Decriminalizing agency costs

Larry Ribstein —  6 December 2011

The WSJ reports on comments by former FBI official David Cardona’s on why there haven’t been more prosecutions of financial executives as a result of the recent financial crisis:

“There’s been a realization and a more deliberate targeting by the Department of Justice before we launch criminally on some of these cases” * * * The Justice Department has decided it is “better left to regulators” to take civil-enforcement action on those cases, he said. * * *

Many legal experts have said much of the most controversial behavior likely was a product of poor judgment, not criminal wrongdoing. More than 1,000 bankers went to prison in the wake of the savings-and-loan banking crisis of the 1980s and 1990s. After the financial crisis, “there was an immediate reaction that maybe this was another savings-and-loan type crisis, that we could actually establish criminality in many of these cases,” Mr. Cardona said in the interview. Those hopes eventually faded. * * *

“A lot” of the Justice Department’s criminal investigations, Mr. Cardona said, “hinge on disclosure.…What does adequate disclosure mean? And those are really technical arguments that sometimes get lost with a jury.” * * * U.S. officials also are leery of bringing to trial criminal prosecutions where a jury might decide the losses were due to bad judgment or market conditions, not deceit.

I’ve written on the excesses of corporate criminal prosecutions and on the prosecutorial incentives that drive these excesses.  So obviously I find some satisfaction in the recent prosecutorial caution.

Unfortunately, if the reader comments on the WSJ article are any indication, I may not represent popular opinion.  No doubt many of the Occupiers would feel better about their own economic plight if only the criminal justice system could be used as a vehicle for venting public resentment.  Hopefully prosecutors will continue to keep in mind the potential costs to this system of prosecutions based on public anger rather than careful legal judgments.

Larry Ribstein

Posts

Professor of Law, University of Illinois College of Law