Following through on policy changes announced earlier this year that opened the door to individuals being held criminally responsible for corporate misconduct that helped cause the financial crisis, the Department of Justice is reportedly pursuing criminal charges against executives at the Royal Bank of Scotland (RBS) and JPMorgan Chase (JPM).
According to a report from the Wall Street Journal, federal investigators are working on establishing cases against the RBS and JPMorgan Chase executives for “allegedly selling flawed mortgage securities,” despite reportedly receiving warnings that they were securitizing too many potentially toxic mortgages.
From the Wall Street Journal report:
Officials are working to establish that the bankers ignored warnings from associates that they were packaging too many shaky mortgages into investment offerings and are weighing whether they can prove that constituted fraud, the people said.
At RBS, prosecutors are scrutinizing a $2.2 billion deal that repackaged home mortgages into bonds in 2007, the people said. In a 2013 civil settlement with RBS, the Securities and Exchange Commission described the lead banker on that deal, whom it didn’t name, as trying to push it through over concerns of the diligence department.
At J.P. Morgan, prosecutors are focusing on two people who worked on a different residential-mortgage deal, the people said.
According to the WSJ report, the DOJ is pushing to complete any criminal cases against individuals before the end of President Obama’s presidency and the expiration of the 10-year statute of limitations in 2017.
Again from the WSJ:
The J.P. Morgan criminal probe flows directly from the Sacramento civil investigation, in which prosecutors unearthed a 2007 memo written by a bank employee warning her bosses before the financial crisis hit that they were putting bad loans into securities—warnings that were ignored. That memo helped the Justice Department develop a legal basis for the then-record 2013 settlement.
Earlier this year, the DOJ announced that it would begin to target individual employees for corporate misconduct in addition to the companies themselves.
In a memo authored by Deputy Attorney General Sally Yates and addressed to all other assistant attorney generals as well as all U.S. attorneys, Yates said that the DOJ is taking “six key steps” to strengthen its pursuit of individual corporate wrongdoing, including requiring companies to provide the DOJ with all information related to misconduct, including the individuals involved, in order to qualify for any cooperation credit.
“Corporations can only commit crimes through flesh-and-blood people,” Yates told the New York Times earlier this year. “It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”
In the years since the crisis, the DOJ reached a $16.65 billion settlement with Bank of America (BAC) to resolve claims over toxic residential mortgage-backed securities, collateralized debt obligations and an origination release on residential mortgage loans sold to Fannie Mae and Freddie Mac.
Last year, Citigroup (C) officially announced a $7 billion dollar settlement with the DOJ, several state attorneys general, and the Federal Deposit Insurance Corporation to settle residential mortgage-backed securities and collateralized debt obligations.
And back in November 2013, JPMorgan Chase signed an agreement with government agencies to end all existing legacy mortgage-backed securities issues for $13 billion.
But in each of those settlements, the DOJ did not prosecute the individuals responsible, causing many to wonder if the DOJ would ever go after the people actually behind the alleged crimes.
It looks like that’s about to change.
