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Financially Respectable Crimes of Wall Street

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After the whistle-blowing Congressional testimony of SEC attorney Darcy Flynn in the summer of 2011, it became well known that “the nation’s top financial police [had illegally] destroyed more than a decade’s worth of intelligence they had gathered on some of Wall Street’s most egregious offenders,” including insider trading and securities fraud investigations involving such Wall Street heavies as Goldman Sachs, Lehman Brothers, AIG, Deutsche Bank, and many others.[i] All totaled there were the records of some 9,000 investigations of wrongdoing or “Matters Under Inquiry” (MUI) since 1993 that were “deep sixed.” [buried at sea, ed.] There were also a cozy number of cases involving high-profile firms that were never graduated into full-blown criminal investigations because of what has been referred to as an “obstruction of justice” by misbehaving attorneys caught up in the revolving personnel doors of regulation and Wall Street.

The problem of controlling securities fraud goes far beyond revolving personnel doors that are not really conflicts of interests per se. As Matt Taibbi of Rolling Stone wrote during summer 2011, the “SEC could have placed federal agents on every corner of lower Manhattan throughout the past decade, and it might not have put a dent in the massive wave of corruption and fraud that left the economy in flames three years ago.”[ii] In the United States, the noncontrol of high stakes securities fraud or the lack of state-legal criminalization of security fraud has a very rich tradition.

Throughout U.S. history the illegal use of public money by economic and political elites for personal gain without any penal sanctions has been the most common sanction, if and when, the state decides to intervene. The fraudulent use of public money can be traced back to an “insider trading” arrangement that involved the nation’s first Secretary of the Treasury, Alexander Hamilton. This financial corruption revolved around the use of federal funds that enriched politicians and close friends of Hamilton. The non-prosecution of the facts against Hamilton and his associates may have established a precedent of sorts. That is: crimes committed by the financially powerful may not really be crimes even when they obviously are, as in the case of the Wall Street meltdown of 2007-08.

In criminological and socio-legal circles alike, the absence of law or social control as an explanation for a variety of crimes has a long tradition.[iii] At the same time, sociologists and psychologists have used social control for more than a century to explain the conduct of people in organizations, neighborhoods, public spaces, and face-to-face encounters. Social control is ubiquitous and can be found wherever and whenever “people hold each other to standards, explicitly or implicitly, consciously or not; on the street, in prisons, at home, at a party.” Importantly, social control also “divides people into those who are respectable and those who are not; it disgraces some, but protects the reputations of other.”[iv]

In the legal process of social control criminality and respectability are both defined at the same time. Donald Black contends that social respectability helps to explain the behavior of the law. Accordingly, “to be subject to law is, in general, more unrespectable than to be subject to other kinds of social control. To be subject to criminal law is especially unrespectable.”[v] As one of Black’s legal principles maintains, when all else is constant, the amount of law varies inversely with the respectability of the offender’s socioeconomic standing.

These characteristics of the behavior of law and of social control beg a couple of related questions: “how far will agents of law enforcement and/or academia go to ‘whitewash’ the financial crimes of Wall Street in order to protect those fraud minimalist reputations of some of the most ‘successful’ bankers in the world?” and “when it comes to financial securities control who exactly is regulating whom?”

A little history - of securities frauds in the USA

At the time of the Constitutional Convention in 1787, national and state governmental debts totaled $80 million. Forty of the fifty-five delegates held debt certificates issued by the federal and state governments during and following the Revolutionary War. When issued these certificates were worth $5,000 or more, but their value had steadily declined as the new nation became embroiled in financial chaos under the Articles of Confederation.[vi] Other delegates like Benjamin Franklin who had “loaned the national government $3,000 at 6 percent interest, noted that such loan certificates had fallen drastically in value and hoped and believed that their value would ‘mend when our new Constitution is adopted’.”[vii]

Under the circumstances, Hamilton decided that the new federal government would honor its debt and make good on what had become essentially worthless paper. The Secretary of Treasury had also agreed “to pay in full people owning the certificates at the time of redemption, not necessarily the original owners. Word of this policy was leaked to Hamilton’s friends and in-laws, all of who began buying up certificates at a record pace.”[viii] By the time the policy was officially announced on January 14, 1790, the certificates were almost totally owned by speculators.

