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: