Saturday, December 21, 2013

More data re ethics and compliance mission program

Business news keeps coming that points out the failure of the mainstream ethics and compliance community to face up to significant questions about the mission program it has been propagating for twenty years.  [Numerous entries in this blog explain and document that failure.  Quick access to these entries may be initiated  by starting with this entry and by following the links.  More in depth access may be achieved by further links in this entry below or navigating through the blog using the labels on the left hand side.]

This entry is prompted by several recent Wall Street Journal articles.  I have posted these articles on the blog, and I will make links to the articles in this entry.

No amount of prodding (as best I can tell) has been able to budge the mainstream ethics and compliance community to do crtitical thinking about enity level liability versus individual officer and employee liability for trying to deter corporate wrongdoing.  The nonresponsiveness of the Ethics & Compliance Officer Association, the Ethics Resource Center, and the Society of Corporate Compliance and Ethics, and of many others in the field, is well dcoumented in this blog.  See, e.g., these entries collected under Label F1.

The recent business news of Ex-Banker Gets Prison Term and JPMorgan's huge corporate fines begs again for ethics and compliance professionals to delve into the subject of entity level liability versus individual officer and employee liability to try to deter corporate wrongdoing, and to wrestle with very difficult questions that are presented.  As indicated, thus far there has been virtually no willingness to do that.

As reported in the article, JPMorgan's top lawyer Stephen Cutler has spoken out publicly criticizing what has gone on in the levying of these fines.  One can well ask whether the thoughts of JPMorgan's ethics and compliance officers were sought by Mr. Cutler in formulating and taking his public stance?  Or are they on the sidelines regarding this important JPMorgan corporate matter?  (See my blog entry Are Ethics & Compliance sidelined?)

The article says that Mr. Cutler was chief of enforcement for the Securities and Exchange Commission from 2001 to 2005.  For at least a couple years, the ethics and compliance community has been importuning federal enforcement officials to pay more attention to corporate ethics and compliance programs.  In February, the Ethics Resource Center had a summit in Washington DC about this, entitled  "Improving Corporate Conduct Through Pro-Compliance Enforcement Practices."  I believe the ERC was too narrowly focused on its own agenda and lacked appreciation that the federal enforcement officials had other more important considerations on their mind.  (See this email I sent to the ERC.)

Relating this back to JPMorgan, I don't see from the article that Mr. Cutler was much occupied with whether JPMorgan's corporate ethics and compliance program was or was not adequately considered by the Justice Department, and I conclude that was very minor, or a nullity, in Mr. Cutler's mind, and he had bigger other issues in his head about the way the Justice Department was trying to deal with corporate wrongdoing.

Note further that the article talks about how Mr. Cutler, when he was with the SEC, went after JPMorgan for helping Enron commit fraud.  Up again pops the question about the efficacy and approrpirateness of entry level liability to deter corporate wrongdong.  See my own writing Enron's smartest guys, crooks, victims and other saps.

The Caterpillar news story about possible dumping of train parts in the ocean as part of defrauding railroad owners and operators begs for informaation about whether there will be "discipline" of culpable officers and employees under Sec. 8B2.1(b)(6)  of the Federal Sentencing Guidelines for Organizations. I have tried to inquire in the ethics and compliance community about whether any surveying has been done about the utilization of discipline under Sec. 8B2.1(b)(6),  iin order to try to evaluate its efficacy, but I could not find any interest in the ethics and compliance community about this.  See, e.g., the April 24, 2012, email to Dr. Harned of the ERC that is reproduced in this blog entry.

An interesting contrast is provided by Microsoft deploying corporate assets to combat real criminals and real wrongdoing, as reported in the "Web Fraud 'Botnets'" article, contrasted with this editorial (concerning Facebook), which illustrates how the plaintifffs' lawyers harrass corporations with abusive lawsuits that are ultimately counterproductive to the deterrence of corporate wrongdoing, including that they waste and divert corporate assets (either to fight real criminals on the outside or to improve corporate ethics and compliance programs internally).  For almost ten years I have been trying to purvey to the ethics and compliance community my article Does the Civil Liabilty System Undermine Business Ethics?, but there has been no meaningful response from that community.  

