or denying guilt: "The disservice to the public inherent in such a practice is palpable."); SEC v. Vitesse Semiconductor Corp., 10 Civ. 9230 (S.D. N.Y. 2011); SEC v. Vitesse Semiconductor, 10 Civ. 9239 (Jsr). NYLJ 1202487374133,at *I, *9 (Mar. 21,2011).

I" See ANDREW ROSS SORKIN, TOO BIGTO FAIL 14,123 (2009) (describing Lehman Brothers' temptation to over-leverage "like everyone else on Wall Street" by borrowing money to increase the returns on risky investments. despite the knowledge of the great riskiness of the undertaking). Both Lehman Brothers and MerriU Lynch modeled their investment risk-taking after Goldman Sachs. Id at 28, 144.

corrupt profits.163Greshamrslaw comes into play, as the inequality in profits and market Once this power due to illegitimate practices causes the bad actors drive out the good.1fi4 realization dawns, then rejection of the social order ensues as each actor minimizes relative misconduct due to widespread engagement in such conduct, much like the lynch mobs of the past.'65 The complexity in assessing the basis of a prosecutorial decision is illustrated in the following example. In October 2007, BP entered into three plea agreements with the United States to address a number of criminal investigations that had arisen in connection
'"see ww BLACK, THE BEST WAY m ROB ABANK IS m OW ONE2 (2005) (explaining that CEO "control frauds" manipulate the external controls over CEO power by "shop[ping] for accommodating accounknts, appraisers, and attorneys").
164

See id. at 40; NATIONALCOMMISSIONON F W A N C I A L l N S ~ O N REFORM, RECOVERYAND

ENFORCEMENT, ORIGINSAND CAUSES OFTHE S&L DEBACLE ABLUEPW WR REFORM, A REWRT TO THE PRESIDENTAND CONGRESS OF THE UNlTEO STATES76 (1993); FClC REPORT, supra note 3 , at xxv, 147-50

(2011) (describing the carelessness with which Moody's corporation assessed risk iu rating smctured financial products). "[l]ssuers [of the credit default obligations (CDOs)] could choose which rating agencies to do business with, and because the agencies depended on the issuers for their revenues, rating agencies felt pressured to give favorable ratings so that they might remain competitive." FClC REPORT, supra, at 150. The revenues from structured products, including mortgage-backed securities and CDOs were lucrative; from 2000 to 2006, Moody's "revenues surged from $602 million to $2 billion and its profit margin climbed from 26% to 37%." Id at 148. In 2006, Moody's rate 30 mortgage-related securities as triple-A (its highest rating) every day; in early 2010, only 6 private-sector companies received the triple-A rating From Moody's. Id at xxv. See, e.g., Peter Coy, Paul M. Bmett, & Chad Terhune, Mortgage Mess: Shredding the Dizam, BUSINESS WEEK Oct. 25,2010, (reporting on rampant fraudulent conduct in mortgage loans and foreclosures, as well as the involvement by many in the mortgage lending business, ~ncluding large banks). In reporting on the reaction of need to address the crisis quickly, the authors observed. 'The longer it drags on, the more the foreclosure crisis corrodes Americans' faith in their financial and legal systems. Apervasive sense of injustice is bad for the economy and democracy as well." Id. See also Norris, supra note 102 (reporting that the regulators looked the other way, investigators were ignored by their bosses, internal auditors were pushed aside, and the board passed resolutions but "did nothing to stop the rot"); BUCK, supra note 163, at4 (2005) (explaining why federal regulators left insolvent S&Ls open while pursuing and closing the apparently most profitable S&Ls-they were Ule fums committing fraud),
I"

with operations by the corporation or its subsidiaries in the United States. One of the investigations involved an explosion at the BP Products Texas City refinery that killed fifteen persons and injured 170 others.'66 A second investigation involved two extensive crude oil spills on the north slope of h d h o e Bay, Alaska, due to a pipeline leak.'67 Although no human injuries were associated with the spill, the spill was the largest The recorded at that time and threatened both wildlife and the en~ironment.'~~ third investigation involved attempted market manipulation in the commodities market for propane.'69 In resolving all three cases, the prosecutors looked to all readily provable charges at that time.17' Nevertheless, the FBI agent investigating the oil spills expressed frustration because there had not been sufficient time (the time ordinarily allotted) to complete the investigation before the deal was struck, and the investigation had pointed to greater liability than the $20 million dollar fine negotiated with respect to that case.'"

Ifi6 Dep't of Justice Press Release #07-850, British Petroleunt to Pay More $370 Million in Environmental Crimes, Fraud C u e s (Oct. 15,2007) (reporting on plea agreements involving 2005 Texas City refinery explosion, Alaska Pipeline leaks, and an attempt to manipulate the price of propane carried through Texas pipelines; and the announcement of a 20-count indictment against four BP employees for fraud and market manipulation).

Id.; Jim Carlton, Ex-EPA Oficial Faults Pmbe of BP Alaska Oil Spill, WALLST.J. (Nov. 19,2008) at A6 (reporting on former FBI special ageot-in-charge of investigation of two BP oil spills in 2006, and his concern that the investigation had been quashed mid-investigation by the Departmentof Justice after BP agreed to a plea to a misdemeanor and a substantially lower fine than recommended by the EPA to settle the charges).

167

See J o b Roach, A h k a O l Spill Fuels Concerns Over Arctic lEldl$e, Future Drilling, NN'L i GEOGWH~CNEWS (March 20,2006) (reporting on the 267,M)O gallon spill, and the clean-up efforts)
Dep't of Justice Press Release #07-850, British Petroleunl to Pay More Than $370 Million in Environmental Crimes, Fraud Cases (Oct. 15, 2007).
170

168

'"

Carlton, .supra note 167

Id.

171

In assessing whether the prosecution properly exercised discretion to resolve the oil spill case, one could look at the decision from the perspective of the investigator (and those impacted by the environmental harm) and understand the frustration with not holding the corporation responsible to the maximum extent permissible by law. From the prosecutor's point of view, however, a number of considerations would support the deal.

In order to hold the corporation criminally liable to the maximum extent permitted by
law, the prosecution would need to wait at least another year since that was the minimum estimate of time it would take to complete the investigation."' The delay could weaken

the case as evidence deteriorates in that memories could fade, documentary evidence could disappear and witnesses could remove themselves from jurisdictional reach, and suspects would have more time to manufacture a defense. Resources used to continue investigating the BP case consequently would not be applied toward other potential cases.173 With several ongoing criminal investigations of BP or its subsidiaries, BP may have been more willing to make a deal on each of the cases early on and cut its losses, but not so willing if forced to wait for the investigations to conclude. Moreover, accepting a plea to currently readily provable offenses regarding the oil spill case, might yield additional plea agreements or at least cooperation from the corporation against individual

172

Carlton, supra note 167.

See CULLEN, note 1, ar347-48 (2d ed. 2006) (observing that in exercising discretion to prosecule, supra prosecutors face "powerful disincentives" including balancing 'We d e s k to enforce the law against the reality of limited resources.").

employees in the ongoing investigation of the market manipulation ~cheme."~ Since the market manipulation case is likely more difficult to prove, gaining an agreement or cooperation on that case could yield more value to the govenunent than the additional fine that might be awmded if the prosecution waits a year, brings the oil spill case to trial, and earns a guilty verdict from the trier of fact. Given the uncertainty inherent in trial litigation, if the outcome of the trial is anything less than guilty, e.g., a hung jury or an acquittal, the government has lost the opportunity to recover any part of the losses, and in the case of a mistrial would have to assess whether a retrial is available and woah the additional resources given the outcome of the first trial. Even if the government wins at trial, the defendant could delay the outcome through appeals. Negotiated deals yield certainty and finality, and conserve limited resources. Moreover, the resolution is considered a 'kin" for the government. Defendants may consider such resolutions as "wins" too. The exposure to greater liability and the cost of litigation is eliminated from a criminal conviction and, because the govemment frequently does not require an admission of guilt, the agreement limits the ability for private litigants to use a criminal conviction as a basis for civil litigation recovery. Since the burden of proof in a civil trial is always less than the guilty beyond a reasonable doubt proof, and since civil Litigation by private litigants may expose the defendants to great losses. Resolving the oil spill investigation will likely lead to halting
See U.S.A.M., supra note 41, $89-28.1300 (Plea Agreements with Corporations). 9-28.700 (The Value of Cooperation); Peikin, supra note 153, at 4. Section 9-28.700 provides that "[iln determining whether to charge a corporation . . . its cooperation with the government's investigation may be relevant. . . . In ganging the extent of the corporation's cooperation, the prosecution may consider . . the corporation's willingness to provide relevant information and evidence and identify relevant actors within and outside the corporation, including senior executives." U.S.A.M., supra note 41, $9-28.700.

or limiting the government's investigation. Thus, private Litigants will not only be able to use the "guilty" outcome of a criminal trial to its advantage, but they will also have to
bear the costs of any additional investigation of the wrongdoing. If the government loses

the criminal trial, the verdict is not available to the defendant to use against private litigants because the burden of proof is lower in civil trials. Large organizations or powerful corporations are able to use their size and power to protect themselves and their employees from criminal prosecutions for decisions made

by individuals on behalf of the corporations, even when those decisions result time and
again in death or great financial calamity. This is especially true when there is an established regulatory presence or perception that civil litigation is sufficient to address wrongdoing.'"

In the above BP investigations, potential criminality included homicide,

environmental crimes, financial crimes, and numerous regulatory violations. The cases discussed below are broken down into two categories: direct physical harm, and extensive fmancial ham.
A.

Direct Physical Harm

Despite the cost in human lives or health, corporate decisions that result in direct physical harm to humans are infrequently addressed as crimes. Typically, injuries or loss of life is redressed through civil litigation brought by the victims or victim's family, or

See CLlLLmi, supra note I, at292 (2d ed. 2006). Thus, for health and safety violations in the United States, the Food and Drug Administration and the Occupational Health and Safety Administration have been the primary governmental vehicles for expressing societal expectations in the workplace and in consumer goods. Id at 292-93,298.

'"

alternatively, through regulatory channels created to expedite and narrow the dispute, while also providing remedies to prevent future harm. In products liability cases, one tends to think of civil litigation as the obvious point of recovery. The victim may sue for damages and even obtain punjtive damages in many cases. Occasionally, however, a case is so offensive to the psyche, that a prosecutor is inspired to seek criminal prosecution. One such case in the United States is the case of Ford's Pinto automobile, which had a precariously placed gas tank that was subject to rupturing from rear-end colli~ions.'~~ Ford Pinto case was a forbearer of The the potential to use criminal prosecution to send the message of deterrence to Ford and to other manufacturers that lethal products would be subject to scrutiny in the marketplace.17' Even though the defendants were not convicted in the criminal case, the discovery that the corporation had known of the dangerous defect, had identified that the cost of the part to fix the defect was less than ten dollars, but had determined that the cost of a recall to make the repair would be more than the likely civil settlements from victim lawsuits, was a chilling reminder that behind the corporate mask are people who are capable of making intentional and informed decisions that risk lives needlessly.'78

"e " e

CULLEN.supra note I, at234-37

See CLTLLEN, supra note 1, at 206 (describing the prosecution's relief in the trial coult's denial of defendant Ford's motion to dismiss based upon the argument that it was concephldy impossible for a corporation to commit reckless homicide under Indiana law) .
See C m , supra note 1, at 145-46, 149,234-37,355-56. Cullen describes the automobile industry's reluctailce to embrace safety standards, and provides excerpts of taped conversations between President Richard Nixon; Henry Ford U, and Lee lacocca (then president of Ford) on April 27, 1971, in which the Ford 1-epresentativesseek to gain Nixon's support to oppose recently adopted safety standards by the Department of Transportation. Id at 141-45. The Ford Pinto was known around the company as "Lee's cai' because lacocca set limits on its weight (no more than 2000 pounds) ,its cost (under $2000), and

"'

"'

57

Despite the recognition that corporate employees could face criminal prosecution for allowing lethal products to persist, there are relatively few successful criminal prosecutions based upon known product defects. In the 1990s another Ford product was in the news because the tires on the Ford Explorer SUV were separating from their treads at high speeds.t79The chief defect was in the BridgestoneLFirestone Wilderness AT tires, yet both companies were aware of the problem due to dozens of deaths and serious injuries, and Ford bad replaced the tires two years earlier on Fords in European countries where the threat of criminal prosecution due to product defects is more established."' Despite legislative urging upon the Department of Justice, no criminal charges were brought.lX1New legislation in response criminalized the failure to report known "motor vehicle safety related defects that have caused death or serious bodily injury to an individual," but limited the reporting violation to instances where there was the "specific intention to mislead the Secretary [of ~rans~ortation]."'~~only is the weak Not legislative response limited to "failure to report," but the "specific intent" mens rea

rushed it through production (25 months rather than the n o d 43 months) so that it would beat foreign competition. Id at 145.
1.79

See CULLEN,supra note 1, at 293.

See Mark Stavsky, ManuJacturers'Liability,at14 in 4 PRODUCTSLIABILITY(Frumer and Friedman, eds., supra note 1, at 293,298 (reporting that in Neward, NJ: MatthewBenderLexisNexis 7-003); CULLEN, Gemany '%re and pharmaceutical makers . . .have been prosecuted for negligent homicide for failure to warn consumers of known product defects or risks" and that fiance, Belgium, Italy, Spain, and Portugal all have "long-standing tradition[sl" of criminally prosecuting prcducts liability cases).
" O I81

See CULLEN, supra note 1, at 294.

Recall Enhancement, Accountability, and Documentation Act, 42 U.S.C. $ 30170 (2004) (TKEAD Act) (emphasis added).
IR2 Transportatiou

requirement places the highest burden on prosecutors.183 No matter how much legislation is passed, its effectiveness lies with the prosecutor's discretion to enforce it; the more burdensome or onerous the level of intent required by such laws, the less likely the prosecutor will choose to go forward with charges and the more likely the prosecutor will have acceptable reasons to decline such prosecutions.'s4 Failure to prosecute such cases, where individuals within the corporation made decisions that foreseeably placed humans in grave danger, encourages those individuals and those that follow in their path to place corporate profit above human life because there are no tangible personal consequences. Even where individuals do not share in corporate profits directly, salaries, promotions, and even continued employment may depend upon their ability to keep costs of production low and profits high. With every promotion or other perceived recognition for a job well done, the affirmance message is clear. Employee deaths in the workplace is another area where criminal prosecution is infrequentla5and regulatory oversight is prevalent. In a study of workplace deaths resulting from willful violations of health and safety laws between 1982 and 2002, a New
York Emes report "identified 2,197 cases in which the federal OSHA office or state

versions of OSHA concluded that a worker had died because of a willful violation."186

I R 3 CUUEN,supra note I, at294 ("it is the failure to report that is criminalized, not placing dangerously ut defective products into the market in the F s place.").
1R 4

See U . S . A . M . , supra note 41, 999-27.220, 9-28.300

'" See CULLEN,supra note 1, at 293

I8"ee David Barstow, When WorkersDie (Pam 1-M),N.Y.TIMES (Dec. 21-23.2003); CULLEN, supra note I., at 298.

Overall, out of 1,798 investigations, only 81 convictions and 16jail sentences re~ulted.'~' Just as in the products liability cases, there is a regulatory system in place that addresses the great majority of these cases. Moreover, worker's compensation provides for, but can also limit, the financial recovery for injuries and

death^."^

While federal law provides

for criminally liability in connection with workplace hazards, the limitations in the laws
undermine their utility as a means of expressing social policy.189

See CUILEN, supra note 1, at 298 ("Taken together, the data reviewed by the E m s shows that the likelihood that anyone will go to jail when a worker dies as aresult of a willful safety violation is less than one out of 100.").
IR7 IRR
189

See CUILEN, supra note 1, at299.

