Federal prosecutors have come in for considerable criticism over their failure to press criminal charges against executives of financial institutions whose stumbles led to the global financial crisis. As Southern District of New York Judge Jed Rakoff pointed out in his blistering January 9, 2014 opinion column in The New York Review of Books (here), “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.”
Rakoff’s statement is not quite accurate, as there was at least one prosecution of a Wall Street banker. But while it may be true that few high-level Wall Street executives were prosecuted, it is not true that there were no criminal prosecutions. Prosecutors did file criminal actions against some financial executives, albeit largely against individuals associated with smaller institutions. In at least some cases, these prosecutions resulted in criminal convictions. On June 5, 2015, the Fourth Circuit Court of Appeals affirmed the convictions of three former officers of the failed Norfolk, Virginia-based Bank of the Commonwealth, in connection with the bank’s September 2011 failure. The Fourth Circuit’s opinion in the case can be found here.
The Bank of the Commonwealth of Norfolk, Virginia failed on September 23, 2011. In connection with the bank’s failure, the FDIC sustained losses of approximately $333 million. As discussed in a prior post (here, second item), on July 11, 2012, a grand jury returned an indictment (here) against the bank’s former Chairman and CEO, Edward Woodard, Jr., for conspiracy to commit bank fraud, bank fraud, false entry in a bank record, multiple counts of unlawful participation in a loan, multiple counts of false statement to a financial institution, and multiple counts of misapplication of bank funds. Three other former officers of the bank and two of its customers are charged with a variety of related charges. The FBI’s July 12, 2012 press release regarding the indictment can be found here.
As described in its January 9, 2013 press release (here), the SEC separately filed a civil enforcement action against Woodard, Cynthia Sabol, the bank’s CFO, and Stephen Fields, the bank’s former executive vice president. The SEC’s complaint, which can be found here, asserts claims for securities fraud against the three defendants for alleged “misrepresentations to investors by the bank’s parent company.” The SEC charged the three “for understating millions of dollars of losses and masking the true health of the bank’s loan portfolio at the height of the financial crisis.” The SEC alleges that Woodard “knew the true state” of the bank’s “rapidly deteriorating loan portfolio,” yet he “worked to hide the problems and engineer the misleading public statements.” Sabol also allegedly knew of the efforts to mask the problems yet signed the disclosures and certified the bank’s financial statements. Fields allegedly oversaw the bank’s construction loans and helped mask the problems. As discussed here, the SEC ultimately reached settlements with each of the defendants, in which the individuals agreed to an officer bar and to pay fines.
Trial in the criminal case began on March 19, 2013, against Woodard; Fields; Troy Brandon Woodard, who is Woodard’s son and was the bank’s Executive Vice President and Commercial Loan Officer; and two other defendants. Trial in the case lasted ten weeks. The government called 48 witnesses and entered over 600 exhibits into evidence. The defendants called 44 witnesses and entered over 400 exhibits. All five defendants testified on their own behalf. On May 24, 2013, the jury returned guilty verdicts against both of the Woodards and Fields.
Woodard was convicted of conspiracy to convict bank fraud; making a false entry in a bank record; four counts of unlawful participation in a load; two counts of making a false statement to a financial institution; two counts of misapplication of bank funds; and bank fraud. Fields was convicted of conspiracy to commit bank fraud; two counts of making a false entry in a bank record; making a false statement to a financial institution; and two counts of misapplication of bank funds. Brandon Woodard was convicted of conspiracy to commit bank fraud; and three counts of unlawful participation in a loan. Woodard was sentenced to 23 years imprisonment. Fields was sentenced to a 17-year imprisonment term. Brandon Woodard was sentenced to eight years imprisonment.
All three appealed their convictions and Brandon Woodard appealed his sentence. On appeal, Fields challenged time limitations the district court placed on his direct testimony. Woodard challenged the sufficiency of evidence against him and the trial court’s exclusion of certain evidence. Brandon Woodard also challenged the sufficiency of the evidence and also challenged the trial court’s use of sentence enhancements in fixing the period of his imprisonment. All three defendants challenged various evidentiary rules the district court made during the trial.
The June 5 Opinion
In an unpublished June 5, 2015 opinion written by Judge Dennis Shedd for a unanimous three-judge panel, the Fourth Circuit affirmed the convictions and Brandon Woodard’s sentence.
With respect to Fields’s contention that his direct testimony was cut short, the appellate court noted that “throughout the examination, the court warned counsel repeatedly that he was straying into irrelevant or marginally relevant lines of questioning.” The appellate court also noted that Fields’s direct examination lasted over seven hours and was the longest direct examination of any witness in the case –longer than that of the other co-defendants who were charged with a larger number of substantive counts. Fields’s counsel also failed to avail himself of the opportunity for redirect examination. The appellate court concluded in light of these considerations, the district court did not abuse its discretion in limiting the duration of Fields’s testimony.
With respect to Woodard’s and Brandon Woodard’s contention that the evidence against them was insufficient, the appellate court found that the government “presented ample evidence” in support of the conspiracy to commit bank fraud charge. In support of this conclusion, the court reviewed trial testimony showing how Woodard collaborated with various bank customers to try to help Brandon Woodard with various loan repayment difficulties he was having. The appellate court found that the testimony was sufficient to sustain the convictions.
This case is not the only one in which former executives of a failed bank were criminally prosecuted. Other failed bank executives were also prosecuted (refer, for example, here and here). So as I said at the outset, it is not true that there were no criminal convictions in the wake of the financial crisis. However, when you look at the enormous resources the government deployed just to snag these relatively lower level individuals while no charges were brought against the Wall Street executives whose actions nearly brought down the entire global financial system, you do start to wonder what is going on.
On the other hand, when you look at the enormous effort that was required just to convict these smaller profile defendants, you can imagine what might have been required if the government had tried to go after some of the bigger fish. Former Attorney General Eric Holder may have had that kind of concern in mind when he said while testifying before Congress in 2013 that “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them.”
In any event, this appellate court ruling does have a little bit of an end of an era feel about it. The final remnants from the financial crisis are slowly winding down. While the global financial system is still not yet fully recovered from the crisis, in many ways the world has moved on.
I did note while preparing this post that though the bank failure peak is now well in the past, banks are continuing to fail, albeit at a much reduced pace. The FDIC’s failed bank list shows that so far in 2015, five banks have failed (though only once since the end of February). There may yet be further bank failures. But by and large the bank failure wave seems to have just about played out. The time may soon come to close the book on the financial crisis.