America has waited a decade for an aggressive government crackdown on white-collar crime. Now, just before the election, and in the middle of a bull market, it has arrived.
Why it matters: When times are good, investors become more trusting and more greedy. That makes them more likely to put their money into fraudulent or criminal enterprises.
- After a decade-long bull market, there is no shortage of those frauds to prosecute.
Driving the news: Just this week we've seen headlines about multi-billion dollar fines for Goldman Sachs and Purdue Pharma; the unveiling of a major antitrust case against Google; venture capitalist Elliott Broidy pleading guilty to accepting millions of fraudulently-obtained dollars; an allegation that software magnate Bob Brockman criminally evaded taxes on some $2 billion of income; and an admission of tax fraud by Robert Smith, the founder and CEO of Vista Equity Partners.
Background: Historically, waves of prosecutions arrive after a market bubble bursts, rather than before an election.
- In 2002, after the dot-com crash, there was a series of major prosecutions of white-collar crimes at high-flying companies like Enron, WorldCom, and Tyco.
- In 2009, after the financial crisis, a series of prosecutions and settlements targeted banks who engaged in massive fraud when they issued and securitized subprime mortgages.
- This year, the difference is that the crackdown is happening when markets are still healthy — but while prosecutors and defendants both have an incentive to settle before a new administration is sworn in.
Be smart: When markets surge, investors lower their guard. They invest in fraudulent companies like Theranos and Wirecard, and glorify self-described rule-breakers like Uber's Travis Kalanick and Tesla's Elon Musk.
- "There are always fraudsters out there who are trying to appeal to investors," says Yale Law professor Jonathan Macey. "The question becomes: How successful will they be. During times of irrational exuberance, we see upticks in the success rate that people have in prying people from their money."
How it works: "At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country’s business and banks," wrote the great economist JK Galbraith in 1929. "This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars."
- "It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful... The rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly."
The bottom line: The greatest bull market in history has been accompanied by a predictably enormous degree of fraud and other illegal corporate behavior. That means rich pickings for politically-appointed U.S. Attorneys on the lookout for ways to grab credit for cases before a new administration arrives in January.
- Defendants, too, have every incentive to settle now. "Irrespective of politics, you don’t want to deal with a new team," says Robert Driscoll, a former deputy assistant Attorney General under George W. Bush who now works in private practice at McGlinchey.
