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S. HRG. 111–835 

WALL STREET FRAUD AND FIDUCIARY DUTIES: 

CAN JAIL TIME SERVE AS AN ADEQUATE 

DETERRENT FOR WILLFUL VIOLATIONS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CRIME AND DRUGS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MAY 4, 2010 

Serial No. J–111–88 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

ARLEN SPECTER, Pennsylvania 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

AL FRANKEN, Minnesota 

JEFF SESSIONS, Alabama 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

MATT MINER, Republican Chief Counsel 

SUBCOMMITTEE ON CRIME AND DRUGS

ARLEN SPECTER, Pennsylvania, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

LINDSEY GRAHAM, South Carolina 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JEFF SESSIONS, Alabama 

TOM COBURN, Oklahoma 

HANNIBAL KEMERER, Democratic Chief Counsel 

WALT KUHN, Republican Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Kaufman, Hon. Edward E., a U.S. Senator from the State of Delaware ............ 2 

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared 

statement .............................................................................................................. 130 

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1 

WITNESSES 

Breuer, Lanny A., Assistant Attorney General, Criminal Division, U.S. Department of Justice, Washington, DC ................................................................ 34 

Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia Law School, 

New York, New York ........................................................................................... 18 

Pontell, Henry N., Professor of Criminology, Law & Society, University of 

California-Irvine, Irvine, California .................................................................... 20 

Ribstein, Larry E., Mildred Van Voorhis Jones Chair, Associate Dean for 

Research, University of Illinois College of Law, Champaign, Illinois ............. 24 

Roper, Barbara, Director of Investor Protection, Consumer Federation of 

America, Pueblo, Colorado ................................................................................... 2 

Silvers, Damon A., Policy Director and Special Counsel, AFL–CIO, Washington, DC ............................................................................................................. 6 

Verret, J.W., Assistant Professor, George Mason University, Arlington, Virginia ....................................................................................................................... 22

Weissmann, Andrew, Partner, Jenner & Block, New York, New York .............. 4 

SUBMISSIONS FOR THE RECORD 

Black, William K., Associate Professor of Economics and Law, University 

of Missouri, Kansas City, Missouri, statement .................................................. 49 

Blumenthal, Richard, Connecticut Attorney General, Hartford, Connecticut, 

statement .............................................................................................................. 80 

Breuer, Lanny A., Assistant Attorney General, Criminal Division, U.S. Department of Justice, Washington, DC, statement ............................................. 84 

Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia Law School, 

New York, New York, statement ........................................................................ 106 

Cummings, Andre ́ Douglas Pond, Visiting Professor of Law, University of 

Iowa College of Law and Professor of Law, West Virginia University College 

of Law, statement ................................................................................................ 118 

Galbraith, James K., Lloyd M. Bentsen, Jr., Chair in Government/Business 

Relations, Lyndon B. Johnson School of Public Affairs, The University 

of Texas at Austin, statement ............................................................................. 127 

Pontell, Henry N., Professor of Criminology, Law & Society, University of 

California-Irvine, Irvine, California, statement ................................................ 132 

Ribstein, Larry E., Mildred Van Voorhis Jones Chair, Associate Dean for 

Research, University of Illinois College of Law, Champaign, Illinois, statement ...................................................................................................................... 141 

Roper, Barbara, Director of Investor Protection, Consumer Federation of 

America, Pueblo, Colorado, statement ............................................................... 152 

Silvers, Damon A., Policy Director and Special Counsel, AFL–CIO, Washington, DC, statement .......................................................................................... 165 

Verret, J.W., Assistant Professor, George Mason University, Arlington, Virginia, statement ................................................................................................... 172 

Weissmann, Andrew, Partner, Jenner & Block, New York, New York, statement ...................................................................................................................... 174 

(1) 

WALL STREET FRAUD AND FIDUCIARY DUTIES: CAN JAIL TIME SERVE AS AN ADEQUATE DETERRENT FOR WILLFUL VIOLATIONS? 

TUESDAY, MAY 4, 2010 

U.S. SENATE, 

SUBCOMMITTEE ON CRIME AND DRUGS, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:30 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Subcommittee, presiding. 

Present: Senators Specter, Whitehouse, Klobuchar, and Kaufman. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. Good morning, ladies and gentlemen. The 

Judiciary Subcommittee on Criminal Law will now proceed with 

this hearing on the issues of alleged Wall Street fraud and what 

is the appropriate governmental response. 

The issues have come into sharp focus recently with the filing of 

charges by the Securities and Exchange Commission against Goldman Sachs. We have seen an economic crisis gripping the country 

for many months, enormous loss of jobs, enormous loss of gross national product, problems that are worldwide, and serious issues 

have been raised as to the connection between the so-called mortgage bubble and what has happened. 

In the allegations by the Securities and Exchange Commission, 

they have focused on packaging of mortgages, subprime mortgages, 

then bundled and then securitized with the stock being sold backed 

up by those subprime mortgages. The allegation has been made 

that the player who put together the mortgages then engaged in 

short selling. But a question arises as to what the duty, if any, is 

owed by the participants in this kind of an arrangement where investments are sold, what reliances on the part of the purchasers 

that there is a sense of a solid investment, while at the same time 

they are being sold short, which is a bet that they are going to go 

down in price. Some defenses have been raised, but we are dealing 

here with sophisticated buyers, and we are going to inquire into 

that. 

There are complicated arrangements with a variety of definitions 

and classifications, different duties owed as to someone who is deVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
2 

fined as a broker, someone who is defined as a dealer, someone 

who is defined as an investment adviser. And the final resolution 

of duties really depend upon how Congress sees it. We have the authority to define those relationships once we understand them. An 

extraordinarily complex field. 

I have long believed that it is insufficient to have fines for fraud. 

For corporate fraud, if you have a fine, it is calculated as part of 

doing business. And even where you have $1 billion fines, it is a 

relative matter where you have corporations which have $85 billion 

in net proceeds and very, very substantial profits. 

I had experience as a public prosecutor years ago and found that 

criminal convictions worked as an appropriate measure of punishment and worked as a deterrent to others. This Subcommittee has 

the responsibility for making recommendations to the full Committee and in turn to the full Senate as part of a legislative package as to what kind of penalties ought to be imposed. 

The Assistant Attorney General of the Criminal Division had a 

conflict this morning, but we will have an afternoon session to hear 

his testimony. We have very distinguished witnesses and a great 

deal of testimony, so I am going to keep this opening statement 

brief. 

I turn now to my distinguished colleague Senator Kaufman. 

STATEMENT OF HON. EDWARD E. KAUFMAN, A U.S. SENATOR 

FROM THE STATE OF DELAWARE 

Senator KAUFMAN. Yes, Mr. Chairman, I want to tell you I have 

rarely seen a hearing that had better timing than this one. I mean, 

talk about being at the right place at the right time, and it is not 

unusual for the Chairman to do that. I think he has been one of 

those people that has constantly looked out for how we can change 

things, how we can make things better, and how we can better 

make sure that the law is enforced. 

So thank you for holding the hearing today, and I am looking forward to the testimony. 

Chairman SPECTER. Thank you very much, Senator Kaufman. 

Our first witness is Ms. Barbara Roper, the Director of Investment Protection for the Consumer Federation of America, an alliance of approximately 300 pro-consumer organizations representing 

approximately 500 individual consumers. Ms. Roper has extensive 

experience conducting studies of abuses in the financial planning 

industry and is an adviser on financial reform. Ms. Roper earned 

her bachelor’s degree from Princeton University, a frequent witness 

before Congressional committees. 

We welcome you here, Ms. Roper, and look forward to your testimony. 

STATEMENT OF BARBARA ROPER, DIRECTOR OF INVESTOR 

PROTECTION, CONSUMER FEDERATION OF AMERICA, PUEBLO, COLORADO 

Ms. ROPER. Thank you very much. Mr. Chairman, members of 

the Committee, I greatly appreciate the opportunity to testify before you today on an issue that I have been working on since I first 

joined CFA in 1986, which is the need to hold brokers to a fiduciary duty to act in the best interest of their customers. 

3 

At CFA, our primary focus has been on protecting average, retail 

investors. But as last week’s hearing in the Permanent Subcommittee on Investigations made clear, institutional investors are 

also in need of protection from Wall Street’s increasingly predatory 

ways. And it is that aspect of the issue I will be talking about 

today. 

In examining the root causes of the financial crisis, many have 

observed that Wall Street firms no longer exist to primarily serve 

the needs of their customers. Indeed, the Goldman Sachs executives who testified last week seemed bewildered at times at the notion that anyone would expect them to do so. In their world, it appears that everyone takes it for granted that customers who cannot 

look out for their own interests are simply sheep waiting to be 

shorn and that the only imperative they recognize is the imperative 

to maximize the firm’s profits. While no single approach can offer 

a panacea, extending the fiduciary duty to brokers and to their 

dealings with institutional investors has the potential to significantly improve the culture on Wall Street. 

So what would it look like if these Wall Street firms were required to act in the best interests of their customers? 

For starters, it would be considerably more difficult to sell a 

product that you had specifically designed in order to move risks 

off your own balance sheet and in order to make a bet against it. 

At the very least, you would have to at least disclose the reasons 

for believing the securities were in the best interest of the customer, the nature of your role in that transaction and the conflicts 

of interest, and the risks that the client might be exposed to in the 

deal. Providing boilerplate disclosures that you might be either 

long or short the transaction would not suffice. And a firm’s proprietary trading practices generally would have to be accompanied by 

more robust disclosures and enhanced protections to ensure that 

the transactions truly benefited the customer. In other words, fiduciary duty could help to significantly rein in the kinds of abuses 

that were highlighted in last week’s hearings. 

Fiduciary duty could play a similarly beneficial role in targeting 

the kind of abusive practices that have been used to sell local governments all around the country on derivatives and other swaps 

arrangements. For example, it is hard to see how an investment 

bank could sell a swap designed to help a county hedge its interest 

rate risks that expose that county to greater risks—risks that were 

far greater than the risk that they were actually hedging, as has 

been experienced in communities all over the country. And what 

about those multi-million-dollar surrender fees that clearly benefit 

the investment bank, but what about the customer? At the very 

least, all of these features would have to be disclosed, including 

such factors as the firm’s financial interest in the trade and the 

maximum exposure of the customer would have to disclosed under 

a fiduciary duty. And if the customer would be better off in a traditional fixed-rate bond or variable-rate bond, then that is what the 

investment bank would have to recommend. 

In considering whether to expand fiduciary duty, Congress would 

need to decide when and to what that duty should apply. The legislative proposals currently under consideration offer several different approaches. The financial regulatory reform bill that passed 

4 

the House requires the SEC to adopt a fiduciary duty for brokers 

when they provide personalized investment advice to retail investors, and it permits the agency to extend that fiduciary duty to institutional investors. Unfortunately, the Senate bill, which started 

out stronger than the House bill, now does nothing to strengthen 

the fiduciary duty for investment advice. Senator Akaka and Senator Menendez have indicated that they plan to offer an amendment to fix that problem by substituting the House language, 

which is something that CFA strongly supports. 

On the other hand, the derivatives package in the Senate bill 

does include a fiduciary duty for swaps dealers in their dealings 

with Government entities, pension plans, endowments, or retirement plans. Because it covers derivatives, this provision fills an important gap necessary to reach the full range of Wall Street abuses 

that contributed to the crisis. Furthermore, because derivatives are 

among the most opaque and complex investments, they represent 

an area where all but the most sophisticated institutional investors 

are at an extreme disadvantage in their dealings with Wall Street 

and most in need of the fiduciary protection. 

As with any regulation, imposing a fiduciary duty on brokers will 

be only as effective as the regulatory enforcement that backs it up. 

Regulators, therefore, need to be prepared to impose fines that are 

commensurate with the damage to the customers, to hold supervisors accountable for the actions of those they supervise, and to 

pull the licenses of individuals who commit serious violations. But 

given the potential profits at stake in this area, as you have noted, 

fines are rarely going to be heavy enough to serve as a true deterrent. Holding out the possibility of jail time for violations has the 

potential to provide that deterrent. Moreover, tying criminal sanctions to willful violations would set an appropriately high bar to 

ensure that only the most egregious abuses result in jail sentences. 

As such, we believe that expanding the fiduciary duty and imposing criminal sanctions for willful violations could serve as a truly 

effective deterrent to the kinds of abuses that brought the global 

economy to the brink of collapse. 

Thank you. 

[The prepared statement of Ms. Roper appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much, Ms. Roper. 

Our next witness is Mr. Andrew Weissmann, from the firm of 

Jenner & Block, co-chair of the White-Collar Defense Unit there. 

Mr. Weissmann served as director of the Enron Task Force, was 

the chief of the Criminal Division of the United States Attorney’s 

Office for the Eastern District of New York, later special counsel 

to the Director of the FBI; a graduate of Columbia Law School. 

We welcome you here, Mr. Weissmann, and the floor is yours. 

STATEMENT OF ANDREW WEISSMANN, PARTNER, JENNER & 

BLOCK, NEW YORK, NEW YORK 

Mr. WEISSMANN. Thank you, Senator Specter, Senator Kaufman, 

and staff. As the former director of the Enron Task Force, I see certain parallels between the response to Enron and the issues being 

addressed today regarding the financial crisis. Now, as then, for instance, we have learned that the stability of the institutions we reVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
5 

garded as most robust may be illusory. But while comparisons are 

tempting, we have yet to see in the current crisis the kind of systemic fraud that occurred at Enron. 

I am not convinced at all that all or even the core of the conduct 

that we find most troubling on Wall Street now is properly considered criminal. 

Of course, Wall Street is not immune from criminal activity, but 

to the extent there is misconduct, there are abundant tools at the 

Government’s disposal to address the problem now. Thus, even if 

jail time for certain Wall Street misconduct is the best prescription 

for the current crisis, that goal does not require additional Federal 

crimes. I will make three points. 

First, before we add more criminal statutes to the Federal code, 

we should examine those that are already available to prosecute financial crime. Here, an anecdote of my own may be illustrative. I 

was a Federal prosecutor for 15 years, and when I switched from 

prosecuting organized crime bosses in New York City to going after 

financial fraud on Wall Street, I sought advice from a senior prosecutor regarding what I thought were intricate securities fraud 

statutes. His advice to me was get to know the mail and wire fraud 

statutes really well and not to worry about the rest. That is all embroidery. 

That advice was a recognition that in our technological age it is 

hard to see what criminal conduct at a financial institution would 

not satisfy the jurisdictional hook of the mail or wire fraud statutes. Any e-mail or SEC filing in service of a scheme to defraud 

could suffice. Even if we were to define new fiduciary duties, it is 

difficult to imagine what kind of material breach would not involve 

a misstatement or omission and, thus, be covered by at least one 

and probably several of the existing Federal criminal statutes. And 

if the misstatement is not material or the intent not willful, it is 

not evident that the conduct can or should be considered criminal. 

Another point that I would like to make is that a statute that 

criminalizes the breach of fiduciary duties could be struck down by 

the Court as impermissibly vague. Inquiries into the existence and 

scope of fiduciary duties can be a highly fact-specific project. If fiduciary duties are imported into the criminal context, their vagueness may take on constitutional significance. 

The Supreme Court is currently considering this issue in three 

cases involving the so-called honest services statute, which criminalizes the use of the mail or wires to deprive someone of ‘‘the intangible right of honest services,’’ a statute that some have criticized as criminalizing everything from defrauding a client to an 

employee calling in sick for a day. 

Imposition of criminal liability for breaching fiduciary duties 

would raise similar concerns about notice and fairness. For instance, would it be a Federal crime for a broker to fail to read diligently a prospectus or call a client daily about the market? Would 

every breach of a duty of care now become a crime? 

Given the pending Supreme Court decisions on the honest services statute, it would be wise to wait at least for the Court to speak 

before initiating legislation criminalizing conduct in this area. 

But there are other reasons not to leap to criminalizing conduct 

that is not now the subject of even civil liability. The line sepaVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
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rating criminal conduct from all other is society’s starkest boundary between right and wrong, and it should continue to be reserved 

for the most egregious misconduct. 

