Legal News

DOJ to Boost Billables for the Street?s Outside Counsel

By Amir Efrati

Have your Wall Street clients misled investors by booking inflated prices of mortgage bonds despite knowledge that valuations had dropped? Did they value mortgage bonds differently on their own books compared to the holdings of customers? Or did they change the way they valued the bonds to avoid or forestall taking big losses?

If you represent a big financial firm on the Street and answered “maybe,” “no” or “I don’t know” to any of the above, you may soon get a call from your neighborhood U.S. attorney’s office.

Responding to the subprime mortgage-market collapse, DOJ’s emissaries are now getting into the act that’s kept the SEC and a few state AGs in high gear lately. Unlike those regulators and prosecutors, who mainly have civil enforcement powers in this area, the U.S. attorneys are searching for criminal conduct.

According to an article in today’s WSJ, the Manhattan U.S. attorney’s office is looking to get information on Merrill Lynch’s handling of mortgage bonds, while its Brooklyn rival has opened probes into two internal hedges funds at Bear Stearns that collapsed last summer because of subprime-related losses and, as WSJ reported Saturday, into UBS’s mortgage-bond valuations.

In addition to the questions listed at the top of the post, regulators are looking at whether financial firms:

In today’s WSJ story, ex-prosecutor Michael McGovern in NYC made the point that especially given the potential subjectivity of valuation, criminal cases could be tough to bring “because of the complexity, the availability of defenses and the difficulty of proving intent.”

Law Blog readers: What’s your take on the subprime mess and Wall Street and the reach of the criminal law? Do the two not mix? Or is it high time prosecutors did their thing? And if you care to share specifics, please email me at amir.efrati@wsj.com.

Full post as published by Law Blog - WSJ.com on February 08, 2008 (boomark / email).