See, e.g., Occupation Safety and Health Act, 29 U.S.C. 8 651, et seq. (applicable to willful employer violations of OSHA standards resulting in employee's death); Federal Mine Safety and Health Act, 30 U.S.C. 8 801, e t seq. (applicable to willful violations of mandatory health or safety standards by mine operators); Longshoremen's and Harbor Workers' CompensationAct, 33 U.S.C. $901, et seq. (applicable to willful violations of the LHWCA by any marine employer). Thus, for example, OSHA's criminal law provides for misdemeanor liability only and OSHA standards must be violated by the employee and not a manager or supervisor. See CUILEN, supra note 1, at 302. Unless the employer is a relatively small business in which the employer also directly manages or supervises employees, criminal liability is not available under the Act. Thus, large employers with hundreds or thousands of employees are unlikely to he subject to criminal prosecution under OSHA's criminal provisions. Id The majority of all jobs held in the United States would he excepted h m the criminal provisions of the act. The U.S. Census Bureau's 2008 Statistics of U.S. Businesses shows that 65% of employees work for large businesses, employing 100 or more employees. See U.S. Census Bureau, 2008 Statistics of U.S. Businesses, I (last visited Mar. 14,2011). The U.S. Census Bureau defines paid "employment" as "wnsist[ing] of full and pas-time employees, including salaried officers and executives m of corporations." Id A f is "a business organization consisting of one or more domestic establishments in the same state and industry [,I specified under common ownership or control... [a] multi-establishment f ~ ... [is] counted as one f [and] employment [is] summed frnm the associated establishments." Id m m

The tragic deaths of workers in consecutive mining tragedieslgO the BP and Deepwater Horizon oil rig explosion1g1 2010 c ntinue to express society's tolerance for in worker-related deaths due to employer failures to meet established federal safety guidelines. In the case of a 2010 mine explosio that kiUed 29 miners, the only criminal charges brought thus far are obstruction of justice charges against the security chief from the Massey Energy Company subsidiary that op

West ~ u ~ i n i a ' ~explosion occurred less th The ~

$a

Energy subsidiary pled guilty to nine misdemean rs for safety violations and one felony count for falsifying safety records in a mine fired bat resulted in the deaths of two

I+
4

ted the Upper Big Branch Mine jn two years after another Massey

See Ian Urhia, No SurvivorsFoundAJler West Virginia ine Disaster, N.Y. TIMES (April 10,2010) at Al(reporting that 29 mine workers died as a result of an exp osion at the Massey energy operated mine due to an unsafe build-up of methane gas that impeded rescue ef om); Associated Press, Two Workers Are Killed In Kentlrcb Mine Collapse, N.Y. T m (April 30,20 0) at A15 (reporting numerous safety violations including that "[sltate and federal records show m re than 40 closing orders for the mine over safety violations since January 2M)9).
19'

141

See Justin Blum & Alison Fitzgerald, BP

U.S. Review for Manslaughter

Markon, Obama

Iq2

~ d Associated Press, West Virginia: Mine e chief allegedly tied to FBI security documents).

of Lying,,N.Y. TIMES, M r 1, 2011, at A16 a. the m n e explosion, and destroyed

miners.'93 Notably, the only felony charge was not for the death or illegal operation of the mine, but rather for the failure to report safety violations. oil With respect to the Deepwater ~ o r i & n rig explosion and massive oil spill in the Gulf of Mexico that drew worldwide att+ntion, the President's National Oil Spill Commission Final Report and comments fr rn sources close to the federal criminal investigation have led to speculation that cri 'nal charges may be fonhcoming against some of the BP managers both on the oil rig and 0nsh0re.I~~ former head of the The Department of Justice, Environmental Crim

ap.
t
I

Section, David Uhlmann, has cited

excerpts released from the President's ~atiofial Spill Commission final report, in Oil predicting that criminal charges in the case h e inevitable given the well-publicized
See Massey Finn to Plead Guilty, supra note 160; News Release, U.S. Attorney's Office for the S.D. of West Virginia, Largest Settlement in Coal Industry H rfory, Dec. 23, 2008. The global settlement provided that Massey Energy Co. subsidiary, Aracoma would lead guilty to the charges, pay a $2.5 million criminal fine and a $1.7 million civil settlement to resolve ove 1300 violations of the Federal Mine Safety and

supra. The original proposed civil fine government from criminal charges

as part of the global

or employees of

Luskin, Attorney for setting forth terms exhibits), mailable at (last

Apr. 6,2010, visited Apr 22,2011). See Blum & Fitzgerald, supra note 191

(last

negligent conduct of BP, Transocean, and ~alliburton.'~~ at least one expert has Yet, noted that "given the wide latitude [that prosecutors] have, . . .they could go either way" on the charging decision.'% The pursuit of criminal charges in these tragic recent cases may signal a shift by the current Department of Justice to finally address the recklessness of the corporations, through the actions of its agents. As Professor Jane Barrett at the University of Maryland observed, "[clharging individuals would be significant to environmental-safety cases because it might change beha~ior."'~" Without action by the government, those who run the mega-corporations such as BP, will continue to make short-term profit decisions that risk massive harm on others, be it the lives of employees or the worldwide environment. Tony Hayward, the BP CEO at the time of the explosion and oil spill, expressed frustration at the distraction that the oil leak had become in his life, even as thousands suffered from the short-sighted misconduct

See David Uhlmann, Afier the SpiU is Gone: The Gnlfof Mexico, Environmental Crime, and the Criminal Low,-MICH. L. REV. -(2011) (fonhcoming);Russell Mokhiber, The Criininal Case Against (Feb. 17.2011) (last visited BP, Counterpunch, M r 14,2011); Harry R. Weber & Curt Anderson, David Uhbnann: BP, Hallibunon Likely Face Criminal a. Chargesfor GolfOil Spill, The Huffington Post, Jan. 6,2011, http:l/www.huffingtonpost.com/2011/01/07/david-uhlmann-bpOnn805723.html visited Mar. 14,2011). (last In response to Uhlmann's predictian, one Los Angeles expert in environmental law observed that "prosecutors bdve wide discretion about whether to bring criminal charges." Weber & Anderson, supra. Moreover, in addition to concluding that the companies "took a series of very hazardous steps which appeared to be motivated by economic concerns," the commission also blamed government regulators, "which could mitigate culpability of the companies." Id. See also National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf Oil Disaster and the Fuhrre of Offshore Drilling, Report to the President (released 01111/2011), available at (last visited Mar. 14,2011).
'%
197

195

Weber &Anderson, supra note 195; see BIum & Fitzgerald, supra note 191 See Blum & Fitzgerald, supra note 191

of BP employees.198 While BP agreed with the U.S. government to place $20 billion in an escrow account to cover losses, Hayward's insensitivity to the disaster became a liability; he agreed to step down from the CEO post with one-a payment of one-year's salary of 1.045 million pounds in lieu of notice.199

B.

Direct Financial Harm

Today, many corporations have become conglomerates wielding both political and economic power.2" Multinational corporations have driven the wave of globalization,
I98

at
199

See Terry Macalister & Richard Wray, Tony Hayward to Quit BP, The Guardian, Jul. 26,2010, available (last visited Apr.22,2011).

See i d ; Press Release, BP CEO Tony Hayward to Step Down and Be Succeeded by Robert Dudley (Jul. 27,2010), (last visited Apr. 23, 2011).
200 "The threat of social meltdown arises not from excessive growth of the state and its regulatory role, but from its capture by groups able to translate market power into political power: socialism for big investors, capitalism for everyone else." Nancy Folhre, Risks, Radiation and Regulation, N.Y. TIMES, Mar. 18,2011, Economix, RICHARD D. HARTLEY, CORPORATECRIME 14 (2008); MARSHALL BARRON CLINARD, CORIQRME C O R R l J O N4-5 (1990). Clinard traced the growth of America's Fortune 500 and the contraction of competition in major industries through mergers and consolidations, and considers the expansion into international markets. CLTNARD, supra, at 2-6 (1990). He further connected the contributions of corporations and industry political action committees (PACs) to the democratic process. Id. at 6-7. McCain-Feingold was bipartisan legislation designed to address the concetn over the political influence wielded by these large conglomerates through political campaign contributions. Bipartisan Campaign Finance Reform Act of 2002, Pub. L. No. 207155, 116 Stat. 81 (2002). In Citizerzs United v. Federal Election Comm'n, the Supreme Court effectively gutted the legislation, stating that "we now conclude that independent expenditures, including those made by corpnmtions, do not give rise to cormption or the appearance of cormption." 130 S. Ct. 876,909 (2010) (5-4). In a vigorous dissent joined by three other justices, Justice Stevens cited the extensive record in McConnell in a f f ' i n g the BCFRA. and traced Congress's concern with corporate influence over political campaigns back as early as 1907, in tbe passage of the Tillman Act, banning corporate contributions to candidates. See Citizens United v. Federal Election Commission, 130 S. Ct. 876,940,952-56 (J. Stevens. dissenting) (recounting the history of corporate spending limits in political campaigns). In January 2011, Public Citizen, a national, non-profit advocacy organization, released a report on the effects of the Citizens United decision on the 2010 election cycle. See 12 Months After: The Effects of Citizens United on Elections and the Integrity of the Legislative Process available at . Among its fmdings are the following facts:

Spending by outside groups jumped to $294.2 million in the 2010 election cycle from just $68.9 million in the 2006 cycle. The uncharacteristically lugh spending in 2010 presages blockbuster spending in the upcoming 2012 elections; Nearly half of the money spent ($138.5 million, or 47.1 percent) came from only LO groups;

64

promoting

NAFTA and other free-trade agreements that permit the free flow of goods and

services,2'' while allowing these entities t o take advantage of favorable legal

conditions.z02With threats of corporations that are "too big to fail"203or reports that

charges against a corporation could bring a substantial loss of jobs to thousands of

innocent

employees,2" there is significant temptation f o r t h e prosecutor t o hide behind

Groups that did not provide any information about their sources of money collectively spent $135.6 million - 46.1 percent of the total spent by outside groups during the election cycle; and Of 75 congressional contests in which partisan power changed hands, spending hy outside groups favored the winning candidate in 60 contests. See Press Release, Public Citizen, Citizenr United: One Year Later (Jan. 18,2011), available U I NAETA is a trilateral trade agreement among the United States, Canada, and Mexico whose objective is to eliminate trade barriers and facilitate cross-border movement of g w d s and services. North American Free Trade Agreement, U.S.-Can.-Mex., an. 102(1), Dec. 17, 1992,32 I.L.M. 289 (1993).
202 See HARTLEY, .supra note 200, at 14 (2008) (regarding favorable legal conditions); U.S. GOV'T ACCOUNTABILm OFFICE. REPORT TO CONGRESS~ONALKEOUESTORS. INTERNATIONALTAXATION: LARGE u.S. CORPORATIONS AND~WERALCONTRACTORSWITH IN JIJRISDIC~ONSLISTED AS TAX HAVENSORFINANCIALPRIVACY JuR~SDICTIONS (Dec. 2008) (reporting that 83 of the 100 largest U.S. 4 corporations have subsidiaries in tax havens or international financial privacy jurisdictions). See, e.g., Press Release, Remarks by the President on International Tax Policy Reform (May 4,2009), available at
201

SUBSIDIARIES

(announcing proposals to "crack down on illegal overseas tax evasion, close loopholes, and make it more profitable for companies to create jobs here in the United States," and to ensure that companies are not rewarded "for moving jobs off our shores or transferring profits to oversees tax havens").
203

See SORKIN, supra note 162; STIGLlTZ, supra note 15, at 40 (2010); SIMON JOHNSON &JAMES KWAK, 13

BANKERS (2010); RCGERLOWENSTEW, T E END OF WALL S T E T 252,247 (2010). H

See, e.g., Elizabeth K . Ainslie, Indicting Corporations Revisited: Lessons of the Arthur Andersen Pro,secution,43 AM. CRIM. L. REV. 107, 107 (2006). Artbur Andersen, formerly one of the "Big Five" accounting and auditing fums in the United States in 2002, was criminally investigated for destroying a Emon-related docunients. Id. Arthur Andersen w s charged with a single-count indictment for obstruction of justice, and w s convicted by a federal jury in Houston, Texas. Id After its conviction. the fun a surrendered its accounting licenses and thus ended its accounting and auditing functions. See JEROIU H. 1sETAL., supra note 136, at 345. The Fifth Circuit afkmed the convictions, but it was reversed and remanded by a unanimous Supreme Court. Arthur Andersen U P v. United States, 544 U.S. 696,697-98 (2005) (holding that the jury instructions failed to properly convey the elements of "corrupt persuasion" for a conviction under 18 U.S.C. 5 1512(b)). The Department of Justice subsequently moved to dismiss the charges against the fum. See Move by Ex-Andersen Pamter Could Affect Enron Case, N.Y. TiM!3S, Nov. 24,2005, at C9. It was the criminal indictment, however, and not the conviction that sealed the firm's fate. See Lawrence D. Finder & Ryan D. McConnell, Devolution ofAufhorify: The Depoment of

2 M

65

the numerous and noncontentious2" discretionary factors available to a prosecutor in choosing not to charge criminal conduct or to enter into a deferred prosecution agreement. The top executives who manage these corporations sit in particularly powerful seats because they direct the financial heft of the corporations they govern.206 In the financial crisis of 2007-2009, financial institutions were bailed out by the federal government before regulators had an opportunity to assess the viability of the institutions and before investigators could assess whether fraudulent conduct had lead to the crisis. Professor Bill Black, a senior regulatorzo7 during the Savings and Loan debacle of the late 1980s, examined the risk of moral hazard, or adverse incentives, in the financial markets."' Nobel Laureate Joseph Stiglitz has also pointed to the moral hazard that

justice!^ Corporate Charging Policies, 51 ST. LOUISU.L.J. I_3 n.8 (2006) (discussing the fallout from the prosecution of Arthur Andersen). Although the criminal investigation of Arthur Andersen involved a limited number of employees in the Houston ofice of the nationwide firm, the demise of the firm reportedly led to the loss of 28,000 U.S. jobs. See Ainslie, supra, at 107-08; Finder & McConnell, supra, at 3. The Euron-related conviction of Arthur Andersen in June 2002 came on the heels of a large 2001 settlement with the SEC for the f m ' s accounting and auditing work for Waste Management Corporation and an SEC suit against five Arthur Andersen officers and the lead partner for its work with the Sunbeam Corporation; neither of these investigations was centered on the Houston office. Ainslie, supra, at 107.
205

See supra Part 1V (Discretion and the Prosecutor)

Ramirez, Lessonsfrorn the Subprim Debacle, supra note 102, at I.

2im See
207

See Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner, Hearing before the H. Comm. on Financial Services, 11" Cong. 2d sess., April 20, 2010, at 2-3 (Statement by William K. Black), available at (last visited Mar.25, 2011) (listing Black's regulatory roles during the S&L crisis). See BLACK, supra note 163, at 6 ("Moral hazard is the temptation to seek gain by engaging in abusive, destructive behavior, either fraud or excessive risk taking. This is not unique to S&Ls; it is in the nature of the corporation.").
208

attaches to bank bailouts.20gOrdinarily, a bank or lending institution that has insufficient funds to pay its depositors or creditors would be placed in conservatorship so that it could be financially reorganized?" Typically, one consequence would be that management is replaced and shareholders may lose al of their interest, a risk recognized by the l shareholders when purchasing shares?" In his book, Freefall Professor Stiglitz asserts that the 2007-09 government bailout of the financial industry, like the bailouts of the 1980s, 1990s, and 2000s, sends a signal to the banks that they need not worry about risk management because the government will "pick up the pieces."2!2 This assurance permits the least prudent bankers to continue or to repeat their reckless practices.2" The moral hazard, that the bankers' incentives to act responsibly are weakened if they know they will be bailed out by the government because they are too big to fail, risks not only the need for future bailouts that will be even greater in magnitude than the generous bailouts in 2007-09, but also risks "our sense of fairness and social cohesion in the long
StigLitz observed that even those operating in the financial markets

objected to the bailouts as favoring the mega-institutions, at the expense of other

'"STIGLlTZ, supra note 15, at 16-17,39

212 Id

at 135. L the bank bailouts of 2007-09, the government opted to avoid conservatorship for those too n big to fail. Id. Earlier bailouts by the Federal Reserve after the collapse of LTCM and later, Enron, gave rise to a new term by analysts to describe the behavior, "the Greenspan put." This term was shorthand for "investors' faith that the Fed would keep the capital markets function no matter what." See FClC REPORT, rupra note 3, at 60-61 (2011).
2'3
214

STIGLIW, supra note 15, at 118, 135; see FClC REPORT, supra note 3, at 61 (2011).
STIGLITZ supra note 15, at 39.

