Financial Stability News

Flashing news about financial stability and central banking

MF Global – Why has there not been more prosecution of fraud?

This interesting but somewhat technical post discusses an important issue: Why has there not been more prosecution of financial fraud in this crisis? This is i large part due to the tradition of appointing trustees for the failed institution, instead of appointing receivers. This again is related to the US Bankruptcy law and legal tradition, which mistakenly has avoided appointing receivers when there are clear signs of fraud against unsecured creditors. As the post notes …

There are a number of examples where a receiver function plays an important role in fighting fraud. In case of The Stanford Group, an Article III receiver was appointed by a federal District Court without any bankruptcy to pursue a wide ranging investigation, which included efforts to conserve customer funds and pursue third parties via criminal and civil means.

He goes on to note that the FDIC is a good example of who such receiver powers could be used …

The FDIC is another excellent example of how receivership powers enable that bank agency to limit losses to the mutual insurance fund supported by insured banks and also pursue claims against bank officers, directors and other parties. Unlike a trustee in a bankruptcy, the FDIC acting as receiver has broad authority to seize assets, sue officers and directors, reject contracts and even make criminal referrals related to a failed bank.

More frequent appointments of receivers whenever fraud is suspected should restore some of the balance for unsecured creditors and lead to more prosecution in obvious fraud cases.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: