​​​​​Baserman  Law

Below is a section of Mark Baserman Jr's Fall 2011 article

regarding White Collar Crime:

THE PROPOSED CRIMINAL STATUTE
In basic, narrowly tailored form, a criminal statute aimed at rating agencies could read as follows:

“Title I - Credit Ratings Accountability
§ 1.01 - Management Accountability
(1) All credit ratings provided by a Nationally Recognized Statistical Rating Organization must be approved by two personnel, including at least one management-level individual.
(2) Nationally Recognized Statistical Rating Organizations must keep records of which personnel certified each credit rating for a period not less than 10 years.

Title II - Criminal Credit Rating Fraud
§ 2.01 Criminal Credit Rating Fraud
Whoever recklessly certifies, or attempts to certify a falsely inflated or falsely depressed credit rating to be published by a Nationally Recognized Statistical Rating Organization shall be criminally fined or imprisoned not more than 15 years, or both.”


This is a proposed statute from a Northwestern law review article.  Despite the tremendous amount of public discussion regarding criminal conduct on Wall Street, few in the academic field have published solutions to why no one has been prosecuted.  Although skeletal in nature, I believe this proposed statute would adequately police credit rating agencies, and meets all the other basic elements of a criminal statute, including an actus reus, a mens rea, and is sufficiently clear to sustain vagueness challenges.  Also, because the statute attaches criminal liability without requiring an injury or causation, the burden on prosecutors is greatly diminished.

    This statute addresses the public policy objective of policing the rating agencies.  It attaches culpability for recklessness, that is often considered the actual state of mind that raters in the late 2000’s exhibited.  Ohio Law defines in relevant part:  “A person acts recklessly when, with heedless indifference to the consequences, he perversely disregards a known risk that his conduct is likely to cause a certain result or is likely to be of a certain nature. A person is reckless with respect to circumstances when, with heedless indifference to the consequences, he perversely disregards a known risk that such circumstances are likely to exist.”  The Model Penal Code defines in relevant part: “A person acts recklessly with respect to a material element of an offense when he consciously disregards a substantial and unjustifiable risk that the material element exists or will result from his conduct. The risk must be of such a nature and degree that, considering the nature and purpose of the actor's conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation.  The key portions of this definition involve “substantial and unjustifiable risk” and “gross deviation” in conduct.  When a CRA certifies a rating without adequately assuring that the issuing company has supplied valid information, or certifies without adequate assurances that its employees are not subject to undue influence by the issuer, the agency has created a substantial and unjustifiable risk to others.  The credit collapse of 2008 has shown that this risk not only attaches to purchasers of the financial instrument, but to the nation, if not the world.  Also, certification of a rating without adequate research as to its validity represents a gross deviation in conduct as compared to a common law abiding person.  Society should have an expectation that its citizens, particularly learned experts, will not engage in the proliferation of inadequately researched information which presents a clear and present danger to the pecuniary interests of others.  Therefore, recklessness is a viable and justifiable mens rea for the policing of rating agencies.

Furthermore, because responsibility attaches to manager level employees, the actions and ethos of the entire rating agency is likely to change.  This could be described as two-tiered liability, accountability both for the analyst generating the rating and for the management-level employee who oversees her work.  Those in positions of authority are more likely to alter the practices of an organization when their own liberties are at stake.  Also, a known statute which criminalizes the actions of management would create more confidence with investors, and the overall market, because the public will know that the ratings represent the well thought out decisions of multiple people, and are backed by the entity as a whole.

As a constitutional matter, an affirmative act, or occasionally an omission or failure to act, is necessary for the commission of a crime.  Here, the proposed statute specifies an act of certification, or approval to certify may carry a criminal penalty as an actus reus.  Also, a criminal law typically requires a some level of criminal intent.  Here, the statute specifies reckless intent in approval or certification, which is likely sufficient.  Finally, the due process clauses of the Fifth and Fourteenth Amendments prohibit enforcement of statutes defining crimes if those statutes are impermissibly vague.  Typically the statute must be sufficiently definite (1) so that ordinary people can understand what conduct is prohibited, or (2) so as to discourage arbitrary and discriminatory application.   Here, the proposed statute is sufficiently definite to inform NRSRO officials that reckless certification is criminalized, and thus could likely survive constitutional challenges on vagueness grounds.  

Regarding causation, the statute is ideal because it requires none.  Any criminal statute which creates causation as an element imposes a tremendous burden upon prosecutors to prove a nexus between the criminal act, intent, and a result.  This is one of the primary deficiencies in the prosecution of CRA’s under existing wire fraud and conspiracy.  Under this theoretical statute, the government need not carry the heavy burden proving the reckless ratings represented by NRSRO’s actually or proximately caused financial harm to another.  This is good, because in a criminal proceeding an agency could viably argue an investor's malinvestment relied on a myriad of representations and influences.  Thus, any statute which viably aimed to police the rating agencies should not include a causation element.