In late November, J.P. Morgan , the Justice Department and other agencies reached a $13 billion settlement over practices involving mortgage securities. Three days later, J.P. Morgan’s General Counsel, Stephen Cutler, participated in a panel discussion hosted by a trade group named The Clearing House. According to a November 25 article in the The Wall Street Journal, Mr. Cutler remarked, “At what point does this stop?,” referring to fines for J.P. Morgan and other banks.
As someone who regularly deals with regulators and prosecutors, it struck me that Mr. Cutler’s observations are well taken. When negotiated settlements are announced, the regulators are understandably quick to trumpet the size of the settlement as a validation of their investigatory efforts. However, the size of the settlements often appear to be based on whimsy. This same Wall Street Journal article reinforces this view, referring to a comment by Daniel Stipano of the Office of the Comptroller of the Currency: “Mr. Stipano said the government’s application of fines in legal settlements is ‘more art than science.’” This raises the question of whether there should be more transparency in how settlement amounts are determined by the regulators.
Twenty-five years ago, Congress enacted Federal Sentencing Guidelines to apply to all federal criminal cases. The Guidelines calculated a presumed range of sentencing based on a number of facts such as type of crime, the defendant’s role in the offense and criminal history. The intention of the Guidelines was to apply greater uniformity to sentences of defendants convicted of federal crimes.
One consequence of the Guidelines was to reduce discrepancies in federal criminal sentences to some extent. However, another consequence was to shift sentencing powers from judges to prosecutors. Under the Guidelines, prosecutors could “game the system” by demanding that a defendant plead guilty and agree to Guidelines calculations that had a direct impact on the defendant’s sentence. Or alternatively, the Guidelines provided for “downward departures,” based on a defendant’s cooperation with the government. A few years ago, the U.S. Supreme Court ruled that these Guidelines were only advisory; they were not mandatory. Nevertheless, they are still used in all federal criminal cases and carry significant weight, even though they are advisory. Federal judges have some power to depart from these “advisory” Guidelines, but their authority to do so is not unlimited. Thus, they provide a limited check against prosecutors who use the power of their office to extract harsh sentences in settlements with criminal defendants. Whether the defendant is J.P. Morgan or a defendant represented by Legal Aid, the reality is that prosecutors have tremendous leverage, with limited oversight by the courts.
Enter Mr. Cutler, who states: “We should all be concerned because at some point people become immune to the numbers.” This is true in both criminal and regulatory cases. In criminal cases, there is some limited power that judges can exercise to reign in prosecutorial over-zealousness. In non-criminal cases, this is largely not true– although Judge Rakoff in the Southern District of New York has clearly started a trend to apply greater scrutiny to SEC settlements than has ever been applied before.
More thought needs to be given to the larger question of how to limit the power of regulators and prosecutors without doing damage to the public good. This is a delicate balance, but one worth considering in some detail.