Second, it would be better to regulate problematic conduct directly or to first define the scope of specific fiduciary duty obligations in the civil context than to impose a vague criminal stricture 

that would leave the Government with unwarranted discretion and 

the public without the certainty of clear rules. 

Finally, the case for regulatory weapons, new ones, has not been 

made. Current law provides civil regulatory agencies with numerous tools. Executives and brokers can be barred from the industry 

by the SEC; corporations can lose their license to sell securities or 

to contract with the Government; and corporations’ profits can be 

wiped out by both the SEC and the Department of Justice. 

To the extent that one believes that the SEC, in spite of some 

contrary examples, has been a toothless tiger, the remedy is to encourage the SEC and the Civil Division of the Department of Justice to make greater use of their enforcement authority, not to rush 

to criminalize new conduct. 

Thank you. 

[The prepared statement of Mr. Weissmann appears as a submission for the record.] 

Chairman SPECTER. Thank you, Mr. Weissmann. 

Our next witness is Mr. Damon Silvers, associate general counsel 

for the AFL–CIO, where his responsibilities include corporate governance, pension, general business law issues. He was part of the 

AFL–CIO legal team that won severance payments for laid-off 

workers from Enron and WorldCom. He graduated from the Harvard Law School and has an MBA from the Harvard Business 

School. 

Welcome, Mr. Silvers, and we look forward to your testimony. 

STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR AND 

SPECIAL COUNSEL, AFL–CIO, WASHINGTON, DC 

Mr. SILVERS. Thank you and good morning, Chairman Specter, 

Senator Kaufman, and staff. I am Damon Silvers. I am now the 

policy director of the AFL–CIO, a recent promotion, and I serve as 

the Deputy Chair of the Congressional Oversight Panel for TARP. 

My testimony before this Committee is on behalf of the AFL–CIO 

and not on behalf of the Congressional Oversight Panel, its staff, 

or its Chair. 

The financial crisis that began in 2007 has had a devastating effect on working Americans. The U.S. economy lost 8 million jobs. 

Pension funds saw their asset values decline by close to $3 trillion, 

a drop of 30 percent, driven by broad equity market declines in the 

40-percent range, from which the markets have yet to fully recover. 

Mass home foreclosures, which not so long ago were a distant 

memory of the Great Depression, now seem to be a permanent feature of American life, running this year at the rate of 2.8 million 

foreclosures a year. 

Finally, the American public had to foot the cost, yet unclear, of 

rescuing the financial system. 

As a general matter, the AFL–CIO believes that proper structuring and implementation of financial regulation is key to proVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
7 

tecting the public from the consequences of financial boom and bust 

cycles, and we support strengthening and passing the Wall Street 

Accountability Act of 2010. 

We have always been skeptical of the line that we heard from 

then President Bush after Enron that everything was fine, just a 

few bad apples in the barrel that needed to be weeded out and 

prosecuted. In that sense, jail time, or the threat of jail time, for 

willful acts is not an adequate deterrent for financial misconduct, 

nor is the criminal law in and of itself adequate to police our financial system. 

However, we also believe that the fundamental fairness of our society is at issue when we look at the application of the criminal law 

to securities fraud and other types of business cases. 

There is a public perception in the wake of the events of 2008 

that unfortunately has some justification that a small number of 

wealthy and powerful Americans did vast damage to our country 

and to the lives of millions of families with relatively no personal 

consequences. A double standard with respect to willful illegal activity should not be acceptable in a democracy. 

Now, recently we have seen action by the Securities and Exchange Commission on a major case related to the financial crisis 

involving Goldman Sachs, which Barbara Roper referred to, and 

the press is reporting that the Justice Department has opened a 

criminal investigation. The legal arguments associated with this 

case have revealed a paradox with implications for the criminal 

law. Many Americans seek financial advice from their stockbrokers. 

Yet the reality is that the legal obligations of a broker are simply 

limited to recommending securities that are suitable and reasonable for their clients, not putting their clients’ interests first. There 

is also no obligation for brokers to avoid or disclose conflicts of interest. 

The AFL–CIO supports a clear fiduciary standard for both 

broker-dealers and investment advisers, as was provided in the 

original draft of Chairman Dodd’s Wall Street Accountability Act. 

I have attached to this testimony a letter from SEC Chairman 

Mary Schapiro to Chairman Dodd which discusses this issue in further detail. We particularly support requiring dealers in derivatives, when dealing with institutional clients such as pension funds 

and municipalities, to meet a fiduciary duty standard. 

In the context of adopting such a clear uniform standard, Congress should adopt companion language in the criminal code addressing willful breaches of fiduciary duty by brokers, much as the 

criminal code addresses willful acts of securities fraud or intentional breaches of fiduciary duty in the ERISA context. I would 

submit there is nothing particularly exotic about criminalizing intentional breaches of fiduciary duty. It is a well-known feature of 

our pension law today. 

There is another gap in our system of accountability for Wall 

Street, a gap you, Mr. Chairman, have taken the lead in addressing, for which we commend you, and that is the area of aiding and 

abetting securities fraud. While the aiding and abetting problem is 

a civil issue and not a criminal issue, it has consequences for the 

enforcement of the criminal securities laws. Effective deterrence of 

both civil and criminal securities fraud has always been in part reVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
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liant on the ability of investors themselves to pursue those who defraud them, and thus to draw the attention of the SEC and the 

Justice Department. This chain of events simply does not occur 

when private parties have no ability to pursue investment banks 

and other third-party actors in securities fraud cases. 

The AFL–CIO has long taken the view that the financial system 

needs to be regulated not with an assumption that the system is 

populated either by saints or villains, but by ordinary people subject as all of us are to economic and organizational pressures. 

Strong, comprehensive regulation is the right approach to such a 

system today as it was in the days when our securities laws were 

first enacted. But the criminal law is a necessary part of such a 

system, as my fellow witnesses have pointed out, for the most egregious acts. 

Thank you very much for the opportunity to testify before this 

Subcommittee. 

[The prepared statement of Mr. Silvers appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Mr. Silvers. 

We will proceed now with 10-minute rounds of questioning. We 

may have to modify depending upon how many Senators arrive in 

terms of the length of the hearing, but we will start at 10 minutes. 

Ms. Roper, how would you classify Goldman Sachs on the scale 

of definitions in the transaction being pursued by the SEC? 

Ms. ROPER. Well, in the transaction, the Abacus transaction that 

is at the base of the SEC case, the issue in dispute is a very narrow 

technical one. Did Goldman Sachs, when they supplied all of that 

information about ACA’s involvement in selecting the mortgages, 

misrepresent the facts by leaving out John Paulson’s role? And, you 

know, I do not have the expertise to judge that decision. What I 

do know is that in the series of transactions that were described 

in that hearing, the Goldman Sachs executives continually said, 

‘‘We are just market makers. We are just market makers. We are 

providing liquidity. We are bringing buyers and sellers together.’’ 

But the evidence in their e-mails and the evidence in their own 

statements suggests that that is clearly not the role—they were not 

limited to playing that role. They were actively moving securities 

off their books onto the books of their customers. They were looking 

to get out from under risk. They were packaging these products for 

a particular intent. And in several cases, they specifically stepped 

back from their role of market maker. For example, when they had 

a customer who wanted to short a stock, arguably what a market 

maker would do would be to bring those customers together. They 

retained the right to short it instead. They stepped ahead of their 

customers. When they had customers who wanted them to support 

a transaction, they refused because they knew it was a bad deal. 

So, you know, their conduct may well—I mean, their conduct in 

many of these instances may well have been perfectly legal, which 

is the first problem we have to solve. We need to create an obligation for brokers to act in the best interests of their customers to 

recognize that the notion, in light of the complexity and opacity of 

products today, the notion that institutional investors, that the majority of institutional investors can look out for their own interest 

is simply a fiction. 

9 

Chairman SPECTER. Ms. Roper, what standard applied to Goldman Sachs in this transaction? What duty of care? 

Ms. ROPER. Well, if they were acting as a broker and if the sale 

was not a private placement where—well, even if it were a private 

placement, they would have had a suitability obligation, they would 

have had an obligation that particularly in this context is really 

barely removed from a fraud standard. In other words, they would 

have needed to make sure that the customer was permitted to engage in this transaction. They would have needed to make sure 

that the customer wanted a security that roughly resembled what 

they were offering, but then they would not have had to take the 

next step of saying among all of the things I have available to sell 

that fill the bill, you know, that fit those qualifications, is this the 

one that is best for the customer? 

Chairman SPECTER. Ms. Roper, would you say they had a duty, 

as you characterize it, to act in the best interests of the customer? 

Ms. ROPER. Well, I think they had a moral duty to do that, but 

I do not think they necessarily had a legal duty because of a basic 

gap in our current laws. 

Chairman SPECTER. I understand that Senator Kaufman needs 

to go to the floor at 10. Let me yield to you at this point, Senator 

Kaufman. 

Senator KAUFMAN. Thank you. I would just like to deal with one 

point. There are a lot of things I would like to deal with, but unfortunately in this job you do not get to say where you are going to 

be. 

Anyway, Mr. Weissmann raised a good point that a lot of people 

raised. He says that the regulators had the ability to do this, everybody has got a right, we really don’t need to change the law and 

just let things go on the way they are. And I would like to ask each 

one of you: Isn’t our responsibility to make sure this does not happen again? We went through 8 years where we had regulators that 

basically did not enforce the law, and not because they were bad, 

they just did not think that we should have laws on regulation. I 

mean, they were quite clear about that from top to bottom. 

So one of my concerns as we move forward on this—and I think 

that Senator Specter’s idea of criminalizing this thing just—since 

I am not going to be here for a long time, I agree with what Mr. 

Silvers says—that there really is a crisis in this country, and I do 

not think it is a populist statement. I just think there is a crisis 

in terms of people thinking there are two different rules. So basically I am for, you know, doing something about it. 

But starting with Mr. Weissmann, then others, don’t you think 

it is important that the Congress give the regulators clear law on 

this since the regulators had the ability, as you said so well, to do 

so many of these things and they did not do it? Just in regard to 

this one question of criminalizing things, and I would like Ms. 

Roper and Mr. Silvers to make a comment. 

Mr. WEISSMANN. I agree with the sentiment and I agree that 

there is an issue with respect to the public viewing there as being 

two worlds and two different systems that are going on. But I think 

that creating a new criminal statute, which was similar to some of 

what was done post-Enron, will not cure the problem. You can look 

at Goldman—and I do not think we know the facts yet—but if 

10 

there was a misrepresentation in terms of the disclosure, that can 

be prosecuted civilly, and if it is intentional, that can be prosecuted 

criminally. 

The answer is to have oversight of the Department of Justice and 

the SEC to be taking those actions. Putting yet another law on the 

books might sound good to the public, and that Congress is interested in making sure something happens, but it will not assure 

that somebody actually implements it. 

So Goldman, assuming that there was wrongdoing there, could 

happen again without the SEC and the Department of Justice 

being vigilant about oversight with the current tools that they 

have. 

Senator KAUFMAN. Ms. Roper. 

Ms. ROPER. You know, it is no mystery you all have a huge task 

before you in dealing with the current crisis. The number of things 

that went wrong to create this crisis is really sort of mind-boggling. 

And in addressing it—I mean, yes, you have to regulate where we 

have in the past chosen not to regulate, so, for example, in the 

over-the-counter derivatives markets. 

Where there are things that were not illegal that should have 

been illegal, we need to make it clear that they are illegal. And I 

think the conduct in this area is one of those areas. 

The system did not work because there were sort of structural 

flaws in the system because we had institutions that were too complex to be effectively regulated or to be handled when they started 

to fail. We need to fix those aspects of the problem. And, yes, we 

need to make it clear to regulators what it is that we expect them 

to do in enforcing the laws, and then we need to hold them accountable for doing it. 

One of the biggest concerns about this legislation, which CFA 

strongly supports, is that it relies for its success on regulators to 

do effectively what they did very poorly in the run-up to this crisis. 

And so there is a job to be done after the legislation is passed and 

holding them accountable, and providing them with clear guidance 

in terms of the laws you expect them to enforce makes that easier. 

Senator KAUFMAN. Mr. Silvers. 

Mr. SILVERS. I will make two points, one about the specific legal 

issues involved in the broker-dealer area and what the problem is. 

The problem lies in what my fellow witness Mr. Weissmann said 

about a misrepresentation. My understanding of the Goldman case 

in a nutshell, it is like if you went to buy a car, and you said to 

the dealer, ‘‘Is this car safe?’’ And the car dealers says, ‘‘Yes, the 

car is safe.’’ And the dealer may or may not have made a misrepresentation to you, but what the dealer did not tell you is that the 

car has been selected for you by someone who has taken out a life 

insurance policy on your life. 

Now, not telling you that is not a misrepresentation. I do not 

know—and I think no one in this country at the moment knows— 

whether not telling you that in the context of a derivatives transaction by a broker-dealer constitutes fraud. That is going to be the 

subject of extensive litigation. It is unquestionable, though, that if 

we had a fiduciary standard, any fiduciary standard, that not telling you that in that context would breach that fiduciary standard. 

11 

The criminal issue is if you did not tell somebody that intentionally, if you had e-mails saying, oh, you know, we better not tell 

the customer what we are doing because if they found out they 

would behave differently, and we really want them to buy this and 

that sort of thing, if you had that type of intentional, willful conduct, should that be a crime? I suspect that if you think about it 

in the context of the auto analogy I drew, most of us would say 

that feels like a criminal act. 

The point of my testimony is that it is—in order to have sort of 

consistent fabric of the law, willful, intentional, egregious breaches 

of fiduciary duty in general in our legal framework are crimes. 

Now, Senator, you raised the much broader and more difficult 

problem of what do we do about regulators and enforcement agencies that do not do their jobs. I think there is an easy answer and 

there is a hard answer. The easy answer is we ought to at least 

fix the structural problems that make it very unlikely they will do 

their jobs. The AFL–CIO’s view is that it is dysfunctional to ask 

prudential regulators to protect consumers, that those two missions 

are in profound conflict, and we support an independent consumer 

financial protection agency for that reason. So that is a structural 

fix. 

We do not view the SEC, the Securities and Exchange Commission, as having a structural problem. We are pleased with the general direction of its leadership. But I think we have to recognize 

that as long as large financial institutions wield the kind of political power that they do in our society currently, the efficacy of our 

regulatory agencies is always in jeopardy. And I think that is one 

of the reasons why the AFL–CIO very strongly supports your efforts, along with Senator Brown’s, to do something about the size 

of those institutions. 

Senator KAUFMAN. I just want to say that we had the meltdown 

in 1929. In 1933, we came and we passed good laws, hard laws, 

Glass-Steagall and others, that lasted us for generations. I think 

the Chairman here—I want to cosponsor your bill. I think the 

Chairman is on to something in terms of the fact—and I do not feel 

like a populist when I say that. The fact that the vast majority of 

Americans could not understand what Goldman Sachs was doing in 

the testimony, but everybody that knew and follows what goes on 

knew what they were saying, and it all had to do with this brokerdealer relationship. But I think every single person I have run into 

since that hearing says, ‘‘That was wrong,’’ and we know that is 

wrong. It is the Potter standard. We know it when we see it. And 

guess what? If I am an auto dealer and I do that or I am someone 

that is in another business and I do that, where I am basically, you 

know, misrepresenting what it is that I am doing, that the other 

side, I do not let them know what my real personal position is in 

what I am doing, every American knows that is wrong, and every 

American knows in just about every other industry and business 

we are in, if you do that you go to jail. 

So I support what—I do not think that is—I do not believe—now 

anything that says something like that is populism. I do not think 

that is populism, because the people I talk to that are upset about 

it are not populists or anything else. The people I talk to that 

watched what went on said, ‘‘This is just wrong. I know it is wrong. 

12 

Everybody knows it is wrong. You should go to jail when you do 

something like what Goldman Sachs did.’’ They cannot go to jail 

now because it is not against the law. 

So, Mr. Chairman, I support totally what you are doing. I think 

we need strong laws. Great fences make great neighbors. And I 

think that we need some kind of a criminal statute to deal with 

this. 

Chairman SPECTER. Thank you very much, Senator Kaufman. 

Ms. Roper, we are on a point before I yielded to Senator Kaufman where I was asking you whether you thought that Goldman 

Sachs acted in the best interests of the customer. 