67

institutions which may have been more pragmatic in their investment strategies.'15 Indeed the whole market may become distorted as the bailed out banks benefit from lower costs of capital due to the recognition of "tacit government In 2008, the financial markets were "on the brink" of collapse, as characterized by
Hank Paulson, U.S. Treasury Secretary at that time.'"

To stave off implosion of the

American financial markets, the bankers and executives at banks, financial companies, and insurance giant A= received billions of dollars in bailouts for their firms at the taxpayers' expense.'" To the dismay of the taxpayers, many of whom were victims of

the financial industry's reckless conduct, the leaders of these bailed-out corporations gave themselves hefty bonuses for doing such a good job.'I9 Not surprisingly, such catastrophic failures of capital management led to calls for criminal investigations into the practices of the corporations and the people who ran
5 I '

Id. at 39, 118.

*"
218

See P A ~ O N , note 16, at 254. supra

See SORKIN, supra note 162, at 396-99 (2009) (even prior to the Troubled Asset Relief Program (TARP) adopted by Congress in 2008 to bail out the financial markets and despite the fact that it was an insurance company, AIG received $85 b i o n from the Federal Reserve, pulling it from the brink of bankruptcy). In all, AIG received a total of $182 billion in federal bailout money. See Plumb, supra note 18. Whether the bailout of ALG was a consequence of its political ties, or a necessity because its bankruptcy would have left so many major banks and other financial institutions "holding the worthless mortgage investments, including Goldman Sachs," Treasury Secretary Hank Paulson's former company, and subject to cascading bankruptcies. remains a subject of debate. See Carol D. Leonnig, AIG Founder Wielded Personal Influence AH in Washington,W S . POST, Oct. 1,2008, ,415.
'I9 See, e.g., Edmund L. Andrews & Peter Baker, A.1.G Plunning Huge Bonlcres Afer $170 Billion Bailout, N.Y. TIMES, Mar. 15,2009, at Al, mrailnble at (last visited Mar. 23,2011); Ben White, WhatRedInk? Wall Street Paid He& Bonuses, N.Y. TIMES, Jan. 28,2009, at A l ; Peter Cohan, Goldman Sachs: $I Billion ,for Charity, $23 Billion for Banker Bonuses. Daily Finance, Oct. 13,2009, h t t p : / / w w w . d a i l y f i n a n c e . c o m / s t o r y / g o l d ~ - 2 3 billion-for-banker-bo/19193897/ visited Mar. 23,2011). (last

them."'

Those who benefitted from creating the subprime mortgage debacle faced civil

and regulatory fines, yet no major players, nor their firms, have been criminally charged at this time.221Although the financial crisis extended across the globe, and a number of corporations failed or were bailed out, corporations at the center of the crisis are illustrative of the rampant extreme recklessness and misconduct yielding outrageous fortunes to some at the expense of millions. One is the now-defunct Countrywide Mortgage, absorbed by Bank of America during the crisis.222 Bank of America was also a

I major beneficiary of the bailout. The other is the insurance giant, A G given nearly $200
billion in bailout funds. The subprime mortgage crisis, in which "lenders made loans that they knew borrowers could not afford" and in which "lenders put borrowers into higher cost loans so [lenders] would get bigger fees, often never djsclosed to borrowers," fueled a speculative housing bubble in which borrowers were expected to default causing massive losses to
220

See, e.g., FClC REPORT, .supra note 3 (2011); Morgenson & Story, supra note 48; Matt Taibbi, Why Isn't Wall Street in Jail?, ROLLING STONE, Mar. 3, 2011.

See, e.g., Joe Nocera, Biggest Fish Face Lirtle Risk of Gening Caught. N.Y. TIMFS, Feb. 26,2011, at B1 ; No Charges Against Former CEO of C o u n t ~ w i d a s Federal Probe Ends, Charlotte Observer, Business e Digest, available at 1 ;Amire Efreti, AIG Executives Won't Face Criminal Charges, WSJ.com,May 22,2010, . Angelo Mozilo, the fomer CEO of Countrywide had settled a suit accusing Mozilo and two other Countrywide executives of misleading investors bmugbt by the SEC for $67.5 million. Nocera, supra; No Charges Against Former CEO of Counhywide a.7 Federal Probe Ends, supra. See al,so RAMlREZ, REIMAGININGCAPITALISM, ruprn note 102, at cl1.7, 11-12 nn.38-47; Ramirez, Les.ronsfrom the Subprime Debacle, supra note 102, at 24-25. Bank of America was founded in 1904, by an Italian immigrant a%the Bank of Italy. MARQUIS JAMES & BESSSJE R. JAMES, BIOGRAPHY OFA BANK-TIE STORY OF BANKOF AMWCAN.T. & S.A. HARPER & BROTHERS 16 (1954). Over 105 years later and numerous mergers, acquisitions, and name changes, Bank of America had assets of $2.3 trillion in September 2009, absorbing both Countrywide and Merrill Lynch after the 2008 global financial meltdown. See IOHNSON & KWAK, supra note 203, at 84-85, 180 (2010). Indeed, in March 2009, Bank of America's assets were 16.4 % of GDP. Id. at 12.
"2

221

investors in mortgage securities."

Countrywide Financial originated more subprime

loans that any other company?% The fees from the easy mortgages granted by Countrywide yielded financial riches for Angelo Mozilo, the former CEO of Countrywide, whose income included $102 million in 2006, a total of $229 million in

2007, and a retirement benefit package of $58 million in 2 0 . ~ Modlo settled a civil 08"
suit brought by thc SEC for $67.5 million, in which Mozilo and two other Countrywide executives were accused of misleadiig investors, but no criminal charges were

Millions of Americans lost their homes to foreclosure as low-interest teaser rates on the easy mortgage loans expired and were replaced by higher rates and monthly payments that exceeded the income levels of the mortgagors, or the spiraling unemployment rate left mortgage holders jobless and thus without income."' As

foreclosures flooded the real estate market with bargain-priced homes for sale, the buyers retreated to wait out the shiti as real estate prices dropped, leaving over a quarter of aII mortgage holders with homcs valued below the outstanding mortgage due.

"3

See FClC REFQRT, .supra note 3, at xxii (2011).

221 See RAMIRE& EWMAGININGCAP~ALISM,102, at ch.7, 11-12nn.38-47; Ramirez, Lessons supra note from the Subprirne Debacle, rupra note 102, at 24-25.

2" For 2006, Mozilo's compensation included salary plus abonns of $20.5 million; in 2007, he earned $102 million in salary, $30 million in Options compensation, and $127 Million in sales of Countrywide stock sold immediatelyprior to the fums announcement of a $388 million write down due to loan losses. See RAMIREZ, R E I M A G ~ G CAPITALISM, supra note 102, ch.7, 11-12 nn.38-47; Ramirez, Lessonsfrom the Subpiiine Debucie, supra note 102, at 25.
226 See Nocera, supra note 221; No Chnrges Againrf Fonner CEO of Counirywide as Federal Probe En&, supra note 221.

n7 STIGLITZ, supra

note 15, at 16;Taibbi, supra note 220.

70

At the same time that the U.S. government was bailing out the largest banks in America from their high-risk gambles trading in derivatives in the mortgage and subprime mortgage markets:z8 calls to aid mortgage owners unable to meet their repayments

were met with objections from the financial markets that doing so would create a moral l~azard,"~ is, a disincentive to pay their mortgages because owners would hold out that hope of a bailout.230 American Insurance Group ("AIG) was the world's largest insurance company, and one of its units, AIG Financial Products Corporation ("AIG W),"dominated in dealing in OTC derivatives," accumulating a one-half trillion dollar position in credit default swaps.231AIG recognized the income from these derivatives without creating any
note 16, at 364,368. On Monday, Oct. 13,2008, nine banks agreed to receive $125 billion to address massive undercapitalization in the banking system: Citigroup, Wells Fargo, and JP Morgan, all received $25 billion; Bank of American received $15 billion; Memill Lpcb, Goldman Sachs, and Morgan Stanley each received $10 billion; Bank of New York Mellon received $3 billion; and State Street Corporation received $2 billion. Id. at 364-65. Among the basic terms that each bank CEO signed on to as a condition of the loans, was to "expand the flow of credit to U.S. Consumers and businesses; and to 'work diligently, under existing progams, to modify the tenns of residential mortgages, as appropriate."' Id at 366. Subsequent events would reveal that the bankers did not diligently work to modify residential mortgage terms, and in some cases, seemed to actively delay or even undermine modification; State of Nevada v. Bank of America Corp., Case No. A-10-631557-BXXV (D. Ct. Clark County, Nevada, Dec. 17, 2010) (Complaint) (also available at by selecting link "initial terms of a deal" in text).
n9See

22%~UUON, supra

Richard Eskow, Foreclosunx and Guilt: The "Home Loan Moral Hazard Scorecard, " Campaign for America's Future, Oct. 18,2010, ("scorecard" comparing the moral hazard of bankers versus borrowers in the wake of the 2008 subprime mortgage crisis) (last visited Apr. 11,2011).

"'STIGLITL, note 15, at 16. supra

See FCIC REPORT, Supra note 3, at50 (201 1) A key OTC derivative in the financial crisis was the credit default swap. . . . The purchaser of a CDS traosferred to the seller the default risk of an underlying debt. The debt security could be any bond or loan obligation. The CDS buyer made periodic

71

reserves for possible losses,23z basically insuring subprime mortgages through these derivatives. When borrowers began defaulting on subprime mortgages, financial institutions holding the credit default swaps sought to have AIG post collateral under the terms of the credit default swaps. When the housing bubble burst, AIG Financial Products had guaranteed billions of dollars worth of subprime mortgages for which it could not pay. That AIG sat in the eye of the financial crisis storm was unsurprising given that the company and its former CEO, Hank Greenberg, had avoided criminal punishment for past financial practices.u3 On the very day Hank Greenberg was being deposed by the
payments to the seller during the life of the swap. lo return, the seller offered protection against default or specified 'credit events' such as apartial default. I f a credit event such as a default occurred, the CDS seller would typically pay the buyer the face value of the debt.

See FCLC REPORT, supra note 3, at 50 (2011). Although a CDS is often compared to insurance, two key distinctio~~s first, that it can be used to speculate on the losses of others' property or interests because are the purchaser of the CDS need not have a property interest in the underlying debt (somewhat akin to being able to insure your neighbor's car and then hoping the car will crash so that you may cash in on the insurance policy), and second, that because the CDS seller risk is unregulated as part of the derivatives market, unlike the regulated insurance market, the seller of the CDS is not required to put aside financial reserves in case of loss. Id.
232
233 In 2003, ALG settled a civil action with the SEC for a $10 million fine, based upon aiding an Indiana cell phone distributor in biding $11.9 million in losses and then lying to the SEC about its role. SORKIN, supra note 162, at 155. In 2004, AIG settled civil and criminal charges for its role in shifting had loans off the books of PNC F i c i a l Services. Id The fum entered into a deferred prosecution agreement with the Department of Justice and agreed to a thiieen-month probationary period for AIG Financial Products Corp. (one of its operating units). Id. In 2005, AIG Financial Products Corp. was involved in another accountillg scandal for inflating AIG's cash reserves by $500 million, resulting in the resignation of its CEO, Maurice Raymond "Hank" Greenberg. Id at 153, 160. Although considered by New York's Attorney General, no criminal charges were filed against Greenberg or AIG Id at 160. In FebmaIy, 2008, AIG was required to adjust loss estimates for November and December 2007 from $1 billion to more than $5 billion. Id AIG and Greenberg are noted for their strong financial support of political candidates and the ready access it has provided them, as well supporting favorable legislative initiatives, and opposing unfavorable regulations. See Leonoig, supm note 218 (reporting that Greenberg's Starr Foundation "gave $500.000 to support a

72

New York State Attorney's General office regarding previous questionable accounting practices at AIG AIG settled a $4.3 billion lawsuit it had filed against Greenberg, for about $860 million, so that it could announce that Greenberg was returning to AIG as its chairman e m e r i t ~ s . 'AIG needed Greenberg's relationships with wealthy investors to ~ shore up its financial distress and hopefi~lly the company some time as it faltered buy under the weight of AIG Financial Products' credit default swaps obligations.235 The AIG Financial Products Corporation was founded in 1987, in a deal between Greenberg and Howard Sosin, who fled investment firm Drexel Burnham Lambert for the deeper pockets of AIG, leaving before Drexel Burnham pled guilty to violations of federal securities laws in 1988, agreeing to a $650 million fine, and ultimately collapsing in bankruptcy due to Michael Miken's "epoch-defining" junk bond scandal.23h Sosin brought thirteen Drexel employees with him to AIG Financial Products, where they operated a high leveraged unit with similar success to the prior Drexel operation.237 Notably, Joseph Cassano, who headed up AIG Financial Products Corp. and is was one of those credited with pushing AIG into underwriting credit default swaps,238
November 2006 report by the Cornmiltee on Capital Markets Regulation that [recommended] fewer criminal prosecutions of businesses.").
U4 See

SORKIN, supra note 162, at 272,280.

"'See SORKIN, supra note 162, at 155-56; FRIEDRICHS, supra note 44, at 164-65. Milken plead guilty to
six felony charges for securities fraud and conspiracy. FRIEDRICHS, id. at 164. See SORKIN, supra note 162, at 155-56. See id. at 157-58. By F e b r u q 2008, AIG's outside auditors, PricewaterhouseCoopers,concluded that Cassano was not "open and forthboming" in the valuation of risk taken on by AIG FP, and AIG was required to revise its 2007 estimgtes of losses in November and Decembcr from $1 billion to more than $5
238

73

thirteen employees who had previously worked for Drexel Burnham Lambert during Michael Milken's reign of the junk bond market.u9 After Sosin left AIG Financial Products in 1993, Cassano remained and was promoted to chief operating officer.240 kassano eventually took the helm as CEO A n g a reported $280 million during his I g h t year tenure a AlG Financial Pmductskl In Decernhrr 2007, Cassano had assured t

I.

L
6

Investors that "it is very difficult to see how here can be any losses" in the CDS r t f ~ l i o swithout revealing that AIG ha posted $2 billion in collateral to Goldman ,~~~

achs to cover losses."243Nor did Cassano i o m those investors that AIG's had

buerstateci i s earnings by $3.6 billion?

c ssano was forced to resign in 2008

i 1
I
I

dter the

billion. Id at 160.61. Although MG's CEO Martin kullivan wanted to fire Cassano, he ageed to keep bassua on as a consultant at $1 million per month. at 161-62.

&

See SORKni, .?upra note 162. at 155-56.

240

See id at 156; Robert @Harrow, Jr. & Brady Dennis, The Beautrful Machinr, WASH. POST, Dec. 29, 2008, Al, available at (last visited Mar. 23,2011).
See David Voreacos &Elliot Blair Smith Cassano:?Statements on AIG Probed by Prosecutnr.v, People Nov. Say, BLOOMBERG, 26,2008,

1
I"'
I

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6m~BOe9F~4&refer=news.

