A COMPLIANCE OFFICER’S MUSE—

By
Benson Weintraub, Esq.
wall_street.jpgFORT LAUDERDALE, FL (September 15, 2008) In post-Depression era history, the federal government has yielded to systemic extensions of credit through extortionate means, most recently in bailing out Fannie and Freddie, the first of many economic casualties of the sub-prime mortgage crisis.
The impact upon markets and investors associated with the failure of Enron and WorldCom resulted in an expression of American political condemnation culminating in Sarbanes-Oxley and the new corporate controls, including radical expansion of corporate compliance programs.
The anecdotal reduction of securities fraud correlated with compliance programs over the past fifteen years—and amendments to the federal Corporate Sentencing Guidelines—should have significantly deterred offenders having prompted Sarbanes-Oxley, including Enron, WorldCom, Adelphia. Still, in it’s wake, massive white collar frauds are perpetrated in the health care industry, accounting profession, and financial markets.
The unanticipated failure of the loans endorsed by Fannie and Freddie Mac triggered the latest institutional scam; this time under the nose of regulators, compliance officers, audit committees, oversight committees; and which brings the imprimatur of government to the equation by it’s guaranty on the defaulted mortgages, past, present, and future.
The market has always been inundated with ordinary financial scams perpetrated by individuals by deceiving investors with respect to “prime bank instruments” supported by “letters of credit” from the “banks.”. United States v. Polichemi, 219 F.3d 698 (7th Cir. 2000)(defendants convicted of money laundering). The provisional success of this conspiracy was facilitated by a minor official’s regulatory assistance, conduct which was also criminalized.
Yet when more conventional looking institutional investors driven by the same motives invent a similar instrument labeled “sub prime mortgages”—and get the imprimatur of the government through its support, not previous ownership—the offenders not only get a free ride but the domino effect on the lack of confidence in the markets mitigate institutional losses for utilitarian, not moral reasons.
The sub-prime mortgage” scam, reminiscent of the 1980’s bailout of the Savings and Loan Industry, then Bear Stearns which begets the fall of Lehman Brothers, now seeking protection and reorganization of investment in US Bankruptcy Court. Confidence on Wall Street has never been lower with the impending takeover of Merrill Lynch by Bank of America.
As business continues as usual, well, where were the compliance officers?