Ms. ROPER. No. I mean, I do not think you can remotely conclude 

from the evidence that has been put forward that they were looking 

to act in the best interests of the customers or recognized any obligation to do so. 

Chairman SPECTER. Mr. Weissmann, what duty, if any, do you 

think Goldman Sachs owed to the customers? 

Mr. WEISSMANN. Well, I do not think we know yet enough about 

the intricacies of that case. But one thing that we do know is the 

laws that they are currently subject to. If they, in fact, misrepresented the role of one of the people who was going to be influential 

in picking securities in the Abacus deal, then that is currently a 

civil and criminal offense, criminal obviously if it is done with the 

requisite intent. 

Chairman SPECTER. Well, what if it is a failure to disclose that 

participation? 

Mr. WEISSMANN. If there was no misrepresentation and they simply did not disclose it, but they were serving as a market maker, 

then that is something that is legal. 

Chairman SPECTER. Do you think Congress ought to change that 

if that conduct is legal? 

Mr. WEISSMANN. No, I do not. I think that there is a place for 

caveat emptor. If I as a buyer want a heightened duty at a financial institution, there is currently a clear mechanism for doing so. 

You can have a discretionary account. You can pay that financial 

institution to be an investment adviser and have them—you can 

choose to have a different type of relationship where you are not 

going to just give the institution instructions, and then they have 

a fiduciary duty currently to carry it out and to offer you suitable 

securities. But if you decide to have a relationship where they are 

going to be exercising any form of discretion, then there currently 

is a fiduciary duty requirement, certainly in New York where I am 

from. 

Chairman SPECTER. Well, let us explore that for just a minute. 

Is there no implicit representation when Goldman Sachs sells these 

securities that Goldman Sachs does not have an intent to bet 

against them to, in effect—wait until the question is finished. 

Mr. WEISSMANN. Sorry. 

Chairman SPECTER. Wait until Goldman Sachs is, in effect, of a 

mind that these securities are going to go down in value, when you 

talk about a misrepresentation, how would you distinguish that 

kind of a mens rea that the value is going to go down according 

to Goldman Sachs, isn’t that really a misrepresentation? 

13 

Mr. WEISSMANN. I think that is a great question, and I think it 

is very fact specific. If the issue is what is being implicitly represented when somebody is a market maker, I think that people 

who deal with market makers implicitly understand—and I think 

this was, in fact, in Goldman disclosures—that the market maker 

could be taking all sorts of different positions, that there could be 

people including Goldman Sachs that are thinking that it is a foolish thing to be on one side of the deal versus the other. I think that 

is, by definition, what a market maker is. 

Chairman SPECTER. Well, how about the participation of Mr. 

Paulson as alleged? And I agree with you, we do not know all the 

facts yet. But as alleged, Mr. Paulson was the person who put 

these subprime mortgages together, and he is a major hedge fund 

operator. And as it worked out, he, according to the allegation, selling them short, made $1 billion. How can even a sophisticated investor exercise diligence to go into a bundle of subprime mortgages 

and figure out what they are when the person who is putting them 

together knows what they are and thinks they are going to go down 

in value? How about that? 

Mr. WEISSMANN. I agree with you, if those are the facts, if it 

turns out that that is what Mr. Paulson was doing, and Goldman 

knew it and was representing otherwise, then that clearly is not 

only a civil problem, but it could be a criminal problem. I think 

that my point earlier is that—— 

Chairman SPECTER. It could be? When you say Goldman knew 

what Mr. Paulson was doing? 

Mr. WEISSMANN. The only reason I say it could be a criminal 

problem is, as a former prosecutor, one looks for criminal intent 

and whether one can prove that beyond a reasonable doubt. But assuming those set of facts, you would look at civil liability and to 

make a criminal case in connection with misrepresentations about 

the fact that a person was choosing undisclosed—in fact, a misleading statement was made about that person’s role in the security that was being marketed. That would be very different and 

raises—I think that is the reason there is such a strong reaction 

to the Goldman Sachs allegations by the SEC. It is not simply the 

market maker factor. It is the issue of whether the disclosure was 

misleading about what Mr. Paulson’s role was going to be. And if 

those bear out, then I think everyone has good reason to be upset 

about what happened. 

Chairman SPECTER. Well, how about the nondisclosure? Isn’t 

nondisclosure sufficient to establish culpability? Nondisclosure of a 

very material fact? 

Mr. WEISSMANN. That could be. Under the current securities 

laws, a material omission can be prosecuted civilly, and it can be 

prosecuted criminally under the current civil laws and criminal 

laws. 

Chairman SPECTER. Mr. Silvers, Mr. Weissmann is moving along 

here. He is, I think, conceding that there is criminal liability here 

on the facts as represented. Maybe we do not need to change the 

law at all. What do you think? 

Mr. SILVERS. Well, I think you need to follow very carefully these 

distinctions between misrepresentations, misleading statements, 

and omissions. My understanding is that the question of an omisVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
14 

sion under current law for a broker-dealer or a market maker is 

at best unsettled, and that that really is the nub of this discussion; 

the question of whether the general securities law standard that 

Mr. Weissmann referred to at the end of his comments, which is 

the standard that would apply to an issuer of securities—or an investment adviser who has fiduciary duties. An issuer has a set of 

statutory duties that are non-fiduciary. The adviser has fiduciary 

duties. 

Chairman SPECTER. How would you classify Goldman Sachs in 

this transaction? 

Mr. SILVERS. Well, Goldman Sachs appears to have been a 

broker-dealer acting as a market maker. It is unclear to me whether or not in the context of doing that they were rendering investment advice. If they were rendering investment advice, their defense is going to be they are not covered by the Advisers Act because it was incidental to their market-making function. 

Chairman SPECTER. Well, when you say rendering investment 

advice and that is the fiduciary standard, Congress has the authority to define what investment advice is. But if you have Goldman 

Sachs selling these securities knowing that they were in a bundle 

of subprime mortgages put together by an individual who thinks 

they are going to go down in value, isn’t that sufficient to the customer, when you talk about a fiduciary duty, to tell them what is 

happening? Fiduciary duty is a big fancy word, but, in effect, to tell 

them what is going on? 

Mr. SILVERS. Mr. Chairman, I think what you are pointing out 

here is that the reality of behavior today by broker-dealers is that 

it involves both sort of old-fashioned sort of market-making caveat 

emptor type behavior where a customer shows up and says, ‘‘I want 

a particular security. Sell it to me, please. Quote me a price,’’ which 

is, I think, what the framers of the securities laws in the 1930s had 

in mind. It also involves investment advice. The customer who calls 

up and says, you know, ‘‘Tell me, Mr. Broker, what would you suggest I buy today,’’ or ‘‘What do you think my portfolio mix ought 

to look like?’’ They do not have discretion over the account, but 

they are rendering advice. 

And a third thing which I think is really the key to understanding the Goldman situation, which is something that looks sort 

of like being an issuer, which is you are packaging a security. Goldman knew something about the internal workings of these securities, according to the allegations at least, that a customer could not 

possibly have known in a way that a traditional market maker 

would not. 

Chairman SPECTER. Even a sophisticated investor? 

Mr. SILVERS. What Goldman knew, apparently, according to the 

allegations was that John Paulson, who had a short position, was 

putting the package together. 

Chairman SPECTER. Mr. Silvers, is it adequate to deal with this 

kind of conduct with a fine? I note a media report that Goldman’s 

value declined some $21 billion. Is it sufficient to impose a fine? Or 

what kind of a fine would be big enough to be punishment? What 

kind of a fine would be big enough to be a deterrent to others? Is 

there any fine sufficient to equate a jail sentence in terms of deterring other people? 

15 

Mr. SILVERS. Well, Mr. Chairman, I am reluctant to comment 

about the details of this case for the same reason as my fellow witnesses are. But I will comment in detail about what your question 

is in general. 

It has been a mystery to me throughout my involvement in these 

issues why it is that fines in the area of securities fraud and other 

investment issues are as small as they are in relation to the firms 

and the conduct involved. But it is a feature of our system that 

they are very small in relation to a firm like Goldman Sachs. 

Chairman SPECTER. Well, is any fine sufficient compared to a jail 

sentence? 

Mr. SILVERS. I think there is a qualitative difference. 

Chairman SPECTER. Ms. Roper, is a fine sufficient? Do we need 

jail sentences here as a deterrent? 

Ms. ROPER. I agree that white-collar criminals should face the 

same risk of going to jail, arguably, that they do much greater 

damage. And if you look at the history of the fines that are imposed, even the most, you know, extensive fines that have been imposed in recent years, they are a drop in the bucket compared to 

the profits that the firms are making on this activity. And as a 

practical matter, we will not get fines at the level that would inflict 

that kind of damage. 

If you look, for example, in the issue of JPMorgan’s sales of 

swaps to communities around the country which have left towns, 

school boards firing people in debt, it was the criminal investigation into price fixing in that market that ultimately convinced 

JPMorgan to shut that unit down. It was the threat of jail time, 

which one JPMorgan employee actually did a little, that really sort 

of got their attention. And I do not think, given the kind of profits 

that they were making in that business that you could have done 

it with the traditional tools. 

Chairman SPECTER. Mr. Weissmann, would fines have been sufficient in the Enron case, or don’t you really need jail time to have 

a deterrent? 

Mr. WEISSMANN. I agree with you that there are cases where you 

need jail time to have a sufficient deterrent. I think it is a complicated question. First, for corporations, there is no jail time, so 

the kinds of—to answer your question about what can be an adequate deterrent, sometimes a fine is not going to be sufficient, and 

other measures, such as a monitor barring the company from engaging in certain types of transactions, either permanently or for 

a temporary period, can serve a deterrent value. 

Individual prosecutions criminally can serve a deterrent value, 

but not necessarily for corporations because they can simply cut 

loose that employee and not really take to heart what that means 

in terms of systemic change at the institution. So when you deal 

with corporations, the issue of jail time is really illusory, and you 

have to sort of figure out what else one can do other than a fine 

to get the company’s attention when you really have egregious conduct. 

Chairman SPECTER. Mr. Weissmann, I want to shift to a little 

different subject. The Supreme Court has said that aiding and 

abetting does not give rise to civil liability under the securities 

acts. I have introduced legislation, cosponsored by others, to change 

16 

that. Congress, of course, has the authority to change the laws, or 

the Supreme Court interpretation on something other than a constitutional issue. Aiding and abetting is a crime. How can you have 

conduct defined as a crime, which is a much tougher standard to 

prove a crime, than civil liability? Wouldn’t it logically follow that 

there ought to be civil liability for aiding and abetting? 

Mr. WEISSMANN. I think that the current state of the law is certainly unusual in that you have a criminal aiding and abetting 

statute, but it is not true that there is no civil liability. It is a question—the Court, I think, interpreting what Congress had done, determined that the SEC has enforcement power. And I think, candidly, what was going on—— 

Chairman SPECTER. Unusual? Do you know of any other case 

where conduct is defined as criminal conduct but does not give rise 

to a civil claim? 

Mr. WEISSMANN. Not off the top of my head. I am sure there are, 

but not sitting here right now. 

Chairman SPECTER. Let me move to one other subject because I 

want to bring in the second panel. You omitted the paragraph in 

a revised statement which you submitted that—it is a long one, but 

I think it is a very important issue, and I want to read it. This was 

in your first statement and omitted from your second statement. 

’’Likewise, to the extent that civil lawsuits brought by private individuals have also failed to create a sufficient deterrent effect, the 

problem may well be that the likelihood of civil liability is too low 

rather than civil sanctions are too weak. In particular, prior to imposition of new criminal liability, it may be worth examining 

whether some of the road blocks erected to prevent civil strike suits 

have been unintended consequences of blocking legitimate civil 

claims, particularly when they concern complex financial instruments. For example, it has been made intentionally difficult to 

comply with pleading requirements that dictate that the initial 

complaint must spell out the specifics of the civil fraud even prior 

to taking discovery. This may be unwarranted when the securities 

involved do not trade on a transparent open market—many structured financial products do not—and the practices of the financial 

institutions are not seen by the investor. Similarly, even in cases 

of blatant fraud, victims may find it difficult to overcome case law 

that almost automatically deems buyers so-called sophisticated investors even if they understand little about the complex securities 

marketed to them and even if they were told the securities were 

not complex at all.’’ 

Now, that is pretty complicated for C–SPAN viewers, but the 

people in the field will understand it. Aren’t you really saying there 

that the law has gone too far and that the decisions, Congressional 

decisions, the 1995 Private Securities Litigation Reform Act requiring particularity when the plaintiff really cannot know the facts 

and has gotten them traditionally by discovery but cannot now, and 

that the limitations on the pleading rules on the recent Supreme 

Court decision have gone too far, and that there ought to be greater 

latitude in the civil lawsuits? You are suggesting that if there were 

that latitude, that might deal with the issue as opposed to criminal 

liability. Should we reduce the particularity necessary for a plaintiff—— 

17 

Mr. WEISSMANN. Yes—— 

Chairman SPECTER [continuing]. And revise the pleading standards as interpreted by the Supreme Court? 

Mr. WEISSMANN. Well, I think that the Supreme Court was correct in the Stoneridge decision in recognizing a difference in terms 

of who would be bringing the lawsuit and trusting that the SEC 

would be looking after the public interest with the concern that 

many lawsuits are brought as strike suits where they are not meritorious. And the issue is how to screen out the so-called strike suits 

that, frankly, are a tax on all of us because they are not meritorious, and you have corporations spending a fortune defending 

them. 

The reason for the change in what I submitted was because the 

issue of how to best regulate, how to best deter conduct. I do not 

think comes from bringing more private civil lawsuits. I do not 

think that is a mechanism for effecting change. I think that there 

are other ways to do it, but I do not think corporations respond to 

that. I think that what you get, because there are so many frivolous lawsuits like that, is corporations spending a lot of money and 

correctly viewing the vast majority of those cases as not meritorious. 

Chairman SPECTER. Mr. Weissmann, can you answer yes or no? 

If you can, I would like you to do that. If you cannot, I understand. 

But can you answer yes or no that there ought to be greater latitude on pleading? 

Mr. WEISSMANN. I think the answer is—— 

Chairman SPECTER. To avoid a motion to dismiss. 

Mr. WEISSMANN. I am sorry. I did not hear you. 

Chairman SPECTER. To avoid a motion to dismiss. 

Mr. WEISSMANN. I do not actually know, but I do not think that 

the current standard is inappropriate as set forth by Stoneridge 

and recent Supreme Court cases. 

Chairman SPECTER. Why did you take the paragraph out of your 

resubmitted statement? 

Mr. WEISSMANN. Precisely for the reason I told you, which is that 

the issue of how to best regulate conduct, how to best—what I understood this hearing was about was what is the best way, when 

there is wrongdoing at corporations, to get them to change. 

Chairman SPECTER. What did you think was the best way to regulate conduct when you submitted your first statement? 

Mr. WEISSMANN. Exactly what I wrote. When I looked at that 

paragraph, I realized that that did not address—— 

Chairman SPECTER. Did you change your mind on the best way 

to regulate conduct? 

Mr. WEISSMANN. Yes, I did. 

Chairman SPECTER. OK. Thank you very much, Ms. Roper, Mr. 

Weissmann, and Mr. Silvers. I appreciate your testimony. 

Chairman SPECTER. We will move now to panel two: Professor 

John Coffee, Professor Henry Pontell, Professor Verret, and Professor Ribstein. 

Without objection, we will insert into the record the written 

statements of the witnesses unavailable for this hearing. 

[The statements appear as a submissions for the record.] 

18 

Chairman SPECTER. Our first witness is Professor John C. Coffee, 

Jr., the Adolf A. Berle Professor of Law at Columbia, also the director at Columbia of the Center on Corporate Governance. Professor 

Coffee has a very distinguished record as a member of the Legal 

Advisory Board of the New York Stock Exchange and NASD and 

a member of the Economic Advisory Board of Nasdaq. He has been 

a professor at an amazing array of law schools—Harvard, Stanford, 

Virginia, Michigan. Is that correct, Professor Coffee? 

Mr. COFFEE. I have been a busy professor at all the ones you just 

named. 