As white-collar criminologist David Simon underscores:

"Hamilton’s assistant, William Duer, ignored all charges of conflict of interest and engaged in numerous shady schemes. Besides benefitting from insider information about the debt certificates (he bought as many as he could with borrowed money), Duer demanded kickbacks on government contracts. An outraged public finally forced Hamilton to request Duer’s resignation. But Hamilton’s relatives and associates were guilty of some of the same conflicts of interest, and their punishment was merely to have their fortunes greatly increased.[ix]

The treatment of Hamilton’s associates at the end of the 18th century as “beyond incrimination” is consistent with the history of large-scale fraud and looting throughout 19th and 20th century America. In fact, the noncriminal reactions to securities fraud and financial looting represent a constant, dependable, and unswerving pattern of non-enforcement of the criminal sanction for society’s most powerful wrongdoers of the public trust. A history of this type of fraud and looting in the U.S. would, for example, include: (1) the insider trading and “cooking of the books” perpetrated by the bank executives, directors, and branch managers of the Second Bank of the United States (1816-1836); (2) the 1867 collapsing of Credit Mobilier while its owners absconded with $23 million in loan proceeds; (3) the 1912-13 Pujo Committee investigations by the U.S. Congress of the “money trusts” and their influence and manipulation of the New York Stock Exchange involving connected Wall Street bankers led by J.P. Morgan; and (4) the 1932-34 U.S. Senate Banking and Currency Committee’s Pecora Commission’s investigation of speculation and the marketing of hundreds of millions of dollars of worthless stock by such Wall Street banks as Chase National Bank, J.P. Morgan, and Kuhn Loeb & Company, leading up to the 1929 stock market crash.[x]

Similarly, the illicit Wall Street banking realities at the turn of the 21st century were well established early in the 20th century and foreshadowed in 1947 when 17 leading Wall Street investment banks were sued by the federal government, charged with “effectively colluding in violation of antitrust laws.”[xi]. The Department of Justice in its complaint alleged that these firms, among other things, had created “an integrated, overall conspiracy and combination” that began in 1915 and was in continuous operation thereafter, by which they developed a system “to eliminate competition and monopolize ‘the cream of the business’ of investment banking.” The U.S. argued further that these Wall Street investment banks, including Morgan Stanley as the lead defendant and Goldman Sachs, had created a cartel that set the prices charged for underwriting securities. The cartel also set the prices for providing mergers-and-acquisitions advice, while “boxing out weaker competitors from breaking into the top tier of the business and getting their fair share of the fees.” Finally, the government argued that the big firms had placed their partners on their clients’ board of directors, as a means of knowing what was coming down the pike internally and as a means of keeping competitors at bay externally.

The banking oligopoly of America

As journalist, former Wall Street banker, and best-selling author of House of Cards, The Last Tycoons, and Money and Power, William D. Cohan, has recently contended, the government was “spot on” in their 1947 case: “The investment-banking business was then a cartel where the biggest and most powerful firms controlled the market and then set the prices for their services, leaving customers with few viable choices for much needed capital, advice or trading counterparties.”[xiv]. The very same arguments can be made, only more so today, as the capital worth of the leading firms (e.g., Goldman Sachs Group, Inc., Morgan Stanley, JP Morgan Chase & Co., Citigroup Inc., and Bank of America Corp.) is even more concentrated (see Figure 1 below). In effect, this banking cartel or oligopoly with its political allies, pretty much control what does or does not constitute securities’ violations in the world of fraudulently based market transactions.

Figure 1. Source: The Wild West of Finance, Adam Davidson, NYT, Dec. 7, 2011.

State-legal criminalization of security fraud hangs in the balance of the contradictory forces of free-market capitalism. For example, when similarly dominant interests and behaviors of the political economy are both illegal and controlling as numerous financial transactions were in the run up to the Wall Street meltdown, such as credit swap defaults, then bourgeois legality finds itself in the contradictory position of both trying to chastise and to excuse these violations. In practice, how have these contradictions in “legal relativism” been accommodated?  

Pragmatically, this has occurred through the differential application and selective enforcement of civil, criminal, and regulatory law. Cognitively, this occurs through the cultural and social denial of the mass victimization of the American people and the corresponding lack of moral accountability for those responsible. These denials have been reinforced by a U.S. mass media that has failed to examine the obvious state-legal contradictions in the control, discipline, justice, or punishment of those securities frauds that caused the financial crisis of 2007-08 and the ensuing Great Recession that followed.

