I discussed here the compelling facts alleged in the complaint against Standard and Poor’s filed by Los Angeles US Atttorney André Birrotte, Jr. Now let’s look the legal claims, and try to explain why there is no criminal prosecution.
The suit is grounded in wire fraud. There are three elements to the crime. Shah, Mail and Wire Fraud, 40 Am. Crim. L. Rev. 825 (2003) (available through your public library). The prosecutor must prove the existence of a scheme to defraud, intent to defraud, and use of the internet or the phone in furtherance of the scheme to defraud.
a) Scheme to defraud. The concept of fraud comes to us from the Common Law, and has not been defined by statute. Here is a definition from Black’s Law Dictionary Free On-line:
Fraud consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury.
It is easy to see how S&P’s actions described in the complaint fit this definition. S&P knew that the issuers would only hire it if the issuer was satisfied with the proposed ratings The complaint says that the issuers had input into the software used to calculate the ratings. See, for example, ¶¶ 125 and following, and 171. The goal of the scheme to defraud was to enable S&P to earn those fees. As part of that scheme, S&P defrauded investors about the nature of their ratings. At the same time, S&P was aggressively touting its independence and objectivity. This element doesn’t require that the injury itself results in gain to the perpetrator. It is enough if it injures the victim.
b) Intent to defraud. Lanny Breuer, the soon-to-depart head of the Criminal Division of the Department of Justice, constantly whines about the difficulty of proving intent. It isn’t hard. Shah explains:
The second element the government must prove for a mail fraud conviction is the defendant’s specific intent to defraud. This element is met using circumstantial evidence and “a liberal policy has developed to allow the government to introduce evidence that even peripherally bears on the question of intent.” Similarly, the defendant can also use circumstantial evidence to show that she did not have the requisite intent.
Id. at 835-6. The US Attorney Criminal Resource Manual agrees:
“The requisite intent under the federal mail and wire fraud statutes may be inferred from the totality of the circumstances and need not be proven by direct evidence.” Thus, intent can be inferred from statements and conduct. Impression testimony, that is, testimony of victims as to how they had been misled by defendants, is admissible to show an intent to defraud
Citations omitted. In the S&P case, bank officers will testify about their impressions of S&P and that will be evidence of intent. S&P’s own statements in its ads, manuals, speeches and testimony to Congress will also be admissible on the issue of intent. And of course, there is a mountain of evidence about the phony ratings and the role played by issuers in design of S&Ps software.
c. Use of wires. The complaint contains charts showing use of wires, including use of the internet and wire transfers. in furtherance of many transactions.
Burden of Proof
In a civil case the plaintiff must prove every element of the case by a preponderance of the evidence. For each element the prosecutor must prove that it is more likely than not that the element is proven. This is a lower standard than that required in a criminal case. To prove a crime, the prosecutor must prove each and every element “beyond a reasonable doubt”.
Theoretically the burden of proof is lower in a civil case, and in practice, it is lower for many kinds of offenses. A murder conviction requires proof that the defendant acted with specific intent to kill, with malice and premeditation, and it is easy to see how hard that would be in many cases.
Wire fraud isn’t like that. Put simply, for this case the US Attorney will show that specific S&P executives a) knew that their ratings were falsely high, b) knew that the people who bought their services influenced S&Ps internal systems to get undeserved higher ratings; and c) insisted that their ratings were objective and fair. From this jurors can and should infer that they fully intended the natural consequences of their lies: that their audience would believe the lies, act on that belief and lose money.
Intent is never a matter of direct proof. No one can know what is in someone else’s mind. Intent is always proved by circumstantial evidence. When Breuer says it is difficult to prove intent, he means that he believes in his heart that no jury would believe that the Lords of Wall Street intended to commit fraud. Their lawyers told him so.
So, why isn’t this a criminal case? Depending on the strength of the evidence, which we don’t have, a jury could use the same evidence the US Attorney has in his civil case to find beyond a reasonable doubt that that there was wire fraud. I don’t think it’s because the US Attorney doesn’t think he can prove his case beyond a reasonable doubt. I think it’s because Birrote would paint Breuer as a liar and a coward if he indicted S&P or its executives for their relatively smaller part in fraudulent sales of RMBSs and CDOs, while Breuer let the Lords of Wall Street roll in the money they stole.
Photo by Funky Tee under Creative Commons license