The U.S. Justice Department (DoJ) is preparing to for additional mortgage related securities cases in the very near future as calls for individual prosecution of criminal wrongdoing grow.

DOJ Coalition of 27 Groups Urge Support for Operation Choke Point

Public to hear from DoJ’s residential mortgage-backed securities working group

The American public can expect to hear more from the DoJ’s residential mortgage-backed securities working group in the “very near future,” said U.S. Associate Attorney General Tony West. West made the comments when speaking at a news conference announcing a $7 billion settlement against Citigroup Inc (NYSE:C) on Monday but it was unclear if he was referring to individual prosecutions or additional charges against banks.

“The sad part is (the fine) comes out of the pockets of shareholders, not the pockets of officers and directors,” Chris Whalen, head of research at Kroll Bond Rating Agency, said in an interview on Bloomberg Surveillance this morning.

Supporters of individual prosecution note the point is future deterrence. Punishing shareholders and the entire corporation of the illegal actions of a few individuals who might not have thought they would be investigated or held responsible is part of the problem, critics say.

“The government’s approach is not on target,” Whalen said. “Coming out of the crisis we did not prosecute securities fraud. We did not hold officers and directors accountable, we (now) make the shareholders pay for it and I think that’s wrong.  It sends the wrong message.”

DoJ: Individuals accused by reformers of protecting big bank interests

When asked why DoJ hasn’t gone after individuals, Whalen clearly identified individuals who have been at the center of derivatives deregulation since 1998 and have been accused by reformers of protecting big bank interests during their time in government service.

“Larry Summers and Tim Geithner said the world would end if we went after individuals,” Whalen said. “You couldn’t prosecute them for acts of fraud.”  The argument had been made that going after large banks for criminal behavior could damage those banks, a theory that has been largely discredited. After announcing a $7 billion settlement this morning with Citigroup Inc (NYSE:C), for instance, the stock rose 4 percent.

In 1999 a policy, described in the “Holder Letter” was set forth by a then young DoJ prosecutor Eric Holder that essentially allowed a prosecutor discretion to not pursue a case if they believed actions against a bank or its key employees could pose a threat to the economy.  In later public statements DoJ’s chief criminal prosecutor, Lanny Breuer, acknowledged that investigations into wrongdoing by bank executives were halted as a result of concerns for overall economic security.  The 1999 policy letter was followed by a period of time when documented criminal behavior of the largest banks reached a historic high water mark as measured by fines against the banks.

After leaving the DoJ days after acknowledging this policy in a PBS Frontline report, Breuer went on to receive an estimated $4 million per year base compensation as a white collar defense lawyer.

Eric Holder has since been reported to recant on the policy of firms or individuals being “too big to prosecute,” and the Obama administration is said to have admonished the policy.