(12/27/11) Crisis Crooks May Finally Be Punished

Most investors are angry that no one has been punished for causing the financial crisis, but MoneyShow's Jim Jubak shares the reasons why this might change in 2012.

One of the great questions that investors and just average people have had during the whole financial crisis is, why is nobody in jail?

Well I think we’re about to answer that question in the positive. I think we’re starting to look at the first time when you might wind up with maybe people going to jail, but certainly very large civil penalties for specific banks and maybe some sense that people who did bad things are going to get punished.

Oddly enough, the reason to believe this is not because the federal government has somehow gotten its act together, or that the Justice Department has decided to do this. It all comes down to this very peculiar thing called the Martin Act, which is the law that governs financial transactions for fraud in New York State—just one state’s law.

What’s happened is that the New York State Attorney General has gotten together with the federal investigators who have been working on the whole issue from that end, and they’re going to pool their resources. What’s great about this is if you’re looking for some kind of sense of justice is that having the feds involved means that the New York State Attorney General will be able to pool lots of documentation without having to subpoena it all and being worried about the feds saying well you’re just a state guy so go away. We have the rights to do this so they’re going to work together.

The thing that the New York State Attorney General, Eric Schneiderman, brings to the table is this thing called the Martin Act, which specifically defines financial fraud in New York State as being "anything that results in fraud." It takes out of the whole prosecution...it simplifies prosecutors' lives by basically saying that they don’t have to prove the intent to defraud. It just has to be a fraud.

So that makes things very, very simple. You don’t have to go into all these things about, well, did you know? No, if the fraud is the result, it doesn’t matter what your intention was. That’s the Martin Act.

The second thing the Martin Act does is it says basically anybody who is headquartered in New York State or does business in New York State comes under this act. So the fact that you’re Bank of America (BAC), where most of your business is in California, is irrelevant. New York State can go after you with the Martin Act.

So this is really a game changer. It happened very late in the process. It only happened on the weekend of December 19, so it was very late. But it really is the first time that I think we have a chance to see some justice come out of this whole thing.

What’s really interesting is that, if you look at prosecutions during this financial crisis and the one before and the one before that, there’s a lot to be said for having an elected attorney general who is hungry. Who wants to go after higher office, like Eliot Spitzer. Burned and crashed as governor, but he was a great attorney general.

That seems to be exactly what’s going on here. You’ve got an ambitious guy who sees this as a chance to make his chops, and he’s going after these guys. And the banks are not going to be happy with the results.