Chairman SPECTER. Wow, a lot of law schools. And he has the 

most widely used casebooks on securities regulation and corporate 

law. The Adolf A. Berle Professor of Law Chair at Columbia is 

named after an extraordinarily distinguished professor who wrote 

the casebooks and the treatises for many years. Professor Coffee is 

a graduate of Amherst and the Yale Law School. 

The floor is yours, Professor Coffee. Five minutes. 

STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF LAW, COLUMBIA LAW SCHOOL, NEW YORK, NEW 

YORK 

Mr. COFFEE. Thank you, Chairman Specter and members of the 

staff. My message is simple and direct: A fundamental hole exists 

in the center of the pending financial reform legislation that is now 

wending its way through Congress, and it will continue to exist unless and until Congress tells broker-dealers and investment banks 

basically that the client comes first, or in the language of lawyers, 

that broker-dealers and investment banks owe a fiduciary duty to 

the investor. 

Conflicts of interest played a key role in causing and intensifying 

the 2008 financial crisis. I study financial history. That is not unusual. Conflicts of interest have played a key role in most of our 

major financial meltdowns. 

We saw, we have seen already this morning—I will not rehash 

the history of what happened with investment banks and credit 

rating agencies giving inflated ratings and selling products that 

they were personally betting against. But I want to take you back 

just 10 years ago when we had Enron and WorldCom. At that time, 

we found that securities analysts were making inflated recommendations which they in contemporaneous e-mails discounted 

and showed they disbelieved. At that time, an iconic securities analyst, a man called Jack Grubman at Citicorp, told the world that 

what others called a conflict, he called a synergy. I think that was 

symptomatic. He was underplaying the role of conflicts. 

That same attitude was prevalent last week when there was another symptomatic moment. At a critical point in last week’s Goldman hearings, Senator Susan Collins asked a panel of Goldman executives did they have a fiduciary duty to act in the best interests 

of their clients. They were sort of stumped by that question and 

gave somewhat halting answers, but one of them eventually said 

that he did believe that ‘‘we have a duty to serve our clients.’’ 

Now, whatever he meant by that, the correct answer is simple 

and unambiguous: Except in a very few States, like California, 

broker-dealers owe no fiduciary duty, no general fiduciary duty to 

19 

their clients. That defines the problem, and that makes possible 

the continuation of serious conflicts of interest. 

What brokers today owe is a much lesser dilute standard set 

forth in something called the suitability rule. The suitability rule 

is passed not by Congress, not by the SEC, but by self-regulatory 

bodies that began with the Stock Exchange and the NASD, and it 

is now a rule of FINRA, but it requires only that the broker not 

believe on facts that the client has disclosed to him that this particular security is unsuitable, is contrary to their needs given the 

information they have disclosed to the broker. That is a much lesser standard. A fiduciary duty requires that you act in the best interests of the investors. So the difference is between today a standard that says do not recommend a security if it is clearly unsuitable on facts the client has told you versus act always in the best 

interests of the customer. 

Acting in the best interests of the customer, is that a bad idea? 

Several panelists in their prepared statements will tell you and 

have set forth in their statements that a fiduciary duty is inefficient, vague, ambiguous, and liability-laden. I think basically these 

are a laundry list of Chicken Little reasons telling us that the sky 

will fall in if we mandate that you act in the best interests of the 

customer. Let me make some basic points about whether or not the 

sky will fall in. 

First of all, the securities laws contain a number of specified fiduciary duties and have done so since 1940. If you look at the Investment Company Act of 1940, it has a Section 36 which last 

month a unanimous Supreme Court interpreted to continue to set 

forth the fiduciary duty that governed. The Supreme Court reversed the decision of the Seventh Circuit that had sought to eliminate that fiduciary duty. So that is what all mutual funds are subject to today, a fiduciary duty about setting their own investment 

contracts. 

There was a major hearing in front of a body called the Investment Company Institute 3 weeks ago. I was the keynote speaker 

at their lunch, and at that lunch they all agreed that they could 

live with the Jones v. Harris standard that the fiduciary duty recognized by the Supreme Court was not going to be a significant 

business problem for them. My point is the sky is not falling in in 

that field. 

Now let us talk about the Investment Advisers Act of 1940, a different statute. All investment advisers are subject to a fiduciary 

duty, and most of the major investment banks already live with 

that standard in at least part of their activities. So much of what 

they do, they do live with the fiduciary duty. Chairman Schapiro 

at the SEC has proposed a uniform standard. The House Committee did and with no strong objection from FINRA at the time 

of that proposal. 

My point is that the world is living with fiduciary duties today. 

The sky is not falling in. And I think the key issue for Congress 

is: Is it going to accept the current world, which is, as some described it, caveat emptor in terms of what can be done in the private world of placement agents? Or is it going to insist on a fiduciary duty? That is for Congress to answer. I do not have time to 

go into all the issues about the criminal law, but I would point out 

20 

that because the Supreme Court is certain, almost absolutely certain to be invalidating the existing honest services fraud statute— 

which is an overbroad, overripe statute that I previously criticized. 

But because they are unlikely to invalidate that statute, there is 

a need for a more focused, specialized statute dealing with just the 

fiduciary duties of a broker-dealer and not the fiduciary duties of 

all people at all times, which is what the honest services fraud 

statute was. 

You are going to have an empty slate, not the slate that everybody has been describing as having many laws. The principle on 

a services statute would be invalidated, and you do need something 

to replace it. 

So at this point, let me stop and just say that I think the key 

issue is the fiduciary duty, and I congratulate you for being on that 

right track. 

Thank you. 

[The prepared statement of Mr. Coffee appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Professor Coffee. 

Our next witness is Professor Henry Pontell, teaches criminology 

and law and society at the University of California at Irvine, has 

a bachelor’s degree and master of arts and Ph.D., all conferred by 

the State University of New York at Stony Brook. He has devoted 

three decades of academic scholarship to the problem of financial 

fraud and white-collar crimes, served as vice president of the 

American Society of Criminologists and president of the Western 

Society of Criminology. 

Thank you for coming a long way, Professor Pontell, and we look 

forward to your testimony. 

STATEMENT OF HENRY N. PONTELL, PROFESSOR OF CRIMINOLOGY, LAW & SOCIETY, UNIVERSITY OF CALIFORNIA– 

IRVINE, IRVINE, CALIFORNIA 

Mr. PONTELL. Thank you, Chairman Specter, staff, and thank 

you for the invitation to discuss policy issues related to the use of 

criminal punishment to deter financial fraud. 

White-collar and corporate crimes impose an enormous financial 

burden on citizens, and it must be appreciated that they constitute 

a more serious threat to the well-being and integrity of our society 

than traditional kinds of street crime. As a Presidential Commission put the matter, ‘‘White-collar crime affects the whole moral climate of our society. Derelictions by corporations and their managers, who usually occupy leadership positions in their communities, establish an example which tends to erode the moral base 

of the law.’’ 

There are several major themes that I want to address in this 

brief presentation which summarizes my longer written testimony, 

and I will stick closely to the issue of deterrence through criminal 

punishment, which I was asked to concentrate on, versus the larger 

issues of the crisis. 

First, I want to support the infliction of criminal penalties on 

white-collar and corporate criminals who violate criminal laws. The 

current spate of financial sanctions is no more than an additional 

and mildly bothersome cost of doing business. 

21 

Second, I want to emphasize that persuasive anecdotal evidence 

indicates that particularly for potential white-collar offenders the 

prospect of criminal penalties can be effective deterrents. There is 

no definitive empirical evidence to prove this. To mount a satisfactory experiment on the subject would violate ethical standards. But 

we know that upper-class businesspersons fear shame and fear incarceration. They are rational calculators par excellence. 

Third, I would endorse the notion that regulatory agencies, most 

notably the Securities and Exchange Commission, be empowered to 

mount criminal prosecutions with internal personnel. Too often 

interagency agendas that must be negotiated between an agency 

and the Department of Justice inhibit effective deterrent responses 

to white-collar and corporate crime. 

Fourth, I believe the public is growing increasingly restive about 

the failure of the criminal law to be tied to the crimes of those who 

engaged in them. The war on drugs snared a horde of financially 

marginal people. There has been no similar war on financial thugs. 

To make a decisive move toward deterring fraud in the higher 

echelons of business, a significant influx of enforcement resources 

is necessary to allow investigators and prosecutors to bring major 

cases. 

Fifth, besides considering harsher penalties, Congress needs to 

seriously consider having chief criminologists and fraud experts as 

central officers of regulatory agencies, just as there currently are 

chief legal counsels and economists. A fraud analysis should be conducted before any new regulatory legislation is enacted so that we 

can avoid repeating mistakes of the past. 

Given the low probability of apprehension and the likelihood of 

no or light punishment, white-collar crime is seen as a rational action in many cases. The comparative leniency shown white-collar 

offenders has been attributed to several factors related to their status and resources, as well as to the peculiar characteristics of their 

offenses. 

Empirical evidence supports the leniency hypothesis. A study of 

persons suspected by Federal regulators in Texas and California to 

be involved in serious financial crimes during the savings and loan 

crisis of the 1980’s revealed that between only 14 percent and 25 

percent were ever indicted. The study also examined the sentences 

imposed in S&L cases involving mean losses of a half million dollars and found that the average sentence was 3 years—significantly 

less than the average prison terms handed to convicted burglars 

and first-time drug offenders tried in Federal court. 

Some financial writers have labeled past reactions of politicians 

to corporate scandals as ‘‘hysterical,’’ arguing that ‘‘penalties for 

failure are not merely lower earnings, but lawsuits, prosecution, 

huge fines, and long prison terms.’’ They may be correct about failure causing lawsuits and even fines; but they are mistaken about 

prosecution. Long prison terms are not caused by mere failure; they 

are caused by serious criminal behavior. 

A central problem that underlies deterrent strategies is that despite some high-profile cases, the Government has trivialized criminal fraud to the point that it is routinely dealt with at the lowest 

offense levels, and when larger cases are discovered they are more 

likely to be pursued civilly and not criminally. We can look at a key 

22 

example in the current crisis. The FBI publicly announced in 2004 

that there was the potential for ‘‘an epidemic of mortgage fraud,’’ 

yet Attorney General Michael Mukasey declined to create a task 

force to investigate the root causes of the subprime debacle, likening the problem to ‘‘white-collar street crime’’ that could best be 

handled by individual United States Attorneys’ Offices. The lack of 

Government response after the alarm had been sounded stands in 

direct contrast to the Government’s response to the savings and 

loan crisis—a financial disaster that was approximately 1/30 the 

size of the one we are currently experiencing. The central issue 

here is strong, proactive policing. 

In conclusion, in August 2009, Maurice (Hank) Greenberg, 

former AIG chief executive officer, and Howard Smith, the company’s former chief financial officer, paid $15 million to the SEC 

to settle the charge that they had misstated the financial condition 

of the company. Regarding the dynamics of white-collar crime, it 

was noteworthy that Greenberg did not admit guilt and insisted 

that had he been charged criminally with securities fraud, he 

would have fought the case rather than settle. This might be regarded as a piece of evidence favoring the view that the most effective tactic against white-collar offenders is the criminal charge. 

They find notably onerous and oppressive the stigma associated 

with a criminal label, while a financial penalty can be written off 

as not much more than the relatively small price of doing business—especially monkey business. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Pontell appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Professor Pontell. 

Our next witness is Professor J.W. Verret, assistant professor of 

law at George Mason University, where he teaches corporate and 

security law. Prior to joining the faculty at George Mason, Professor Verret was an associate in the SEC enforcement defense 

practice at Skadden Arps in Washington. He has his bachelor’s degree from Louisiana State University, a master’s from Harvard’s 

Kennedy School of Government, and his law degree from the Harvard Law School. 

Thank you for coming in, Mr. Verret, and the next 5 minutes are 

yours. 

STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR, 

GEORGE MASON UNIVERSITY, ARLINGTON, VIRGINIA 

Mr. VERRET. Thank you, Chairman Specter and Ranking Member Graham, and distinguished members of the Subcommittee. I 

appreciate the invitation to testify today. As you said, my name is 

J.W. Verret. I teach securities law at George Mason, and I also 

work with the Mercatus Center at George Mason. I also direct the 

Corporate federalism Initiative, a network of scholars who are dedicated to studying the intersection of State and Federal authority in 

corporate governance. 

Considering new legislation requires that we compare the costs 

of the new law against its benefits. This is typically a very complicated process. For today’s proposal, however, the exercise is fairly simple. A criminal fiduciary duty standard for securities brokers 

23 

would impose inordinate costs on the securities markets that would 

be passed through to investors while doing little to stop future financial crises. 

I will also note that comparing today’s topic to the Goldman 

Sachs controversy is inappropriate. That case is complex and that 

case awaits a final verdict. I certainly do not need to remind the 

Committee on the Judiciary that it would be foolhardy to make 

new legislation under the assumption that wrongdoing occurred 

without a full trial on the issue. 

If it is ultimately determined that Goldman Sachs did engage in 

wrongdoing, the Department of Justice already has the necessary 

tools to prosecute securities fraud under Section 10(b) of the Securities Exchange Act of 1934. The legislation under consideration 

today, then, would not assist in prosecuting fraud of the sort alleged in the Goldman Sachs case, if indeed fraud occurred in that 

case in the first instance. 

My work focuses in part on fiduciary duties in State corporation 

law. I was privileged to clerk for the Delaware Court of Chancery, 

one of the sources of American corporate law. The concept of fiduciary duties we are discussing today emerged from that court in 

many ways. 

The challenge for judges reviewing business investments, under 

a fiduciary duty standard and after the fact, is that it is too tempting to decide whether a decision was fair at the time it was made 

in light of how the investment ultimately performs. Business decisions, like purchases of investment products, are highly risky. That 

is why they can be so profitable. But in administering fiduciary 

duty laws, it is nearly impossible to avoid being influenced by the 

perfect vision of hindsight. 

Such Monday morning quarterbacking would, however, chill the 

securities markets in a significant way at a time when they are already under severe strain. 

Getting fiduciary duties right in the civil liability sphere is difficult enough. Making fiduciary duty violations into criminal violations would pose an even greater challenge. 

There are a wide variety of different relationships between securities brokers and their clients. Some securities brokers act as 

counselors; some merely facilitate transactions at the client’s direction. Some brokers cater to large institutional investor clients; others cater to individual retail clients. The contracts governing these 

relationships are equally diverse. A global fiduciary standard for all 

of these relationships would limit investors’ flexibility to design 

contracts appropriate for their particular needs. 

By way of analogy, consider for a moment the market for foreclosed housing. Foreclosed homes are more likely to need significant refurbishment and have high maintenance costs. Banks foreclosing homes do not have the resources to inspect all of those foreclosed homes. So foreclosed homes sell ‘‘as is’’ at a deep discount. 

Buyers with the skills to gauge the risk are willing to buy those 

foreclosed homes, without requiring absolute guarantees from the 

banks that are selling them because they offer the possibility for 

generous profit, but also, of course, in tandem, they offer the possibility of significant risk. 

24 

Now, if we were to mandate that banks selling foreclosed homes 

issue an absolute guarantee on the homes they sell, there would no 

longer be a market for those homes, and a recovery in the housing 

market would be all but impossible. 

The same thing would happen in the securities markets if we 

made brokers, through an unprecedented criminal fiduciary duty 

standard, absorb all of the risk of the financial products that they 

sell, particularly given the protections of 10(b)(5) in this area. The 

securities markets would freeze up. Brokers would operate under 

the possibility of prosecutions that, through hindsight bias, targeted them for selling products that lost money despite being fair 

risks at the time that they were sold. 

A criminal fiduciary duty standard for securities brokers is a 

misguided idea. A civil fiduciary duty standard also poses the risk 

of significant cost. Now, should this Committee decide to institute 

a civil standard for securities brokers, I would urge an exemption 

permitting brokers and their clients to opt out of fiduciary liability 

to permit transactions for which all of the parties to the transaction feel fiduciary duties are not entirely appropriate. 

I thank you again for the opportunity to testify, and I look forward to answering your questions. 

[The prepared statement of Mr. Verret appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Professor Verret. 

Our next and final witness on this panel is Professor Larry E. 

