By Peter J. Henning
At the sentencing hearing for Kareem Serageldin, a former senior executive at Credit Suisse, Judge Alvin K. Hellerstein of the Federal District Court in Manhattan pointedly asked why someone in such a position would engage in misconduct. As DealBook reported, the judge asked, “Why do so many good people do bad things?”
That is the conundrum of many white-collar crime cases: successful business people act in ways that put careers and personal fortunes at risk for seemingly modest gains, and sometimes the misconduct benefits their company but themselves only indirectly.
Mr. Serageldin was the global head of the structured credit group at Credit Suisse, responsible for overseeing its subprime mortgage securities portfolio. He was indicted in February 2012 for inflating the value of bonds held by the bank to cover up losses as the collapse in the housing market hit in late 2007.
As seen in other recent cases, there were recorded telephone conversations in which Mr. Serageldin and other defendants discussed keeping the prices high to protect their positions in the hope that the housing market would turn around. When internal inquiries into the valuations were made, the defendants did their best to cover up what they had done, a losing battle that led the bank to disclose the mismarking in February 2008.
Judge Hellerstein imposed a 30-month prison term, a punishment below the recommended sentence for the violation. In explaining the reason for the reduction, the judge noted that Mr. Serageldin’s conduct “was a small piece of an overall evil climate inside that bank and many other banks.” Credit Suisse disagreed with that characterization, noting that regulators had highlighted the isolated nature of the wrongdoing.
Of course, even if the judge was correct, a corporate culture that puts pressure on employees to cut corners to make their targets is not an excuse for criminal conduct. Was this a case in which the moral compass simply went awry when a person was put in a stressful situation?
If the misconduct is just an aberration, then that may support the proposition that crimes by these types of individuals really cannot be deterred because they have convinced themselves that the conduct is not “really” wrong, or at least they will be able to make things right at the end of the next quarter. If you do not believe you are doing anything illegal, then there is no fear of punishment.
Perhaps misconduct by some groups can be ascribed to the belief that so long as everyone else seems to be doing something, it cannot actually be wrong. Continuing investigations into global banks’ manipulation of the London interbank offered rate, or Libor, as well as foreign currency exchange rates are replete with examples of traders exchanging information and boasting of their ability to artificially raise or lower a benchmark rate. These are not isolated instances, but part of a pattern of conduct over months and even years. So it cannot be chalked up to the heat of the moment.
What is so puzzling about people who have led otherwise good lives is that they are unlikely to have engaged in the misconduct if it is presented to them in stark terms. Ask a Wall Street trader, for example, whether he or she would trade on material nonpublic information received from a corporate insider, and the answer from most would be “no” — at least if there was a reasonable chance of being caught.
But under pressure to produce profits for a hedge fund or a bank, traders are often on the lookout for an “edge” on the market that can slowly take them closer to crossing the line into illegality. Add to that the vagueness of the insider trading laws in determining when information is “material,” and it can be easy to cross into illegality without necessarily noticing it.
The current trial of Michael S. Steinberg, a former senior portfolio manager at SAC Capital Advisors, puts the firm’s culture on display and raises the question about how far traders are willing to go for that edge on information. A former SAC analyst, Jon Horvath, is expected to testify about how he obtained inside information and passed it along to Mr. Steinberg, claiming they both knew it had been improperly obtained. But in the fast-paced environment of securities trading, do those buying and selling pause to ask whether they have come close to the line, or maybe even crossed it?
Perhaps the most inexplicable insider trading case involves Rajat K. Gupta, formerly head of global consulting firm McKinsey & Company and a former director of Goldman Sachs who was convicted of tipping Raj Rajaratnam, the founder of the Galleon Group hedge fund, about impending developments at Goldman. He is appealing the conviction, and a separate order in a civil enforcement action brought by the Securities and Exchange Commission permanently barring him from serving as a director or officer of a public company.
Mr. Gupta did not make any money from his actions, and before sentencing, his lawyers argued that the conduct represented an “utter aberration.” In imposing a two-year prison sentence, Judge Jed S. Rakoff of the Federal District Court in Manhattan said he had “never encountered a defendant whose prior history suggests such an extraordinary devotion, not only to humanity writ large, but also to individual human beings in their times of need.”
When looking at Mr. Gupta’s case, Judge Hellerstein’s question about why such a good person would do bad things looks to be unanswerable.
That does not mean that good people should avoid punishment just because they have lead otherwise exemplary lives. But it does raise questions about how much punishment is appropriate for someone who has lost so much, and about how to ensure that people do not cave in to the pressure to engage in misconduct.
As Judge Hellerstein pointed out in sentencing Mr. Serageldin, “Each person has to look within himself and ask himself what is right, what is wrong.” White-collar crime cases too often involve defendants who never seem to have asked such questions.
Peter J. Henning, a professor at Wayne State University Law School, is the author of “The Prosecution and Defense of Public Corruption: The Law & Legal Strategies.” Twitter: @peterjhenning
Via Vilma Bonilla, Dorothy Retha Cook