I posted the editorial about Mississippi Attorney General Hood because, on the one hand, I believe state attorneys general are a better societal tool for deterring corporate wrongdoing than plaintiffs' lawyers, and, on the other hand, state attorneys general may get conflicted by their own personal interests and fail to fill their role properly in helping society deter corporate wrongdoning.  

Friday, December 20, 2013

Health care ethics and compliance officers

Sent: 12/18/2013 8:24:09 A.M. Central Standard Time
Subj: J&J $2.2B fine; ethics and compliance 20 year mission program

To: Ethics and compliance officers in health care industry

This email is being sent to the health care industry ethics and compliance officers who are listed in this online document.

I think the recent $2.2 billion fine that the Justice Department imposed on Johnson & Johnson is an example that is supportive of my contention that there is a serious shortcoming in how the mainstream corporate ethics and compliance community has been pursuing and implementing its mission program for the past twenty years.

If you are interested in what I have to say, please read this letter I have sent to Ms. Kris Curry, Vice President, Health Care Compliance, of the Johnson & Johnson Pharmaceuticals Group, and follow the links to other entries in my blog.

If you would like to discuss this subject with me, please write me back.

Thank you.

Robert Shattuck
Birmingham, AL

Thursday, December 19, 2013

How Lawsuits Fund Lobbyists

The Wall Street Journal


How Lawsuits Fund Lobbyists
Facebook pays millions in class actions to privacy groups. Facebook users may get nothing.

Nov. 10, 2013 6:39 p.m. ET

The Supreme Court last week set a record for the gap between innovative technology and hidebound regulation. The justices upheld a settlement against Facebook FB -2.39%based on a legal concept created by ecclesiastical courts in the Middle Ages to ensure that promises of charitable gifts made to secure entry into heaven would be carried out.
The good news is that the court said it would look for a new case to get Silicon Valley out of the purgatory of having to pay legal settlements to the very lawyers and advocacy groups whose mission is to regulate high-tech firms.
The case of Marek v. Lane arose after Facebook launched its Beacon program in 2007. Beacon automatically posted announcements when Facebook users bought a new product. It turned out that many users preferred confidentiality for surprise gifts and potentially embarrassing purchases. User complaints led Facebook to end Beacon after just a month.
That would have ended the matter except for the inevitable class-action lawsuit. Facebook eventually agreed to pay $9.5 million, but not to its hundreds of millions of users. The lawyers who brought the case got $3 million, and Facebook agreed to donate $6.5 million to create a new nonprofit group focused on privacy issues.
The legal basis of the settlement was a doctrine borrowed from trust law called "cy près," a French term that means a close enough use of funds. That makes sense when a charitable gift can't be carried out as intended, but not in a case that is supposed to compensate people who've suffered harm.
In an opinion accompanying the denial of review, Chief Justice John Roberts wrote that the court will look for a "suitable case" to "clarify the limits" on funding nonprofits instead of compensating victims. "This court has not previously addressed any of these issues," he wrote, "including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new legal entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class and so on."
Privacy lobbying groups such as the Electronic Frontier Foundation and the Center for Democracy and Technology get significant funding from class-action settlements. No wonder they advocate for more lawsuits. In 2011, the Electronic Privacy Information Center even went to court complaining when it wasn't among the advocacy groups sharing in a $10 million settlement from GoogleGOOG +1.39%
The GigaOM technology news site discovered that one of the groups selected to share in another Facebook settlement—for $20 million relating to Facebook publicizing user "likes" in ads—had no idea why it was included and rejected its allotted $500,000. Representatives of the MacArthur Foundation said they "did not ask to participate" and don't work in online privacy.
"Under the current model, the legal process serves to stoke privacy panic while also failing to explain to consumers the basic nature of the contract they undertake when they sign on with Facebook or Google," reported GigaOM. "Consumers receive an incredibly useful product for no money, but pay instead with personal information which the companies collect for advertising."
The law is a clumsy tool to regulate fast-changing technology. Indeed, under the Beacon settlement, Facebook could relaunch the program under another name even though, as Chief Justice Roberts noted, the settlement by Facebook "insulated itself from all class claims." Ted Frank, a critic of the class-action system, has written that "a lawsuit where the cost of litigation is greater than the benefit to the class suggests the social costs are greater than the social benefits."
These kinds of lawsuits create the illusion that judges determine appropriate uses of technology. But people are still learning how much information they want to share online. It's becoming increasingly clear that users are the "product" being sold; the paying customers are the advertisers who want information allowing them to deliver personalized advertising.
A new novel ridicules companies like Facebook and Google for promoting openness without making clear why this is so basic to their advertising business. "The Circle" by Dave Eggers features an imaginary Silicon Valley company that takes these ideas to an extreme with rallying cries such as "Secrets are lies. Sharing is caring. Privacy is theft."
People should be free to choose the online services they want to use and how much personal information they will share. Markets, not lawsuits or lobbyists funded by lawsuits, are the most efficient way to monitor business practices affecting privacy. If companies such as Facebook and Google go too far, competitors will step in promising to be more user friendly.