"See AIG -American loternational Group Investor Meeting, Dec. 5,200'7, Final Transcript, at 8,
(last visited Apr. 17. available at 201 1). Cassano made a similar statement at the prior investor meeting on August 9,2007, insisting that the credit default swaps were not a problem: "It is hard for us, without being flippant, to even see a scenario within any kind of realm or reason that would see us losing $1 in those transactions. . . . We see no issues at all emerging. We see no dollar of loss associated with any of [the CDO] business." See FClC REPORT, supra note 3, at 268. Despite those assurances, the following day AIG posted $450 million in cash to Goldman Sachs in response to its prior collateral calls. Id at 26566,268

1I

243 See

FClC REPORT, supra note 3, at 272.

'"See id. at 272.

catastrophic billions of dollars of losses from the sub-prime mortgage derivatives began to hit and gave rise to the need for the company to report a multibillion dollar loss.245 Rather than facing criminal charges, AIG received the benefit of a $182 billion bailout from the federal government in 2008 and 2009 despite a record of financial r n i ~ c o n d u c tand~Cassano was given a $1 million monthly consulting fee upon ,~ resigning as CEO and walked away with millions in earnings. The federal probe of AIG and Cassano's role in the financial crisis resulted in the unusual announcement that no criminal charges would be brought against AIG executives.247Reports of the New York Attorney General's investigation into the fmancial crisis and its aftermath indicate that New York Federal Reserve Chairman Geithner visited with NYAttorney General Cuomo and discussed A I G ' ~ Although Cuomo's investigation into the crisis continued, no ~ charges were filed against AIG prior to Mr. Cuomo's d e p - ~ from the office for his newly elected position as Governor of New ~ o r k . ' ~ ~ In 2010, a new scandal emerged as banks-some of which had been given

government bailoutsused forged or fraudulent documents in courts to support home

245

See Voreacos & Smith, supra note 241.

*' See Nocera, supra note 221; Matthew Karnitschnig et al., US to Take Over AIG in $85 Billion Bailout;
Central Banks Inject Cash as Credit Dries Up, WALLST.I., Sept. 17,2008, at -available at (last visited Mar. 18, 2011).
247 Eketi, supra note 221 (reporting that federal prosecutors had focused the investigation on Joseph Cassano. head of AIG's London-based Financial Products unit).

2 4 '
249

See, e.g., Morgenson & Story, supra note 48 See id.

foreclosures.250A group of banks had collectively created an organization, known as Mortgage Electronic Registration Systems (MERS), and used it as the designated mortgagee in home loans rather than the actual beneficial owners of the 10ans.~' By doing so, the banks avoided additional filing fees required to lawfully record mortgage assignments or transfers.252As Professor Christopher Peterson observed, the mortgage

60 Minutes: The Next HouFing Stuck (CBS television broadcast Apt 3,201 l(avai1able a t (last visited Apr. 19,2011) (reporting on Docx, a company hued to sign fraudulent mortgage ownership documents prepared for use by banks in home foreclosures-because the original documents were unavailable--on behalf of numerous banks, including Wells Fargo, HSBC, Deutsche Bank, Citibank, U.S. Bank, and Bank of America); Rauch & Baldwin, supra note 29 (reporting that the biggest U.S. mortgage lenders in the United States "are bedg investigated by 50 state attorneys general and U.S. regulators for foreclosing ou homes without having prbper paperwork in place or without having properly reviewed paperwork before signing it"); Gretchen dorgeuson, A Sw@ Deal May Not Be a Sound One, N.Y. Times, Mar. 12,2011, (reporting on the bank settlement being negotiated between state attorneys general and Bank of America and its subsidinries to aJdr?\s improper loanscrvicinp and li>rrclo\ure practice,); State of Nevada v. Bank of Amcrica Curp.. Ca\r KO.A-I0 631557 UXXV ( U C . ClarkCounty, Ne\,ada, Dee 17. 2010) (G,niplatnl) (also ;~vailnblr~xt b$ selecting link "initial tenns of a deal" in text).
250 See

See Chrisopher L. Peterson, Foreclosure, Subprime Mortgage Lending and the Mortgage Elecironic Registration Sptem, 78 U . CIN. L.REV. 1359, 1361-63, 1368-70 (2010) (describing th$ creation of MERS, its role in the mortgage industry, and its questionable legal role with respect to recordihg mortgages and bringing foreclosures). MERS, created by a Mortgage Bankers Association of America member companies, is listed as the mortgagee (MERS claims it is a nominee) on the publicly filed documents and any transfers of the ownership of the mortgage loan are recorded internally in a compqter data system, rather than with the county property recorder's oflice. Peterson, at 1361-62, 1368. "Sixty percent of all new mortgage loan originations are recorded under MERS's name, and more than half of the nation's existing residential loans are recorded under MERS's name." Id at 1373.74. In addikion to avoiding iiuther fees to the recorder's office, MERS has also attempted to bring fureclosure praceedings in its name, the Richard ~ s k o w , ~ i c t u rofMERS, es rather U~an true owner's name. Id at 1362-63, 1372-73. See aL~o Part I : Corporate Documenis Illustrate the Mortgaze Shell Game, HuffPost Busines$, Oct. 20,2010, (Ihst visited Apr. 6, 2011) (listing a who's who of MERS owners, including AIG-UG, Bank of America, ~ttimortgage, Fannie Mae, Freddie Mac;GMAC, HSBC, Merrill Lynch, Nationwide, Washington Mutual (JP Morgan), and Wells Fargo).
252

See Chrisopher L. Peterson, Foreclosure, Subprime Mortgage Lending and the Mortgage Electronic Regisnation System. 78 U. CIN. L.REV. 1359, 1361-62 (2010); Toluse Olomnnipa, Mdr.shal1 C. Watson :F l.at33 Firm I,, Pa? 52 .Millio,~l Scrlh~ o Fori~rlr,su,uI ~ ~ ~ ~ s t i.Mianti Ilcrdd. iMar. 25. 201 1, ~~~li~r . (last visited Apr. 6,2011)

finance industry set about to create an entirely new national system of public land title recordkeeping without seeking legislative reform.z53Instead, "the mortgage finance industry circumvented the state and national debate that normally precedes significant legislative change."254When loans began to fail, banks realized that the failure to properly document the transfers left them potentially without recourse in the foreclosure process.255Consequently, forged documents and fraudulent affidavits in support of foreclosure actions were created and submitted to courts in support of forec~osures."~ Despite unquestionably fraudulent conduct, federal regulators investigating the misconduct in foreclosures have agreed to consent orders against the fourteen largest mortgage servicers, who agreed to address problems in fraudulent loan documentation and understaffed and undertrained foreclosure operations, without admitting or denying any wrongdoing.257As one critic from the National Consumer Law Center observed, "These consent orders are worse than doing nothing. . . . They give the appearance of

See Chrisopher L. Peterson, Foreclosure, Subprime Mortgage Lending and the Mortgaxe Electronic Regisnation System, 78 U.CIN. L.REV. 1359, 1369-70, 1374, 1406 (2010).
254

253

Chrisopher L. Peterson, Foreclosure, Subprime Mortgage Lending and the Mortgage Elecfronic Registration Synern, 78 U . CW.L.REV. 1359, 1405 (2010).
255

See Chrisopher L. Peterson, Foreclosure, Subprime Mortgage Lending and the Mortgage Electronic Regi.~nation System, 78 U.CIN. L.Rw. 1359,1367-68,1375-80 (2010).
256
257

See 60Minute.v: The Nefl Howing Shock, supra note 250.

See Alejandro Lazo 81 E. Scott Reckard, Changes Ordered in Home Seizures, CHL TRIB.. Apr. 14,2011. at 21 (reponing that regulators from the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corp. assured critics that their settlement "wouldn't interfere with a wider-ranging investigation conducted by state attorneys general and other federal agencies, including the Justice, Treaquq and Housing departments and the Federal Trade N.Y.nMes, Mar. 12,2131I, Commission"); Gretchen Morgenson, A Sww Deal May Not Be a Sound One,

doing something while giving banks control of the process."258 Indeed, such agreements are worse than nothing. They affim unlawful conduct, encourage others to follow unlawful actions, and undermine the rule of law by once again expressing the message that the wealthy and powerful remain above it.

VI.

Conclusion
The affiimance effect appears evident in the subprime mortgage lending, the

financial market crisis of 2007-2009, the generous fees and bonuses awarded for creating a financial Armageddon, the fraudulent loan documentation to support foreclosures, and the failure to pursue criminal charges against any of the major actors or their legions of supporters in the legal, accounting, and credit rating fields, despite evidence of financial fraud. In contrast, foreclosures continue unabated, except to the extent that bankers do not want to write down the losses and reveal the extent of their financial plight further,259 while social programs such as healthcare are cutZ6'under public pressure to balance a federal budget devastated by the cost of the bailout.261With such lop-sided
218

See Lazo & Reckard, supra note 257 (quoting Alys Cohen, staff attorney for the National Consumer Law Center).

259 see Robert Lenzner, US Bar&.? Reporting Phantom Income on $1.4 Trillion Delinquent Mortgages, Forbes.com, Jan. 12,2011, htp:llblogs.forbes.com/robertlenzner/2011/01112/us-banks-reporting-phantomincome-on-14-trillion-delinquent-mortgages(last visited Apr. 6,201 1) (observing that accounting rules permit bank., to allow "phantom" interest that is not actually collected to accme on non-performing mortgages and be reported as income until those properties are foreclosed upon, which averages about 16 months). Once the property is foreclosed, the anticipated interest income comes off the books, but the balks must acknowledge the loss. Id

260
261

See FClC REPORT, supra note 3, at 398-400 (2011).

See id: Associated Press, Obmna Pitches Spending Cuts, Higher Tares on Wealthy, Laying Down Marker.rfor 2010 Campaign, WASH. POST, Apr. 13,2011,

(last visited Apr. 21, 2011).

78

consequences, it is easy to predict that leaders in the financial industry will continue to probe for opportunities to fulther violate laws in the pursuit of fortune262 use their or fortunes to decriminalize and shape laws to their favor:63 that others will follow in their path, and that those not in the top 18,who take in nearly one-quarter of a l U.S. income l and hold 40% of U.S. wealth, 264 will continue to lose Caitl~ the rule of law. in Social meaning in law has evolved so certain individuals, and white collar fraudsters in particular, understand they face Little risk of criminal punishment for acts that fall into the definition of criminality. When the criminal actors can move the question of exercising prosecutorial discretion to charge by highlighting the costs to society of punishing corporations or their leaders. or by characterizing the pursuit of justice as a political act of retribution rather than a reasoned decision to deter future conduct, the impact of such influence upon prosecutorial discretion can be obfuscated by the traditional factors deemed appropriate for consideration in exercising discretion. Allowing money or politics to influence discretionary charging decisions, whether real or perceived, convcys social meaning that undermines effective government, models bad behavior, and reinforces rewards creating a moral hazard for future wrongdoing. Before

"'See Steven A. Ramirez, D o h - F n m k as Maginot Line, 14 CHAP L. REV., 110.3 (fortl~coming2011)

(assehng that the Dodd-Erank Act, created to address the financial banking crisis and mortgage collapse of 2008, will not prevent fuhue financial crises); The 7.30Reporr: Troubles Ahadfor World Econorny, ABC (last visitcd Apr. 6, 2011) (Anstl.) (July 27,2010), (interview with Nobel laureate Joseph Stiglitz) (predicting another financial crisis because the core problcms of fhccrisis, too-big-to-fail banks, exces~ive risk-taking, and lack of transparency, were not addressed, and because the banks used their political power to protect derivative activity that generates large profits, but puts America at risk).
2N See FClC REPORT, supra note 3, at xviii (2011) (concluding that the financial industry "played a key role in weakening regulatory constraints on institutions,-markets, and products").

2M Joseph

E. Stiglitz, Of the I%, By the 1%, For the 1%. VANINFAIR, May 2011.

79

prosecutors refrain from charging, they need to factor in the idea of "affirnance" in exercising prosecutorial discretion so that an offensive approach to such criminality is constructed and conveys a new social understanding for those in politically or financjally powerful positions.265 Prosecutorial discretion is broad, but there is a need to compel the government to impose criminal punishment upon these Law-breakers so that they are constrained by the law to the benefit of society because these laws and the enforcement of them have meaning. Moreover, failure to enforce some laws can undermine the confidence in all laws.266Prosecutors must recognize the social compact formed by law abiding citizens who obey and respect the laws and expect nothing less of the rest of

A f f i a n c e of the crimes of the powerful means they retain the power to impose massive costs into the future through their continued control of massive fums, and the
I

incentives facing others holding such power. A petty thief may steal again when not prosecuted, but only a bank CEO can engage in fraud that can crash the global financial system. Similarly, a petty thief that evades prosecution has zero impact on the rule of law, but a CEO that evades prosecution could tempt millions into skirting the law. Today, America flias with financial and corporate elites that behave as if they are above the law,
2"
266

.Tee Lessig, supra note 65, at 961-63.

"Basically, if you are a market participant you play by the rules, and if you are an honest person you want the rules to be better even if it's not to your advantage[;] that's really what you need for a democracy to work well." National Public Radio, Morning Edition (March 9,2010) (interview with George Soros, billionaire investor) (commenting on the need for increased financial market regulation), audio clip available at http://www.npr.orghlogs/thetwo-wayf2O10/03/soros~would~m&eeit~harder~for.html.
See Lessig, supra note 65. at 955-56; Kahan, supra note 75, at 358 (individuals may wish to uphold the law but do not want to be taken advantage of; "When others refuse to reciprocate, submission to a burdensome legal duty is likely to feel more servile than moral.").
267

and a public that holds the legal system in contempt. As such,

future economic lawlessness and catastrophes.268

may lead to

26R

William K. Black, 2011 Will Bring More De Facto Decriminalization of lite Financial Fraud, (predicting that state and federal prosecutors will

HUFFWGTON POST, Dec. 28,2010,

1 to prosecute or reign in (be

financial market elites).

81

OFFICE THE OF ASSESSOR-RECORDER

SAN FRANCISCO

PHIL TING
ASSESSOR-RECORDER

FORECLOSURE

Aequitas Compliance Solutions. Inc. 1 422 31st Street, Newport Beach, CA92663 1 Phone 949.272.3955 1 aequitasauditcom

counsel. As lq:dl advlce must he I~nlored the cpec~fic tv rinumstanrcc as a substitutefor Ule advice of competent counsel

NO'I'IIX: Thc information contained hereln is tor infurrnabonal pwposes only and is nu1 1 ~ . ~advlcc or r svhstilule fur legal ul of ruch casc nothlnt: pr8nvlded herein should he uscd

The City and County of San Francisco's Office of the Assessor-Recorder retained Aequitas Compliance Solutions, Inc. t o review 382 residential mortgage loan transactions (the "subject loans") that resulted in foreclosure sales that occurred from January 2009 through October 2 1 . 01' Over this period, there were 2,405 foreclosure sales. The subject loans thus represent approximately 16% of the total. (See Appendix B - Methodology.) We analyzed the subject loans t o determine the mortgage industrfs compliance with applicable laws. Specifically, we focused our analysis on important topics relating t o six Subject Areas: Assignments Notice of Default Substitution of Trustee Notice of Trustee Sale Suspicious Activities Indicative of Potential Fraud Conflicts Relating t o MERS

(In this report, we irregularities and "exceptions").

refer to violations

both as

As Figure 1 1 shows, we found significant . exception rates across all Subject Areas.
. . . . . .. .. . .. . .. . .. .. . .. . . . . . . . . . . . .

Our Subject Areas and the topics we explore therein may not be exhaustive. Nonetheless, we believe our analysis presents an accurate picture of the nature and frequency of the mortgage industry's performance respecting compliance with important aspects o f California's nonjudicial foreclosure laws. Overall, we identified one or more irregularities in 99% of the subject loans. In 84% o f the loans, we identified what appear t o be one or more clear violations of law.

Figure 1.2 illustrates the volume of exceptions. The y-axis represents the percentage o f the subject loans with various exception counts. For instance, "21" shows the percentage of subject loans with one or more compliance exceptions. Likewise, "25" shows the percentage of subject loans with five or more compliance exceptions. The bars show both exceptions representing clear violations of law and those where the facts identify likely or potential violations.
. ... . . . .. . . .. . . .. . . . .. . .. . .. . .. . .. . . . . . . . . .

