After lull, financial-crime prosecutions seen set to rise

A December study of Justice Department records showed that federal prosecutions of financial crimes have dropped dramatically nationwide over the past six years, despite the recent media frenzy over big-time Ponzi schemes and insider trading scandals.

The Southern District of New York saw a similar trend, which some may find disturbing considering Wall Street has been the epicenter of most financial scandals of the past two years.

Washington legislators have latched on to a USA Today study that found in 2009 there was a 55% drop in corporate fraud cases, a 44% drop in bankruptcy fraud cases, and a 17% drop in securities fraud charges when compared to 2003. Lawmakers are now setting up task forces and playing the blame game for the financial crisis.

Prosecutors and lawyers alike say a combination of politics and patience are turning those numbers around, albeit slowly. In the Southern District, at least, white collar prosecutions are on the rise.

The FBI, for example, said it was working on 2,800 mortgage-fraud cases as of the end of last year. Earlier this year, at a white collar defense attorneys luncheon in Manhattan, acting U.S. Attorney Lev Dassin assured the crowd that his office had a lot of cases in the pipeline and that business would likely start picking up for them in 2010.

“It takes time to go from investigations to formal charges,” explained Nathaniel Burney, a former Manhattan federal prosecutor and white collar defense attorney with Quadrino Schwartz. There may be hundreds of investigations, but that doesn’t mean there are hundreds of prosecutions, he said. “Not yet anyway. That could all change tomorrow.”

With an average of about 25 white collar fraud cases per month filed in the Southern District during the first half of the year, 2009 has not been boom-times for white collar defense lawyers, according to data compiled by Syracuse University research publication TracReports.

The data show that trend is moving decidedly upward. From a low of fewer than 15 cases filed in January, there were more than 35 white collar fraud cases filed in June.

Part of the reason is there’s a lag time—often up to two years—from when the government declares a change in investigative focus to when those new cases hit the court room.

For example, after the terrorist attacks of Sept. 11, 2001, the Feds focused their attention on terrorist threats to national security, diverting resources away from the Enron-type securities fraud cases. It took until 2003 for the securities fraud cases to wend their way out of the system, Mr. Burney said, at which point financial fraud cases started dropping precipitously.

When the credit crisis and mortgage fraud exploded onto the national consciousness in late 2007, emphasis turned back to white-collar investigations. The results of those investigations are only now starting to bear fruit.

Ms. Potkewitz is a reporter at Crains New York Business, a sister publication to InvestmentNews.