Web Fraud 'Botnets"

The Wall Street Journal


Inside the Effort to Kill a Web Fraud 'Botnet'

Working With Law Enforcement, Team Cuts Off Servers for Zombie Computers


Updated Dec. 5, 2013 8:55 p.m. ET

For months, investigators at Microsoft Corp. MSFT -0.03% hunkered down in front of their computer monitors, patiently stalking the shadowy figures behind what the company says is a major Web ad-fraud machine.
Then, on Thursday, they pounced. Armed with a court order and law enforcement help overseas, the team took steps to cut off communication links to European-based servers considered the mega-brain for an army of zombie computers known as ZeroAccess.
Criminals for years had used the ZeroAccess "botnet," which combines the power of more than 2 million hijacked computers—or bots—around the world, to fraudulently bill some $2.7 million a month from online advertisers, company investigators say.
Microsoft doesn't know precisely who is behind ZeroAccess, nicknamed after code in the malware, but suspects the operators are based in Eastern Europe. Last week the company filed a civil suit in federal court in Texas, where there is high concentration of bots. It got authorization to knock out connections between infected computers in the U.S. and the European-based servers linked to a core of 18 IP addresses. The unit said it also worked with the European law enforcement agency Europol to seize the computer servers, located in Latvia, Germany, Switzerland, Luxembourg, and the Netherlands.
The coordinated attack reflects increasingly aggressive efforts by businesses to police a largely unpoliced world, where hackers are scheming to grab some of the money flowing into digital ads.
Microsoft has good reason to finance its own digital detectives. It owns multiple targets for infection, including the Bing search engine; the Bing Ads exchange; and the Windows operating system, which runs on many of the Web-enabled computers around the world. Going after ZeroAccess helps defend its brand and reputation, the company said.
Microsoft's Digital Crimes Unit recently moved into a new 16,800 square-foot headquarters in Redmond, Wash., to wage its war. Touch-screen monitors detailing the workings of suspected cybercriminals blink on the walls. The team, which numbers more than 100, juggles around five malware cases at a time, among other digital crimes.
This year, digital-ad spending in the U.S. is expected to rise 14.9% to $42.3 billion, according to eMarketer. Security company Solve Media Inc. estimates that digital losses world-wide for display advertising alone could run as high as $10 billion this year.
As the industry has ballooned online, so has its complexity, creating a labyrinth of openings for criminals. The growing automation of stock-market-like advertising exchanges, where fast-paced trading in ad space between multiple parties is hard to track, has opened up a particular vulnerability in the ecosystem, security firms say. An explosion in websites and many layers of new middlemen has made it easy for fraudsters to hide out, the firms say.
At its most basic, digital ad fraud involves generating fake traffic. It works because marketers pay websites for advertising space, with the payments typically determined by the number of people who are supposedly clicking on the site and able to see the spot.
A popular scam involves gaming that basic business model. Hackers build websites and direct hijacked computers to them, to give the appearance of real Web traffic. Advertisers' pitches, drawn by the traffic, then appear on the fake sites where there is no real audience. Sometimes the advertisers pay directly and other times through middlemen.
ZeroAccess specialized in "click fraud," where it directed each of its almost two million bots to click on as many as 48 ads an hour—all day long, according to investigators. Another of its schemes was "search hijacking," where a user's search results from, say,Google GOOG +1.39% or Bing, were redirected to websites connected to the alleged criminals, according to the Microsoft civil complaint.
In one case, Microsoft investigators said ZeroAccess directed a hijacked computer through six suspicious-looking websites, with little useful content, before landing on something called There, an ad was delivered for the credit company—which the zombie computer clicked on. This all happened in the blink of eye, unbeknown to the computer owner. Had Microsoft not caught it, would have been billed.