Like the omissions from civic discourse there has also been a general capitulation in academic studies of law, crime, and society. For example, whether one is examining the Wall Street fiasco from the dominant lens of criminology, economics, or jurisprudence, the traditional epistemological orientations have been ideologically disconnected from the socio-legal realities of high stakes securities fraud. In the case of mainstream criminology, more than 40 years ago critical deviance theorist, David Matza, underscored that among “their most notable accomplishments, the criminological positivists [had] succeeded in what would seem the impossible. They separated the study of crime from the workings and the theory of the state.”[xv]. For the non-criminologists amongst you, Matza was saying that taking the state’s definition of crime as the basic assumption of criminology was to assume that the state criminalized everything that was criminal when in reality it was and is highly selective.

Similarly, mainstream economists and jurisprudents have respectively separated their studies of the economy and the law from any analysis of the state. Matza was careful to point out that this separation was not necessarily a conscious or a deliberate action. Rather, he contended that these scholars or scientists’ partial blindness was due to the fact that these fields structured their studies “in such a way as to obscure obvious connections or to take the connections for granted and leave the matter at that.”[xvi]. As both an iconoclast among sociological positivists and an integrationist among legal scholars, Black’s holistic method to the study of legal behavior stands apart from most mainstream theorists. First and foremost, Black’s formulations imply that:

"....equality before the law does not exist. The reality is legal relativity, not legal universalism: Law varies with its social geometry—its location and direction in social space. Such a theory completely flies in the face of the conventional conceptions of law and justice found among lawyers, judges, legal scholars, and members of the general public."[xvii]

Conceptually, Black discusses and identifies four styles of law or governmental social control: (1) penal, (2) compensatory, (3) therapeutic, and (4) conciliatory. All but the therapeutic mode, which aspires toward achieving normality for the deviant violator, is applicable to Wall Street looting. Penal control in its purest form involves the state taking the initiative against the offender. The question becomes the guilt or innocence of a criminal defendant. By contrast, in the case of compensatory control, the victim takes the initiative without the assistance of the state. As the plaintiff, his complaint “alleges that someone is his debtor, with an unfulfilled obligation. He demands payment.”[xviii]. Both of these legal forms of governmental control are adversarial. They have contestants—complainants and defendants—winners and losers. In the case of criminal-penal control, the conflicts are between self-determination versus punishment. In the case of compensatory-civil control, the conflicts are between self-determination versus payment.

Both the therapeutic and conciliatory styles of law are remedial. They involve methods of social repair and maintenance, or of providing assistance to people in trouble. In “these styles of social control the question is what is necessary to ameliorate a bad situation.”[xix]. In the case of conciliation, the goal is about re-establishing social harmony. In the pure case, “the parties to a dispute initiate a meeting and seek to restore their relationship to its former condition. They may include a mediator or other third party in their discussion, together working out a compromise or other mutually acceptable resolution.”[xx]. Finally, Black carefully emphasized that “social control may deviate from these styles in their pure form, combining one with another in various ways.”[xxi]

What crime?

In the case of Wall Street looting and federal regulatory colluding, there have been multiple expressions or overlapping exercises in both compensation and conciliation. Predictably, at the very height of the Wall Street pyramid of securities fraudsters, the “high rollers” have not been subject to any criminal or penal control. Further down the financial market “food” chain, a relatively small number or handful of inside traders or hedge fund dealers has been subjected to criminal arrests, indictments, and convictions. Even further down the network of financial illegalities, a few thousand petty mortgage fraudsters have been criminally prosecuted and sanctioned. Most of those fraudsters were caught up in the sweeps carried out by the FBI’s Operation Stolen Dreams in the spring of 2010.

To recapitulate, by the spring of 2012, some four years after the Wall Street debacle, no senior executives from any of the major financial institutions have been criminally charged, prosecuted or imprisoned for any type of securities fraud. This is in stark contrast to the Savings and Loans scandals of the 1980s when special governmental task forces referred some 1,100 cases to prosecutors, resulting in more than 800 bank officials going to prison. Comparatively, some critics have argued that there has been a lack of collective governmental resolve to pursue these offenses with the criminal law. Other critics have argued that a collective governmental resolve not to hold these offenders accountable has all but succeeded. Both of these claims are sustained by an examination of the available evidence.

