White-collar criminal

The New York appeals court agreed that what Trump did was fraudulent.

He gets to keep the fruit of that fraud anyway.

That's dangerous. 

Appeals Court Judge Peter Moulton said, "While harm certainly occurred, it was not the cataclysmic harm that can justify a nearly half billion-dollar award to the state." The original judgment was $355 million, but it grew to $500 million due to the statutory interest of 9 percent per year while the case was on appeal. 

The case was controversial. President Trump's lawyers argued that the loans Trump received from banks were issued at a rate that banks found satisfactory, and that they were paid back on schedule. The rate of interest Trump paid was lower than it might have been because Trump vastly overstated the value of collateral for the loan, but this was an arm's-length transaction between sophisticated market participants. They argued no-harm-no-foul. No one got hurt.

In fact, we all got hurt. Business fraud isn't just a matter between two parties in a transaction. The whole financial system depends on honest transactions. We know this from experience.

When Enron cooked its books, employees and pensioners in companies that Enron bought when it was flying high, including one of Oregon's two big utility companies, Portland General, lost their jobs and pensions.  People got hurt when Bernie Madoff cooked the books on the value of the fund he managed.

The housing boom and bust was fueled by business fraud. Banks and mortgage companies accepted "liar loans" from customers knowing that the ability to repay was questionable at best. They approved the loans anyway because they could instantly re-sell the loans to loan syndicators. Credit rating agencies, eager to get the fee for assigning it an AAA -rating, signed off on the loans. Those loan packages were sold to pension funds by banks eager to get them off their books. At every level, the market participants fudged because it was good money while it lasted. My own employer, Citibank, was a participant in that fraud. Its president, Chuck Prince, explained that the loan marketplace looked sketchy as of June, 2007, just before the bubble popped, but the bank continued with its willful blind eye.

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

That "dancing" destroyed the bank. It had to be bailed out by taxpayers.

Imagine a different kind of business fraud.  A homeowner buys an insurance policy on his house to protect against fire or another catastrophe. The homeowner wants it, and his mortgage lender demands it. His insurance agent pockets the premium. The agent sends fraudulent certifications of insurance to the homeowner and mortgage lender. Years pass without incident, the insurance agent pocketing the premium and, fortunately, no incident takes place triggering a claim. Was that a no-harm-no-foul situation? Should the agent keep the money he pocketed? Of course not.

Someone was hurt. The homeowner thought he was insured, but was not. The mortgage lender thought their loan collateral was protected, but it was not. Parties were exposed to risk they didn't know they had. 

The way to discourage that behavior by insurance agents -- beyond being fired by the insurance company and the criminal sanctions for defrauding the homeowner -- is disgorgement of the profit from the crime. Whether it is theft or an innocent mistake, a person must never profit from an error. Gains from errors are disgorged as a matter of law. They are returned to the client or turned over to the state, depending on circumstances, but never given to the fraudster or careless mistake-maker. How else to discourage outright fraud or accidentally-on-purpose mistakes?

The public is deeply suspicious that the wealthy are coddled in prosecutions. I applaud New York for demanding disgorgement of gains made through fraudulent business practices. Trump calls it a “WITCH HUNT.” New York and every other state should conduct more of these hunts. White-collar crime sometimes involves high-status, well-connected, wealthy people. All the more reason to go forward with those investigations and prosecutions. Let the public see equal justice. High profile criminals should be prosecuted, not pardoned. 

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