"These aren't just kids operating in their parent's basement," said Steve Sullivan, vice president of advertising technology at the Interactive Advertising Bureau, or IAB, an industry group, speaking about digital ad fraud. "What we have here are organized crime groups in foreign countries targeting the ad world."
With fraud becoming more sophisticated, the ad industry has started to fight back. While some companies hire outside security experts, many of the major players in the industry have their own security forces. The ad exchange AppNexus more than doubled its investigations unit in the past year. Google Inc.'s DoubleClick, one of the industry's largest exchanges, employs a geek squad of more than 100 quants, engineers, and Ph.D.s just for security purposes.
Scott Spencer, DoubleClick's product management director, said some days his team kills off as much as 10% of the exchange's traffic, using filtering techniques. Last year, they rejected about a million suspicious websites from the exchange. "It's as if you have thousands of people pick-pocketing, all orchestrated by one mastermind," Mr. Spencer said of each fraud operation.
The IAB trade group this week published a playbook for the industry, giving advertisers and websites tips on how to avoid fraud. An IAB-backed initiative is meanwhile working on a system for buyers and sellers to share intelligence on alleged fraudsters by flagging them in real-time on the exchanges.
Authorities and Internet-security companies estimate that there are perhaps thousands of botnets. The more sophisticated bots act like humans, clicking on ads, playing videos and moving products into shopping carts.
Taking out a botnet isn't easy. Hackers build them with encryption and passwords and many times control them from far-flung locations, where law enforcement is more lax.
Microsoft said it has taken action against seven other botnets in the past three years. Over the summer, Microsoft teamed up with the FBI to attack the "Citadel" botnet that allegedly stole bank account information. It isn't clear who is behind the operations of Citadel, which is being investigated by law enforcement.
Throughout its investigation, the Microsoft unit examined ZeroAccess in its lab, setting up its own infected computers to study how the botnet worked. It kept the operation secret, said Richard Boscovich, assistant general counsel of the Microsoft investigative unit. "If the bad guys sense us monitoring them, they will change," he said, or "start cleaning" their digital trails.
Unlike many botnets, ZeroAccess didn't have a single central server controlling it. Instead, the operators had the ability to use any infected computer in the botnet to distribute commands to commit crimes, making it hard to kill off, Microsoft said.
In its civil suit, the company alleges ZeroAccess "profited unjustly." Notices of the suit were sent to the hosting companies where the 18 IP addresses are located, as well as to the registered owners of 49 domains, which are thought to part of a backup mechanism for the botnet, and were also taken offline. Microsoft demanded they respond, or risk a default judgment.
The big question is whether Microsoft's assault on ZeroAccess will have enduring impact. ZeroAccess came back to life once before after an attack on it. Earlier in the summer, the software company Symantec Corp. SYMC +0.87% disrupted the botnet, but it persisted, enlisting new computers into its zombie web of crime.
Eight hours into the operation on Thursday, Microsoft investigators said there were no signs that the operators behind ZeroAccess were responding to the shutdown action, and that they had seen a "dramatic" drop in the click fraud committed by the infected computers.
Having blocked ZeroAccess' servers, Microsoft wants to begin answering some of the mysteries behind the crime machine, including the identities of its backers. Details of the operation have been passed over to the FBI, Mr. Boscovich said.
"If we can't put the bad guys in jail," said Craig Schmidt, senior manager of investigations at the Microsoft unit, "at least we can take away some of their money."
Write to Christopher S. Stewart at and Merissa Marr

Mississippi Attorney General Hood

The Wall Street Journal


Class-Action Dodge

In in Mississippi ex rel. Jim Hood, Attorney General vs. AU Optronics Corp, the Supreme Court can rein in an abuse by state attorneys general.

