On the heels of news that Angelo Mozilo, the former CEO of now-defunct Countrywide, who made more than $500 million in bonuses by peddling toxic and poisonous loans in the run-up to the financial market crisis or 2008, has been absolved of any criminal wrong doing, the New York Times reports that the Obama Justice Department is aggressively imprisoning individuals that took out the toxic loans, but not even criminally investigating the lenders or executives that were wildly writing and authorizing them.As carefully documented by the NY Times, Charlie Engle, a 48 year-old man whose accomplishments include overcoming a serious drug addiction to become one of the best marathon runners in the world, eventually running across the Sahara Desert in 2006 with two others, has been imprisoned for 21 months for overstating his income on two “liar loans” that he took out at the encouragement of his mortgage broker several years ago. Despite weak evidence (forensic handwriting analysis indicated that Engle’s signature on at least one “liar loan” was forged), the government pursued its case against Engle as if HE was responsible for collapsing the global economy (while individuals like Dick Fuld, Joseph Cassano, Angelo Mozilo and others, much better candidates for governmental pursuit for collapsing the economy, remain criminally uncharged with ill gotten bonuses intact).
Particularly outrageous in Engle’s case is the way in which the government brought its case. The IRS special investigation was initiated by an IRS agent watching the documentary “Running the Sahara” and wondering whether Engle was funding his training by speculating in the real estate market bubble. Confident that Engle was speculating in real estate in order to fund his marathon running and his Sahara Desert run of 2006, this agent pursued Engle with a complement of multiple agents and investigators, the involvement of multiple theories, entailing personal dumpster diving at Engle’s home, using an attractive and flirtatious female undercover agent, and involving a hidden wire. All this to “catch” Engle in the deception of misstating his income on two investment home applications, encouraged and supported by a mortgage broker.
So, Angelo Mozilo who engaged in widespread and systematic deception in selling self-described “toxic” and “poisonous” loans to the pubic, was criminally absolved, but Charlie Engle for taking out two of the types of loans that Mozilo was widely and recklessly peddling, is imprisoned for engaging in deception? Just another enormous disappointment in the way the financial market crisis has been handled by the Obama administration and those agencies and legislators charged with representing and protecting the public. Apparently, Engle must be the low-hanging fruit that the government is willing to charge, while Mozilo, Cassano, Fuld, and others are untouchable. Seriously?
Angela N. - UC
ReplyDeleteWow. The story of how the gov't started their investigation is particularly astonishing. Somehow the fact that this man has overcome something amazing is proof/evidence that he is engaging in problematic activities?
By not holding the actual peddlers of these problematic loans responsible, the government is not encouraging responsibility and accountability among lenders.
It seems amazing to me that that the Government went so out of its way to punish an individual who is following the advice of a mortgage broker but those recommending the loans are ok. To me it's like saying those who rob bank should go to jail but not the person who planned the robbery or encouraged it.
ReplyDeleteI wonder if this is a risk reward analysis of the government. Are they going after those with less money because it is easier? Mozilo has made $500 million in bonuses which would give him a significant amount of money to create a defense, prolong trial, and cost the government more. It is unlikely that Engle has the financial stability to put forth a defense equal to Mozilo. I would classify it as selective investigation/prosecution. But it doesn't make sense to not go after someone who is promoting these loans.
I think it would be easier to deter these loans if the people who were promoting them were going to jail instead of those who are following advice. If there is no risk of being criminally punished why stop promoting and losing out on millions.
Patrick
I tend to defer to the determinations of law enforcement officials on the whether to prosecute a particular individual. After all, they are the ones with inside knowledge of the facts, not me. However, this case is a little hard to stomach, especially in light of the tactics used to go after Mr. Engle (i.e. "dumpster dives," agents wearing undisclosed wires, and other law enforcement antics). Juxtaposed with the fact that the DOJ literally refused to prosecute Mr. Mozilo, these tactics seem to be highly unfair.
