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This is probably wrong to say. Or maybe not. I don’t know. The experience of watching FTX crypto fraudster Sam Bankman-Fried receive a conviction carrying a maximum potential sentence of 115 years in prison for stealing billions from unwitting investors tapped into a long-neglected pleasure center in my brain. Apparently, the rare occurrence of justice releases some kind of endorphin rush that, while fleeting, is a nice change of pace.

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We eagerly await sentencing.

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Read more about the FTX Case here.

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If the event itself wasn’t rare enough, its head-spinning velocity was truly stunning. We’re talking roughly one year from the time that Bankman-Fried tanked the crypto industry to the day he was slapped with a Count of Monte Cristo-style conviction.

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And to be clear, we take no pleasure in this man’s suffering. But the true and swift justice that this man faces…this is something that we do appreciate. After all, “justice deferred is justice denied.”

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Still, we’ll stop short of applauding, and not just because it would be in poor taste, but because the nature of this justice is so rare and so fleeting that this fact alone demands scrutiny. Why does the life story of this self-destructive and easily-prosecuted 31-year-old end in prison while so many older and more experienced corporate criminals preside over our economy to this day?

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Sorry for the bait and switch, but this isn’t about Sam Bankman-Fried. It’s about rampant, unchecked, consequence-free criminality on Wall Street (and in a broader context, since man first started congregating in a bazaar to trade with, and fleece, one another). Bankman Fried’s was an open-and-shut case—good ol’ fashioned embezzlement. 

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But the lenders that torpedoed the economy during the subprime mortgage crisis? The banks that turn a blind eye to price fixing, spoofing and money laundering under their own roofs? The broker-dealers who colluded with internalizers to screw over everyday investors? Their crimes are far harder to investigate and prosecute at least to the point of getting handcuffs involved. 

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That, in a nutshell, is why few have attempted to do so in earnest.

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So without the threat of jail time, what does enforcement actually look like?

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This Is Fine(s)

Corporate criminals rarely go to jail, but they do spend a ton on bail. That’s how enforcement generally works in the financial industry. Regulators like the SEC and CFTC only have the power to enforce civil penalties. Massive fines are generally the preferred method for remedying instances of fraud, investor abuse, and other more abstract corporate malfeasance.

According to its own reporting, during fiscal year 2023, the SEC filed 784 enforcement actions, from which it recovered nearly $5 billion in financial remedies. Some $1 billion of these dollars were distributed to harmed investors.

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So what’s the takeaway? 

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If you get caught robbing a bank, you’re going to jail. If a bank gets caught robbing you, they just have to agree to give some of the money back.

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Doesn’t seem totally fair, but technically, putting people in jail isn’t the SEC’s job. Again, the SEC can only impose civil enforcement penalties. That job of imposing criminal penalties belongs to the Justice Department, and to the various federal and state attorneys general offices around the U.S.

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In a New York State of Fines

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We wanted to learn more about the role that these offices play, so we invited a former Senior Enforcement Counsel from the New York State Attorney General, John Castiglione to join us on this week’s episode of Let’s Talk Markets. 

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We asked him why more corporate criminals don’t wind up behind bars. Is it really because they’re too big to jail? Well, yes…but more accurately, it’s because they’re too expensive to jail. 

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Corporate crimes are complicated, a fact which works well to the advantage of the corporate criminal. This is not to say that crimes like fraud and insider trading are impossible to prove…it’s simply that they cost a lot to prove.

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They cost even more when the alleged offender has nearly unlimited financial resources to wage battle in the courts. Whereas Bankman-Fried’s misdeeds are easy to prove, and his financial ruin already well underway, the executive decision makers for banks who have been charged for defrauding investors are insulated by chains of command, legal departments, and endless financial resources. 

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It’s not to say that their actions can’t be proven. But as John Castiglione points out, state attorneys general offices simply don’t have the personnel, expertise or the endless funnel of federal resources to prosecute these cases with any degree of certainty.

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The implication is that any case a state attorney general takes on has a nearly 100% chance of reaching a guilty verdict. The odds of reaching that verdict against the CEO of a major global bank are quite a bit lower.

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As John points out in our Let’s Talk Markets chat, there are several somewhat abstract questions that need to be answered first.

