Preet Bharara: Fraud Charges Pending Against Big Financial Institution

Preet Bharara: Fraud Charges Pending Against Big Financial Institution

The US Attorney for the Southern District of New York, Preet Bharara, indicated today that criminal charges may be pending against a major Wall Street financial institution.

Charging the institution and not individuals

“You can expect that before long a significant financial institution will be changed with a felony or be made to plead guilty to a felony,” the Twitter account of the Southern District of New York (@SDNYnews) posted.

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Hesitation to investigate and much less prosecute financial firms

The US Department of Justice has long been hesitant to prosecute Wall Street financial institutions for fear it could lead to damaging the US economy.  In fact, the DoJ’s criminal division, when led by Lanny Breuer, had admitted that it did not fully investigate criminal leads in the mortgage-backed derivatives market, in particular at Countrywide.  Further, when interviewed by FrontLine’s Martin Smith, Breuer admitted that investigations into some of Wall Street’s most powerful figures were halted.  The days following this interview, Breuer and his press chief left the DoJ.

Financial institution’s lack of deterrence

Failure to investigate and prosecute criminal behavior on Wall Street has led to calls from large hedge fund players that Wall Street is “lawless,” and that deterrence of crime has completely broken down, Wall Street observers had assumed the prosecution would come on an individual basis where the potential for market damage was the lightest.  However, in the Tweets from Bharara, indications are the US Attorney is prepared to file charges against the entire financial institution.

“When institutions are held to account for institutional failures, then responsible institutions will and do respond,” another Tweet from the judicial office typically responsible for Wall Street criminal prosecution said.

Were tweets a negotiation tactic?

It is unclear at this point if the tweets were an attempt to move the needle on negotiations with an existing financial institution, as the tweets significantly noted that the institution would either plead guilty or face charges.

“A breakdown in a system requires an overhaul of the system,” another in a series of four tweets released minutes from each other said.  For the US Attorney in New York to consider the system has broken down is a significant development.  While hedge fund executives have noted both publically and privately that Wall Street is “lawless,” for a leading law enforcement official to make such a statement is highly unusual and an indication of the commitment to what could be a “law and order” solution to the problem.

The critical component of success in financial regulation is deterrence – the belief that if illegal behavior were to occur the law would be equally enforced and justice would be served.  Wall Street insiders had come to expect that certain powerful banks and top players in the banking community were exempt from prosecution.  Some say a lack of deterrence resulted in episodes such as MF Global Holdings Ltd (OTCMKTS:MFGLQ).  In this episode, speculation among observers is top executives transferred customer assets to cover firm expenses after being given clear warnings from regulators not to do so – all potentially with the belief that they would not be investigated, much less prosecuted.

When asked to comment on the tweets, the US Attorney’s office in New York did not respond by press time.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)

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