Fraud fines not enough, Specter says
Share with others:
WASHINGTON -- Capitalizing on widespread public revulsion for Wall Street traders who sold customers elaborate financial products they had no confidence in, Sen. Arlen Specter is pushing for more criminal penalties for financial crimes as part of the financial reform bill.
Mr. Specter, a Pennsylvania Democrat, on Tuesday introduced an amendment that would give any registered broker or dealer a "fiduciary duty" to act in their customers' best interest -- with violation of that duty punishable by as much as 25 years in prison.
Meanwhile, Senate Democrats agreed Tuesday to jettison a $50 billion fund that Republicans attacked repeatedly as a perpetual Wall Street bailout-in-waiting, according to officials in both parties, clearing one of the key obstacles to approval of tougher federal controls over the financial industry.
While a formal announcement was held up pending a review by key lawmakers and the Obama administration, the emerging agreement was designed to assure that any taxpayer costs arising from the liquidation of big firms in the future would be temporary and on a case-by-case basis.
Mr. Specter, as chairman of the Judiciary subcommittee on crime and drugs, also held a hearing Tuesday to attack the issue of fiduciary duty. The hearing lacked the expletive-filled drama of the 11-hour grilling of Goldman Sachs executives last week, but the Goldman trades were a prominent theme.
In a civil fraud case brought by the Securities and Exchange Commission, Goldman is accused of defrauding clients by selling them investments the firm was betting against. Mr. Specter said he would like to criminalize such behavior, with penalties that bite.
"I have long believed that it is insufficient to have fines for fraud," Mr. Specter said. "For corporate fraud, if you have a fine it is calculated as part of doing business."
Most of the panelists cheered Mr. Specter's aims.
"The fundamental fairness of our society is at issue when we look at criminal law and business cases," said Damon Silvers, an attorney with the AFL-CIO. "There is a fundamental perception that a small number of wealthy and powerful Americans did vast damage with little personal consequence."
Barbara Roper, of the Consumer Federation of America, said Goldman "had a moral duty to [protect investors] but I don't believe they had a legal duty because of a gap in our current laws."
But the man who led the federal probe of Enron, former federal prosecutor Andrew Weissman, warned against an over-broad knee-jerk response to the financial crisis -- and the Goldman case specifically. Now a private defense attorney, Mr. Weissman said current mail and wire fraud law is sufficient to tackle most of the discussed abuses.
"Putting yet another law on the books might sound good to the public in that the Congress is interested in making sure something happens, but it won't assure that someone actually implements it," Mr. Weissman said.
"Goldman -- assuming there is wrongdoing there -- can happen again, assuming the SEC isn't vigilant about the tools they have."
George Mason University law professor J.W. Verret, a former defense attorney specializing in SEC cases, said any requirement that traders act in their clients' best interests could be interpreted to punish all sorts of failed investments by authorities acting with the benefit of hindsight. Traders would respond, he said, by becoming overly cautious.
"This type of Monday morning quarterbacking would chill securities markets in a significant way at a time when they are already under severe strain," Mr. Verret said.
Mr. Specter, though, pressed the point that stronger laws are needed to force traders to disclose any conflicts of interest, as required by his amendment, and insisted jail time would be a much more effective deterrent.
Lanny Breuer, the head of the criminal division of the Department of Justice, testified about heightened white-collar crime enforcement at the department that has resulted in jail sentences -- but Mr. Specter noted that most of the cited cases were not related to Wall Street trading.
Sens. Ted Kaufman, D-Del., who is co-sponsoring the fiduciary duty amendment, Sheldon Whitehouse, D-R.I., and Amy Klobuchar, D-Minn., also attended the hearing and expressed support for Mr. Specter's goals. No Republicans appeared.
During a break in the hearing, Mr. Specter said he is confident the amendment will pass.
"I think the prospects are pretty good given the temper of the times, given what has happened," he said. "I think there's a lot of public outrage."
Mr. Specter is in the midst of a difficult primary election fight with Rep. Joe Sestak, D-Delaware County, who held an event in Philadelphia on Tuesday with people who have been hit hard by the financial crisis.
Mr. Specter, a Republican until a year ago, was part of the GOP establishment that supported the deregulation of the financial industry, Mr. Sestak said.
"For the untold numbers of Pennsylvanians who lost their jobs or had their savings wiped out by the financial crisis, Arlen Specter's latest reversal is too little, too late," Mr. Sestak said in a statement. "Specter supported every major policy that caused this recession and cast key votes for Wall Street deregulation that allowed banks, like Goldman Sachs, [the] opportunity to profit off our hardship."
First Published May 5, 2010 12:00 am