Ribstein, who occupies the Mildred Van Voorhis Jones Chair in 

Law at the University of Illinois College of Law. Professor Ribstein 

is the author of leading treatises on limited liability as well as two 

business association casebooks. From 1998 to 2001, he was co-editor of the Supreme Court Economic Review and has written or coauthored approximately 140 articles on corporate securities and 

partnership law. He has a bachelor’s degree from Johns Hopkins 

and a law degree from the University of Chicago. 

We appreciate your being with us, Professor Ribstein, and we 

look forward to your testimony. 

STATEMENT OF LARRY E. RIBSTEIN, MILDRED VAN VOORHIS 

JONES CHAIR, ASSOCIATE DEAN FOR RESEARCH, UNIVERSITY OF ILLINOIS COLLEGE OF LAW, CHAMPAIGN, ILLINOIS 

Mr. RIBSTEIN. Thank you, Senator Specter, for the invitation to 

testify today. My testimony focuses on whether securities professionals, including investment bankers, should have fiduciary duties 

and whether there is a criminal liability for willful breach of these 

duties. 

In summary, I believe this is the wrong tool or these are the 

wrong tools for dealing with any problems that might exist in the 

investment banking industry or the securities industry generally. 

A fiduciary duty is one of the most amorphous concepts in the 

law, and that is not a Chicken Little statement. That is simply a 

statement of fact. Courts and commentators have used fiduciary 

language to describe many duties arising in a bewildering variety 

of circumstances, from doctor-patient to shareholder-director. It is 

not clear, for example, precisely how fiduciaries differ or whether 

they include a duty of care, implied contractual covenant of good 

25 

faith and fair dealing, duties arising out of contractual relationships, duties imposed only because of unequal sophistication, information, or bargaining power. 

Fiduciary duties in their strict sense of a duty of unselfish conduct are appropriate only in a limited case where one party delegates open-ended management power over his property to another. 

This is the classic situation for imposing fiduciary duties. This is 

the situation that Justice Cardozo referred to when he called for 

duties stricter than the morals of the marketplace, and it is far removed from the usual situations involving investment bankers, 

broker-dealers, and investment advisers. 

Fiduciary duties, I would also remind the Committee, are predominantly a matter of State law. There is no general Federal common law on which courts can draw to determine the dimensions of 

a new Federal statutes or a fiduciary duty. 

A general fiduciary duty applicable to a broad range of investment banker dealings could leave significant uncertainty as to the 

nature of the duties in each specific context. For example, it may 

not be clear under a general fiduciary duty what types of conflicts 

of interest are permissible, what types of compensation investment 

bankers are entitled to earn, when contracts waiving fiduciary duties are enforceable, whether disclosure of conflicts is sufficient to 

avoid a fiduciary duty, what types of information must be disclosed, 

how material omitted information must be to trigger liability, to 

whom a duty is owed, and what the remedy for a breach of duty 

should be. 

Professor Coffee raised the existing fiduciary duties under the Investment Company Act and the Investment Advisers Act as an indication that these are unfounded fears, but I would point out that 

in the case of the Investment Company Act, in the case that was 

recently decided by the Supreme Court in Jones v. Harris, that 

duty, which is actually fairly specifically defined in Section 36(b) of 

the Investment Company Act, is still unclear after 40 years of litigation and not a single plaintiff victory at trial. There is also an 

ambiguous, ill-defined duty for investment advisers defined by case 

law and, again, not very clear. So I think those are examples rather than counter examples of the problems that we might be facing 

by imposing a fiduciary duty. 

Disclosure duties are, in fact, generally sufficient without resorting to inventing a new investment banker fiduciary duty, and that 

would include the situation involved in the Goldman Sachs case. If 

those omissions, those misrepresentations were material, there is, 

in fact, a remedy under existing law. If they were not material and 

there was no material nondisclosure, then there should be no remedy. 

Any new investment banker duty should not be imposed as part 

of a general fiduciary duty, and it should emerge from careful 

study, which the current financial reform bill pending before Congress requires for new standards of care for broker-dealers and investment advisers. 

I would add that the application of criminal penalties would significantly exacerbate the problems of applying inherently vague 

and ambiguous fiduciary duties, possibly violating constitutional 

rights. Vague criminal duties may actually result in less deterrence 

26 

of misconduct than would be accomplished by more precise remedies by failing to inform parties of the conduct that they must 

avoid. 

We also must keep in mind—and this is the closest I am really 

going to get this morning to a Chicken Little statement—that 

criminal fiduciary duties may overdeter by threatening punishment 

even of socially valuable behavior. Legitimate firms seeking profits 

over the long haul will give a very wide berth to behavior that 

poses even the slightest risk of criminal sanctions that could put 

them out of business or send individual employees to jail. This 

could impose significant social costs by inhibiting innovation, 

among other things. 

Broad criminal liability for breach of fiduciary duty could encourage abusive prosecutorial power. We have seen examples of this in 

recent back-dating cases. Without defining the duties that give rise 

to criminal penalties, we give powerful weapons to prosecutors, and 

I think we should keep this in mind. 

In conclusion, whatever problems exist in the securities markets—and I am not one to say that there are no such problems and 

that no remedies are called for—criminal fiduciary duties are the 

wrong tool to deal with them. 

Thank you again for the invitation, and I welcome any questions. 

[The prepared statement of Mr. Ribstein appears as a submission 

for the record.] 

Chairman SPECTER. Well, thank you, Professor Ribstein. 

Professor Coffee, is it practical to define fiduciary duty in a 

criminal context with sufficient specificity to avoid the problems of 

due process of law being vague and indefinite? 

Mr. COFFEE. Well, two responses to that. First of all, this statute 

is much narrower than some of the criticisms suggest it is. It does 

not just say you are a fiduciary, go out and observe a punctilio of 

an honor the most sensitive. It is focused on a special context: the 

broker-dealer giving investment advice or the broker-dealer soliciting purchases or sales. That is really going to be the context, 

which is also the Goldman context, of the broker-dealer functioning 

as a placement agent, selling securities that it has packaged to its 

investors. Now, that is a context that the statute does address because your statute—and I have made some suggestions to narrow 

it further—only addresses the broker-dealer giving investment advice or soliciting purchases or sales. And in that context, we know 

what is going on. I think that is not a general duty. It does not 

mean you will be liable for negligence, and it will only be a willful 

violation. Willful violation in the Federal criminal law means a 

conscious intent to defraud the investor and receive a gain at the 

investor’s expense. 

Now, taking that all together, I think that the standard of fiduciary duty is very much like the standard of 10(b)(5). You are going 

to be trying to cheat someone. The difference between the two is 

that while we have been told by everyone, including Mr. 

Weissmann in the prior panel, that 10(b)(5) is sufficient, 10(b)(5) 

does not reach all contexts. 10(b)(5) does not reach, for example, 

the context where there is not a purchase or sale, and the Supreme 

Court said that in the Merrill Lynch v. Dabit case. That is the context that the fiduciary duty standard would reach. So there are 

27 

areas that the fiduciary duty standard would reach that nothing 

else reaches. 

Finally, I would say the most important thing for Congress to do 

is to specify the fiduciary duty standard, not so much the criminal 

penalty, because we cannot tell regulators to enforce the law without first telling the subject people in the private sector what their 

duties are, what you must do is put the interests of the client first; 

what you must do is act in the best interests of the client in giving 

investment advice or in soliciting purchases or sales. I do not think 

that approaches being vague at all. 

This is not the problem of the honest services fraud statute, 

which did not tell you whether it was addressing Federal law, 

State law, and it was subject to every possible interpretation so 

that the Boy Scout oath could be brought into the honest statute. 

This is very narrow. Selling or giving investment advice, you 

must act in the best interests of the customer. It does not affect 

the mere market maker who is quoting a two-sided market. It requires you to do something much more specific, and I think there 

is no serious void for vagueness problem. 

And, finally, the SEC is given express authority to draft exemptions, interpretations. They can add a great deal of density, extending the law, explaining where it applies and where there are exemptions. And I have suggested some revisions to your statute that 

would give the SEC greater authority to give exemptions and safe 

harbors, all of which will curb the problems of overdeterrence. 

So that is my long answer to your short question. 

Chairman SPECTER. Professor Ribstein, doesn’t that delineation 

in the parameters of the proposed legislation pretty much answer 

the issues which you have raised? 

Mr. RIBSTEIN. I do not think so, Senator. The standard best interests of the client is actually pretty close to a broad fiduciary 

standard. It could be interpreted to extend all the way to refraining 

from all kinds of unselfish—all kinds of selfish conduct, which is 

really what the fiduciary duty does, but it extends that to a situation that is not really the situation that is governed by that strong 

fiduciary duty generally, the mere rendering of advice, rather than 

the turning over of complete delegation of control, which is normally the situation where the fiduciary duty of unselfishness applies. 

So what we would have under that standard is, again, decades 

of litigation, just like we had with the fiduciary duty in Section 

36(b) of the Investment Company Act, where courts eventually 

might define a standard, but until they do, parties would not know 

exactly what standard, what kinds of conduct are forbidden them. 

And, again, we get the problems of overdeterring innocent, socially 

productive conduct, and possibly underdeterring conduct that we 

really want parties to refrain from. 

Chairman SPECTER. Professor Ribstein, would the existing laws 

impose criminal liability on Goldman Sachs for what is alleged by 

the SEC? 

Mr. RIBSTEIN. If they are guilt of what they have done—and I 

would go back to Andrew Weissmann’s testimony earlier today— 

they did it willfully, they did it with scienter, they engaged in 

fraud, then yes. 

28 

Chairman SPECTER. Professor Verret, you said on an analogy to 

housing that brokers would have to conduct widespread investigations. Is that really so? We are talking illustratively in the context 

of the SEC complaint against Goldman Sachs. These are things 

Goldman Sachs knew. Now, this is not a matter of telling the party 

in that line to go and investigate matters. These are things they 

knew and failed to disclose, acts of omission. Isn’t that significantly 

different from the consideration you raised? 

Mr. VERRET. Well, I would offer first that this statute would not 

be limited solely to the Goldman fact situation, so it would be used 

much, much more broadly. And I think, frankly, contrary to Professor Coffee’s analysis, I would offer that, you know, we have seen 

a number of pieces of language and legislation become very, very 

widely defined by the SEC, and I would offer as an example the 

definition of ‘‘offer’’ under the registration statement rules and how 

offer has come to mean not just offer, but any communication of 

any kind. 

And so I am still concerned about the uncertainty in the fiduciary duty standard, and, you know, the fact patterns that would 

be subject to the statute would be much wider than the Goldman 

scenario. And even in the Goldman scenario, I would point out one 

difficulty, which would be that if you are a fiduciary to a wide variety of different, potentially conflicting interests, you could be in a 

very difficult spot. Let us remember, you know, you change the fact 

pattern a little bit or even in the Goldman scenario, if Goldman 

had had fiduciary duty to the investors who lost money, let us remember they might have had a fiduciary duty to Mr. Paulson as 

well. So what if Paulson comes to Goldman and says, ‘‘Here is some 

information I have got through my own investigations and here is 

why I think housing is going to go down? ’’ If Goldman had an obligation to share that information with other investors, they might 

be violating their duty of confidentiality to Mr. Paulson. 

So putting someone in a fiduciary duty situation that is already 

subject to a variety of different conflicting interests might just set 

them up to fail without any malicious intent. 

Chairman SPECTER. Professor Verret, how about the issue of adequacy of fines? Don’t you think that to have some deterrent effect 

there have to be jail sentences at the end of the rainbow? 

Mr. VERRET. Well, under the securities laws already, we have a 

number of different jail sentences for securities fraud. And so I 

think—I do not think we need to add new legislation for fines. I 

think we already have a lot of fines on the books and a lot of jail 

sentences on the books for this type of activity. 

Chairman SPECTER. So you would agree that jail is necessary, 

but it ought to be imposed under existing law? 

Mr. VERRET. It depends on the situation. It depends on the situation. And I do not want to say that I think that the Goldman situation deserves jail time or not because it is just way too early to tell. 

Chairman SPECTER. I was not putting Goldman in the question. 

Mr. VERRET. OK. 

Chairman SPECTER. Professor Ribstein, how about it? Are fines 

sufficient as a deterrent? 

29 

Mr. RIBSTEIN. They may or may not be, Senator. I think we have 

to take into account both the costs and benefits of imposing criminal liability. If we want—— 

Chairman SPECTER. You have Professor Pontell’s example of a $50 million fine willingly paid with the statement that had there 

been a criminal prosecution, it would have been vigorously defended. 

Mr. RIBSTEIN. If we define the criminal liability appropriately, 

then a criminal penalty is justified. My problem is—— 

Chairman SPECTER. A criminal penalty could be fine or jail. I am 

asking you whether you think that it would be indispensable to 

move to jail as an effective deterrent. 

Mr. RIBSTEIN. What I meant to say earlier is if we define the 

criminal conduct appropriately, then a criminal penalty is also appropriate. but my concern in what we are hearing today—— 

Chairman SPECTER. Well, criminal penalty again, but I am asking about jail differentiated from fine, which is a criminal penalty. 

Mr. RIBSTEIN. If we define the criminal conduct appropriately, 

then I think a criminal penalty could be also appropriate. My concern today is defining a breach of fiduciary duty criminally without 

adequately specifying what that breach entails. 

Chairman SPECTER. Well, I have asked you several times whether criminal penalty means jail, and I will not ask you again. Professor Pontell, if $50 million is not enough as a deterrent, 

willingly paid as opposed to contrasting a defense had there been 

a criminal charge as opposed to a civil charge, is there any fine sufficient to act as a deterrent? 

Mr. PONTELL. That is difficult to determine, Mr. Chairman. The 

amount of fines varies, and, you know, depending on the offender, 

on the resources of the offender and/or the offending corporation, 

some fines may amount to what citizens may consider parking tickets. I mean, $15 million to Maurice Greenberg is, you know, a considerable fine; $600 million to Michael Milken was a very considerable fine, but not a major part of their overall wealth or assets. So, 

I mean, paying those fines is, again, a cost of doing business. 

Chairman SPECTER. Thank you, Professor Pontell. 

Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman. Thank you for 

hosting and holding this hearing. I think it is an important one, 

and I appreciate your directing the Committee’s attention to this. 

Just to follow up on the discussion that we have been having, I 

recall the pharmaceutical industry being hit with literally billions 

of dollars in fines for marketing pharmaceutical products for offlabel uses and unapproved uses, and they went right back at it 

again because the fines were simply a cost of doing business. I am 

not remembering the numbers off the top of my head, but it was 

several billion dollars in fines, but they were making several tens 

of billions of dollars in profits from the marketing, and so the conduct continued, and they kept being brought back in to pay more 

fines, and it was just a cost of doing business. 

So I think when you look at the way many of our monetary penalties are structured and you compare that to the vast wealth, the 

huge numbers of dollars that are often involved in these major 

transactions, you can easily get to a situation in which monetary 

30 

penalties alone simply by definition are inadequate. And unless 

people are looking at an actual sentence of incarceration, you are 

never going to have serious enforcement behind it. So I appreciate 

what you are doing. 

I wanted to ask the Committee’s view. We have talked a little 

bit about the Goldman allegations, which suggest that in a transaction Goldman was designing the product with the assistance of 

an investor who was going to bet against the product, and the 

question is: Should the person who was being sold the product also 

be given kind of fair dealing knowledge that this was not just a 

Goldman-designed product, this was a product that was designed 

with the assistance of somebody who would then be betting against 

it? And I have heard anecdotal stories of similar sorts of transactions where products were being resold, securitized in tranches, 

and the bottom tranche, often an equity tranche, became the sort 

of signal to the rest of the market for whether the higher-rated 

tranches were marketable and were valid and people should invest 

in them, and they would look first to the bottom tranche and see 

how that went. And I have heard anecdotally stories of Wall Street 

houses selling off the equity tranche or the worst-rated tranche in 

order to open the market for the other ones, but having cut a side 

deal with the buyer of the equity tranche, that takes away any risk 

of the equity falling. 

And so, in effect, you had a sham equity buyer whose job—if the 

allegations are true, a sham equity buyer whose job was to come 

in and look like a legitimate equity buyer who had made an independent assessment of the risk of the product and thought it was 

investment worthy, when, in fact, they were propped up with this 

side deal that said to them if it goes wrong, we will stack you with 

a lot of shorts on this other stuff so that you come out fine. 

