Issue of the week: A crackdown on corporate crime

It was an amazing week for Wall Street,” said John Cranford in CongressionalQuarterly.com. First, two former Bear Stearns executives were charged with defrauding investors in two hedge funds stuffed with subprime-mortgage securities. Then a top executive of Swiss bank UBS pleaded guilty to helping a wealthy American client evade U.S. taxes. And around the nation, 406 lawyers, real estate brokers, and mortgage company personnel “were charged in a Justice Department sweep aimed at cracking down on mortgage fraud.” The various law-enforcement actions, though unrelated, are “reminiscent of past episodes of financial meltdown.” The Feds moved in as soon as the dust settled, arresting alleged wrongdoers and rewriting regulations—just as they did after the 1987 market meltdown, the late-1980s thrift crisis, and the Enron implosion.

Former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin can now claim a dubious distinction, said Matthew Padilla in the Orange County, Calif., Register: They are the first Wall Street executives to face criminal charges stemming from the credit crisis. Both stand accused of misleading investors about the health of two funds, whose collapse last summer was an early sign that the mortgage market was on unstable ground. Cioffi is also charged with insider trading. “He allegedly took money out of one of the funds when he knew it was in trouble but before telling investors the extent” of its losses. Cioffi and Tannin exchanged e-mails that are now a key part of the government’s case, said Kate Kelly in The Wall Street Journal. In one e-mail, Tannin warned Cioffi that “the funds were headed for the rocks—four days before they told investors there was little to worry about.”

While Cioffi and Tannin were pleading innocent in federal court in New York City, said Lynnley Browning in The New York Times, former UBS banker Bradley Birkenfeld was in federal court in Fort Lauderdale, blasting “a hole in the wall of secrecy surrounding the world of Swiss banking.” In a seven-page statement that “reads like a how-to of high-end tax evasion,” Birkenfeld described telling clients “to destroy banking records,” to “use Swiss credit cards so the Internal Revenue Service couldn’t track their purchases,” and to “stash watches, jewelry, and artwork that they had bought with money hidden offshore” in Swiss safe-deposit boxes. Senior managers at UBS are described as being extremely “nervous” about the exposure of these bank practices.

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Mortgage lenders and investment bankers are also feeling jittery, said Greg Wood in BBCnews.com. Last week’s national roundup, dubbed Operation Malicious Mortgage, was merely a “good start,” in the words of Sharon Ormsby of the Justice Department’s financial crimes unit. She predicted more arrests and indictments in the coming months. The FBI is reportedly “looking at every aspect of mortgage fraud, from the granting of individual loans to their bundling up and sale on Wall Street as investments.” Unfortunately, though, any indictments are not likely to help victims of mortgage fraud. “In the vast majority of cases,” Ormsby said, “there’s not much hope of them getting compensation.”