Nov. 5, 2013 7:17 p.m. ET
When Congress rewrote the law on class-action lawsuits in 2005, it didn't figure on being thwarted by the nation's top law enforcers. Now the Supreme Court has a chance to close what has become a large and illegal loophole.
The High Court on Wednesday will hear arguments in Mississippi ex rel. Jim Hood, Attorney General vs. AU Optronics 2409.TW -0.22% Corp. The protagonist is Mississippi AG Jim Hood, who is famous for moonlighting as a job creator for his trial-lawyer donors. The question is whether Mr. Hood's "state" lawsuits are really an attempt to circumvent the 2005 federal Class Action Fairness Act (Cafa).
Attorney General Jim Hood Associated Press
In 2006 the Justice Department conducted a grand jury probe into alleged price-fixing by makers of liquid crystal display screens (LCDs). Some companies settled with the feds, others refused and weren't charged. The trial bar piled on with 100 or so copycat class actions.
In 2011 Mr. Hood filed his own lawsuit on behalf of his state, municipalities and Mississippians who purchased LCDs. His suit named the same six manufacturers targeted by the private class-action litigation, and 176 of his 206 paragraphs of allegations were verbatim or near-verbatim copies of the private litigation. This was no surprise since one of the two law firms Mr. Hood hired to prosecute his state suit—Zimmerman Reid—has also filed private LCD class actions.
This all looks like a run around the 2005 class-action reform. That law allows defendants hit with civil claims by 100 or more persons to seek removal to federal court, where the rules on classes are stricter and defendants can avoid biased state juries. The private LCD class actions have already been moved to federal court in San Francisco, and at least one defendant, Toshiba6502.TO +0.47% has won a case.
Mr. Hood and his trial-bar friends are trying to evade federal law by running their class-action through the AG's office. Mr. Hood's retention agreement with Zimmerman Reid and another firm, Abraham & Rideout, reads: "Assume Recovery by the State of Mississippi of a monetary, sum, benefit, or value equal to $600,000,000.00." Yes, $600 million.
The agreement stipulates a sliding scale payout for lawyers in any settlement, ranging from a 1% fee (for a settlement above $1 billion) up to 15% (for a mere $25 million win). Such contingency arrangements are routine in Mr. Hood's office and they are often made with out-of-state trial firms whose partners contribute to Mr. Hood's election coffers.
The defendants want Mr. Hood's class actions moved to federal court the way private suits are. Mr. Hood is resisting on federalism grounds, claiming he's obstructed from enforcing his state's laws. In fact, Congress's reform took special care to preserve state rights. Cafa excludes legal actions centered entirely within a state (versus interstate class actions). It also excludes cases in which the state itself is a defendant. Mr. Hood retains sweeping authority to bring a cross-border class action as long as it is heard in federal court.
Mr. Hood also claims that he can bring his suit because he is its only "named plaintiff." He wants the Justices to ignore that he is asserting claims on behalf of thousands of LCD purchasers, and that Cafa is clearly aimed at any "mass action" that could result in a "monetary" judgment.
Congress wrote the law with a particular worry about aggregated claims whose potential liability could cripple a defendant. Even Mr. Hood acknowledges that any illegal conduct ceased years ago, so his real interest is in financial restitution—precisely the sort of high-dollar "monetary" case that Cafa was designed to cover.
During the Cafa debate, 46 state AGs supported an amendment by Arkansas Senator Mark Pryor to exempt state AG actions. Utah Senator Orrin Hatch warned at the time that the exemption would "create a loophole that some enterprising plaintiffs' lawyers will surely manipulate in order to keep their lucrative class action lawsuits in State court." The Pryor amendment lost, 60-39.
The Fifth Circuit Court of Appeals ruled against Mr. Hood, but three other U.S. circuit courts have taken the opposite position in similar cases. The Supreme Court has a chance to clarify federal law and block a state dodge that is preventing the class-action reform that Congress intended.