Again, that raises the same question. Should the investors in the 

other tranches have been made aware that there was more to that 

deal than met the eye? 

And so a lot of this, I think, comes down to a question of what 

disclosure is fair, and that raises questions of whether a fiduciary 

duty is appropriate to prompt that disclosure. It also raises just 

more general questions about whether somebody, anybody structuring a deal should be transparent about who is in on the deal 

and what all the terms of it are, not just the apparent terms that 

the public sees. And I would love to hear your comments on that 

question. Professor Coffee had his finger up first. 

Mr. COFFEE. I think what you have just described is something 

known as the liquidity put. You actually sold the equity tranche, 

but the big bank gave an option to resell it, gave a put agreement. 

They would buy it back if you lost liquidity, and you, the hedge 

fund that bought the equity tranche, could not sell it. What that 

shows is that these conflicts of interest can happen, often come 

back and even haunt the original bank that is subject to the conflicts. These liquidity puts put billions of dollars of liabilities onto 

the balance sheets of our major commercial banks and partially necessitated the TARP bailout. So conflicts of interest—— 

Senator WHITEHOUSE. Hoist with their own petard, would you 

say? Wasn’t that Shakespeare’s phrase? 

31 

Mr. COFFEE. That may be true, but the injury flows through to 

the American investor who had to bail them out. When conflicts get 

too prevalent, we find that everybody starts losing in a very 

opaque, nontransparent world. I think if you had a fiduciary duty 

standard, you would not design transactions in that way. You 

would not let one side write or pick the portfolio and sell it to the 

other side. 

This can be dealt with partly through a disclosure standard, but 

I think the fiduciary duty standard, first of all, tells the operative 

managers what they are supposed to do, and that is the first obligation of the law, to—— 

Senator WHITEHOUSE. Let me ask you to follow up on a point you 

just made that I find very interesting. You just made the point that 

when there is a sort of risk, at least, of a systemic loss of confidence, the fact that these products are not transparent causes, 

the immediate financial result back to the bank of having to buy 

it back and get hit with it, but it also is something that people 

looking at the financial system, thinking that they understood it, 

thinking that they were comfortable with the way it was, suddenly 

think, ‘‘Oh, my gosh, this is a lot weirder than I thought. Until this 

settles out, I had better get my money out,’’ so it could actually 

contribute to system instability to have all of this off the books, 

sort of nontransparent back-door dealing going on when it becomes 

apparent to the public that they have been sort of left out of the 

real equation. 

Mr. COFFEE. I think there were elements of a financial panic in 

2008, and I think the lack of transparency always increases the 

possibility of that sudden revelation that produces a panic. 

Certainly, Lehman fell because of a panic, and everyone backed 

away because they did not know what the full liabilities were. 

Senator WHITEHOUSE. Yes. Transparency has stability value 

then. 

Professor Ribstein, you wanted to say something? 

Mr. RIBSTEIN. Well, Senator, the Goldman transaction, I think, 

really points out some of the problems that we run into with imposing a broad fiduciary duty here, because there is a question about 

what needs to be disclosed by whom to whom that arises out of this 

transaction. 

Now, it turns out that, in fact, the buyer of the securities, as alleged in the complaint, IKB, was a bank that was, in fact, remarketing these securities, as I understand it, through a subsidiary, so 

it was engaged a little bit in what Goldman is being accused of 

doing. It was in effect insuring this block of securities. Warren 

Buffett was quoted as saying yesterday that—— 

Senator WHITEHOUSE. That does not excuse the original person. 

Under the criminal law, if you are a fence—— 

Mr. RIBSTEIN. Well—— 

Senator WHITEHOUSE [continuing]. And you sell something to 

somebody who then fences it, that does not excuse the first fence. 

Mr. RIBSTEIN. No, Senator, I was not trying to indicate that. 

What I was saying is that we had a very sophisticated party on the 

other side, and there has to be a difference between the duty to disclose to this sort of party and what the duty to disclose is to other 

sorts of parties. And I think that these are the kinds of questions 

32 

that need to be addressed and are not necessarily addressed by a 

broad standard about best interests of the client or fiduciary duties 

or whatever broad statement you want to use. 

Senator WHITEHOUSE. Well, I appreciate the witnesses being 

here. I appreciate Senator Specter holding this. What I see is that 

in my State the damage that began on Wall Street and then 

washed like a financial tsunami across the country, we are still 

digging out from, and we are in no mood to allow this to happen 

again, and I think it is very important for hearings like this to look 

into ways in which the criminal law can be used to discourage the 

kind of Wall Street misconduct that has taken ordinary families in 

Washington and Rhode Island and subjected them to really grievous personal suffering from unemployment, from loss of their 

health insurance, from loss of their jobs, from loss of their financial 

security. So thank you very much. 

Chairman SPECTER. Thank you, Senator Whitehouse. 

I want to insert into the record the article published by the 

McClatchy Newspapers way back on November 1, 2009, where they 

pointed out that in 2006 and 2007, the Goldman Sachs Group—this 

is their article—‘‘peddled more than $40 billion in securities backed 

by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices 

would send the value of those securities plummeting. Goldman’s 

sales and its clandestine wagers completed at the brink of the 

housing market meltdown enabled the Nation’s premier investment 

bank to pass on most of its potential losses to others before a flood 

of mortgage defaults staggered the U.S. and global economies. Only 

later did investors discover that what Goldman had promoted as 

AAA-rated investments were closer to junk.’’ 

Without objection, the full article will be made a part of the 

record. 

[The article appears as a submission for the record.] 

Chairman SPECTER. Just a few more questions on related subjects. Professor Coffee, as you know, the Supreme Court of the 

United States has held that aiders and abettors are not liable 

under the securities laws, and I and others have introduced legislation to change that decision. Congress has the authority to do that 

where it is not based on the Constitution. The criminal law imposes sanctions for aiding and abetting. Do you know of any case 

where the standard of the criminal law is met but does not give 

rise to a claim for relief or a cause of action under civil law? 

Mr. COFFEE. You asked that same question of Mr. Weissmann 

earlier, and I was thinking then—— 

Chairman SPECTER. Well, I did not get an answer. That is why 

I am asking—— 

Mr. COFFEE. I do not know of another instance like that. As you 

know, I have testified in favor of your aiding and abetting legislation, and I am not generally a fan of what I will call stock-drop litigation. But I think aiders and abettors are a particularly good target for private enforcement to focus on, because they are the gatekeepers. 

Chairman SPECTER. You heard the questions that I asked about 

the missing paragraph in the second submission by Mr. 

Weissmann. With respect to the issue of whether there could be 

33 

some reasonable enforcement by private lawsuits if the standards 

of pleading were relaxed so that there did not have to be the specificity which has traditionally been obtained, the facts and materials 

in discovery, do you think that those limitations go too far? 

Mr. COFFEE. Well, of course, I was asked by the White House in 

1995 what I thought of that statute, and I and Professor Langford 

both wrote a letter to the President at his request which said that 

we thought the statute did go too far, and my view from 1995 has 

not changed that dramatically. 

I would suggest that if you made one change in this area, it 

would be not to repeal the pleading rule, but to give the Federal 

district court, which is right on top of the case, discretion to permit 

limited discovery in cases where it thought there has been some 

showing made of irregularity or fraud. That would give discretion 

to the court rather than letting either side. Now, we have an allor-nothing rule. Either you show fraud with particularity, or you 

get no discovery. And it is hard to show fraud without discovery. 

If you gave the district court a little bit more discretion, allowing 

it to order some limited discovery before it ruled on the motion, I 

think that might deal with the intermediate case and let there be 

justice on the specific facts and circumstances. 

Chairman SPECTER. So you wrote to the President? 

Mr. COFFEE. In 1995, I was requested to by the White House 

Counsel’s Office. 

Chairman SPECTER. I wrote to the President, too, in 1995 suggesting that he veto it. Now, do you think he vetoed it for your letter or mine, or neither or both? 

Mr. COFFEE. I do not suggest I had any impact, but my view was 

the same then and now. 

Chairman SPECTER. Just an irrelevant short story. I was in my 

condo at about 10:30 one night when I got a call from the White 

House, and the President was on the line, and he said, ‘‘Do you 

have time if I read to you part of my veto message?’’ And I said 

I did, and your letter was probably close to mine. He had a number 

of the elements in the veto message. 

One final question for you, Professor Coffee, and that is, I and 

others have introduced legislation to change the Supreme Court 

ruling on pleading, going so far from what had been the traditional 

interpretation of the Federal Rules of Civil Procedure. What do you 

think of those Supreme Court decisions of limited—— 

Mr. COFFEE. You are talking now about Iqbal and Twombly, the 

two Supreme Court cases. 

Chairman SPECTER. Yes. 

Mr. COFFEE. I think it is judicial legislation. It is not usually 

what the Court does. I am not a fan of the old 1938 civil rules 

which gave the plaintiff maybe too much ability, and I think Iqbal 

and Twombly, outside of the securities law context, will screen out 

some meritorious cases as well as some non-meritorious cases. 

Inside of the field of securities law, Iqbal and Twombly do not 

mean that much because the PSLRA has a much more protective 

provision in it than Iqbal—Iqbal and Twombly only require plausibility. The PSLRA requires that there be strong evidence of fraud 

shown before discovery. 

34 

Chairman SPECTER. I note your Yale Law School background. 

Was Judge Clark teaching Civil Procedure when you were there? 

Mr. COFFEE. He taught me Constitutional Law, not Civil Procedure. 

Chairman SPECTER. I did not know that Judge Clark taught—— 

Mr. COFFEE. I am sorry. I thought you said Judge Bork. Did I 

mishear you? 

Chairman SPECTER. I said Clark. I did not say—— 

Mr. COFFEE. Oh, Charlie Clark had retired by the time I went 

to law school. You went there before me. 

Chairman SPECTER. Oh, I do not think so at all. 

[Laughter.] 

Mr. COFFEE. All right. I take that back. But he was retired. 

Chairman SPECTER. Judge Charles Clark did teach my class 

Civil Procedure, and he led off with the case of Dioguardi v. 

Durning, which I will remember forever because he was so effective, about an immigrant who wrote some things down on a slip of 

paper, sent him to the Federal court, and it was held that that was 

a notice pleading. Quite a change from what Judge Clark said writing the Rules of Civil Procedure as to what the Supreme Court has 

recently said. 

Well, thank you very much, Professor Verret, Professor Pontell, 

Professor Coffee, and Professor Ribstein. I very much appreciate 

your coming in. This is an ongoing issue, and we thank you. 

That concludes the hearing. 

[Whereupon, at 11:25 a.m., the Committee recessed, to reconvene 

at 2 p.m., this same day.] 

AFTERNOON SESSION (2:02 p.m.] 

Chairman SPECTER. Good afternoon, ladies and gentlemen. The 

Criminal Law Subcommittee of the Committee on the Judiciary 

will now continue the hearing. We heard from seven witnesses this 

morning, and the Assistant Attorney General in charge of the 

Criminal Division, Hon. Lanny A. Breuer, was in New York, and 

we appreciate his coming back because he has really key testimony 

to provide as the chief law enforcement officer in the Criminal Division. So welcome, Mr. Assistant Attorney General, and we look forward to your testimony. 

STATEMENT OF HON. LANNY A. BREUER, ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF 

JUSTICE, WASHINGTON, DC 

Mr. BREUER. Thank you, Mr. Chairman, and it is always good to 

be with you, and thank you for inviting me to be part of the hearing and giving me the opportunity to discuss the issue of fraud on 

Wall Street and how most effectively to deter it. 

Let me begin, Mr. Chairman, by assuring you that the Department of Justice, together with its law enforcement partners, shares 

your determination to root out, prosecute, and punish financial 

fraudsters. These crimes erode the public’s confidence in our markets and institutions, siphon billions of dollars from hard-working 

Americans, and have convinced many that Wall Street is somehow 

above the law. 

In many respects, we are better positioned now than ever before 

to uncover and prosecute financial fraud. As you know, Mr. ChairVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
35 

man, the Financial Fraud Enforcement Task Force is spearheading 

our efforts. The task force provides a unique forum to discuss 

trends, develop data and intelligence-driven enforcement strategies, 

offer training and coordinate sweeps, and other cooperative and 

creative enforcement initiatives. 

The task force’s leadership is joined by action on the ground. As 

you know, the Department has been deploying increased resources 

to combat financial fraud, and it has been more forward leaning in 

terms of its investigative techniques and its efforts to coordinate 

and cooperate with our law enforcement counterparts, both here 

and abroad. 

At the same time, we have been unwavering in our commitment 

to ensure tough but fair penalties for corporations and individuals 

alike. These penalties have included and they must include jail 

time in appropriate cases. 

Since I appeared before the full Committee in December, there 

have been several new prosecutions by task force members that are 

worth noting. In March, the President of Park Avenue Bank in 

New York was charged with attempting to fraudulently obtain 

more than $11 million in taxpayer rescue funds from the Troubled 

Asset Relief Program, TARP. Just 2 weeks, the U.S. Attorney in 

Newark charged the chief executive of Capitol Investments USA 

with a $880 million Ponzi scheme stemming from the solicitation 

of investors in a purported grocery distribution business. Last 

Thursday, the former treasurer and senior executive vice president 

of Doral Financial Corporation was convicted after a 5-week trial 

for his role in a scheme to defraud investors that caused a $4 billion decline in share value. 

And just yesterday, Mr. Chairman, after a month-long trial, our 

prosecutors in the Fraud Section, along with our partners in the 

Oklahoma U.S. Attorney’s Office, secured a conviction of a lawyer 

and his colleague in a massive fraud, a securities fraud, a pump 

and dump. Right after the verdict, the defendants yesterday were 

detained until their sentencing in late August. 

The Department’s commitment to vigorously identify and pursue 

any wrongdoing in our corporate boardrooms and on Wall Street 

will not and does not end with the indictment. As I mentioned a 

moment ago, our prosecutors and agents are determined to ensure 

that wrongdoers are punished and that potential wrongdoers are 

deterred. This means seeking jail time whenever appropriate. 

Thus, the Department has sought significant prison sentences 

against white-collar criminals. 

For example, since I appeared before the full Committee, since 

then the Department secured a 50-year sentence for Tom Petters 

for a $3.7 billion Ponzi scheme, and just last week, a 117-month 

sentence for Charles ‘‘Chuck’’ E. Hays for a Ponzi scheme involving 

stock, index, and other futures. 

We obtained a 7-year sentence for the principal outside attorney 

for Refco for his role in executing Refco’s more than $2.5 billion 

fraud, and we secured a 5-year sentence for former Credit Suisse 

broker Eric Butler. 

In addition to seeking prison sentences for individual offenders 

in appropriate cases, an essential part of our criminal enforcement 

strategy is to hold corporations accountable as well. The DepartVerDate Nov 24 2008 11:29 Feb 07, 2011 Jkt 063555 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\63555.TXT SJUD1 PsN: CMORC
36 

ment believes that corporate guilty pleas and deferred prosecution 

agreements, fines, and the imposition of independent compliance 

monitors in appropriate cases serve the important criminal enforcement goals of specific deterrence, general deterrence, and rehabilitation. It is not our experience that companies treat such resolutions as a cost of doing business. It is our experience that corporate 

resolutions have a very real deterrent. 

In sum, the financial crisis has demanded an aggressive, comprehensive, and well-coordinated law enforcement response. The 

Department and its partners on the Financial Fraud Enforcement 

Task Force are committed to this effort. We will look at all allegations of financial crime closely, follow the facts where they lead, 

bring our resources to bear to prosecute those who have committed 

crimes, and seek appropriately tough sentences for individuals and 

corporations alike. 

Mr. Chairman, I want to thank you for your interest and commitment to all of this, and I would be happy to answer any of your 

questions. 

[The prepared statement of Mr. Breuer appears as a submission 

for the record.] 

Chairman SPECTER. Well, thank you very much, Mr. Breuer. 

The case which you cite with a 50-year sentence, that is a long 

sentence. What were the facts of the case? 