ReplyDeleteMichael Stark
Bus Org
I would like to partially echo the comments above, insofar as I feel that decisions on who to prosecute in particular matters should be left to those law enforcement officials who are in charge of such prosecutions. Though "peddling toxic and poisonous" loans may not be looked upon favorably by many, I do not believe that those practices are illegal. All over the United States, "toxic and poisonous" goods and services are bought and sold, totally legally, on a daily basis. For instance, the sale of alcohol is legal, yet it kills people, ruins lives, is literally poisonous, and has helped contribute greatly to many crimes and negative incidents in both recent and distant American history. The same can be said for tobacco sales, sales of pornographic materials and legalized prostitution, and the fast-food industry as a whole, as well as ANY lottery or gambling institution. Though these things are not securities or loans, they contribute negatively to America much in the same way as Mozilo's sales have done. In fact, the aggregate of the above-mentioned "toxic" items is hundreds of times worse than anything that Mozilo or Engle could have done. Again, I would like to reiterate that Mozilo has done nothing illegal, according to the investigators in charge of investigating his actions. Additionally, if the government feels as if they could have brought a successful case against Mozilo, I am sure that they would have done so. Clearly, they have been able to muster a successful case against Charlie Engle and have identified illegal activities in which he has engaged, to the detriment of himself and American society generally. Deference to law enforcement here seems to be the correct route.
ReplyDeleteAs far as the investigation tactics are concerned, while some may call using an attractive woman as an undercover agent and engaging in "dumpster digging" questionable or shady, I think that a better identifier would be "good police work." If items that are needed are in a dumpster and no laws are broken while obtaining those items, then that is an example of excellent police work. Also, using an attractive woman wearing a wire is classically American and classically effective (see above article!). At the end of the day, prosecutors could not build a successful case against Mozilo, however, they could against Engle. They successfully prosecuted him and he is now serving his sentence. Another factor, not addressed above but I think pertinent, is that prosectuors probably feared the potential strength of Mozilo's legal counsel, counsel that certainly could be expected to put up a hard fight and refuse to allow their client, an incredibly successful businessman, to be the scapegoat of this whole crisis. Kudos to the prosecutors in knowing when and where to pick their battles.
-Miles B. Berger
Although I would not condone any unethical policing tactics, I do not disagree with the prosecution of Engle so long as he deceptively misstated earnings on loan applications. Banks rely on the information given on an application to determine interest rates and to achieve a balanced portfolio of loans. Misstating the information causes detriment to the bank because the bank is now taking on more risk that in contracted for. Additionally, a prosecution such as this can be used to send a message and act as a deterrent to others seeking loans. (For example, the IRS heavily punishes people evading taxes to deter those who rely on the small chance of getting audited.)
ReplyDeleteHowever, this article really poses this question: does it fit our notions of fairness to prosecute a man like Engle while not prosecuting the Wall Street CEOs?
I view the question as two separate issues. As stated above, it is just that the government prosecute Engle. Second, it also seems that the Wall Street firms should have to bear a consequence for their bad business decisions. Also, to the extent that a firm acted fraudulently or illegally, it should be prosecuted/fined to deter firms from doing the same in the future. (This policy could also be achieved by prosecuting the CEO engaged in illegal activity.)
-S. Andrew Stonestreet
At what point is the public willing to be accountable for its own actions, and desist with its persistent pursuit of finding someone to whom they may pass the blame. Of course, it seems as though a degree of impropriety was exercised in the investigation of Mr. Engle. And to those ends, no one can disagree that every person is entitled to the protections of the Constitution (i.e., right o privacy, no unwarranted searches and seizures, etc.). Therefore, should it be found that illegal methods were utilized in the process of prosecuting this man, then by all means bring that to light so that justice may follow course.
ReplyDeleteI am not ready at this time to condone the practice of the general public in its constant attempt to find anyone or thing other than itself to blame for naive, and unacceptable financial decisions. If proven (and yes, if proven--not using weak evidence), Mr. Engle committed a crime through his misrepresentations to banks and lenders, etc. In accord with many other people of our generation, he is attempting to live outside his means, which is simply not acceptable, at least if he is not willing to own up to the consequences of those actions. At least according to the facts presented here, the prosecution is charging the actual criminal, and doing what should be done by blinding itself of the sympathetic nature of his background.
--Andrew F.
Bus. Org.
Perhaps something could be said for the government putting the general public on notice that obtaining a loan by fraudulent means is unacceptable. In and of itself, then, the inequity of the situation is not apparent.