Wednesday, December 18, 2013

Caterpillar Probed for Dumping Train Parts

The Wall Street Journal


Caterpillar Probed for Possibly Dumping Train Parts in Pacific Ocean

Subsidiary Under Investigation for Possibly Tossing Train Parts Into the Ocean to Conceal Evidence

Nov. 22, 2013 12:07 a.m. ET

Federal investigators are probing a subsidiary of Caterpillar Inc. CAT +1.44% to determine whether it was dumping train parts into the ocean near the Port of Long Beach, Calif., as part of a possible scheme to bill railroad companies for unneeded repairs, people familiar with the situation said.
The Peoria, Ill.-based maker of heavy equipment disclosed in a securities filing three weeks ago that it had received a federal grand jury subpoena to provide documents and information on its Progress Rail unit, which repairs locomotives and railcars. But Caterpillar hasn't provided details about the criminal investigation or how it arose.
The grand jury investigation is being conducted by the U.S. Attorney for the Central District of California, based in Los Angeles. It is examining whether Progress Rail was dumping brake parts and other items as a way of concealing evidence that Progress Rail was charging owners of rail equipment for replacing parts that were still in good shape, these people said.
Union Pacific Corp., a major railroad operator, was one customer believed to have been affected by the alleged Progress Rail activities, according to these people.
The investigation is at an early stage, and such probes often don't result in indictments.
Disputes often arise between rail-repair shops and their customers over how much they should be billed and what services were needed. These disputes typically are resolved between the parties involved.
The U.S. Attorney got involved in this case because of suspicions that Progress Rail was breaking environmental laws, according to a person familiar with the situation.
In its disclosure three weeks ago, Caterpillar said it was cooperating with the authorities. "We currently believe that this matter will not have a material adverse effect on the company's consolidated results of operation, financial position or liquidity," Caterpillar said at that time.
Caterpillar acquired Progress Rail in 2006 for about $800 million. Progress Rail, which had its origins in the metal-scrap business, was founded by William P. "Billy" Ainsworth, an Alabama native who built up a nationwide business repairing and refurbishing rail equipment.
Mr. Ainsworth has remained head of Progress Rail. He oversaw Caterpillar's diversification into production of railroad locomotives via the 2010 acquisition of Electro-Motive Diesel, or EMD, formerly owned by General Motors Co.
Progress Rail is based in Albertville, Ala., and has more than 90 branches across the U.S. It competes with small independent shops as well as large railcar manufacturers, such as Union Tank Car Co. and Greenbrier Cos., that also do repair work.
Railcar owners, such as chemical producers and leasing companies, and the railroads hire Progress Rail to make repairs or replace worn brake shoes, wheels and other components. Railroad inspectors routinely pull cars out of service if they discover a problem.
Industry experts say repair shops that billed for more work than necessary were once common in the industry. But better monitoring of repairs and greater emphasis on standards for replacing parts have reduced the frequency of disputes between equipment owners and repair shops.
"There's more policing than there used to be," said Mike Francis, an equipment consultant from Texas who inspects repairs on behalf of railcar owners. "Twenty or 30 years ago, repair shops were like the wild, wild West."
Even today, Mr. Francis said, "the opportunity to take advantage of folks is high. If you're in Chicago and your car is in Florida and somebody says you need repairs, you don't know that. You're not there."
The investigation marks a possible second embarrassment in a year for Caterpillar. Last January, the company was forced to make a $580 million writedown in the value of ERA Mining Machinery Ltd., a Chinese maker of roof supports for coal mines, acquired in 2012 for about $700 million. Caterpillar blamed accounting "misconduct" by several former senior managers of the acquired company.
Write to James R. Hagerty at and Bob Tita at

Ex-Banker Gets Prison Term

The Wall Street Journal


Former Credit Suisse Investment Banker Sentenced in Financial Crisis Case
Updated Nov. 22, 2013 5:34 p.m. ET