'Throughout this paper, we are offering no opinion onthe merib of various legal arguments put forth by the industry or those representing homeowners. We simply report the exceptions found bared on publicly available facts and our understanding of applicable regulations. We explain our understanding of such rrgulationr in the discussions alongside the specific exception rates presented herein. It 6 ou! goal to present only objective findingr of faca.

Clear Violations

Likely or Potential Violations

Figure 1.3 shows the percentages of loans with multiple exceptions across different

and governed by California Civil Code 52924. Generally, lenders begin the foreclosure process by giving the defaulting borrower a "Notice of Default" or "NOD." This is the first document that must be recorded as part of the non-judicial foreclosure process. If the borrower is unable t o make payment after three months, the trustee can begin the auction of property by filing and mailing t o the borrower a "Notice of Trustee's Sale." One of the most important differences between a judicial and non-judicial foreclosure is the amount of judicial oversight: in the former the lender sues the borrower while in the latter it is the borrower who has t o involve the courts. Furthermore, under the non-judicial foreclosure process homes are sold without court approval. Therefore, the expedited non-judicial foreclosure process frequently results in little, if any oversight. Indeed, since most foreclosures in California are non-judicial, the borrower has t o be the party that brings court oversight t o the foreclosure process, if a court is t o be involved at all.

For the most part, Cal. Civ. Code 52924 and California's foreclosure laws generally are concerned with imposing procedural obligations on foreclosing Beneficiaries and providing due process rights to homeowners in order t o ensure that the streamlined non-judicial foreclosure process is not abused. Because non-judicial foreclosure is a "drastic sanction" and a "draconian remedy." courts have generally required strict compliance with statutory requirements2
It is worth noting that the process was created long before things such as the secondary market and mortgage brokers existed. When the laws were first enacted, lenders "originated-to-hold" loans for their portfolio and rarely sold mortgage loans.

Many mortgage industry advocates correctly point out that much of Cal. Civ. Code 52924 deals with technical requirements and that inadvertent violations should not provide windfall remedies t o reckless borrowers. While there is much merit t o this argument,
it ignores legitimate victims for whom Cal.

Civ. Code 52924 serves as a last check on abusive lending practices and illegal foreclosures. We hope this report will achieve t w o goals. The first is t o illustrate and explain foreclosure processing issues in a way that allows everyone-no matter their mortgage knowledge or association with the crisis-to understand them. Second, we hope t o open a dialogue o n the importance of ensuring compliance with these laws so that corrective action can take place. This means both working productively with the mortgage industry t o improve compliance and effecting legislative change so that the law more accurately reflects California's modern mortgage market. Reckless borrowing notwithstanding, much publicly available evidence suggests that there are indeed many legitimate victims of abusive lending and servicing practices. For example, a remarkable report published by the inspector general for the FDIC reveals that at the peak of subprime originations approximately 83% of FDICregulated institutions were cited for patterns of "significant compliance violation^."^ 26% of were violations of the

'Mtllerv. Core. 127 Cal. App. 3d 888,894 (1982)

'FDIC, Report No. 06-024, September, 2006

Truth In Lending Act (TILA) violations. TILA is the cornerstone federal regulation intended t o protect consumers from inaccurate and unfair disclosure of the cost of a credit transaction, such as the interest rate and payment schedule of a mortgage loan. In other words, FDIC-regulated lenders were struggling t o accurately and fairly present t o borrowers the amount and timing of their required loan payments. Presumably, then, at least some homeowners who suddenly and unexpectedly saw their mortgage payments spike lo% had cause t o complain. We presume these violations were even higher for lenders outside the FDIC's purview. These include the state-licensed, non-depository lenders-such as Ameriquest and New Century-who were responsible for originating 52% of subprime mortgages.4 News accounts are replete with former employees acknowledging they routinely hid fees, fabricated data and forged documents. There is, for instance, the infamous story of how loan officers for one such lender used "a brightly lighted Coke machine as a tracing board, copying borrowers' signatures on an unsigned piece of paper.''5 These widespread, though certainly not universal, practices did not stop at the origination stage. In fact, the securitizationspurred boom in originations ultimately made it infeasible t o carry out large-scale foreclosures once the market turned. Evidence of this can found in an April 2011 Interagency Review by the Federal

Reserve, OCC and OTS of servicers, which found critical weaknesses in servicers' foreclosure processes and oversight and monitoring of third-party vendors, including foreclosure attorneys. These weaknesses resulted in unsafe and unsound practices and violations of applicable federal and state laws, elevating the agencies' concern that "widespread risks may be presentedt o consumers, communities, various market participants, and the overall mortgage market." The servicers included i n this review represented more than two-thirds of the servicing market. Given these well-documented and widespread origination and servicing issues, it is not implausible that there are homeowners who are alleged t o have defaulted on loans t o which they never fully agreed t o and, further, are being foreclosed upon by lenders that might not even own such loans. The fact that these homeowners borrowed something, on some terms, from someone should not be enough t o rob them of their due process right. Importantly, we are not asserting that every distressed borrower is a victim and that the mortgage industry is collectively guilty of defrauding homeowners. Certainly many borrowers knowingly and recklessly overextended themselves. Furthermore, the remarkable growth of the U.S. housing markets is a consequence of, and its future stabilization depends heavily upon, the responsible actions of many of the industry's leading participants. Rather, we can deduce from the public evidence that there are indeed legitimate victims in the mortgage crisis. Whether these homeowners are systematically being deprived of legal safeguards and due process rights is an important question.

'Source: Federal Reserve Board bared on Home Mortgage Oirclorure Act data "Workers Say Lender Ran 'Boiler Raomr"', Los Angeles rimes (Februan/4,2W5) 'Interagency Review of Foreclosure Policies and Practicer, April 2011

Civ. Code 52924 affords those homeowners certain rights, including in some cases the right t o stop or slow foreclosure proceedings. Furthermore, as we shall see, violations of Civ. Code 52924 and California's other foreclosure requirements are sometimes indicative of broader, substantive consumer protection issues. Therefore, widespread non-compliance with such regulations is a matter that warrants the serious attention of the legislature and the courts.

settlement would not release lenders from charges arising under California Penal Code 5115, which states that any person who "knowingly procures or offers any false or forged instrument t o be filed, registered, or recorded in any public office within this state, which instrument, if genuine, might befiled, registered, or recorded under any law of this state or o f the United States, is guilty of a felony." Moreover, the settlement does not provide a release for any private claims by individuals or any class action claims. All this notwithstanding, if nothing else, this report provides a fuller context for understanding the general nature and extent of the problems precipitating California's participation in the settlement. To our knowledge, this is the first public study t o provide a rigorous, quantifiable analysis of foreclosure practices in California. Until now, public information in California regarding the variety and frequency of improper foreclosures has been largely anecdotal. This is because, as we discussed in Section 3, California's expedited nonjudicial foreclosure process results in little, if any, oversight of foreclosing entities. In contrast, states with more rigorous judicial foreclosure requirements have uncovered and exposed patterns of servicer misconduct.' The results of this report, therefore, provide the transparency t o better understand this important and timely development.

week of the announcement that 49 state attorneys general and the federal government have reached agreement on a joint state-federal settlementwith the country's five largest loan servicers regarding some aspects of the servicer's foreclosure practices. It is worth briefly discussing how this report relates t o that settlement. As of the date of this publishing, federal and state officials have not yet made public the agreement and i t s final wording is still being drafted. However, the general principles are known. The agreement settles only some aspects o f the lender misconduct relating t o the foreclosure crisis and, with respect t o those, does not resolve all legal claims. Consequently, based on our understanding, the settlement does not resolve most of the issues this report identifies, nor immunizes lenders and sewicers from a host of potential liabilities arising therefrom. State and federal authorities can pursue criminal actions and also punish wrongful conduct related t o the bundling and sale of mortgage loans into investment securities, among other things. For instance, the

'See: Office of the Attorney General of the State of florida, Economic Crimes Division, "Unfair, Deceptive and Unconscionable A& in Foreclosure Cases: Presentation to the Florida Association of Court Clerks and Controllerr" (2010). Note that florida is a judicial foreclosure state.

from our analysis organized by the Subject Areas identified in Section 1 For each . Subject Area (such as Assignments or Notice of Trustee's Sale) we focus on particular topics (such as chain of title issues or timing requirements). In addition t o a Subject Area's overall exception rate (which combines all topics), we show the exception rates and explanatory discussion for each topic.

recorded documents, Assignments ostensibly executed by the Trustee or Servicer, assignees ostensibly signing for assignors and potential issues relating t o Assignments filed subsequent t o the Notice of Default. Overall, 75% of the subject loans contained one or more exceptions relating t o these five topics. A discussion of the five topics and our findings are set forth below. The percentages highlighted in the shaded boxes indicate the exception rate for each topic. Recordation Of Conflicting Assignments: In 6% of the subject loans, two or more ..... . conflicting Assignments of the Deed of Trust were recorded, purporting t o transfer ownership of the Deed of Trust t o two or more separate entities. For these loans, the conflicting transfers make it impossible for both recorded Assignments t o be legally valid. In such cases, there is a strong possibility that neither of the recorded Assignments is legally valid. At the very least, the conflicting Assignments challenge the power and authority of the entities foreclosing on the property and call into question whether the foreclosing Beneficiary does in fact own the loan. Conflicts Between Federd Filings And Recorded Documents: In 23% of the subject loans, the foreclosure documents contradict the findings of a securitization audit regarding who is the true, current owner of this loan. Specifically, federal securities data regarding the ownership of the loan contradict the documents filed a t the County Recorder's office.

When a lender decides t o sell a trust deed t o another lender or to a party t o a securitization transaction8, the lender signs an assignment of the deed of trust in favor of the new lender. This assignment typically includes an assignment of the Note the Deed of Trust secures and gives the new lender the same lien on the property that the original lender had under the trust deed. The new lender essentially steps into the shoes o f the old lender.

While we observed a meaningful number of issues relating t o Assignments, we focused specifically on five topics: recordation of conflicting assignments, conflicts between federal filings (usually filings with the Securities Exchange Commission) and
See Appendix A for a primer on securitization.

Assignments that are ostensibly executed by the Trustee or S e ~ i c e r :27% of

the time we found evidence t o suggest that the original or prior owner of the loan may not have signed the Assignment and that it instead was improperly signed by an employee of the Servicer or Trustee. We suspected this because the name o f the person that executed the Assignment of the Deed of Trust was verified t o be an employee of the Trustee or the Servicer. The original owner or a subsequent owner of the loan must execute the Assignment of the Deed of Trust. It is unlikely that an employee of the Trustee or the Servicer was a prior owner of the loan. Moreover, it is unlikely that the employee of the current entity claiming t o be Beneficiary was, in fact, an agent of a prior owner, as this suggests the prior owner signed an unrecorded document granting authority t o assign the Deed of Trust rather than simply signing the Assignment itself. More likely, the chain of title t o such loans has been broken and the written transfers from the original owners t o the current entities claiming t o be Beneficiary do not exist. The possible undocumented or, worse, nonexistent transfers of the loan may explain why the prior, known owner of the loan did not execute the Assignment.

Trustee or Sewicer. Here, simply put, an apparent employee of the buyer of the loan has executed the assignment on behalf of the seller.) The original owner or a properly assigned subsequent owner must execute the assignment of the Deed of Trust. It is unlikely that an employee of the entity claiming t o be the current Beneficiary was also a prior owner of the loan. Moreover, it is unlikely that the employee of the current entity claiming t o be Beneficiary was an agent of a prior owner, as this suggests the prior owner signed an unrecorded document granting authority t o assign the Deed of Trust rather than simply signing the Assignment itself. More likely, the chain of title t o this loan has been broken and the written transfers from the original owners t o the current entity claiming t o be Beneficiary do not exist. The possible undocumented transfers of this loan may explain why the prior known owner of the loan did not execute the Assignment.

Potential Issues Relating to Assignments Filed After The f Notice O Default' For 59% of
the subject loans, an Assignment of the Deed of Trust was filed subsequent t o the Notice of Default. Therefore, the persons filing the Notice of Default claimed at that time t o represent one purported Beneficiary and then, subsequently, stated that the actual Beneficiary was another personlentity. It is possible that the order and substance of these notices caused a failure t o comply with Cal. Civ. Code 52923.5. This could indicate that the Notice of Default was not executed under the proper authority of the true Beneficiary of this loan. Cal. Civ. Code section 2924(a)(l)(C) expressly requires that a Notice of Default include "A statement setting forth the nature of each breach actually known t o the beneficiary." Furthermore, the Notice of Compliance attached t o the Notice of Default may not meet the requirements of Cal. Civ. Code

Assignees Ostensibly Signing For Assignors: Additionally,

11% of the time we found evidence t o suggest the prior owner of a subject loan may not have signed the Assignment and that instead the assignee signed also as assignor. This is suspected because the name of the person that signed the Assignment as assignor was verified t o be an employee of the entity claiming t o be the current Beneficiary. (Note that this differs from the topic examined immediately above. Above, the Substitution appears t o be executed by the

52923.5 because that statute requires the actual Beneficiary o f the loan t o attempt t o discuss alternatives t o foreclosure with the Borrower. It should be noted that while the new Beneficiary came t o light late in the foreclosure process, the new Beneficiary may have purchased the loan years before the Assignment was recorded.

noncompliance does not affect the title to the foreclosed property, as the Legislature did nothing t o affect the rule regarding foreclosure sales as final. Therefore, if the property is sold t o a bona fide purchaser for value, there is a significant chance that the homeowner will have waived this defect and lose the property.g

Before commencing the foreclosure process, California requires the recordation of a Notice of Default i n the county in which the property is located. Importantly, a lender is not required t o record a Notice of Default simply because one or more payments are not met. In fact, a lender may decide not t o record the Notice of Default until after a loan is i n substantial default-sometimes six months or more past due. However, a Notice of Default must be filed t o set California's non-judicial foreclosure process i n motion. Pursuant t o Cal. Civ. Code $2923.5, lenders are required t o first contact the borrower "in person or by telephone" t o "assess the borrower's financial situation and explore options for the borrower t o avoid foreclosure," thirty (30)days prior t o recording a Notice o f Default against a property. We found that 6% of the foreclosures did not comply with Cal. Civ. Code 52923.5 because no affidavit attesting t o compliance was file.

In most instances, the original Beneficiary will substitute another trustee t o handle the foreclosure under a Substitution of Trustee. Substitute trustees are typically firms that specialize in default servicing needs and foreclosure processing. Where there is a successor Trustee, there can be no valid non-judicial foreclosure where the trustee under the original deed of trust is not properly substituted with a "recorded document. To avoid confusion and litigation, there cannot be a t any given time more than one person with the power t o conduct a sale under a Deed of Trust. Therefore, failure t o execute or record a Substitution of Trustee is a substantial defect and impacts a right afforded to borrowers t o know whom the Trustee is that will sell their property a t a foreclosure sale. As such, the sale may be void. While we observed a meaningful number of issues relating t o Substitutions of Trustee, we focused on four topics: invalid Substitutions subsequent t o the Notice of Default, Substitutions recorded subsequent t o the filing of the Notice of Trustee Sale, Substitutions executed by an entity other than the Beneficiary and other suspicious executions.

52923.5 was enacted i n 2008 t o encourage communication between lenders and borrowers prior t o commencement of nonjudicial foreclosure. The extent of the private right of action for non-compliance is limited t o obtaining a postponement of an impending foreclosure t o permit the lender t o comply with the statute. In cases where a foreclosure sale has already been held,

Mabry v. The Superior Court of Orange County, No. 6042911(June 2,2010)

9 See

Overall, 85% of the subject loans contained one or more exceptions relating t o these four topics.
A discussion of the four topics and our findings are set forth below. The percentages highlighted in the shaded boxes indicate the exception rate for each topic.