ReplyDeleteWhat strikes me goes along with Miles's comment-the difficulty posed by bringing charges against an executive contrasted with the ease by which the government can prosecute (if it puts its mind to it, apparently) the borrowers. While an investigator can leap in a personal dumpster to find the borrower's incriminating information, the resources required to prosecute a corporate executive would be tremendous. The lack of government resources could serve as one way to rationalize these decisions.
Natalie A.
Bus. Org.
This seems to be a recurring theme in America today. Certain extremely wealthy individuals who are in powerful positions have seemed to escape criminal prosecution recently. Two examples: higher officials with significant roles in the financial collapse and coal miner operators who played significant roles in recent coal mine tragedies. In these examples it seems clear that these powerful individuals are most responsible for these terrible tragedies, yet are not held criminally responsible.
ReplyDeleteSome have argued that coal operators cannot be held criminally liable for actions that took place within their mines unless these operators acted intentionally. However, that is untrue. The Mine Act explicitly calls for criminal sanctions (up to one year imprisonment) for coal operators who “knowingly authorized, ordered, or carried out” violations of the safety standards. (Mine Act §820(d)). Further, the 4th Circuit (of all circuits) has held that when a coal mine operator acts with “reckless disregard” the coal operator acts “knowingly,” and can therefore be held criminally liable under the Mine Act. (U.S. v. Jones, 735 F.2d 785 (4th Cir. 1984)).
In the Aracoma mine fire of 2006, Massey Energy admitted that its failure to replace a ventilation wall “resulted in the deaths” of the two miners that died in the Aracoma fire. Yet prosecutors brought no charges against Massey CEO Don Blankenship or any higher officials at Massey. Massey’s mines consistently featured abnormally high numbers of safety violations and subsequent citations from MSHA. But, Blankenship was never charged criminally, and nothing seemed to change at Massey.
Four years after the Aracoma fire, the Upper Big Branch mine exploded, killing 29 miners. This was the worst American coal mine accident in the past 40 years. Perhaps this could have been avoided had Blankenship been held personally accountable what happened at Aracoma. There are criminal sanctions available to deter reckless, dangerous, and deadly behavior. I think they should be utilized against all who are responsible, not just those who can’t afford to escape it.
If you are interested in this subject, Jeff Goodell wrote a particularly biased and damning article about Don Blankenship and his role as CEO of Massey for Rolling Stone last winter that can be accessed here: http://www.rollingstone.com/politics/news/the-dark-lord-of-coal-country-20101129?page=1.
John-Mark Atkinson
Bus. Org.
A jury earlier today handed down a guilty verdict for an executive involved in the mortgage crisis. Mr. Farkas, formerly of Taylor, Bean, and Whitaker Mortgage Corp., faces potential life imprisonment! The prosecution attempted to explain the perceived inequities we've been discussing here, saying that it would not bring cases that it could not prove beyond a reasonable doubt, no matter how popular they may be. See: http://online.wsj.com/article/SB10001424052748704740204576273511899362604.html?mod=WSJ_hp_LEFTWhatsNewsCollection
ReplyDeleteNatalie A.
Bus Org
This seems to be a recurring theme in America today. Certain extremely wealthy individuals who are in powerful positions have seemed to escape criminal prosecution recently. Two examples: higher officials with significant roles in the financial collapse and coal miner operators who played significant roles in recent coal mine tragedies. In these examples it seems clear that these powerful individuals are most responsible for these terrible tragedies, yet are not held criminally responsible.
ReplyDeleteSome have argued that coal operators cannot be held criminally liable for actions that took place within their mines unless these operators acted intentionally. However, that is untrue. The Mine Act explicitly calls for criminal sanctions (up to one year imprisonment) for coal operators who “knowingly authorized, ordered, or carried out” violations of the safety standards. (Mine Act §820(d)). Further, the 4th Circuit (of all circuits) has held that when a coal mine operator acts with “reckless disregard” the coal operator acts “knowingly,” and can therefore be held criminally liable under the Mine Act. (U.S. v. Jones, 735 F.2d 785 (4th Cir. 1984)).
In the Aracoma mine fire of 2006, Massey Energy admitted that its failure to replace a ventilation wall “resulted in the deaths” of the two miners that died in the Aracoma fire. Yet prosecutors brought no charges against Massey CEO Don Blankenship or any higher officials at Massey. Massey’s mines consistently featured abnormally high numbers of safety violations and subsequent citations from MSHA. But, Blankenship was never charged criminally, and nothing seemed to change at Massey.