Kareem Serageldin arrives at court in New York, where he was sentenced to 2 1/2 years in prison on Friday.Jin Lee/Bloomberg News
A former Credit Suisse Group AG CSGN.VX +0.15% investment banker was sentenced to 2½ years in prison for his role in a conspiracy to falsify records related to inflating the values of mortgage bonds during the financial crisis.
As the former global head of Credit Suisse's Structured Credit Trading business, Kareem Serageldin is the highest-ranking Wall Street executive charged criminally in a case related to the 2008 financial crisis.
U.S. District Judge Alvin K. Hellerstein expressed ambivalence about handing down a sentence, saying he had to weigh the seriousness of Mr. Serageldin's crime with a tearful statement read by Mr. Serageldin's mother during the hearing Friday.
"Your crime is a serious one," Judge Hellerstein said. "It has to teach people that in the worst of times they have to do what is right."
As the U.S. real-estate market began to deteriorate in 2007, Mr. Serageldin and others began manipulating the value of securities backed by mortgages held by Credit Suisse, U.S. prosecutors said. Mr. Serageldin was extradited from the U.K. in April and pleaded guilty to a conspiracy to falsify the Swiss bank's books and records.
Judge Hellerstein ordered Mr. Serageldin to forfeit more than $1 million and pay a $150,000 fine. But he said Credit Suisse wasn't entitled to any restitution from Mr. Serageldin, which the bank asked for, saying the bank had created a "rather terrible climate" and that Mr. Serageldin wasn't alone in his crimes.
"Mr. Serageldin's crime, and it was a crime, was duplicated by many others at the bank," the judge said.
A Credit Suisse spokesman referred to a 2012 statement from the Securities and Exchange Commission that commended the bank for cooperating with the investigation.
Mr. Serageldin also faces civil charges by the SEC in connection with mortgage-securities manipulation. At the time, the SEC said it had decided not to charge Credit Suisse because of the isolated nature of Mr. Serageldin's wrongdoing and the bank's "immediate self-reporting" to the SEC, among other things.
Mr. Serageldin and the SEC are in the "final stages of finalizing settlement papers," according to court records.
Mr. Serageldin's notoriety was the subject of some debate during his sentencing hearing Friday. Lawyers for Mr. Serageldin argued he should receive little to no time in prison, saying his exposure in the press was a punishment in itself. That Mr. Serageldin also lost $25 million in deferred compensation to Credit Suisse and had his career destroyed should also be factored into the decision, his lawyers told the judge.
Prosecutors had asked the judge for a sentence of 57 to 60 months in prison, citing the importance of deterring similar conduct in the financial-services industry.
The government alleged in an indictment last year that Mr. Serageldin and two others conspired to inflate the values of mortgage bonds during the financial crisis. Mr. Serageldin was originally charged with conspiracy to commit wire fraud, conspiracy to falsify books and records, and two other charges, but was only charged with one conspiracy count under his plea agreement with prosecutors.
Write to Christopher M. Matthews at