Mr. BREUER. So in the Petters case, that was a businessman in 

Minnesota who was involved, Mr. Chairman, in a massive commodities fraud, Ponzi scheme, where he induced investors to invest 

money with him under the understanding that they were making 

reasonable, conservative investments in commodities that were 

then going to be resold. In reality, what this fellow was doing was 

anything but that, Mr. Chairman. He was simply doing a classic 

Ponzi scheme where he would take the investments of the latter investors, provide some money to the early investors, and would keep 

this Ponzi racket going forward. 

Chairman SPECTER. Do you know whether there was any publicity given to that sentence? 

Mr. BREUER. There was some, Senator. There was. I mean, I 

would have to go back to see how much and whether it was sufficient. But there was some publicity given to it. I can go back and 

let you know how much. 

Chairman SPECTER. There has been some comment that the 

prosecutions which have come out of the Wall Street fraud have 

been on minor participants contrasted with the savings and loan 

matters a few years back. The case you mentioned does not appear 

to be a matter of Wall Street fraud. Or was it? 

Mr. BREUER. Well, Senator, it was not a matter of Wall Street 

fraud in the sense of it was not literally on Wall Street and it was 

not, for instance, a financial institution. But to the degree we are 

talking about a fellow who purported to be an investor—an investment person who was seeking investment to the degree that he 

was seeking and getting investments for many both retail and perhaps some institutional investors, I think if we take a more expansive view of what we mean by Wall Street, which is those who we 

bring into our confidence, those who we provide money to, and 

37 

those who have in one way or another acted criminally, then in the 

broader sense I think it was. 

Chairman SPECTER. Well, tell me what the facts were on the case 

where you got 117 months. 

Mr. BREUER. So the 117 months, Senator, was also a fellow by 

the name of Hays. From what I remember, he also was involved 

in a Ponzi scheme. 

Chairman SPECTER. Was it a Wall Street matter? 

Mr. BREUER. Again, he was not based in New York. He was out 

in the Midwest, Senator, I think as well in Minnesota. And, again, 

it was a fellow who was seeking investments, structuring transactions to avoid reporting requirements. And so, again, Senator, I 

would say it would not be, as I think you are thinking of, a classic 

Wall Street case; rather, I would say it is more of a national case 

dealing with those who, once again, have preyed upon the—— 

Chairman SPECTER. And the 7-year sentence in the Refco case? 

Mr. BREUER. Right. So the Refco case—and it will take me a moment. I think the Refco case, Senator, was one of the lawyers involved in that case, and I guess that was a case of securities fraud 

and had to do with false reporting. So I do think that—again, it 

is a little hard to define, but it deals more broadly with financial 

fraud and this administration’s commitment to prosecuting all 

types of financial fraud and holding those accountable. 

Chairman SPECTER. Was it any of the cases involving prominent 

Wall Street operators? 

Mr. BREUER. Well, Senator, I know what you are saying, and let 

me be clear here. I am not disputing the premise of what you are 

suggesting. But, of course, there is—— 

Chairman SPECTER. Well, I do not have any premises—— 

Mr. BREUER. But let me begin by—— 

Chairman SPECTER. I am just asking questions. 

Mr. BREUER. There is the Credit Suisse case. In the Credit 

Suisse case, you had a Credit Suisse official who misrepresented— 

he and another misrepresented the securities that they were selling. They claimed that the securities that they were selling were 

secure securities that were backed by investment-grade securities. 

I think the suggestion was that they were investment grade and 

perhaps dealt with student loans. In reality, they were not investment grade. They were mortgage-backed securities that underlay 

the investment and were, in fact, extraordinarily risky. In that 

case, one was a plea, one was a conviction in the Eastern District 

of New York, and the defendant was convicted and is now in jail. 

Chairman SPECTER. And what was the sentence? 

Mr. BREUER. I think it was 5 years. Yes, it was 5 years. 

Senator, I would say—I am sorry. 

Chairman SPECTER. The Subcommittee would be interested in 

knowing about what prosecutions have been brought in the course 

of the past couple of years as we have seen evidence on Wall Street 

fraud. We are trying to deal here with what deterrent effect there 

is, and that is why we are on this looking at the kind of situations 

that are before the public today. And in order to have the deterrent 

effect, the case obviously—you are an experienced prosecutor; I 

have had some experience at it—has to be in the realm where others are similarly situated, has to have sufficient notoriety, and that 

38 

really turns on the positioning of the person, whether they are an 

underling, whether they are in a prominent position, whether they 

are one of the lead names in the profession. 

Do you have any examples of that kind of a case—— 

Mr. BREUER. Well, let me give you a few examples, Senator—— 

Chairman SPECTER. Let me finish the question. 

Mr. BREUER. I am sorry. 

Chairman SPECTER. Any examples of that with a tough sentence. 

Mr. BREUER. Well, let me do my best and give you a few examples, and then you can let me know if you think that they fit the 

bill at all. 

Last week, the former treasurer and senior executive vice president of Doral was convicted of securities and wire fraud, Mr. Chairman, after a 5-week trial, and that trial dealt with a scheme to defraud investors and potential investors with respect to the stock of 

his Puerto Rican-based company. 

Chairman SPECTER. Wall Street? 

Mr. BREUER. Well, it was publicly traded, sure, a publicly traded 

company. 

Chairman SPECTER. Was the defendant a Wall Street operative? 

Mr. BREUER. Well, I think the defendant was the senior vice 

president and treasurer, and I think he was based in Puerto Rico, 

Mr. Chairman. But his actions led to a $4 billion decline in share 

value, so we think of that as an important case and a case that occurred just last week. And, of course, there has been no sentence 

yet. 

And then—— 

Chairman SPECTER. What will you be looking for there? 

Mr. BREUER. Well, I am not the—I do not yet know what the Department will be seeking. It will be seeking, I am sure, a very, very 

significant sentence, I am sure. 

Chairman SPECTER. Mr. Breuer, how are the sentence recommendations determined? For example, to what extent do you 

play a role in them? Are there any cases which reach the Attorney 

General on sentencing? 

Mr. BREUER. Well, the Attorney General is keenly interested in 

this issue, very interested. 

Chairman SPECTER. Well, does he make decisions on sentencing? 

Mr. BREUER. In significant cases, I will brief him typically on 

what the case is, the status of the case. He will often ask about 

the strength of a case or where we are on a case where he is aware 

of the investigation stage. And though I do not think he will ever 

be the person who will weigh in on a specific sentence, I think his 

orientation is always known. 

And then, Mr. Chairman, when I will weigh in is in various circumstances. There are many cases where the Criminal Division 

partners up with the U.S. Attorneys around the country. We do 

that very often. And in those cases, I will be briefed by the lawyers 

and will weigh in as to what we are seeking in a sentence. That 

is not atypical at all. 

And often the prosecutors in the case, of course, who have been 

living and breathing the case will have a very reasoned and a very 

strong view, and it will virtually always be within the realm of the 

advisory sentencing guidelines. 

39 

For the kinds of cases we are talking about, Mr. Chairman, of 

this value, typically the sentences are very, very stark and very, 

very high. But we do seek very stiff sentences in these kinds of 

cases when appropriate, and it often is appropriate. 

Chairman SPECTER. Are you familiar with the Siemens prosecution, Mr. Breuer? 

Mr. BREUER. I am, Senator. To a degree I am familiar with the 

Siemens prosecution. 

Chairman SPECTER. Well, that is a case where Siemens, according to the information provided to me, agreed to pay a total criminal fine of $450 million and a disgorgement of $350 million in profits, and nobody went to jail. Siemens’ income, according to the information I have, was $104 billion, and income in excess—or approximately $2.5 billion in fiscal year 2008. Did that conviction 

arise during the course of the current administration? 

Mr. BREUER. It did, Senator. It did, Mr. Chairman. It was an ongoing investigation, and you are right. Let me just add a little to 

what you say. 

First, Siemens, its total monetary penalties were actually $1.6 

billion. That would include both from the U.S. and in Germany. 

The company was incredibly cooperative and very, very helpful in 

the information it provided over an extensive period. 

In making Siemens’ plea, we made it as an absolute explicit provision that there was absolutely no protection for any of the individuals of Siemens. And, therefore, the individuals, executives, and 

others who were involved remain exposed, and the matter is not 

closed. Simply all that we have done is have a plea against a corporation. We have not closed out nor have we claimed to have 

closed out investigations with respect to individuals. They are ongoing. 

And, Mr. Chairman, I agree with you. I think the hallmark of an 

effective criminal justice plan must be that we will prosecute individuals when appropriate and ongoing. And I should say in that 

vein, Mr. Chairman, just 2 weeks ago we received the longest sentence in an FCPA case in the history of the FCPA when we obtained an 87-month sentence against a fellow who had violated and 

was convicted of the FCPA. So we will continue to pursue that. 

Chairman SPECTER. Well, you are saying that even though the 

case was concluded against the corporation, the matter is ongoing 

as to the individuals? Ordinarily, a case is wrapped up once and 

for all. Before a corporation will pay a fine, they want to know that 

that is the limit of their liability. 

Mr. BREUER. Right. 

Chairman SPECTER. And there is obviously a motivation to not 

have the jail sentence and for the corporation to pay a fine. And 

this morning, we heard very extensive testimony—not that it was 

surprising—that fines are added into the cost of doing business. 

One testimony related to one defendant who paid $50 million and 

said if it had been a criminal prosecution, he would have fought it 

tooth and nail. But you are saying that you are really going to go 

after some people in this Siemens matter? 

Mr. BREUER. Well, Mr. Chairman, what I am saying is that—I 

do not want to say whether we are or not for the reasons that I 

know you understand well. But what I will say is the following: We 

40 

are not willing—and you are absolutely right, corporations do want 

to settle these cases, they do want to pay money, and they do want 

the assurance that the matters will be closed against the individuals of their company. We did not allow that to happen in that 

case, and we will not let it happen for the reasons you said. 

Now, in the Siemens case, I do want companies to feel an enormous incentive to come in and to disclose, and in Siemens, they did 

come in, they did disclose, and they provided us with an enormous 

amount of information. And so there was a real judgment that 

there was a real merit to having closure with respect to that and 

for the company to be rewarded for providing us with almost unparalleled cooperation. 

Chairman SPECTER. Did you start the prosecution before they 

made the disclosures? 

Mr. BREUER. I do not think so in that case. I think, Senator, I 

will have to go back—that is a good question. 

So my colleague is right. In this case, of course, one of the challenges that I was going to go into is in this particular case the 

prosecution began in Germany, and then we, of course, as we try 

now more and more to deal with the challenges we have, are working closely with our international colleagues and partners. That 

was a case where it began with the German prosecutors, and, of 

course, many of the individuals involved are in Europe. But there, 

nonetheless, it began in Germany. The company—we reached out, 

I believe. The company provided us with an enormous amount of 

information, and—— 

Chairman SPECTER. Mr. Breuer, what I am getting at is, Did 

they provide you with information after you already had the case? 

Mr. BREUER. No. I mean, Mr. Chairman, in a case like this, these 

are very complicated cases, and this, of course, was a massive example of violations of the FCPA in different countries. And so 

there, there is no question that the law firm providing us and Siemens providing us with information were able to provide us with 

information that we would not have had but for them giving us the 

information. It was all over the world. Frankly, we would not have 

had the resources to have investigated to the degree that the company provided us the information. And so they did get a benefit for 

that. The benefit they got was certainty in the resolution of the corporate deal. What they did not get was closure for the individuals. 

Chairman SPECTER. Well, keep us posted as to what you are 

doing there. 

According to a story published last night by David Heath on the 

Huffington Post called ‘‘Too Big to Jail,’’ bank regulators like the 

Office of Thrift Supervision in the context of the current financial 

crisis have made no criminal referrals to the Department of Justice 

concerning fraud by the financial institutions. Do you know whether that is correct? 

Mr. BREUER. Mr. Chairman, I, as you know, just came back from 

New York, and someone just told me about that Huffington Post 

article. I do not know if that is correct. What I can say, if this is 

of help—and I will get back to you right away about that—is that 

what I can tell you is that we have required and ensured that our 

relationships with the regulators are robust and active. I meet regularly with the head of the SEC enforcement, as do my colleagues. 

41 

I meet regularly now with the head of the CFTC enforcement. And, 

indeed, Mr. Chairman, since we last appeared before you, we now 

have two CFTC lawyers who are actually detailed to our Fraud 

Section so that we can ensure and move as quickly as we can when 

those kinds of cases ought to be prosecuted criminally. 

With respect to that particular regulator, I do need to get back. 

I just do not know if we have received any referrals or not. 

Chairman SPECTER. Are you familiar with the OxyContin settlement, Mr. Breuer? 

Mr. BREUER. I am generally aware of it, Mr. Chairman. I am. 

Chairman SPECTER. Well, that is a case where OxyContin agreed to pay $19 million to 26 States on giving inaccurate information on 

dosages, which resulted in deaths. Three executives entered guilty 

pleas. The company’s president paid $19 million in fines, top lawyer $8 million. Paul Goldenheim, medical director, paid $7.5 million. Nobody went to jail. Was that handled by the prior administration? 

Mr. BREUER. It was, Mr. Chairman. Nonetheless, I am happy to 

give you a little bit of background. As I understand that case, it 

was a misbranding case where Purdue claimed that its product, 

OxyContin, that the slow-release version of that product had less 

negative consequences than other types of the similar drug. So the 

issue was what their claims were with respect to the slow-release 

formulation. 

The company pled, of course, to the felony. The individuals pled 

to the misdemeanor, as I recall, for misbranding, which in essence 

is a strict liability—it is a strict liability provision, Mr. Chairman. 

I do not think there was proof—and, of course, it was not under 

my watch, but I do not think there was proof that the senior executives, including the general counsel and others, were aware of these 

particular representations that were being made by Purdue. 

The company itself forfeited in total monies to State, Federal, 

civil suits hundreds and hundreds of millions of dollars, and right 

now the executives have been barred from the industry for an extended period of time. So I think that is a little bit of what happened in that particular case. 

Chairman SPECTER. Well, when you say they entered a plea to 

a misdemeanor, as we know from our joint experiences, that is 

often a compromise, does not indicate that there was not evidence 

of a felony. And the critical point is that there were deaths, that 

they were controlling officials, and nobody went to jail. 

Mr. BREUER. Right. 

Chairman SPECTER. Do you think that was an appropriate disposition on the sentencing issue? 

Mr. BREUER. Well, Mr. Chairman, it was not under my watch. 

I would want to know the facts better before I gave you a specific 

answer with respect to that. More generally, I am concerned. I do 

believe—and I very much agree with your thesis, Mr. Chairman— 

that responsible individuals who break the criminal laws and who 

are executives ought to go to jail. 

In a case with a strict liability statute—and, again, I do not 

know what gave rise, but just I know that they did a plea to the 

strict liability statute in essence. There, obviously, I think that 

would give us all more pause before we—— 

42 

Chairman SPECTER. You have said that twice about strict liability, and that raises the suggestion that there was no intent. But 

on these facts, that does not look like an exoneration. I do not 

know the details either, and I would like you to report back on 

that, whether there was evidence of mens rea, whether they could 

have been prosecuted for something else, and that was an accommodation. But the critical thing is you can go to jail for a case without specific intent. 

I am way past my time. I have been filibustering, Senator Klobuchar, just a little bit. I had some experience at that. 

What I would like to do, Mr. Breuer, is I would like to set up 

an ongoing review process so that we can keep track of the cases 

which you are handling and see what is going on with them. I have 

a long portfolio of cases which were egregious, giant corporations, 

fines, no jail sentences, minuscule compared to net profits, and a 

real question. This is a problem that I have seen my entire tenure 

here, that in the litigation process there is just too much of a tendency to resolve the case, a fine which looks good in a sense but I 

think is meaningless. I think that was the conclusion of the two 

panels which we had this morning. There were people on the other 

side. We had balanced panels, and some were defending Wall 

Street. But very overwhelming testimony from a professor from 

UCLA at Irvine, a criminologist, about deterrence. Of course, you 

do not really need to know that jail deters people and fines do not. 

You do not need to know that at all. But I would like you to keep 

this Subcommittee posted on what happens, especially out of the 

Wall Street line. 