Non-prosecution of securities fraud

According to the Securities and Exchange Act of 1934, “a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance of a regulatory requirement concerning the securities law” and as amended by the Sarbanes-Oxley Act of 2002, “may be brought not later than the earlier of ‘(1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation’.”[xxii]. Hence, it is not very likely that too many more claims will be filed and accepted by a court of law. Moreover, whether the Obama Administration had been able or not to “pull off” its desired foreclosure settlement with the largest banking institutions and the 50 attorney generals, effectively protecting the banks from any future civil and criminal enforcement actions, the statutes of limitations for most of these frauds was already coming into play.[xxiii]

Non-prosecution of securities fraud is precisely what the economic elites of Wall Street and the political elites from the Bush II and Obama Administrations as well as from the majorities of both the U.S. Senate and House of Representatives have desired since the collapse of Wall Street. The outcome of zero criminal prosecutions is neither by accident nor conspiracy but mostly by consensus or collusion. A concerted effort more generally not to prosecute “big time” financial fraud had begun in 2003, picking up momentum in 2005-06 with the successful overturning of the criminal fraud conviction of Arthur Anderson by the U.S. Supreme Court.

From that point on, instead of strategies to “better” control these financial crimes, strategies have been developing to control the damage done to the faith of Wall Street investors in the financial system. The outcomes of this non-penal strategy of controlling financial fraud have resulted in: (1) conciliatory efforts by the government, namely the Security and Exchange Commission and the Department of Justice, to restore institutionalized business as usual and (2) compensatory efforts by private investors, individual or corporate, to seek damages for their losses. In terms of the conciliatory efforts, these have been pretty successful in restoring the “business as usual” relations of Wall Street. Unfortunately, these investment market relations as usual are at the center of the financial securities crisis confronting the USA and the world today.

In terms of the compensatory efforts, these have included dozens of successful cases against every major Wall Street investment firm for securities fraud, amounting to hundreds of billions of dollars in corporate fines and payments. Either way, however, these financially respectable crimes of Wall Street remain beyond incrimination.

Gregg Barak is a Professor of Criminology and Criminal Justice at Eastern Michigan University. This essay is derived from his forthcoming book, Theft of a Nation: Wall Street Looting and Federal Regulatory Colluding (Lanham, MD and Plymouth, UK: Rowman & Littlefield, 2012).

The second part of this series is published here as Wall Street Crimes II: Dodd-Frank and the limits of regulatory reform.

This article is part of CrimeTalk’s drive in 2012 to discuss the question ‘when is a crime not a crime?’


[i] Taibbi, Matt. 2011. “Is the SEC Covering Up Wall Street Crimes? Rolling Stone. August 17. Retrieved on 8/27/11 from

[ii] Ibid.

[iii] See Johannes Andenaes, 1966, “The General Preventive Effects of Punishment,” University of Pennsylvania Law Review 114 (May): 949-983 or William Chambliss, 1967, “Types of Deviance and the Effectiveness of Legal Sanctions,” Wisconsin Law Review (Summer): 703-719.

[iv] Black, Donald. 2010 (1976). How Law Behaves: An Interview with Donald Black, reprinted in The Behavior of Law. Special Education. Bingley, UK: Emerald Group Publishing, p. 105.

[v] Ibid, p. 111.

[vi] Simon, David. 2006. Elite Deviance, 8th edition. Boston: Pearson/Allyn & Bacon, p. 211.

[vii] Ibid.

[viii] Ibid, p.212.

[ix] Ibid.

[x] Goldmann, Peter. 2010. Fraud in the Markets: Why It Happens and How to Fight It. Hoboken, NJ: John Wiley & Sons.

[xi] Cohan, William. 2012. “How Wall Street Turned a Crisis into a Cartel.” Bloomberg. Retrieved 1/9/12 from

[xii] Quoted in Cohan, 2012.

[xiii] Cohan, 2012.

[xiv] Ibid.

[xv] Matza, David. 1969. Becoming Deviant. Englewood Cliff, NJ: Prentice-Hall, p. 144.

[xvi] Ibid, p. 143.

[xvii] Black, 2010: p. 180.

[xviii] Black, 2010: p. 4.

[xix] Ibid.

[xx] Ibid, p. 5.

[xxi] Ibid.

[xxi] The Sarbanes-Oxley Act of 2002, Section 804—Statute of Limitations for Securities Fraud. July 30, 2002, 107 P.L. 204, Title VIII, § 804, 116 Stat. 745.

[xxii] After more than 18 months a deal was finally struck on February 8, 2012 making it virtually impossible for any state attorneys to pursue criminal prosecutions. As for the DOJ and the U.S. Attorney General, they have yet to conduct a single Wall Street banking criminal investigation, never mind pursuing a criminal prosecution. 

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