J.P. Morgan Lawyer Criticizes Big Bank Fines

The Wall Street Journal


J.P. Morgan Lawyer Criticizes Big Bank Fines

As J.P. Morgan Chase JPM +2.73% & Co.'s top lawyer took the stage on Friday for a panel discussion in New York, he was confrontational as regulators Daniel Stipano of the Office of the Comptroller of the Currency and Deb Morris of the Consumer Financial Protection Bureau sat just to his right.
J.P. Morgan's top lawyer, Stephen Cutler, formerly was the SEC's chief of enforcement. Shown, Mr. Cutler speaking at the SEC in January 2004.Bloomberg News
"At what point does this stop?" he said, referring to record-setting fines for J.P. Morgan and other large banks. "We should all be concerned," he added, "because at a certain point people become immune to the numbers."
Mr. Stipano said the government's application of fines in legal settlements is "more art than science." He said the OCC is exploring ways to improve its calculations. An OCC spokesman declined further comment.
It was surprising to hear J.P. Morgan's general counsel raise such questions just three days after the announcement of the bank's $13 billion settlement with the Justice Department and other agencies over soured mortgage securities.
A person familiar with Mr. Cutler's thinking said he wanted to prompt a discussion about how regulators exercise their power in the future. The comments weren't the product of any personal frustration, the person said.
Acquiescence doesn't come easily to Mr. Cutler, a hard-nosed litigator still remembered for his pursuit of corporate wrongdoing while chief of enforcement for the Securities and Exchange Commission from 2001 to 2005.
But the 52-year-old Mr. Cutler met his match in the bank's battle with the Justice Department. He advised J.P. Morgan Chairman and Chief Executive James Dimon that the New York company couldn't afford to play an extended game of chicken, people close to the talks recall.
The reason: The U.S. government could potentially put the bank out of business with an indictment.
Instead, last week's settlement carried a record penalty and kept open the threat of a criminal investigation. People close to J.P. Morgan believe additional charges for selling shoddy mortgage securities are less likely.
Mr. Cutler "followed the defense playbook by making a lowball offer initially" and asking for a release from criminal liability, said Michael Bresnick, who oversaw the government investigation when he was head of the Obama administration's financial-fraud enforcement task force.
J.P. Morgan's top lawyer was "rebuffed at every turn," added Mr. Bresnick, now a partner at law firm Stein, Mitchell, Muse & Cipollone LLP in Washington.
The Justice Department's lead negotiator on the case, Associate Attorney General Tony West, praised Mr. Cutler. "Steve is a worthy adversary," said Mr. West. "He and his team are talented professionals."
The stress and hours have taken a toll on Mr. Cutler, people close to him say. He is often in the office at 6:45 a.m. and typically works 12-hour days.
Mr. Cutler has fought big cases for the government and against it. While at the SEC in 2003, he took on J.P. Morgan, which he accused of helping Enron Corp. commit fraud. J.P. Morgan executives saw the probe as a misguided response to a political frenzy, but the bank decided to pay a $135 million fine rather than fight.
In a press release at the time, Mr. Cutler said the financial penalty was "a reminder that you can't turn a blind eye to the consequences of your actions." Mr. Cutler became J.P. Morgan's top lawyer in 2007.
Mr. Cutler was a key part of the team that approved the 2008 purchases of Bear Stearns Cos. and Washington Mutual Inc. WMIH +6.80% 's banking operations. The hurried acquisitions gave J.P. Morgan immediate benefits but saddled the company with lawsuits and investigations, including the bulk of the $13 billion settlement announced last week.
At Washington Mutual, J.P. Morgan lawyers believed late changes to the final agreement allowed the bank to recover any future legal liabilities from a Federal Deposit Insurance Corp. receivership that liquidated the thrift in 2008.
The FDIC disagreed. J.P. Morgan agreed not to go after the receivership for any part of the $13 billion deal announced. The bank still might tangle with the FDIC over costs of future cases.
In the Bear Stearns and Washington Mutual deals, the "general counsel's office underestimated the risk they were taking on," said Charles Peabody, a partner at Portales Partners, a New York research firm.
Until early 2013, Mr. Cutler also was in charge of J.P. Morgan's compliance department, a part of the company that monitors adherence to laws and regulations. J.P. Morgan has said it made mistakes with mortgage foreclosures, credit-card collections and derivatives trading. Earlier this year, J.P. Morgan's head of compliance began reporting to another top executive. Mr. Cutler endorsed the move, said a person familiar with his thinking.
Mr. Dimon has defended the job done by Mr. Cutler. "Steve's the best at what he does, and we're lucky to have him," J.P. Morgan's CEO said recently, according to a person familiar with the conversation.
Mr. Cutler is worried about the recent escalation in fines for the largest U.S. banks, airing his views at Friday's panel discussion, which was hosted by trade group The Clearing House.
"I can probably think of about 13 billion reasons why I am here," he joked. "Let me start by saying how handsome Dan Stipano is," referring to the OCC official. The audience laughed at both quips.
Mr. Cutler later turned to Mr. Stipano and Ms. Morris on the subject of how federal overseers handle privileged bank information and said: "I would ask both of you to think about what it might be like to be in my shoes." Mr. Stipano replied: "I can't give legal advice to your clients, Steve."
J.P. Morgan's top lawyer also expressed concern about what he saw as duplicative behavior by multiple regulators.
"There has to be a better way to allocate government resources," he said, calling for a task force to study the issue.
—Julie Steinberg contributed to this article.
Write to Dan Fitzpatrick at and Devlin Barrett