Mr. BREUER. Mr. Chairman, I will. And if I may just comment 

for a moment, in my 1 year as AAG, I would like to think that we 

have been going full bore. We have indicted 46—we have had 46 

indictments just in the FCPA area in that 1 year, Mr. Chairman. 

That is more than in the entire history of FCPA. That is of individuals. As I mentioned to you before the other Senators came, we just 

2 weeks ago got the largest and longest sentence in the FCPA area 

in the history of that statute, 87 months. We have strike forces 

now in health care. We are in more than half a dozen cities. We 

will be in 13, we hope, by the end of the year, and in 20 by the 

next year. We are bringing real cases. We have probably had over 

a dozen trials. So if you do not plea to what we demand, we have 

been asking and going to trial, and we have gotten convictions in 

every one of those cases. Those people are going to jail, and with 

respect to Wall Street, we are looking hard at those. 

We are also doing this with respect to mortgage fraud where we 

are creating strike forces and partnerships with not just the U.S. 

Attorneys but with State and local governments as well. 

So I am delighted to let you know what we are doing. We are 

recruiting great people to our Fraud Section in the Division, but it 

is a very dynamic time, and I do not want the misimpression to be 

that the Criminal Division is not working in all areas. It is. I know 

you are not suggesting otherwise, but whether the cases are very 

big, Mr. Chairman, or smaller, you have my word that we are 

working tirelessly at them, and we are seeking jail time in the 

great preponderance of these cases. 

43 

Chairman SPECTER. Well, those are impressive statistics, and I 

accept what you say. And we would like to pursue them, and we 

would like to see the level of defendant, whether they are minor 

figures in the overall scheme or whether they are prominent, 

whether the sentences relate to something which is an effective deterrent. And that is the function of the Judiciary Committee on 

oversight. 

Senator Klobuchar, would you be willing to accept the gavel? 

Senator KLOBUCHAR. I can just stay for a good 5 to 10 minutes, 

but I can do it for that amount, and then maybe Senator Kaufman 

can do it. 

Chairman SPECTER. Well, you can pass the gavel on. 

Senator KLOBUCHAR. I will do that. 

Chairman SPECTER. We had a lengthy hearing this morning. 

Senator Kaufman was present. 

Senator KLOBUCHAR [presiding]. I realize that. Very good. Thank 

you. Thank you, Senator Specter. 

Thank you, Mr. Breuer, for being here today, and I am most interested, after we did the Fraud Enforcement Recovery Act—as you 

know, Senator Kaufman was very involved in that as well—how 

things are going with that. I wanted to thank you and the Justice 

Department for the good work you did on the Tom Petters case, 

which is know was mentioned before I got here. That was a huge 

case, just hundreds of millions of dollars lost. I think next to the 

Bernie Madoff case, it was the second biggest case, and it was located in our State of Minnesota, and a lot of people lost a lot of 

money. So I appreciate the good work and the strong sentence that 

the Minnesota U.S. Attorney’s Office was able to get in that case. 

I wondered, first of all, just an update on FERA, the Fraud Enforcement Recovery Act. How are you using that money? I think it 

nearly doubles the FBI’s mortgage and financial fraud budget, but 

how is law enforcement in general targeting fraud with that 

money? 

Mr. BREUER. Well, it has been incredibly helpful both in the way 

that the statute and the amendments were made to encompass conduct that before was not so easy to address. 

With respect to resources, Senator, they are being used wisely. 

I meet every week with the head of the Criminal Investigation Division of the FBI, Kevin Perkins, and often with his superior, T.J. 

Harrington. And among the issues that are at the very top is the 

issue of going after financial fraud, mortgage-related fraud. 

We have right now probably over 1,000 people charged around 

the country for mortgage-related frauds, from the most basic to the 

most advanced and complicated, and that we could not do without 

the additional resources that we have received. 

In our Fraud Section, we have additional attorneys. The U.S. Attorneys have additional attorneys, and the FBI, of course, is doing 

it. So it is very robust. There are strike forces throughout the country. The Financial Fraud Enforcement Task Force, President 

Obama’s task force to address all financial crime, benefits enormously from these additional resources, and the various working 

groups, whether those are working groups dealing with mortgage 

fraud, rescue fraud, recovery fraud, or securities and commodities 

fraud, the added resources are being deployed in all those areas. 

44 

Senator KLOBUCHAR. Thank you. A witness who testified this 

morning—Andrew Weissmann—was skeptical about imposing a fiduciary obligation on brokers or an increased focus on jail time on 

bad actors. I disagreed with some of his testimony. But there was 

one point that I thought was worth exploring with you, and that 

was whether and how we can increase enforcement of existing statutes and remove road blocks to civil liability. 

One of his points was that regulatory agencies could punish bad 

actors through civil sanctions more frequently than they do. For example, the SEC could bar executives and brokers from the industry 

in some circumstances. The SEC and DOJ can assign Federal monitors to corporations. Obviously, banning individuals from an industry is a very serious sanction that would send a strong message. 

Do you have any idea how frequently these kinds of punishments 

are used? And is there a role for Congress to encourage agencies 

to use these kinds of serious civil sanctions more? And do you think 

that that would, just like jail time, create a different culture? 

Mr. BREUER. Well, Senator, I do not know the numbers of how 

often the regulators do it, but I absolutely think that robust tough 

regulators are essential. And I think right now the folks who are 

in charge at the SEC and the CFTC are just that. They are robust 

and they are tough, and they take their assignments, I know, very 

seriously. And I do think that those kinds of sanctions have real 

clout. 

I do not think those sanctions are a replacement for the Department of Justice pursuing appropriate cases criminally. I think we 

have to do that, and we must do that. But I do think that there 

is a role for a tough regulator. I think there is a very big role for 

the Department, and I think our ongoing dialog—I meet regularly 

with the head of enforcement at the SEC, regularly with the head 

of enforcement at the CFTC. My fraud chief, Dennis McInerney, behind me does the same. And I think that that dialog is essential. 

There are cases where we should both do them together. There are 

cases where, frankly, we should only do them, where there is just 

sheer criminality and perhaps not a regulatory component. And, of 

course, there will be the others, which maybe Mr. Weissmann was 

referring to this morning, that ought to get a regulatory response. 

Senator KLOBUCHAR. So do you think that is something in addition to potential jail time that would be helpful if we looked at that 

more? 

Mr. BREUER. Absolutely. 

Senator KLOBUCHAR. OK. In your testimony, back to the Financial Fraud Task Force, the task force has established a financial 

fraud coordinator in every U.S. Attorney’s Office across the U.S. to 

facilitate uniform and aggressive enforcement. How does this work, 

and how do they work with their local law enforcement people? 

Mr. BREUER. So it is essential that the Nation and our citizens 

have a right to know that as an administration we are acting in 

a coordinated manner and in an appropriately aggressive manner. 

What we are trying to do is get our arms around what we are prosecuting and what the dilemmas and problems are and what are 

good strategies and lessons. So the task force does everything, Senator. It keeps track of prosecutions. It comes up with theories for 

prosecutions. It comes up with theories of training. And, frankly, 

45 

in many cases like in the health care area that I referred to, the 

strike forces, we sometimes find the very same bad actors. First, 

maybe they were in Minnesota, and when we are on them in Minnesota, they move on. 

What these financial coordinators do in the U.S. Attorney’s Office 

is ensure that each U.S. Attorney has one point of contact so that 

every U.S. Attorney’s Office knows what we want to hear back 

from them and also has one person who can collect the information. 

This way we can track do they have sufficient resources, are they 

using their prosecutors in the best way, and what can Main Justice 

do. And so that is really what they are doing. 

And then, of course, the task force itself is probably an unprecedented example of State and local and Federal coordination, and in 

part, that is also what these coordinators will do. They will be the 

people on the spot to ensure whether they do it or their colleagues 

in the U.S. Attorney’s Offices, that they are having real partnerships with the Attorneys General or others. And that is the role. 

Senator KLOBUCHAR. OK. What steps have you taken to implement the changes and like what are people saying out in the field 

about how it is going? 

Mr. BREUER. Well, it is a little self-serving. I think people think 

we are doing a lot. I really do. I mean, some of these cases are 

going to take longer, but when you are bringing as many health 

care fraud cases as we are and Medicare fraud cases as we are, 

when you have over 1,000 people charged with mortgage-related 

fraud, when you have an unprecedented number of cases against 

the FCPA, when we have this robust training program—we have 

brought TARP-related cases already. We are dealing very closely 

with Earl Devaney, the Chairman of the Recovery Board. I think 

people feel that we are playing a very active and real role. 

Having said that, I am keenly aware that there are those who 

are wondering why certain types of cases have not yet been 

brought, but overall, I think any objective view would say that this 

is an unprecedented time of prosecutorial and regulatory action 

and oversight. 

Senator KLOBUCHAR. Well, it was much needed, so thank you 

very much, Mr. Breuer. 

Mr. BREUER. Thank you, Senator. 

Senator KAUFMAN [presiding]. Mr. Attorney General, Assistant 

Attorney General, I just want to associate myself with Senator 

Specter’s question. I am sorry it is on such short notice, but I just 

found out about it. But this is pretty devastating. Mr. Black alleges 

that during the savings and loan crisis—which you and I have 

talked about and everyone has talked about. One of the keys to 

kind of find out what is going on are whistleblowers and referrals. 

And he alleges in the article in the Huffington Post whereas during 

the S&L crisis there were thousands of referrals, there have not 

been any on this. That would be very, very, very disturbing. So I 

do not know. It may turn out that way. 

But I will tell you what. It does not strike me, after sitting reading and following all this stuff, but especially in the Permanent 

Subcommittee on Investigations when you have regulators like the 

Office of Thrift Supervision, the head of the Office of Thrift Supervision did not realize that 90 percent of the home equity loans at 

46 

Washington Mutual were stated income loans and 63 percent of the 

ARMs were stated income loans and 50 percent of the subprime 

were stated income loans. This is after the same head of the Office 

of Thrift Supervision—I think his name is Mr. Reed—said that 

stated income loans are anathema to the banking industry, and 

where the Inspector General Thorson from Treasury said that 

these percentages of stated income loans are a target-rich environment for fraud. It is not hard to think that maybe the regulators 

did not—I mean, are there any regulators on the Financial Fraud 

Enforcement Task Force? 

Mr. BREUER. Many. For instance, if we just use one example, in 

the Securities and Commodities Working Group—and, really, the 

task force, it is the working groups that are really the enforcement 

component. The co-chairs are myself, the U.S. Attorney from the 

Southern District, Mr. Bharara, and Rob Khuzami, the head of enforcement at the SEC. And the CFTC is very involved as well, so 

many regulators—I think there are two dozen agencies represented 

by the task force. 

Senator KAUFMAN. That is why it makes it so hard. Again, I can 

well believe—and I do not even want to know about referrals that 

are still secret. I am not saying that. But it just seems hard to believe that this far down the road we have not had significant 

enough referrals from the regulatory agencies. After all, that is 

what they are supposed to do. 

Now, again, I realize that the regulatory agencies that were in 

place while most of this went on have turned out to be folks that 

believed in no regulation. I mean, essentially it is clear that the 

feeling was let the market kind of work it out and let us not regulate. And I think—I know—I am not—I do not want to go over this 

too much, but it is such a key point to this thing. 

Mr. BREUER. Right. Senator, the one thing I will say—and, look, 

I cannot address that, of course. 

Senator KAUFMAN. Right. 

Mr. BREUER. And I have not read the article, but what I can tell 

you—and I may have mentioned it before. I do not know if you 

were in the room. We are meeting, I am personally meeting regularly and my most senior people are meeting regularly with the top 

people at the SEC, the top people at the CFTC. We are meeting 

with regulators throughout in all different areas, and, frankly, we 

will continue to. The head of the TARP, the IG, Mr. Barofsky, we 

are meeting with him. 

Senator KAUFMAN. Good. 

Mr. BREUER. And others. So we are on top of it, and we will call 

it—I will call this agency as well, and I just do not know if they 

have or have not referred, but we will find out. 

Senator KAUFMAN. I am talking about that basically his allegation was nobody is referring. 

Mr. BREUER. Right. 

Senator KAUFMAN. And that, in fact, one of the key ways we 

were successful during the S&L crisis was the matter of referrals. 

And, remember, the other problem is we had at the time of the 

S&L, we had a lot more people involved in the Justice Department. 

Now that is the reason we passed FERA. FERA is—the main objective of FERA, as you and I have talked about—and we have talked 

47 

about it in these hearings. I really appreciate what you are doing 

on mortgage fraud. I think that is important. But the FERA funds 

primarily were to go after the folks, the kingpins, kind of like when 

we passed the drug legislation to go after the drug kingpins, not 

the drug dealers. So we are really interested—and I am not saying 

‘‘we’’ like the imperial ‘‘we,’’ like me. 

Mr. BREUER. Right. 

Senator KAUFMAN. I am just saying it is clear when you look at 

the debate and the discussion of this bill, this is primarily targeted 

at—and not any kind of retribution. This is not about retribution. 

This is just—I mean, I am absolutely convinced, after the hearings 

we had on the Permanent Investigations Subcommittee and the 

studies I have been doing for this bill, that there is rampant fraud 

in these cases. I do not see how you can explain behavior other 

than there was a concerted effort to be engaged in fraud. I am not 

talking about any specific case. 

Let me ask you something. The stated income loan, things like 

that, you know, when you get big numbers, aren’t they—do they 

merit—and I am not talking about Washington Mutual, just in general. Where you have a system where people are accepting less 

than—I mean, much, much less than what is generally recognized 

as good marketing practice in order to package together these 

mortgage fraud things and then ship them off and to sell them to 

somebody else, doesn’t that seem like that would be an area that 

at least we can look at—that Thorson was right, that this is like 

a target-rich environment? 

Mr. BREUER. Senator, I want to be careful about saying what we 

are going to look at or not look at. 

Senator KAUFMAN. Sure. 

Mr. BREUER. But what I will say is that no matter how important or high up you are, we will look at the conduct, your conduct, 

and if we conclude that there was criminal intent in what you did, 

we will pursue it. Sometimes that may mean in these structures 

that it is going to take us longer because of all the reasons we all 

understand. 

Senator KAUFMAN. Right. We talked about that. I totally agree 

with that. 

Mr. BREUER. Right. But let me be clear here. We are incredibly 

invested, my team is incredibly invested, the Attorney General is, 

and that is not just the Criminal Division, but it is the U.S. Attorneys throughout the country. And in any scenario, if we can develop the facts and we can establish criminal intent, we will absolutely prosecute cases. 

Senator KAUFMAN. And, by the way, and to be absolutely clear, 

I look on the Justice Department as kind of a black box on this, 

that I do not want to know what is going on inside the black box, 

I should not know what is going on in the black box. That is why 

it is so scary when you hear someone allege that we are not getting 

referrals from the agencies, which you know that and whistleblowers are our two best sources. That is why it is so scary, because I do not want to get into the black box. I do not want to get 

into how you are making decisions. I do not want to get into any 

of those kinds of things. We do know that it is incredibly difficult. 

These are complex cases. 

48 

Mr. BREUER. Senator, one thing I want to make sure we are 

clear, I do not want to talk about a particular regulator, the one 

you—— 

Senator KAUFMAN. Sure. 

Mr. BREUER. But we are absolutely getting referrals from regulators. 

Senator KAUFMAN. OK. 

Mr. BREUER. We have strong relationships with regulators. We 

are meeting with the regulators. And we have been getting referrals from the regulators, and we are going to continue to get referrals. And when we do not get referrals, I and my colleagues are at 

the regulators complaining and whining and yelling and cajoling. 

We want these cases, and we are aggressively going after them. 

Senator KAUFMAN. I think this is a good point to adjourn the 

hearing. Thank you very much. 

I have a couple housekeeping things. Chairman Leahy has submitted a statement for the record which, without objection, I would 

offer. I do not see any objection. 

[The prepared statement of Senator Leahy appears as a submission for the record.] 

Senator KAUFMAN. The record in this matter will remain open for 

1 week. 

Thank you very much for your testimony, and the hearing is adjourned. 

Mr. BREUER. Thank you, Senator. 

[Whereupon, at 2:51 p.m, the Subcommittee was adjourned.] 

[Submissions for the record follow.] 

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