Corporate & Securities Law

Fraud by Hindsight? C'mon Wall Street...

One of the primary arguments Wall Street firms are asserting to defend themselves from securities fraud allegations is something like this -

We could not foresee the collapse of the housing market, and therefore any allegations of fraud are merely impermissible claims of "fraud by hindsight." 

Our crew at Wall Street Law Blog doesn't buy it.  

(Reminder - the LONG winter is almost over!)
 

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The 'Fraud by hindsight' defense is asserted by defendants in many securities fraud cases.  The meaning of the defense is (as you may have guessed) that there is no fraud (i.e., intentional or reckless misrepresentations or material omissions) if the alleged fraud can only be discerned after the fact.  Hindsight is, as they say, 20/20.  

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Returning to the housing and mortgage markets, and the marketing / sale of mortgage-backed securities, cdo's and related products...

Wall Streeters insist that they did not believe, and could not reasonably foresee, the housing and mortgage bubbles that expanded and ruptured in recent years.  

Umm, let's look at some facts:  

How could such an unprecedented increase in the rate of home price appreciation rationally occur without alerting the experts on "The Street" to watch out for signs of a massive housing bubble?  

For that matter, how do Wall Street executives and risk managers explain their alleged lack of bubblevision in light of the quite relevant fact that the greatest "boom" in the history of U.S. housing was peaking just a few short years after a little event we like to call the tech-wreck.  Remember the great technology stock bubble that ruptured at about the same time many of us were just recovering from the hoax that was Y2K?    

If their collective memories are so short, what the hell were they doing running our largest financial institutions?  (Rhetorical question)

Come on, Wall Street.  You can do better than the fraud by hindsight defense.   Well - maybe not.