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Press reports indicate that the FBI and the Department of Justice are investigating the huge trading losses at J.P. Morgan Chase. As an attorney who has spent much of his career suing large corporations and financial institutions for securities fraud I have no particular love for J.P. Morgan. But the FBI’s involvement in the case may reflect a troubling trend to criminalize business conduct that gives rise to civil liability, but that probably should not be criminalized.
The FBI and the Department of Justice may have evidence that what occurred was the result of conduct that is clearly criminal—but I have not seen indications of any such evidence in the press. J.P. Morgan’s loss was, by the company’s own admission, the result of colossal mistakes that should not have been made. It is true that what the company and some of its officers did may well meet the definition of civil securities fraud. If so, investors in J.P. Morgan stock would rightfully be entitled to recover huge sums from the company and its officers in civil lawsuits based on the federal securities laws. But not every potential civil fraud case that involves billions of dollars should be treated as a criminal case. The fact is that most, and maybe all securities fraud cases that can be successfully prosecuted in civil court could also result in criminal convictions if prosecutors are zealous enough. But the Department of Justice needs to exercise some prosecutorial discretion. Civil litigation under the securities laws by the SEC and private litigants has a tremendous deterrent effect. It is a good thing for the heads of large corporations to know that reckless conduct that causes shareholders substantial losses may cost them and their companies huge sums. But the threat of criminal prosecution is something very different from potential civil liability. I do not think it is healthy for the leadership of large corporations to constantly fear being thrown in jail. Criminal securities fraud prosecutions should be reserved for the Bernie Madoffs of the world—the worst of the worst.