Four years after the Aracoma fire, the Upper Big Branch mine exploded, killing 29 miners. This was the worst American coal mine accident in the past 40 years. Perhaps this could have been avoided had Blankenship been held personally accountable what happened at Aracoma. There are criminal sanctions available to deter reckless, dangerous, and deadly behavior. I think they should be utilized against all who are responsible, not just those who can’t afford to escape it.
If you are interested in this subject, Jeff Goodell wrote a particularly biased and damning article about Don Blankenship and his role as CEO of Massey for Rolling Stone last winter that can be accessed here: http://www.rollingstone.com/politics/news/the-dark-lord-of-coal-country-20101129?page=1.
John-Mark Atkinson
Did Engle really commit a crime or some kind of fraud by overstating his income? There are so many cases from the mortgage crisis where banks either didn't ask borrowers to state their income, or gave them a wink and told them the level of income required to receive the loan the borrower wanted and then left the income unverified. This begs the question of why the bank never checked into his income to verify for themselves. That's the entire purpose of underwriting. Once a bank starts taking someone's word for it, it starts to look like they are allowing themselves to be lied to so they can make the irresponsible loan that they want to make. If a bank is relying on false statements they know are false, then its hard to see where criminal fraud has occurred. And failing to verify income of an individual to whom you are about to bequeath a large loan to is tantamount to understanding that the individual is going to lie about their income.
ReplyDelete- Matt W. / UC
I’m not sure it’s fair to characterize the prosecution’s case against Engle “as if HE was responsible for collapsing the global economy.” Sure, they worked hard to prove their case, but every self-respecting police officer, federal agent, or attorney should do the same. But true, it does seem strange that they couldn’t try a LITTLE harder to go after Mozilo…
ReplyDeleteNatalie A. – Good call on the Farkas conviction; I was going to comment on it myself, and here’s a NYT link to the case: http://www.nytimes.com/2011/04/20/business/20fraud.html?_r=1&scp=1&sq=lee%20farkas&st=Search
Although their efforts leave much to be desired, I’m glad the Feds are going after at least some of the bigger players; Farkas was found guilty of 14 charges, including about $3 billion worth of fraud. From a purely-PR perspective, I think that they should cut more deals with the bit players in order to get the big fish. Six former execs of Farkas’s company had previously pleaded guilty, and some agreed to testify against him. Throwing a few more CEOs in jail would give the administration and the DOJ some credibility.
- Greg E. / UC
PS - A college friend of mine was on the Farkas jury! I look forward to talking with him about his experience…
I cannot disagree with the clarity and insightfulness of the above comments (particularly @Stonestreet and @Berger). I think they all provide interesting takes on this post. But, I would like to add an observation. I believe fundamentally in equal application of the law. However, in this situation it has not happened.
ReplyDeleteAlthough it is easy to identify that Engle is a real “under dog” of sorts and we as Americans love to sympathize with him, but simply put, he broke the law. On the other hand Mozilo, an individual who is well on way to becoming known as another evil that arose out of the financial crisis because of his dealings and lucrative executive bonuses, is someone we as Americans are quick to criminalize and as this article and recent news has suggested, should be for a certain part. But they both broke the law. Was it a correct application of law to go after Engle? (based upon the reading of this article) Yes. Would it have been correct to go after Mozilo? (based upon this article and others) Yes. Equal application of the law requires both.
@Berger raises an interesting point about another factor that may have lead to no charges or further proceedings against Mozilo. That factor being the fear of legal defense by Mozilo. I can only hope for the sake of the legal community that this did not even factor into the equation. Even if charges were brought against Mozilo and he were to win at trial then it would at least allowed the American people to have an opportunity to further understand the problems that his actions helped cause. Fear of legal counsel is no excuse, practically or abstractly, because in the end a jury would have heard this case and a decision made based upon merit (mostly).
A prosecutor is tasked with enforcement of laws, even with a degree of discretion, formal charges should have been brought and Mozilo should have been arrested. If Engle violated the law enough to be tossed in jail, I find it difficult to handle that further investigation and eventual criminal proceedings could not have been brought against Mozilo. Regardless as to the outcome, the title and subject matter of this blog is “Corporate Justice” and here it would have been nice to see some.
Jacob S.
I cannot disagree with the clarity and insightfulness of the above comments (particularly @Stonestreet and @Berger). I think they all provide interesting takes on this post. But, I would like to add an observation. I believe fundamentally in equal application of the law. However, in this situation it has not happened.
ReplyDeleteAlthough it is easy to identify that Engle is a real “under dog” of sorts and we as Americans love to sympathize with him, but simply put, he broke the law. On the other hand Mozilo, an individual who is well on way to becoming known as another evil that arose out of the financial crisis because of his dealings and lucrative executive bonuses, is someone we as Americans are quick to criminalize and as this article and recent news has suggested, should be for a certain part. But they both broke the law. Was it a correct application of law to go after Engle? (based upon the reading of this article) Yes. Would it have been correct to go after Mozilo? (based upon this article and others) Yes. Equal application of the law requires both.
@Berger raises an interesting point about another factor that may have lead to no charges or further proceedings against Mozilo. That factor being the fear of legal defense by Mozilo. I can only hope for the sake of the legal community that this did not even factor into the equation. Even if charges were brought against Mozilo and he were to win at trial then it would at least allowed the American people to have an opportunity to further understand the problems that his actions helped cause. Fear of legal counsel is no excuse, practically or abstractly, because in the end a jury would have heard this case and a decision made based upon merit (mostly).
A prosecutor is tasked with enforcement of laws, even with a degree of discretion, formal charges should have been brought and Mozilo should have been arrested. If Engle violated the law enough to be tossed in jail, I find it difficult to handle that further investigation and eventual criminal proceedings could not have been brought against Mozilo. Regardless as to the outcome, the title and subject matter of this blog is “Corporate Justice” and here it would have been nice to see some.
Jacob S.
Kudos to Jake’s post. Fraud is fraud and those who commit it (rich or poor) should be held responsible.
ReplyDeleteThis point is worth underlining--a criticism of the government's decision in this instance does not amount to a defense of Engle's tactics. Rather, it is a criticism of, as John Mark points out, an apparent unwillingness to criminally prosecute wealthy people for "white collar" criminal activity coupled with zealous prosecutions of everybody else.
However, because it is exam season, some counter-analysis is probably in order. Prosecuting attorneys are government officials and, as such, are trustees of the public resources. They are charged with operating their offices in a way that maximizes the utility of public dollars. Thus, in a very real sense, they are screwing us all over if they waste money that could be of use elsewhere. Accordingly, throwing money at a hopeless case just to make a point has the potential to make a lot of people a lot worse off.
On the other hand, maybe Jake is right that the very symbol of taking a stand against crime and fraud is worth it even it does not ultimately produce a criminal conviction. A fundamental principal of our democracy is that all are equal in the eyes of the law regardless of their position on the corporate hierarchy. While efficiency and practicality are important, they should not be permitted to function as the instruments of moral and ethical evasion or complacent.
Thus, assuming a case against Mozilo would be difficult to make, the question becomes whether the symbol of prosecution--coupled with the possibility of securing a conviction—is worth the expenditure of the public’s resources that bringing such a case would require.
Clearly, these are not easy questions.
Ultimately, I think there are two important take-away points:
1) Just because something is "legal" doesn’t necessarily mean its right. In an ideal world, Mozilo and Engle would have realized that they have a greater social responsibility (both in an individual and a corporate capacity) that compels honesty on loan applications and an avoidance of selling toxic assets. Failing in that obligation is wrong, regardless of whether the government deems it appropriate to prosecute.
(2) The devil is in the details. Just because an issue is emotionally charged, as this one clearly is, doesn’t mean there is a clear “right” and “wrong.” Here, as always, the public will be best served by a constructive dialogue that is ever mindful of the complex choices facing government officials in a democratic society.
Stark
This reminds me of a documentary I saw on the sanctions a small business owner faced for putting his money into tax shelters. He entrusted his money to an investment firm which presented a plan to enhance his earnings with minimal tax implications. He later discovered the scheme was illegal and had to pay penalties to the IRS. Subsequent to settling the claim with the IRS he brought suit against the investment firm and ultimately obtained a large settlement.
