While it won’t impact murderers or sex offenders, it’s likely to matter to your next door neighbor, or perhaps the guy down the block.  From David Ingram at BLT:

The subcommittee on crime and drugs, chaired by Sen. Arlen Specter (D-Pa.), is hearing testimony from academics, advocates, and at least one voice from Big Law. One major point of dispute: a proposed requirement for some financial-services employees to meet a fiduciary duty to their customers, or else face criminal charges and potential prison time.

“I have long believed that it is insufficient to have fines for fraud,” Specter said in an opening statement, adding that fines from the Securities and Exchange Commission are “calculated as part of doing business.”

This isn’t nearly as isolated at Arlen Specter suggests.  Those who are engaged in the business of selling drugs realize that what they are doing could net them some serious prison time.  That’s the price of selling drugs.  There’s a lot of money to be made, and there’s a risk associated with making all that money.  They get it.  They’ve weighed the calculus, the risk of getting caught, of being convicted, of doing time.  They make a choice.

The same is true of those in the financial services industry who engage in wilful deceit and manipulation, except that they don’t need to package their product in glassine envelopes. 

Proving fraud, of course, is quite another matter from proving that someone sells drugs.  The view from behind can be very different from the view in front.  What’s perceived as fraud due to bad, sometimes horrific, results, is often just a lousy job.  Memo to Justice: Not everybody in the financial services industry knows what they are doing, or makes the right guess.  Worse still, not everybody has all the really good information or puts it together the right way.

The impetus for this latest round of criminalization comes from Lloyd Blankfein’s inability to follow his lawyer’s advice when answering questions on television.

Sen. Ted Kaufman (D-Del.) said the public is demanding some action by Congress, especially in the wake of last week’s congressional testimony by Goldman Sachs executives. “I just think there’s a crisis, in terms of people thinking there are two sets of rules,” Kaufman said.

It’s not just a knee-jerk reaction, but one that allows politicians to become overnight heros by criminalizing something.  These opportunities are growing fewer and farther between, and to pass up a chance to pander is just foolish.  There’s always another election right around the corner.  But how novel is this approach?

Damon Silvers, associate general counsel of the AFL-CIO, said such a statute would not be unique. “I would submit that there’s nothing particularly exotic about criminalizing willful breaches of fiduciary duty. It’s a well-known feature of our pension law today,” Silvers said.

It’s a well-known feature of the law that applies to essentially every endeavor, except when it comes to financial services.  A curious omission, to be sure.  When a person deliberately defrauds someone, the idea that they have committed a crime doesn’t strike anyone as odd.  So why has the financial services industry been exempt from criminal liability up to now, with the worst ramification a fine levied by the SEC? 

It could be part of a Financial-Military Complex conspiracy, or that distinguishing wilful conduct from screw-up in this context requires too fine a point.  Then again, Goldman Sachs seems to be awfully good at trading when it comes to their own account.  Why aren’t they ever that good when it comes to anyone else’s?

Of the people who testified before Sen. Specter’s committee, one was there to speak up for the potentially downtrodden.  Not poor, mind you, but downtrodden inchoate.

Among those testifying at the hearing is Andrew Weissmann, former director of the Justice Department’s Enron Task Force. Now the co-chair of the white-collar defense practice at Jenner & Block, he said a new criminal statute relating to fiduciary duty would raise questions of fairness and proper notice to those who might be covered.

“Would every breach of a duty of care now become a crime?” Weissmann asked this morning.

Only in passing do I note that Weissmann went from DOJ to co-chair of white collar defense in the blink of an eye, since he naturally had vast experience in the defense of financial crimes as opposed to their prosecution.  Or maybe it was his huge portfolio of clients.  Or maybe it was because Jenner & Block knows that most of their potential “white-collar” defendants wouldn’t realize that prosecutorial credentials, which sound so impressive, lead down the road to perdition (and conviction).  Still, lack of skillset notwithstanding, Weissmann was chosen to defend the public good.

No doubt there was more said than just one question, but the question is an interesting one.  “Would every breach of a duty of care become a crime?”  As opposed to what, “would every crime be a crime?”  If a fiduciary duty is imposed, and it someone wilfully violates that duty, and if violation of that duty is criminalized, what question is there?  Does he mean, “Would this apply to Goldman Sachs too?”  Does he mean, “What if the loss is under $10 million?” If the question is whether the breach has to be wilful, rather than accidental, then it would appear that he wasn’t listening.

The better question is how one distinguishes the deliberate fraud from the basic fact of life that players in financial services talk a good game but often don’t have a clue how a bet will turn out.  As is brutally clear to anyone who has spent any significant amount of time trying to defend such matters, this is where systems that sound good in theory break down. 

Intent is discerned from conduct, since we can’t see into people’s minds, and conduct is rarely clear enough to differentiate between malice and ignorance.  Pretty soon, everything gets swept together and the negligent get tossed in the same hopper as the deliberate fraudsters.  They all look the same, more or less, and once they are tarred as criminals, nobody really cares all that much whether they meant to do harm or just couldn’t do any better.

As AFL-CIO associate general counsel Damon Silvers noted, it’s really not all that exotic a notion to subject people to criminal sanction for deliberate fraud.  The question then becomes, how has it worked out for others?  It’s unfortunate that nobody thought to ask that question, but then, there was nobody in the room capable of answering.