It was just a matter of time. With losses from the Subprime/credit/housing fallout continuing to grow with no end in sight, lawsuits had to happen eventually. Surely, if you look long and hard, and get the right lawyers involved, you will find that lies were told, not all facts disclosed and investment risks downplayed.
MarketWatch reports in “U.S. widens probe, seeks Merrill information:”
Federal prosecutors, expanding their look into Wall Street firms’ mortgage businesses, asked the Securities and Exchange Commission for information that the agency has collected on Merrill Lynch & Co., The Wall Street Journal reported Friday.
Citing people familiar with the situation, The Journal called the Justice Department’s interest “preliminary” but said sources told the newspaper that the U.S. attorney’s office request could be a precursor to a criminal investigation.
The Justice Department’s move comes after the SEC upgraded its own investigation into a formal probe, the paper reported. Moreover, the FBI is looking into dealings at 14 different firms and the way they did mortgage business.
Last week, authorities in Massachusetts charged Merrill and two of its employees with fraud in connection with securities it sold to the city of Springfield, Mass., which collapsed in value shortly after they were sold.
Federal prosecutors in Brooklyn have been probing activities at Bear Stearns Cos. after two funds run by that firm lost more than $1 billion over the summer. The Brooklyn prosecutors are also investigating Swiss banking giant UBS over its firing of a trader who, according to an earlier report, had clashed superiors over how to value mortgage securities.
Lawyers said any investigation of this sort would likely take years, not months, as regulators attempt to put together solid evidence to make their case.
“The government has a lot of hard work ahead of it in attempting to put together a case of this kind,” said Michael McGovern, a former federal prosecutor and white-collar defense lawyer for Ropes and Gray in New York. McGovern cautions that the complexity of a case of this sort could make it hard for federal regulators to find a smoking gun to prove misconduct.
If regulators can find conclusive proof of wrongdoing, any targets of the probe will probably have settled the lawsuit before then, experts said, as corporate boards attempt to put an end to the matter. The chances of Merrill seeing its employees indicted are also slim, unless they prove uncooperative with federal investigators.
“After the Arthur Andersen debacle, they wouldn’t indict anyone unless the current management is giving them a hard time,” said Solomon Wisenberg, a lawyer specializing in white collar crime who conducted the grand jury questioning of President Bill Clinton during the Whitewater investigation.
“My guess is that current management will bend over backward to give them anything they want, because there are so many sanctions available to the government,” Wisenberg said. “They will be very cooperative if they are smart.”
Political expediency, too, could be a factor in an increasing number of these types of cases. With the subprime mortgage mess fresh on the minds of many lawmakers — and their constituencies — the temptation to find a scapegoat could be too hard for many legislators to resist.
But lawyers cautioned against any attempt to legislate a quick fix.
“It’s important to remember that 20/20 hindsight is not evidence of guilt,” McGovern said. “Just because everything went bad doesn’t mean anybody did anything wrong. It follows every tragedy in the marketplace that people start calling for scalps and the government increases its energy trying to find someone to blame.”
While I am not in favor of frivolous lawsuits, it appears that some of the events justify an involvement as outlined above. Let’s hope that, if eventually certain parties are found guilty, serious penalties are handed down and not just a warning accompanied by a token fine and an extracted promise not to commit the same offense again.