Invalid Substitutions After The Notice Of Defauk: In 18% of the subject loans the Substitution of Trustee was not executed in compliance with Cal. Civ. Code 52934a therefore the Substitution and any document filed by the new Trustee may be invalid. The Substitution of Trustee was recorded after the Notice of Default was recorded, but the required Declaration of Mailing was not included as requ~red Cal. by Civ. Code 52934a (b) and (c). The Substitution of Trustee is defective and, therefore, any documents signed by the new Trustee lack proper authority and any sale of the underlying property may be void. It's worth noting that we are not presuming that the Substitution was never actually mailed t o the homeowner; rather, we are concluding that a valid Substitution of Trustee was not effectuated because the statutory requirements were not met.

Substitution is Recorded Subsequent To The Filing 9 The Notice Of Trustee Sole: We found that 3% of the time the Substitution of Trustee was recorded after the Notice of Trustee's Sale was recorded. Such action is a violation of Cal. Civ. Code 52934a and may invalidate the foreclosure documents filed by the new Trustee. Cal. Civ. Code 52934a requires that only the original trustee or a properly substituted trustee has the power t o file a Notice o f Trustee's Sale and actually sell a property at a Trustee's sale. Under this statutory provision, the Substitution of Trustee must be filed prior t o or currently with the Notice of Trustee's Sale. If a Substitution of Trustee is never properly filed in the County Records office, then the current purported Trustee may not have the authority t o foreclose on the subject property. An incorrect Substitution of Trustee or failure t o file a Substitution of Trustee could invalidate the foreclosure process. While there is a relatively small exception rate associated with this topic, such violations in combination with exceptions elsewhere suggest the possibility of fraud and should be investigated accordingly. Substitution Executed By An Entity Other Than The Beneficory: For 85% of the subject loans, the Substitution of Trustee was not executed by the Beneficiary of the loan. Therefore, the instrument may be invalid unless it was signed with the express authority of the Beneficiary. Specifically, the original lender or a properly assigned beneficiary did not execute the Substitution of Trustee. Cal. Civ. Code 52934a (a)(l) states that only the current Beneficiary of the loan has the authority t o execute a valid Substitution of Trustee. Therefore, a successor Trustee must be appointed by the original Lender or .. a properly assigned Beneficiary. If the new

Trustee was not appointed by the current Beneficiary, the new trustee does not have the authority t o foreclose on the subject property or execute the statutorily required notices. Careful verification that the entity that executed the Substitution of Trustee is the actual owner of the loan is critical t o a determination of whether the Substitution of Trustee is valid. Other Suspicious Executions of Substitution: In 28% of the subject loans, we found reason to suspect the execution of the Substitution was unauthorized. Specifically, there were questions as t o whether the Substitution of Trustee was signed by a person who i s an actual employee of the entity executing the Substitution. Pursuant t o Cal. Civ. Code 52934a (a)(l), a Substitution of Trustee may only be validly executed by the Beneficiaries under the Deed of Trust or their successors in interest. This suggests that an employee or agent of a duly authorized company purporting t o execute the Substitution of Trustee must actually sign the document. In these cases, the individuals signing the Substitutions of Trustee were not actual employees of the companies purporting t o execute the Substitution. This information was verified through a database with the names of employees of several Trustee companies that frequently sign foreclosure documents. The entity that executed the Substitution may claim that it acted as the agent of the Lender or Beneficiary. However, if this is not the case (as has frequently been shown), any unauthorized execution may invalidate the Notice of Default and Notice of Trustee's Sale.

Trustee's Sale can be recorded three (3) months after recording the Notice of Default. The trustee sale date must be no earlier than 20 days after Notice of Trustees Sale is recorded. While we observed a meaningful number of issues relating t o the Notice of Trustee's Sale, we focused on three topics: early filing of NOTS, early actual or planned sale and the NOTS not executed by authorized Trustee. Overall, 42% of the subject loans contained one or more exceptions relating t o these three topics.

A discussion of the three topics and our

findings are set forth below. The percentages highlighted in the shaded boxes indicate the exception rate for each topic. Early Filing of NOTS: 2% of the time the Notice of Trustee's Sale was not filed in compliance with Cal. Civ. Code 52924 because three months did not elapse since the Notice of Default was recorded. The Notice of Trustee's sale was recorded less than three months after the Notice of Default was recorded i n the official County Records. Failure of the trustee t o give the homeowner the statutorily required time t o cure the default is a violation of the homeowner's due

The Notice of Trustee's Sale (NOTS) serves as public notice that the auction of the property will be taking place. The Notice of

process rights. Generally, absent any other wrongdoing, the practical consequence of this violation is t o delay the foreclosure proceedings until all notices are properly filed and timing requirements met. Early Actual o r Planned Sale: In 10% of the subject loans, the actual or planned sale of the property was scheduled less than 20 days after the Notice of Trustee's Sale was recorded. A sale of the property by the Trustee may not occur until twenty days after the Notice of Trustee's Sale is executed and given t o the homeowner. In the case of the affected loans, the Cal. Civ. Code 52924(f) notification requirements were not met and/or the Trustee did not wait until twenty days after the Notice of Trustee's Sale was recorded t o sell the property. Noncompliance with the timing requirement may invalidate the foreclosure sale or delay the sale. Failure of the Trustee t o give the homeowner the full 20 days t o respond t o the notice of sale is a violation of the homeowner's due process rights. n o t executed by authorized Trustee: 34% of the time the original Trustee or a properly substituted Trustee did not execute the Notice of Trustee's Sale. Therefore, the Notice of Trustee's Sale was not executed by the proper Trustee. This should void the Notice and any Trustee's Sale by that entity. The Deed of Trust and California foreclosure statutes give exclusive power t o the original Trustee or a properly substituted Trustee t o file a Notice of Trustee's sale and sell the property at a Trustee's sale (see Section 5.3). Because the authorized Trustee did not execute the Notice of Trustee's Sale, the Trustee's sale may be void.
NOTS

Charges that some of the largest mortgage servicers are engaged i n fraudulent practices continue be made. These practices include: fabricating documents that should have been signed years ago and submitting them as evidence t o foreclose on homeowners, back-dating documents and robo-signing (using fake signatures t o power through foreclosure documents).
It is sometimes difficult t o prove fraudulent practices with certainty. However, by reviewing documents and signatures against public and proprietary databases, we were able to identify numerous specific instances potential abusive practices. We refer t o these instances as "Suspicious Activity."

While we observed a meaningful number of issues relating t o Suspicious Activity, we focused on three topics: "strangers" t o the deed of trust purporting t o be Beneficiaries, back-dating of documents and incorrectly executed documents. Overall, 82% of the subject loans contained one or more exceptions relating to these three topics.

A discussion of the three topics and our findings are set forth below. The percentages highlighted in the shaded

boxes indicate the exception rate for each topic.

Back-Doting Of Documents: We found evidence in 59% of the subject loans that

one or more of the foreclosure documents recorded against the subject property were back-dated (i.e. there is a time discrepancy between the document date and the notary's date or the recording date). Creating a false date of signature is a potentially serious issue as many of these documents carry penalties for perjury or other violations of California's Penal Code. It should be noted that there may have been a legitimate reason for the discrepancy between the document date and the recording date, such as the document was properly executed but mishandled ~ r i otr recordation. o

"Stmngers" to the Deed of Trust Purporting to Be

Beneficiaries: For 45% of the subject loans, the property securing a loan was sold at auction t o an entity that is claiming t o be the Beneficiary of the Deed of Trust when that entity is not the original Beneficiary and either (1)no Assignment of the Deed of Trust was ever recorded granting a beneficial interest t o that entity or (2) such assignment was recorded after such sale. In other words, a "stranger" t o the Deed of Trust purported t o be the foreclosing Beneficiary of the subject property and was granted ownership of said property at the Trustee's Sale. This entity was not the original Beneficiary of the Deed of Trust and no assignment of the Deed of Trust has been recorded assigning the beneficial interests of the Deed of Trust. This is an issue because such entities do not convey any money for the subject property, but instead made a credit bid at the auction. The California foreclosure statutes state that only the Beneficiary of the Deed of Trust can make a credit bid at a foreclosure auction. Without proof of the ownership of the beneficial interests in the Deed of Trust, the entity that was granted ownership of the subject property may not have good title t o the property and the Trustee's Sale t o this unauthorized "stranger" may be invalid. The fact that an Assignment of the Deed of Trust was never recorded could indicate that the chain o f title for such loans cannot be established. Further, only foreclosing beneficiaries have the right t o be exempt from the payment of transfer taxes charged by government agencies. If the foreclosing party was not, i n fact, the foreclosing beneficiary then the transaction may involve the unlawful evasion o f taxes.

Incorrect Execution of One or More Documents: In 10% of

the subject loans we found instances where one or more of the foreclosure documents were incorrectly executed for reasons other than those already discussed above. A natural person must sign each document recorded i n the foreclosure process, including all Assignments, Substitutions of Trustee, the Notice of Default and the Notice of Trustee Sale. Documents not bearing signatures of natural persons may be invalid.

The Mortgage Electronic Registration System (MERS) is a private corporation that tracks the ownership interests and servicing rights i n mortgage loans, allowing the parties t o the securitization process (described in Appendix A) t o buy and sell the loans without having t o record transfers with the county. Mortgage Electronic Registration Systems, Inc. and MERSCORP, Inc. were created by Fannie Mae. Freddie Mac, Ginnie Mae, the Mortgage Bankers Association of America

and large mortgage banks t o provide an electronic registry for tracking ownership interests and servicing of mortgage loans. MERS played a unique role during the advent and subsequent boom of the securitization market for residential mortgage loans. MERS members can sell mortgage loans without having t o record each transfer i n county offices thus eliminating the need for frequent recorded assignments of mortgages and deeds o f trust. MERS asserts t o be the owner (and the owners agent) of the security interest indicated by trust deed and registers assignments of beneficial interests through its system. MERS maintains that by eliminating the need to file assignments in the County Records it lowers costs for lenders and consumers by reducing county recording fee expenses resulting from real estate transfers. MERS further maintains that it provides a central source of information and tracking for mortgage loans, although a transfer between t w o MERS members is effectively unknown t o those outside the MERS system. The scope of this segment of o'ur investigation involves the disclosure of the investor (Beneficiaw) as named in the MERS system versus the investor (Beneficiary) information as named on the Trustee's Deeds upon Sale and/or Assignments of Deeds of Trust that have been recorded in the San Francisco County Recorder's Office. A Trustee's Deed Upon Sale must name a foreclosing beneficiary, who is the grantee of the beneficial interest under the Deed of Trust. We compared this information t o the investor information indicated in the MERS system. All entities that did not match the MERS database were identified as conflicts.

The foreclosing beneficiaries as named in the Trustee Deeds were either entered as a "wildcard" grantee (that is a foreclosing beneficiary grantee whereby there was no assignment to that entity) or the foreclosing beneficiary grantee was named subsequent t o a sale by an assignment. In either case, if this entity was different than the investor as named in the MERS database a conflict was tallied.

Investor information was available from the MERS database on 192 of the 382 subject loans. The investigation resulted i n 112 loans whereby the beneficiary as entered on the Trustee's Deed upon Sale conflicted with the investor information present on the MERS database. This is a 58% failure rate. In addition to investigating conflicts between MERS and the County Records, we also analyzed the MERS-registered loans separately from the Non-MERS loans across all Subject Areas (excluding MERS Conflicts, which of course only includes MERS loans). As Figure 5.6-8illustrates, MERS-registered loans had a higher exception rate in each Subject Area.

What is at stake here is more than merely fairness and minimal due process. Foreclosures impact not only homeowners but also entire communities and housing markets. The integrity of California's record title system i s also at stake because the validity of title for subsequent purchasers is dependent o n those that precede it. The mortgage industry, for its part, asserts it is taking vigorous steps to work at its shortcomings. The paradox i s that the foreclosure crisis has been caused by their successes as much as their failures. During the boom, poor underwriting and documentation standards made possible the blistering rate of originations and securitizations. While it invested heavily i n production, the mortgage industry did not apply commensurate resource and ingenuity to the quality control and servicing function. Consequently, outmoded infrastructure and incomplete, or missing, loan documentation made it infeasible t o carry out large-scale foreclosures. As regards the current crisis, it is difficult t o imagine how the industry can costeffectively solve these problems ex post facto. Going forward, however, much can be done t o improve the entire mortgage loan value chain i n order t o mitigate the potential for these failures t o recur i n the future. So far as public policy is concerned, supervisory m d enforcement activity will likely increase until the industry can demonstrate the weaknesses and deficiencies in i t s foreclosure practices have been corrected. But, here too, there is much looking t o be had i n the mirror. California's real estate laws were designed t o address a far simpler, much different market. The mortgage industry has since seen remarkable

As always, it is important to keep in mind that correlation does not imply causation. Indeed, there are many possible explanations for the correlation between a loan's exception rates and whether it is MERS-registered, Securitization practices may be a significant causative variable explaining these results. in general, MERS loans are more likely t o be securitized. Indeed, facilitating the multiple sales and assignments required by the securitization process is a primary objective of MERS. As Appendix A shows, securitization involves multiple transactions among multiple parties, creating more opportunities for error and introducing moral hazard among various parties with different interests. On the other hand, loans originated for a lender's portfolio do not present the same issues. Another possible explanation is that beneficiaries relying on the County Records, as opposed to the private MERS registry, are more likely t o ensure that all legal instruments are valid, executed and retained.

. ,

. .. . . . . . . . . . .. .. . .. :. .. . . . . . ... :. ..

If there is one lesson to take away from this report it is that, with so many homes being foreclosed and with so little oversight, California's foreclosure process appears utterly broken.

innovation. Considering the extent and consequence of the issues, perhaps it is time for the legislature t o be similarly innovative. Ensuring clear chains of title and the integrity of California's record title system are essential t o the recovery and stabilization of the state's housing market. Similarly, California's hoary statutory foreclosure process is complicated by outmoded assumptions and problematic ambiguities. It is in the best interest of allthe mortgage industry, securities investors, homeowners and communities-to modernize California's real estate laws so that these issues are more effectively addressed.
It is not yet clear that the underlying problems that made possible the catastrophic failures and tragedies wrought by the foreclosure crisis have been solved. On this will depend the chances of a recovered mortgage market and a salvaging of the American Dream.

It is important to have a general familiarity with mortgage securitization i n order t o understand the foreclosure process. Securitization involves a series o f conveyances o f the note evidencing the residential loan and assignment of the mortgage or trust deed securing it. Therefore, chain of title and beneficial interest issues frequently turn on the securitization trajectories.
Securitization is the process pooling loans into "mortgage-backed securities" or "MBS'' for sale t o investors. MBS is an investment instrument backed b y an undivided interest in a pool of mortgages or trust deeds. Income from the underlying mortgages is used t o pay interest and principal on the securities. Figure A below is a simplified schematic depicting the general securitization process and some of the parties involved.

The process begins with Originators, which are the lenders (such as banks or finance companies) that initially make the loans t o homeowners. Sponsor/Sellers (or "sponsors") purchase these loans from one o r more Originators t o form the pool of assets t o be securitized. (Most large A Depositor creates a financial institutions are both Originators and Sponsor/Sellers.) Securitization Trust, a special-purpose entity, for the securitized transaction. The depositor acquires the pooled assets from the Sponsor/Seller and in turn deposits them into the Securitization Trust. An Issuer acquires the Securitization Trust and issues certificates t o eventually be sold to investors. However, the Issuer does not directly offer the certificates for

sale t o the investors. Instead, the Issuer conveys the certificate t o the Depositor i n exchange for the pooled assets. An Underwriter, usually an investment bank, purchases all o f the certificates from the Depositor with the responsibility of offering t o them for sale t o the ultimate investors. What is first important t o understand is that t o effect the securitization process both the note and trust deed (the security interest) must be assigned from the Originator t o the Sponsor/Seller, then from the Sponsor/Seller t o the Depositor and, finally, from the Depositor t o the Securitization Trust. Each assignee, up until it makes an assignment t o the next party along the chain of title, is the beneficiary under the trust deed. There is a break in this chain of title where an assignment is not made or is otherwise invalid. Also worth noting is that almost all Securitization Trusts elect t o be treated as "Real Estate Mortgage Investment Trusts" or "REMICS" pursuant t o the rules and regulations of Sections 860A-F of the Internal Revenue Code ("IRC"). Consequently, a Securitization Trust must adhere to certain strict and absolute requirements involving transfers of assets into the trust. The IRC 860 outlines these requirements, which include a condition that all loans that are stated t o be i n the REMlC trust must be acquired on the startup day of the trust or within three months thereafter. Any other contributions to the REMlC after the startup date or the subsequent 90day window are treated as a "prohibited transaction". A prohibited transaction is catastrophic to a Securitization Trust as it subjects the entire cash flows of the trust t o a minimum 100% tax. For this reason, all parties t o a Securitization Trust must strictly adhere t o the rules of the trust's Pooling and Servicing Agreement and t h e Mortgage Loan Purchase Agreement, especially the guidelines regarding conveyances (and assignments) of the assets.

