Real estate brokers who put together fraudulent income packages without the borrower knowing. Individuals who served as straw borrowers, essentially renting their credit out to those with insufficient credit. An alleged Ponzi scheme. A title company that helped write multiple loans on a single piece of property.

Illustration of a tiny man lifting his arms up defensively out of the collar of his shirt. A large finger points at him accusingly.
Illustration by David Plunkert

These are a few of the allegations made against clients who, in just the past couple of months, have retained the counsel of Edward Swanson ’91 (BA ’85), a white-collar criminal defense attorney at Swanson & McNamara LLP. Such cases represent the early stages of what might be a tidal wave of white-collar crime cases stemming from the financial downturn. “It was very slow to come together,” says Swanson, but “I’m seeing a lot of cases now involving various aspects of the financial crisis, particularly mortgage-related fraud.”

The field of white-collar crime has often been defined by waves of financial crises and the marquee cases that ensue: the savings and loan crisis of the 1980s or the accounting scandals at Enron and WorldCom in the early 2000s. “The latest downturn in the economy may be the most interesting test of the breadth and significance of white-collar crime,” says Robert Weisberg ’79, Edwin E. Huddleson, Jr. Professor of Law.

Most surprising about the current economic crisis is the lack of prosecutions thus far, says David W. Mills, professor from practice and senior lecturer in law, who co-teaches a class on white-collar crime with Weisberg and who represented defendants in the junk-bond cases of the 1980s. He says most of the cases that have wound up in court so far—Bernie Madoff, most notoriously—involve “just plain old cheating,” which legally speaking isn’t very interesting or complex. If anything, says Mills, the intrigue of those cases lies not in law but in the psychology of victims who believed something that was too good to be true—a problem he says underlies much of the financial crisis.

Moreover, some think that prosecutions from the current crisis would pin blame on the wrong culprit. “What really drove this crisis were policies instituted by the federal government,” says Stephen C. Neal ’73, chairman of Cooley LLP. “It’s hard to criminalize that.”

“Creating a problem this large takes help from the government,” says Joseph A. Grundfest ’78, W. A. Franke Professor of Law and Business. Pointing out that people often mistakenly assume AIG was unregulated, when in reality the Office of Thrift Supervision in the Treasury could have intervened, he adds, “There was also massive regulatory failure. Policymakers didn’t have the brains or backbone to stop the abuses.”

Ultimately, few complicated indictments have stemmed from this financial downturn—and even fewer indictments at the high levels—a stark contrast to the savings and loan crisis, the junk-bond crisis, and other financial downturns. “I’ve actually been pretty shocked,” Mills says. He speculates that this downturn is “materially different” because while all crises are driven by greed, the greed in this crisis was equally pervasive on the consumer side. “People were willing to be cheated,” says Mills. “The greed of the victim is offsetting the greed of the perpetrator.”

As for marquee cases, “there’s no one villain to make your name against as a prosecutor,” says Mills. Instead, we’re seeing a raft of cases launched against smaller defendants. So far, Swanson agrees: The cases he has seen are relatively straightforward wire fraud and false statements cases that won’t involve complicated interpretations of federal statutes, he says.

Part of the slow pace of ratcheting up prosecutions, lawyers and scholars agree, stems from the incredible factual complexity of these cases. Haywood S. Gilliam Jr. ’94, a former federal prosecutor who is now a partner in the white-collar crime group at Covington & Burling LLP, says the complexity of the combined underlying financial transactions is compounded by the high bar prosecutors face in proving intent-based offenses. Because white-collar prosecutions hinge on proving that defendants harbored a criminal mental state, not just on proving a bad outcome from their behavior, prosecutors are “appropriately cautious” in deciding what cases they can take to trial.

Carol Lam ’85, a former state judge and United States attorney in San Diego who is now senior vice president and deputy general counsel at Qualcomm, says lags in prosecution stemming from a crisis can be common. After the savings and loan crisis in the 1980s, the Department of Justice started financial institution fraud units to pursue cases. But despite strong popular and political pressures for indictments, these units had a hard time establishing themselves, partly because most agents had no training in financial fraud or accounting. And their ultimate results, she says, were often disappointing: For purposes of statistical recordkeeping, lower-level misdemeanors or bank teller embezzlements were sometimes included as financial institution fraud.

“It’s tough to build these cases,” says Lam. “There are a finite number of prosecutors who can handle a large financial case. It’s not just resources, and it’s not that laws aren’t good enough. The factual complexities make for difficult cases.” That challenge is compounded by the need to explain relatively complicated theories to juries that lack economic sophistication. “Frankly, some of the people involved in the crimes may not have understood what they were doing themselves,” she says. “It may have been criminal—or it may have been incompetence.”

“The biggest reason we haven’t seen more prosecutions is that stupidity is not a crime,” says Grundfest. “Many people did stupid things that in the aggregate have cost our economy trillions, but it doesn’t necessarily follow that those stupid acts are crimes.”

This slow speed doesn’t mean potential targets are off the hook, says Scott F. Turow (MA ’74), the bestselling author who practices white-collar criminal defense at Sonnenschein Nath & Rosenthal: “I would not be betting the ranch that nothing’s going to come of it. … There’s high distrust among Americans of corporate leadership, whether justified or not, with the result that there’s a lot of willingness to bring these cases and a lot of sympathetic juries,” he says.


