'Pervasive Culture Of Corruption In The Financial Services Industry' Cited By Judge In Sentencing Ruling

Federal courts are required to state in open court the reasons for their imposition of a particular sentence in a criminal case. The other day, Eastern District of New York Judge Jack B. Weinstein sentenced a convicted criminal defendant, Eric Butler, who had been charged with fraud in connection with the purchases and sales of auction-rate securities (“ARS”), to five years in prison. The judge’s statement accompanying the sentencing is of particular interest.

The judge declared that Butler’s trial “laid bare the pernicious and pervasive culture of corruption in the financial services industry. The blame for this condition is shared not only by individual defendants like Butler, but also by the institutions that employ them, those who carelessly invest, and those who fail to regulate. Supervision is seriously negligent; greed and short-term gain are so enormous that fraud and arrogant disregard of others’ rights and of ethics almost encourage criminal activities such as defendant’s.”
 
Judge Weinstein also stated that the:
 
staggering sums involved in this case reflect more than the magnitude of the defendant’s fraud. They also evince an industry beset by avarice that has been allowed to run rampant by regulators and negligent supervisors alike. Multiple failures have contributed to the present situation:
 a failure of government regulators and legislators to adequately monitor and supervise potentially fraudulent and abusive activity;
 a failure by purchasers of securities, including sophisticated institutional investors, to exert reasonable control and supervision over transactions made on their behalf;
 a failure by Credit Suisse, Butler’s employer, and other financial institutions to adequately supervise their own brokers and traders;
 a failure of the industry generally to implement a compensation and incentive structure consistent with the importance of preventing fraud and other malfeasance; and
 a failure of the rating agencies to properly classify the risks presented by various securities—for example, bundling of subprime mortgages into what were then classified as high quality securities, as in the instant case.
 
He added that the “most compelling aspect of this case may be its illumination of the need to reconsider how compensation is calculated and investment products are marketed by the financial industry.” Moreover, he concluded, “[s]ystemic reform is needed; mere ‘[c]ompetition in product and capital markets can’t be counted on to solve the problem.’”
 
The case is U.S. v. Butler, 08-CR-370 (E.D.N.Y. Jan. 22, 2010).