The City and County of San Francisco's Office of the Assessor-Recorder randomly selected 382 residential mortgage loan transactions (the "subject loans") that resulted in foreclosure sales that occurred from January 2009 through October 2011. The subject loans included all San Francisco zip codes and comprised proportionally more loans in areas that had a higher rate of foreclosure. Over this period, there were 2,405 foreclosure sales. The subject loans thus represent approximately 16% of the total. We reviewed all recorded documents. We likewise collected and reviewed extensive information using other public resources, including federal filings (usually filings with the Securities Exchange Commission). Finally, we utilized public and proprietary databases t o assist in identifying suspicious activity (such as robo-signing or other execution issues). The loan reviews were performed by experienced mortgage and legal professionals, utilizing a proprietary rules-based auditing software developed by attorneys expert i n mortgage origination, securitization and foreclosure laws.

Aequitas Compliance Solutions, Inc. ("Aequitas") is a mortgage regulatory compliance consulting firm specializing in cornpiex litigation, Investigation and internal audit issues. We work with the mortgage industry and its stakeholders providing accurate, thoughtful and customized analysis, which we present in a clear and persuasive manner. Our experts possess a broad range mortgage and regulatory expertise which enable us to serve large and small companies, law firms and regulators.

Lou PQante is a partner at Aequitas where he leads the firm's Regulatory Compliance & Litigation Support practice. Mr. Pizante has more than 15 years experience in mortgage regulation and capital markets. Prior to Aequitas, Mr. Pizante was CEO of Mavent Inc., currently a subsidiary of Eliie Mae, the leading provider of automated regulatory compliance solutions for the mortgage industry. Mr. Pizante has held positions with RBs Securities Inc., Nomura Asset Capital and Goldrnan Sachs. Mr. Pizante is a frequent author and speaker for various mortgage industry publications and conferences. He holds a bachelor's degree from the University of California a t Berkeley and a master's degree and a juris doctorate from New York University. Mr. Pizante is a member of the California Bar Association. He has been recongnized as a Future Leader by the Mortgage Bankers Association.
Mark Rapparport is a partner at Aequitas where he leads the firm's Forensicand Investigative Services practice.
Jay Patterson is the owner of Full Disclosure, LLC. Mr. Patterson is a forensic accountant and credentialed Certified Fraud Examiner. He is recognized nationally as one of only a handful of professionals that provide forensic and investigative accounting, examination and analyses related to the areas of mortgage loan servicing and securitization. He has been designated as an expert witness in several court jurisdictions around the country, developed methodologies that are used in the forensic examination and analyses of mortgage loan servicing and securitization transactions. His clients are attorneys and governmental entities. He is a frequent speaker and instructor at various mortgage servicing and securitization seminars and is currently involved in several landmark mortgage related cases. Mr. Patterson is a native of Texas and currently resides in Hot Springs National Park, Arkansas.

For questions related to the findings presentedherein: Lou Pizante

949.272.3955
lou@aequitasaudit.com

For copies of this paper: Mark Rapparport

949.272.3955
research@aequitasaudit.com

For media inquiries: Barbara Caruso, APR Caruso Communications

714.841.6777
~ar~so~orn@ao1.c0m

Aaron Sheffield is Associate Counsel at Aequitas and is responsible for audit and quality supervision. Mr. Sheffield holds a bachelors degree from the Univeristy of Kentucky and a juris doctorate from Pepperdine University School of Law. The authors would like to thank Phil Ting, Benjamin Weber and Walter Hockettfor their excellent assistance.

O 2012Acquitas Compliance Solutions Inc. All Rights Reserved.

4 5 6

Regina J. McClendon (SBN: 184669) rmcclendon~lockelord.com Daniel A. Solitro (SBN: 243908) dsolitro@lockelord.com LOCKE LORD LLP 300 South Grand Avenue, Suite 2600 Los Angeles, California 90071 Telephone: 213.485.1500 Facsimile: 213.485.1200 Attorneys for Defendants MGC MORTGAGE, INC.; LPP MORTGAGE LTD, and LOAN ACQUISITION CORPORATION

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SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SANTA BARBARA

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ANACAPA DIVISION l1 l2 DAVID W. GATES, Trustee for the DAVID W. ) CASE NO. 1384851 GATES Tmst dated August 5 , 1996, ) 13 ) Honorable Colleen K. Sterne Plaintiff, 1 14 ) 15 l6
VS.

11

NOTICE OF RULING

=;

MGC Mortgage, Inc., Texas Corporation 17 LPP Mortgage Ltd., LP, Texas Corporation Loan Acquisition Corporation, Texas Corporation 18 Cal-Western Reconveyance Cornoration. Texas Corporation DB Structured products, ~nc., Delaware 19 Corporation Deutsche Bank National Tmst ~ o m ~ aas trustee Washington Mutual Bank, a n~, national banking association Wamu Asset 2,0 21 Acceptance Corporation, SPV vehicle bank Washington Mutual Mortgage Securities 22 Corporation, bank JP Morgan Chase Bank, National Association, a bank DOES 1 through 50, inclusive, 23 Defendants.

1 1
) )

I
j
1
) ) ) )
I

1
) Complaint Filed: February 1,2012

NOTICE OF RULMG David W Gates, Trustee v. MGC Mortgage, Inc,, et al., Case No. 138485 1

TO ALL PARTIES HEREIN AND TO THEIR RESPECTIVE ATTORNEYS OF SCORD: PLEASE TAKE NOTICE that on March 12,2012, in Department 5 of the above entitled
:ourt, the Hon. Colleen K. Sterne presiding, called for hearing the Order to Show Cause re: Issuance f Preliminary Injunction. Daniel A. Solitro of Locke Lord LLP appeared on behalf of defendants IGC Mortgage, Inc., LPP Mortgage Ltd., and Loan Acquisition Corporation (collectively, Defendants"). Nancy Duffy McCarron appeared on behalf of plaintiff David W. Gates ("Plaintiff')

The Court issued the following rulings:

(1) The Court denied Plaintiffs application for issuance of a preliminary injunction and

ischarged the order to show cause and dissolved the temporary restraining order. (2)
(3)

The Court adopted its tentative ruling, attached hereto as Exhibit 1. The Court denied Plaintiffs request for a stay of pending any appeal by Plaintiff of

ie Court's order. (4) Defendants' counsel to give notice.

)ated: March 13,2012

Respectfully submitted, LOCKE LORD LLP

Regina J. McClendon ~ & i e A. Solitro l Attorneys for Defendants MGC MORTGAGE, INC.; LPP MORTGAGE LTD. and LOAN ACQUISITION CORPORATION

2 NOTICE OF RULING Duvid W. Gales, Trustee v. MGC Mortgage, Inc.. el a/., Case No. I38485 1

20, 5 a '

EXHIBIT 1

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CIVIL LAW & MOTION

David Gates vs MGC Mortgage Inc

I
Cas No:

Hearing Date:

1384851 Mon Mar 12,2012 9:30

Nature of Proceedings: OSC re Preliminary Injunction Santa Barbara County Superior Court Department 5 Judge Colleen K. Steme Tentative Ruling March 12,2012

Case:

David W. Gates, etc., v. MGC Mortgage, Inc., et al.,, Case No. 1384851 Order to Show Cause re Issuance of Preliminary Injunction

Mattes.

Tentative Ruling: The application of plaintiff David W. Gates for issuance of a preliminary injunction is denied. The order to show cause is discharged and the temporary restraining order, filed February 3,2012, is dissolved. Discussion:

This is an order to show cause following issuance of a temporary restraining order to enjoin
the nonjudicial foreclosure of plaintiffs residence. Plaintiff David W. Gates, trustee of the David W. Gates Trust dated August 5, 1996, ("Gates") obtained a loan in the amount of $1,142,302.00 secured by a deed of trust on his residence at 1200 Palomino Rd., Simta Barbara, California ("the Property"). (Defendants' Request for Judicial Notice ["DRJN], exhibit A, at p. 1 [deed of hust recorded on Sept. 29, 20051.) The deed of trust lists Washington Mutual Bank as the lender and beneficiary of the deed of trust; the trustee is listed as California Reconveyance Company. (Ibid.) At the time the loan was taken, the Property was Gates's second home. @RJN, exhibit A, "Second Home Rider.") (Note: Opposing Defendants have not complied with Rules of Court, rule 3.11 10(c) by failing to paginate its exhibits and with rule 3.11 13(k) by failing to refer to exhibits by specific page number. This combined failure forces the court to search through multipage exhibits to find language referenced in the opposition. The court expects compliance with the d e s of the court in the future. See Rules of Court, rule 2.30.)

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The Property was destroyed in the Jesusita fire on May 6,2009. (Gates decl., 7 3.) Gates submitted a claim to Farmers Fire Exchange ("Farmers"), which approved the claim but 4.) stated that Gates had to rebuild before it would issue a pay-out. (Gates decl., 1 Gates lost all rental income from his tenants because there were no rooms to rent. (Ibid.) Gates used cash and credit card debt to buy materials to rebuild. (Gates decl., 7 5.) When the Property was 80% rebuilt, Farmers sent three checks totaling $202,548.64 to Gates payable to Gates and to defendant MGC Mortgage, Inc. ("MGC). (Gates decl., 7 7 & exhibit Fl.) MGC acted as the loan servicer. (Verified Complaint, 7 8.) Gates telephoned MGC; MGC's staff told Gates to mail MGC the checks, MGC would sign off and return the checks to Gates. (Gates decl., 7 8.) Gates mailed the checks to MGC, but MGC did not return the checks and ignored Gates's calls and letters. (Ibid.) Gates exhausted his remaining funds and credit to buy materials and eat. (Gates decl., 7 9.) Gates requested help from his current counsel. (Gates decl., 7 10.) Counsel contacted MGC and convinced MGC to release $1 13,622.96, approximately half of the money sent to them. (Ibid.) Gates used a large anlount of the funds to settle claims against him by his creditors. (Gates decl., 7 11.) MGC kept $88,925.68 stating that Gates must complete the rebuilding before they will release the rest of the proceeds from Farmers. On June 12,2009, an assignment of the deed of trust was recorded assigning Washington Mutual Bank's interest in the deed of trust and note to defendant DB Structured Products, Inc. (DRJN, exhibit B.) This assignment is dated August 30,2006. (Ibid.) Also on June 12, 2009, DB Structured Products, Inc., recorded an assig~lent the deed of trust and note of to defendant LPP Mortgage Ltd. (DRJN, exhibit C.) This assignment states that it is effective August 22,2008, and was executed on March 16,2009. (Ibid.) On August 9,201 1, defendant Cal-Western Reconveyance Company ("Cal-Western") recorded a notice of default stating that the amount in default was $73,351.90 as of August 8,201 1. (DRJN, exhibit D.) The August 9 notice of default states that Cal-Western is tbe original trustee, a duly appointed substitute trustee, or acting as an agent for the trustee or beneficiary under the deed of trust. (Ibid.) On October 13,2011, Cal-Western recorded a rescission of the August 9 notice of default. (DRJN, exhibit E.) Also on October 13, CalWestern recorded a new notice of default stating that the amount in default was $91,754.18 as of October 12,2011. (DRJN, exhibit F.) Like the August 9 notice of default, the October 13 notice of default states that Cal-Western is the original trustee, a duly appointed substitute trustee, or acting as an agent for the trustee or beneficiary under the deed of trust. b bid.) On November 15,2011, a substitution of trustee was recorded substituting Cal-Western for California Reconveyance Company as the trustee under the deed of trust. (DRJN, exhibit G.) On January 17,2012, Cal-Western recorded a notice of trustee's sale for the Property for February 6,2012. (DRJN, exhibit H.) Gates has not made any payments on his loan since December 2010; the amount past due as of February 21,2012, is $121,977.56. (Maloney decl., 7 9.) On February 1,2012, Gates filed his verified complaint in this action. The complaint asserts

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nine causes of action: (1) declaratory and injunctive relief (to enjoin foreclosure and to quiet title), (2) slander of title and conspiracy to slander title, (3) Gaud and conspiracy to defraud, (4) breach of fiduciary duty - constructive Gaud, (5) elder abuse, (6) quasi-contract restitution, (7) quiet title, (8) contract rescission, and (9) accounting. On February 3,2012, Gates applied ex parte to the court for a temporary restraining order to prevent the foreclosure sale. The court granted the temporary restraining order and set this order to show cause re preliminary injunction. Gates's principal argument is that defendants cannot foreclose because they do not possess the original note. (Motion, at p. 2.) Gates argues that article 3 of the Uniform Commercial Code requires proper endorsement of the note in order for a transferee to enforce the note. Gates questions the signatures set forth in defendants' documents and insists that the foreclosing trustee produce the original note to ascertain the actual beneficiary. Because the actual beneficiary of the note is in question, Gates argues that a preliminary injunction is proper. Defendants MGC, LPP Mortgage Ltd. ("LPP"), and Loan Acquisition Corporation ("LAC") have appeared and oppose the issuance of a preliminary injunction. Defendant CalWestern has filed a declaration of non-monetary status. Defendants JPMorgan Chase Bank, N.A., WAMU Asset Acceptance Corporation and Washington Mutual Mortgage Securities Corporation have appeared and demurred, but have not filed opposition to the order to shbw cause. Defendants MGC, LPP and LAC ("Opposing Defendants") argue that Gates is not entitled to a preliminary injunction because (1) Gates is admittedly in default in not paying on the loan as due and has not tendered the amount due, and (2) Gates has not shown a likelihood of success on the merits because the Opposing Defendants have met a11 legal requirements to foreclose. In reply, Gates provides voluminous additional exhibits. In further support of his argument that the original promissory note must be provided, Gates argues that, in addition to various irregularities, two documents in particular submitted by Opposing Defendants are fabricated: (1) The promissory note attached as exhibit 1 to the deposition of Bret Maloney itself; and (2) the allonge attached as the last page to that version of the promissory note. Gates argues that, as a core principle, Opposing Defendants should be prevented "from doing that which ought not to be done." (Reply, at p. 1.) Analysis: Notwithstanding the issuance of the TRO, the burden is on plaintiff, as the party seeking injunctive rdief, to show all elements necessary to support issuance of a preliminary injunction. (O'Connell v. Superior Court (2006) 141 Cal.App.4th 1452, 1481.) A preliminary that the commission injunction is available "[wlhen it appears by the complaint or affidavits or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action." (Code Civ. Proc., 5 526, subd. (a)(2).) "The trial courts consider two interrelated questions in deciding whether to issue a