ReplyDeleteIn a similar fashion, I wonder if Mr. Engle could bring a suit against Mr. Mozilo for the scheme he got wrapped into and the consequences he's faced. Perhaps based on the relationship and duties established between the two men in the business transactions?
- Andrew C. - UC
Kudos to Jake’s post. Fraud is fraud and those who commit it (rich or poor) should be held responsible.
ReplyDeleteThis point is worth underlining--a criticism of the government's decision in this instance does not amount to a defense of Engle's tactics. Rather, it is a criticism of, as John Mark points out, an apparent unwillingness to criminally prosecute wealthy people for "white collar" criminal activity coupled with zealous prosecutions of everybody else.
However, because it is exam season, some counter-analysis is probably in order. Prosecuting attorneys are government officials and, as such, are trustees of the public resources. They are charged with operating their offices in a way that maximizes the utility of public dollars. Thus, in a very real sense, they are screwing us all over if they waste money that could be of use elsewhere. Accordingly, throwing money at a hopeless case just to make a point has the potential to make a lot of people a lot worse off.
On the other hand, maybe Jake is right that the very symbol of taking a stand against crime and fraud is worth it even it does not ultimately produce a criminal conviction. A fundamental principal of our democracy is that all are equal in the eyes of the law regardless of their position on the corporate hierarchy. While efficiency and practicality are important, they should not be permitted to function as the instruments of moral and ethical evasion or complacent.
Thus, assuming a case against Mozilo would be difficult to make, the question becomes whether the symbol of prosecution--coupled with the possibility of securing a conviction—is worth the expenditure of the public’s resources that bringing such a case would require.
Clearly, these are not easy questions.
Ultimately, I think there are two important take-away points:
1) Just because something is "legal" doesn’t necessarily mean its right. In an ideal world, Mozilo and Engle would have realized that they have a greater social responsibility (both in an individual and a corporate capacity) that compels honesty on loan applications and an avoidance of selling toxic assets. Failing in that obligation is wrong, regardless of whether the government deems it appropriate to prosecute.
(2) The devil is in the details. Just because an issue is emotionally charged, as this one clearly is, doesn’t mean there is a clear “right” and “wrong.” Here, as always, the public will be best served by a constructive dialogue that is ever mindful of the complex choices facing government officials in a democratic society.
Stark
I don't understand why IRS's reaction here can't be to recognize the flaws in the loan application process and to honestly investigate and pursue ways to ensure more accurate loan applications.
ReplyDeleteI also have a general distrust of the proof in this case: how is the IRS able to prove it was the debtor, and not the lender, who added in the "liar" portions, especially if at least one of the signatures appears to be forged?
Jenna W – UC: I agree that the IRS has a duty to investigate ways to remedy problems in the loan application process, however, I do not think that Americans can wait for government agencies like the IRS to fix this system. The fall of Washington Mutual is a good example. WaMu employed hundreds of people solely to approve mortgage loans (usually for first time homeowners) but the employees neither had sufficient time, nor proper training to approve the loan applications. Once the government caught wind of this, WaMu had been approving loans in this manner for years and the fall of the real estate market was well on its way.
ReplyDeleteSo who is to blame in this system? Of course WaMu’s deceptive and unethical practices are unacceptable. But the U.S. Office of Comptroller of the Currency under the Bush Administration clearly dropped the ball on oversight. I think one lesson to learn from these situations is that at the end of the day, the loan applicant has to watch out for herself. Applicants should be aware that buying a home is similar to buying a house in that the lender will try to stretch your budget and get you to commit to something you might not be able to afford – much like a car salesman.
I couldn’t agree more with the sentiments of this post. Again, the Department of Justice is asleep at the wheel and cannot see the wolves among the sheep. It also shows how far the Department of Justice will go to get someone.
ReplyDeleteThe real sadness to this post is that once again, those in positions of power get away with things that ordinary people and those lower on the food chain cannot get away with. Mozilo certainly was involved with Senators Dodd and Conrad, both Democrats. Furthermore, Dodd was chairman of the banking committee. I wonder if this has anything to do with his release.
In the wake of Sarbanes-Oxley, Mozilo should have known about his corporate affairs. If not jail, he should at least have to pay millions in fines and penalties for his behavior.
This post just goes to show that it is better to be a fat cat than the low man on the totem pole. Fat cats tend to get off while those lower down pay for the crime.
EB
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ReplyDelete