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Money Guys, Beware

August 05, 2003

The money guy who finances illicit corporate deals is committing a crime, just like the wholesaler who offers credit to street corner drug dealers. That message is finally filtering down to executives at investment firms and banks who had previously escaped prosecution by pleading that all they did was front the money. What the customer did with it was his problem, or so the alibi went.

That lame excuse won't work anymore, thanks to a pair of recent legal actions that clearly make abetting corporate fraud, no matter how well disguised, a crime.

The case that generated the most headlines involved two banks that loaned $8.3 billion to fraud-ridden Enron Corp. The Securities and Exchange Commission and the district attorney of New York alleged that J.P. Morgan Chase & Co. and Citigroup Inc. knew that Enron intended to dress up as commodities transactions a series of loans that would help illegally hide billions of dollars in debt from investors in the now-bankrupt company. The banks bowed to that reality last week by agreeing to pay $300 million in fees and fines -- albeit with the usual boilerplate about not admitting or denying guilt.

A federal jury in Orange County delivered a related message in June, finding Lehman Bros. Holdings Inc. partly accountable for fraud at an Irvine mortgage company it had helped finance. Plaintiffs' attorney Richard Scruggs summed up Lehman's defense during the civil trial: "It's like the driver of the getaway car saying, 'I didn't know what the gang was doing in the bank. All I know is that they came out in a hurry and needed a ride.' "

In both cases, the punishments were not as severe as they should have been. Citigroup's portion of the fine in the Enron case would be almost lost in its $4.3 billion in net income during the second quarter. And the Orange County jury assigned most of the responsibility to the mortgage company. But the judge in that case noted the decision's importance because, for the first time, a claim involving so-called secondary liability had gone to trial.

A top SEC official said the new enforcement message was if "you are helping a company mislead its investors, you are in violation of the federal securities laws."

More needs doing. Executives at financial institutions must actively ensure that increasingly complex business deals aren't end runs around laws and regulations. And prosecutors must reinforce the message that those who cheat on their business transactions, from chief executives to their bankers, will lose more than money. The best way to do that is by sending the guilty parties to jail.

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