Tentative Ruling preliminary injunction: 1) are the plaintiffs likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant; and 2) is there a reasonable probability that the plaintiffs will prevail on the merits. [Citations.] '[By] balancing the respective equities of the parties, [the court] concludes that, pending a trial on the merits, the defendant should or that he should not be restrained from exercising the right claimed by him.' [Citations.]" (Robbins v. Superior Court (1985) 38 Cal.3d 199,206.) The first of these two interrelated questions analyzes the relative injury that would be 'caused by granting or denying the preliminary injkction. If the preliminary injunction is denied, Opposing Defendants would not be restmined from moving forward with the trustee's sale. The result of the trustee's sale would be Gates's loss of the Properfy which Gates would not likely be able to recover following success on the merits. If the preliminary injunction is granted, Opposing Defendants would lose the opportunity to conduct the trustee's sale and would lose the use of the proceeds of the trustee's sale during the pendency of the litigation. The loss to Opposing Defendants is the loss of the use of money over time, which is itself secured by the deed of trust. The loss to Gates would be the loss of his Property. The first interrelated question tips in favor of Gates and the issuance of the preliminary injunction. The second of these two interrelated questions addresses the likelihood of Gates prevailing on his claim. In the moving papers, Gates does not focus on any particular cause of action in the complaint, but instead focuses upon the general issue of the validity of the foreclosure because of the asserted problems with the note. As such, this argument best falls under Gates's first cause of action for declaratory relief. The issue before the court in this motion is whether Gates is likely to prevail on the merits, that is, obtain a judicial declaration that a trustee's sale may not be validly conducted. It is important to emphasize that Gates does not dispute that he entered into a loan transaction evidenced by a promissory note he signed and secured by a deed of trust on the Property. (Verified Complaint, 7 23 & exhibit A-5 to A-34.) Opposing Defendants have presented evidence that Gates has not made any payments on his loan since December 2010 and the amount past due as of February 21,2012, is $121,977.56. Gates does not provide evidence either that he is not in default in payment or that he has tendered payment to cure the default. Opposing Defendants seelc to proceed by nonjudicial foreclosure pursuant to the power of sale included in the deed of trust. (Civ. Code, 5 2924.) Opposing Defendants do not bring an action to enforce the note or to obtain a judgment of foreclosure. (See Code Civ. Proc., 5 726, subd. (a).) Consequently, the governing statutes are the foreclosure statutes set forth in Civil Code section 2920 et seq. and the statutes governing enforcement of negotiable instruments set forth in article 3 of the Uniform Commercial Code. "The comprehensive statutory framework established to govern nonjudicial foreclosure sales is intended to be exhaustive." (Moeller v. Lien (1994) 25 Cal.App.4th 822, 834.) None of the foreclosure statutes requires the presentation of the origlnal promissory note to effect a foreclosure. (See, e.g., Civ. Code, 5 2924.) Presentation of the original promissory note is therefore not a requirement for a valid trustee's sale. The first step required for nonjudicial foreclosure is the notice of default. "The trustee,

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mortgagee, or beneficiary, or any of their authorized agents shall first file for record, in the office of the recorder of each county wherein the mortgaged or trust property or some part or parcel thereof is situated, a notice of default." (Civ. Code, 2924, subd. (a)(l).) Consequently, a valid notice of default may be filed by the trustee, mortgagee, beneficiary or any authorized agent. Here, the trustee in the original deed of trust was California Reconveyance Company. According to the recorded documents, the deed of trust and note was assigned to DB Structured Products, Inc., then to LPP. LPP substituted Cal-Western as trustee as recorded on November 15,2011. The operative notice of default was recorded on October 13, 201 1, by Cal-Western and contains the recitation that Cal-Western was acting as the authorized agent of the lender or beneficiaty. Apart from arguing that the documents were fabricated in various ways, Gates provides no persuasive evidence that Cal-Western was not acting as the authorized agent of the beneficiary of the deed of trust in recording the notice of default. On the contrary, the fact that Cal-Western had the requisite information concerning the amounts due in the notice of default indicates that Cal-Western was acting as the authorized agent of the beneficiary of the deed of trust. Gates has not shown a likelihood of obtaining a judicial declaration that the October 13 notice of default was not authorized and validly recorded by Cal-Westem. Gates does not provide evidence that the amount owing as set forth in the October 13 notice of default is incorrect except to argue that the retention of insurance proceeds should have reduced the amount due. Gates points out that $88,925.68 has been retained by MGC. Under the terms of the deed of trust, the lender is entitled to retain the insurance proceeds until repairs have been completed. (DRJN, exhibit A, 7 11.) Gates has not provided persuasive evidence that MGC was not acting consistently with the deed of trust in holding the money for the repayment of repair work as that work was completed. Gates has not shown a likelihood of obtaining a judicial declaration that the notice of default is invalid based upon the amount set forth therein as owing. The court further observes that Gates does not provide evidence that as of the October 13 notice of default Gates was not actually in default of the loan. (Note: Even if the $88,925.68 were to be applied to the outstanding balance, the amount then outstanding was $91,754.18. DRJN, exhibit F.) The next step in the foreclosure process is the recording of a notice of trustee's sale. "[Tlhe mortgagee, trustee, or other person authorized to take the sale shall give notice of sale, stating the time and place thereof, in the manner and for a time not less than that set forth in Section 2924f." (Civ. Code, 5 2924, subd. (a)(3).) The notice of trustee's sale was recorded by-Cal-Western on January 17,2012. At that time, Cal-Western was the trustee of record. Based upon his argument that the note was not validly assigned, Gates argues that the LPP did not have authority to substitute Cal-Western as trustee and therefore Cal-Western did not have authority to record the notice of trustee's sale. The weight of the evidence, however, is that LPP had been assigned the deed of trust and note and therefore had authority to substitute the trustee. Gates has not shown a likelihood of obtaining a judicial declaration that the notice of trustee's sale is invalid. Fundamentally, Gates has not shown that a likelihood of establishing that the underlying

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obligation is substantively invalid and unenforceable. This is not a case where Gates is facing conflicting claims by multiple parties each asserting to be the beneficiary under note and deed of bust. Gates is in default in payment and admits that he is unable to pay the amount outstanding to cure the default. Gates essentially argues that because he does not know with certainty to whom he is in default, foreclosure is improper by anyone. Gates spends much effort arguing that the documents presented by the Opposing Defendants are fabricated. The fabrication claimed, however, is not that Gates did not enter into or obtain the benefits of a secured loan, or that Gates is not in default of the loan by his failure to pay money when due. The fabrication claimed is that the documents were not signed at the right time by the right people. Even so, Gates does not present persuasive evidence that, apart from any technical irregularity, the documentation does not reflect the transaction actually intended by the lender-parties. "An irregularity, even if one has occurred, is not sufficient to invalidate a trustee's sale in the absence of a claim that the irregularity operated to the injury of the owner." (California Trust Co. v. Smead Inv. Co. (1935) 6 Cal.App.2d 432, 435.) Gates has shown no prejudice by any technical defects that may or may not exist in the documentation.

In the moving papers, Gates states that he was not contacted by the lender prior to the notice of default, suggesting that the lender violated Civil Code section 2923.5, subdivision (a)(2): "A mortgagee, beneficiary, or authorized agent shall contact the borrower in person or by telephone in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure." However, "[tlhis section shall apply only to mortgages or deeds of trust recorded from January 1,2003, to December 3 1,2007, inclusive, that are secured by owner-occupied residential real property containing no more than four dwelling units. For purposes of this subdivision, 'owner-occupied' means that the residence is the principal residence of the borrower as indicated to the lender in loan documents." (Civ. Code, $ 2923.5, subd. (i).) The loan documents, including specifically the deed of trust, states that the residence is not the principal residence of Gates, but a second home. By its terms, section 2923.5 therefore does not apply here.
Based upon the evidence presented, the court concludes that Gates is not likely to succeed on the merits of his claim that a nonjudicial foreclosure under the recorded notice of default and notice of trustee's sale is invalid. The court expresser no opinion as to whether Gates's claims for damages or restitution are likely to succeed. In balancing the equities, and considering the totality of the circumstances here, the court concludes that, pending a trial on the merits, the defendant should not be restrained from proceeding with the nonjudicial foreclosure. In reaching this conclusion, the court is mindful of the unfortunate circumstances that have led to Gates's default and of the impact on him of proceeding with foreclosure. On these facts, however, Gates does not provide a substantial claim that the ultimate result of this litigation will prevent foreclosure of the Property. Accordingly, Gates's application for issuance of a preliminary injunction will be denied and the temporary restraining order issued by the court will be dissolved. Evidentiary Issues

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Gates requests that the court take judicial notice of sections of the California Uniform Commercial Code and Evidence Code. The court will grant the request for judicial notice (Evid. Code, 5 451, subd. (a)), but notes that judicial notice is not required for the citation of statutes Opposing Defendants have requested that the court take judicial notice of: (1) the deed of trust recorded September 29,2005 @ R N , exhibit A); (2) the first assignment recorded June 12,2009 (DRJN, exhibit B); (3) the second assignment recorded June 12,2009 (DRJN, exhibit C); (4) the August 9,2010, notice of default (DRJN, exhibit D); (5) the October 13,2011, rescission of the August 9 notice of default (DRJN, exhibit E); (6) the October 13, 201 1, notice of default (DRJN, exhibit F); (7) the substitution of trustee, recorded November 15,2011 (DRJN, exhibit G); and (8) the January 17,20 12, notice of trustee's sale (DRJN, exhibit H). Gates objects to judicial notice as to these documents because the validity of the documents is disputed and the copies are not certified. "Strictly speaking, a court takes judicial notice of facts, not documents. [Citation.] When a court is asked to take judicial notice of a document, the propriety of the court's action depends upon the nature of the facts of which the court takes notice from the document. [F] or example, it was proper for the trial court to take judicial notice of the dates, parties, and legally operative language of a series of recorded documents, but it would have been improper to take judicial notice of the truth of various factual representations made in the documents. [Citations.] Taken together, the decisions . . . establish that a court may take judicial notice of the fact of a document's recordation, the date the document was recorded and executed, the parties to the transaction reflected in a recorded document, and the document's legally operative language, assuming there is no genuine dispute regarding the document's authenticity. From this, the court may deduce and rely upon the legal effect of the recorded document, when that effect is clear from its face." (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256,265.) The documents for which judicial notice is requested are central to the arguments of both by parties and have been discussed and p~offered both parties. The deed of tmst is set forth a part of Gates's verified complaint as part of its exhibit A, at pages A-1 1 to A-34. The first and second assignments recorded June 12,2009, are attached as exhibit D to the &davit of William Paatalo, submitted by Gates in reply. The notice of default is attached as part of exhibit I to the Paatalo declaration and as exhibit H to the reply. The substitution of trustee and notice of trustee's sale is attached as exhibit I to the Paatalo reply affidavit. The court also notes that most of these documents are notarized and presumed authentic. (Evid. Code, 4 1451.) The court will grant the request to take judicial notice of the recorded documents and will consider the legal effect of the recorded documents. However, the court does not take.judicial notice of the truth of facts set forth in the documents. The court overrules objections to the admissibility of these documents, but considers the issues raised by Gates as going to the credibility and weight of the evidence. Gates has also objected to the declaration of Bret Maloney and in particular to the note attached as exhibit 1 thereto. The court overrules objections to the admissibility, but considers the issues raised by Gates as going to the credibility and weight of the evidence

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The memorandum of points and authorities in support of the motion for preliminary injunction begins with the following sentence: "The theme of the case which the court should apply is: NO TICKEE ...NO LAUNDRY!!!" (Motion, at p. 2.) This language is used several more times in the memorandum. While counsel for plaintiff no doubt thought this tag-line clever, this use of racial stereotype language is offensive. (See generally Chen, Petition to U.S. Commission on Civil Rights (1998) 5 Asian L.J. 357 & pp. 368-369.) The court expects that future filings will not contain such offensive language.

02008 Santa Barbara County Superior Court

STATE OF CALIFORNIA COUNTY OF LOS ANGELES

1
)

PROOF OF SERVICE
ss.

I am employed in the County of Los Angeles, State of California. I am over the age of 18 and not a party to the within action. My business address is: 300 South Grand Avenue, Suite 2600, Los Angeles, CA 90071. On March 13,2012,l served the foregoing document described as:

NOTICE OF RULING
on the parties or attorneys for parties in this action who are identified on the attached service list, using the following means of service. (If more than one means of service is checked, the means of service used for each party is indicated on the attached service list). [7 BY PERSONAL SERVICE. I placed -the original or -a N e copy of the foregoing document in sealed envelopes individually addressed to each of the panies on the anached service list, and caused such envelope to be delivered by hand to the offices of each addressee. 1 BY FACSIMILE TRANSMISSION. I caused -the original or- a true copy of the foregoing 7 document to be transmitted to each of the panies on the attached service list at the facsimile machine telephone number as last given by that person on any document which he or she has filed in this action and served upon this office. BY MAIL. I placed -the original or J a true copy of the foregoing document in a sealed enveloped individually addressed to each ofthe parties on the attached service list, and caused each such envelope to be deposited in the mail at 300 South Grand Avenue, Suite 2600, Los Angeles, CA 90071. Each envelope was mailed with postage thereon fully prepaid. 1 am readily familiar with this fum's practice of collection and processing of correspondence for mailing. Under that practice, mail is deposited with the United States Postal Service the same day that it is collected in the ordinary course of business. BY E-MAIL. I caused the foregoing document(s) to be transmitted by e-mail elechonic transmission to the e-mail address on the attached service list as last given by that person on any document which he or she has tiled in this action and served upon this office. BY EXPRESS MAIL. 1 placed -the original or -a true copy of the foregoing document in a sealed enveloped individually addressed to each of the parties on the attached service list, and caused each such envelope to be deposited in the mail at 300 South Grand Avenue, Suite 2600, Los Angeles, CA 90071. Each envelope was mailed with Express Mail postage thereon fully prepaid. I am readily familiar with this firm's practice of collection and processing of correspondence for mailing. Under that practice, mail is deposited with the United States Postal Service the same day that it is collected in the ordinary course of business. a true copy of the foregoing document in a BY FEDERAL EXPRESS. I placed -the original or sealed enveloped or package designated by Federal Express with delivery fees paid or provided for, individually addressed to each of the panies on the attached service list, and caused such envelope or package to be delivered at 300 South Grand Avenue, Suite 2600, Los Angeles, CA 90071, to an authorized courier or driver authorized by Federal Express to receive documents. (State) I declare under penalty of perjury under the laws of the State of California that the foregoing Is bue and correct. (Federal) I declare that I am employed in the office of a member of the bar of this court, at whose direction the service was made. Executed on March 13, 2012, at Los Angeles, California.

4 ;u / , ~ - 0 7
Antoinette Y. Taylor

SERVICE LIST David Gates, Trusteefor the David W. Gates Trust datedAugust 5, 1996 v MGC Mortgage, Inc., et al..

Santa Barbara Superior Court Case No. 1384851 Nancy Duffy McCarron, Esq. LAW OFFICE OF NANCY DUFFY McCARRON 950 Roble Lane Santa Barbara, California 93 103 Telephone: 805.965.3492 Facsimile: 760.345.0019 Email: nanc~duffvsbiiiyahoo.com (*VIA EMAIL) Nicole K. Neff, Esq. WRIGHT FINLAY & ZAK LLP 4665 MacArthur Court, Suite 280 Newport Beach, California 92660 Telephone: 949.477.5050, ext. 1015 Facsimile: 949.608.9142 Email: nneff@,wihtleeal.net Mark L. Block, Esq. Laurie H. Selkowitz, Esq. WARGO & FRENCH LLP 1888 Century Park East, Suite 1520 Los Angeles, California 90067 Telephone: 3 10.853.6300 Facsimile: 3 10.853.6333 Attorney for Plaintiff: DAVID W. GATES, TRUSTEE FOR THE DAVID W. GATES TRUST DATED AUGUST 5,1996

Anorneys for Defendant: CAL WESTERN RECONVEYANCE CORPORATION

Attorneys for Defendants: JPMORGAN CHASE BANK, N.A., individually and as acquirer of certain assets and liabilities of Washington Mutual Bank from the Federal Deposit Insurance Corporation as Receiver; WAMU ASSET ACCEPTANCE CORPORATION; and WASHINGTON MUTUAL MORTGAGE SECURITIES CORPORATION