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Was there intent to defraud? Did the alleged perpetrator understand that a crime was being committed. Is there plausible deniability? Was money actually taken from investors? 

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All of these questions lead to a rather difficult calculus for both the likely success and timeliness of prosecution. And when we say calculus, we’re talking dollars and cents. In other words, the single most important question is “Can we afford to prosecute this case to success?” 

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That is the key question, as opposed to “How guilty is this person?”; “How heinous is the crime?”; or “How badly were everyday investors harmed?”

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Can we afford to prosecute? 

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Well, based on the research, the answer is “no” to an increasing degree. 

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So You’ve Committed a White Collar Crime…

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According to TracReports, a federal data clearinghouse at Syracuse University, the number of federal prosecutions for white collar crimes dropped by more than 30% from 1998 to 2018. 

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Let’s take a beat here and think about everything that happened during the decade in between. If you lost a job, house or small business during that time, you’ll probably have no trouble remembering. Anyways, keep that context  in mind.

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TracReports says that federal prosecutions for white collar crimes reached 9,412 in 1998. That number was less than 6000 in 2018. “This,” says an article from Yahoo! News,  “despite the fact that the economic costs of white-collar crime outpace the economic costs of street crime by 20-to-1.”

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To be fair, federal prosecutions did ramp up during the first three years of the Obama administration. The perception is that few paid for the crimes committed in the years just after the financial crisis. And it’s probably fair to say that a great many perpetrators did get away with their misdeeds. But 2011 actually represents the peak of federal prosecutions, with more than 10,000 white collar criminals getting got. 

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Of course, bank fraud is just a sliver of the pie here—third biggest in 2018 behind “fraud by wire, radio, or television” and “mail fraud”—so, y’know, take it with a grain of salt. 

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Now, back to our shrinking taste for prosecution…

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White collar prison used to be the in-thing. Now, it’s all about posting bail in the form of something called Deferred Prosecution Agreement (DPA). 

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Volunteers of America

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Did you know that there is an alternative to going to prison for committing certain crimes? 

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I’m just going to give you the straight-up Wikipedia definition of DPA because…well, you’ll see:

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“A deferred prosecution agreement (DPA), which is very similar to a non-prosecution agreement (NPA), is a voluntary alternative to adjudication in which a prosecutor agrees to grant amnesty in exchange for the defendant agreeing to fulfill certain requirements. A case of corporate fraud, for instance, might be settled by means of a deferred-prosecution agreement in which the defendant agrees to pay fines, implement corporate reforms, and fully cooperate with the investigation. Fulfillment of the specified requirements will then result in dismissal of the charges.”

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I think the part I like the most is the “voluntary alternative to adjudication.” 

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In other words, I’d like to volunteer to not go to jail. Where was that when we were in college? Amirite? 

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Well, it’s really only a system reserved for people who profit handsomely from their crimes. That’s because this “voluntary alternative” comes with a price tag. 

In 2017, Western Union pleaded guilty to abetting wire fraud, but agreed to pay $586 million to their victims in lieu of real world consequences. In 2019, Western Union reported $5.3 billion in annual revenue. 

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In January of 2020, Airbus agreed to pay $4 billion to the U.S. government for bribing public officials. Airbus surpassed $70 billion in revenue that year. That might be considered a successful bribe.

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It’s hard to believe, under the circumstances, that fines are a real deterrent for companies of a certain size. They are, to be sure, the cost of doing business.

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John Castiglione points out that while regulators like the SEC and the CFTC do not have the power to jail offenders, they do have other tools in the basket beyond simply passing out fines.

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Among them, he points out that deregistering repeat offenders is perhaps a tool not used often enough. But it’s clear that regulators and law enforcement prefer civil penalties and DPAs for a reason. Both err on the side of recouping the economy’s losses, this in lieu of risking the collateral damage that would come from deregistering an economic pillar like Western Union or Airbus.

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So where does that really leave us? 

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The SEC has the expertise to pursue corporate criminals, but lacks the mandate to put them in jail. Law enforcement has the mandate, but lacks the expertise. Hmmmm.

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Regulators, meet the justice department. You guys should hang out.