FBI's Subprime Investigation and Cuomo's "Martin" Move

If the legal departments at our nation's major financial services firms weren't nervous before, they certainly are now. According to news reports, the FBI is looking into potential subprime crimes by 14 companies as part of a wide ranging investigation into the troubled mortgage industry. Apparently they have been doing so since the Spring of 2007. Reading through the tea leaves, the FBI might find that risk disclosures were hid from investors and ratings agencies as well as mortgage lenders and brokers falsifying information on loan applications, among other potential wrongdoings.

The FBI inquiry is extremely important because rather than pursuing these cases civilly through the SEC, we could see federal criminal indictments and jail time. The Feds were successful in prosecuting corporate criminals at Enron, WorldCom, and Adelphia and they have the requisite knowledge and experience to pursue wrongdoing in the subprime mortgage arena.

This is in stark contrast to Eliot Spitzer's strategy who was content to use photo-ops and wrist slaps and call it justice. Mr. Spitzer's performance will hopefully not serve as a case study for the current New York Attorney General, Andrew Cuomo. This is not to say he didn't learn anything from Mr. Spitzer. Attorney General Cuomo apparently is threatening to use The Martin Act to aggressively pursue a case against Wall Street, which also was Mr. Spitzer's legal club of choice.

This is an important development. The Martin Act is quite broad in its scope and can be used to indict a company for virtually anything. No Wall Street firm has ever survived an indictment, so Cuomo will likely garner some settlements. Let's hope that unlike Mr. Spitzer, Mr. Cuomo is hell bent on truly reforming Wall Street and that any settlements involve penalties that might actually serve as painful deterrents to future wrongdoings.