As practitioners and academics wait to see how prosecutors and courts react to the current economic crisis, they build on a growing academic literature and jurisprudence surrounding white-collar crime. “When David and I came up with the course on white-collar crime eleven years ago, we didn’t realize we’d bought a growth stock,” says Weisberg. Even the term itself is relatively new, credited to sociologist Edwin Sutherland in 1939.

For academics and academically minded lawyers, the field can be particularly exciting because it’s perhaps the only area of
criminal law left where trials turn on more than just facts—even at the trial level, much of the argument is about the law itself and novel legal theories, says Mark G. Kelman, James C. Gaither Professor of Law and vice dean. That’s because almost all white-collar crime prosecutions are brought under just a few, relatively spare but broad statutes—generally provisions concerning fraud and false statements. As a result, the field is particularly prone to aggressive interpretation by prosecutors and courts.

Some critique the breadth of these laws for generating excessive vagueness and overexpansion, which is particularly troubling in the criminal realm where the law has its strongest teeth. Because the only real limits on the white-collar crime statutes are constitutional bars, “it’s a laboratory for studying prosecutors and prosecutorial powers,” says Weisberg. “They have the benefit of extremely broad statutes that make prosecutors essentially lawmakers.”


One possible trend in prosecutorial discretion that professors and lawyers are closely watching comes from the aftermath of Skilling v. United States. In June the Supreme Court set aside the conviction of Enron executive Jeffrey Skilling. This decision represented the most significant push-back on the expansion of white-collar crime in recent memory, says Weisberg, with the Court essentially voiding the government’s theory as unconstitutionally vague (see Point of View, page 36).

Skilling reflected a concern that we’ve gone beyond prosecutorial discretion to a realm of insufficient notice, thus raising constitutional problems,” says Gilliam. “There’s certainly a groundswell in courts to really take a look at the government’s decisions more now than historically.”

Swanson says the decision will be helpful as a constraint against prosecutors—who he says often stretch statutes in novel ways that legislators didn’t intend. “The Skilling decision is certainly going to be helpful in pushing back on the increased reliance on the honest services doctrine,” says Swanson.

Still, some question whether Skilling will ultimately prove to be much of a boon for defense lawyers. Prosecutors may just find new ways of describing things as a “kickback,” says Mills. “In my work, I’m hung up in the explosion of the use of words to mean things they didn’t used to mean,” he adds. Gilliam agrees that prosecutors will find other theories: “They have the belt even if they’ve lost the suspenders.”

One powerful tool prosecutors have is the use of secondary charges, when they can’t prove the case they initially pursued, says Weisberg. Most famously, Martha Stewart was convicted for perjury rather than insider trading, and Roger Clemens and Barry Bonds are being pursued for perjury and obstruction of justice rather than steroids use. Lam disagrees that this reflects an abuse of prosecutorial discretion: “Sure, that happens, but people shouldn’t be committing perjury. … If someone will lie in the course of an investigation, in the grander sense is it really unfair to prosecute for that cover-up?”

Legal-ethical issues arise in another domain of white-collar criminal enforcement. Scholars say there’s a growing trend in internal investigations—both to preempt prosecution and as part of deferred-prosecution agreements—for a corporation’s board to hire outside counsel to perform a factual investigation and legal review of an alleged malfeasance. This creates the awkward situation in which private lawyers are given police-like responsibilities. And there’s the emerging possibility that individuals could even be criminally prosecuted for lying to the outside counsel.

It may also confuse employees who are interviewed by investigators—who may not fully understand the difference between a lawyer representing them and one representing their employer. Because counsel represents the company, interviewees don’t receive the normal attorney-client privilege. “If you’re a lawyer representing a special committee, you want to learn as much as you can. But if you want to respect their rights, you ought to say ‘talk to your own lawyer,’ ” says Neal. That’s part of the advantage for prosecutors, Neal adds, “You’re getting the investigation done in this ambiguous environment where you don’t have to tell individuals they are the targets of criminal investigation.”

In most cases, employees are told that their full cooperation is required—even though they have none of the constitutional protections against self-incrimination that they’d have with regular law enforcement. Neal says that he’s recently been involved in three cases in which clients were caught up in individual criminal prosecutions following a special committee’s investigation. The two who declined to talk to the private counsel retained by the board were vindicated in their cases. In each case, Neal says the client told him “ ‘they’ll fire me if I don’t talk,’ and I said they’ll fire you if you do.”

Lam is concerned that the wrong reasons have spurred prosecutors to rely on internal investigations—most notably, a lack of resources or expertise to fully pursue a matter from within the prosecutor’s office. “That suggests to me an abdication of responsibility on the enforcement side,” she says. Moreover, their increasing frequency creates a slippery slope that could lead to “the eventual lowering of the standards to where you’d be unable to justify the criminal prosecution of a corporation,” Lam says, since all corporations would expect to be allowed to conduct internal investigations and have their prosecutions deferred.

Regardless of when and what cases are ultimately brought, white-collar crime may be unique in criminal law not only for its complexity but because the deterrent effect of criminal conviction is extremely high on people in the business world. While other areas of criminal prosecution—notably the drug war—may be an “endless cycle,” says Swanson, white-collar crime prosecutions heavily affect behavior in the business community. “The knowledge that you might be prosecuted is an
effective deterrent,” he says. SL

Jacob Hale Russell ’11 was a staff writer for The Wall Street Journal before coming to Stanford Law School.

Learn more about corporate governance at Stanford Law School.

Watch this Stanford Lawyer Q&A on the financial crisis with Berkshire Hathaway Vice Chairman Charles T. Munger and SLS Professor Joseph Grundfest.